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Southwest Gas Holdings, Inc. - Quarter Report: 2018 June (Form 10-Q)

Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

 

    Commission    

    File Number    

  

Exact name of registrant as specified in its charter and

principal office address and telephone number

 

State of

Incorporation

    

I.R.S.

Employer Identification No.

001-37976    Southwest Gas Holdings, Inc.   California      81-3881866
   5241 Spring Mountain Road       
   Post Office Box 98510       
   Las Vegas, Nevada 89193-8510       
   (702) 876-7237       
         
1-7850    Southwest Gas Corporation   California      88-0085720
   5241 Spring Mountain Road       
   Post Office Box 98510       
   Las Vegas, Nevada 89193-8510       
   (702) 876-7237       

Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether each registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Southwest Gas Holdings, Inc.:

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company    
Emerging growth company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Southwest Gas Corporation:

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company    
Emerging growth company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

Southwest Gas Holdings, Inc. Common Stock, $1 Par Value, 49,133,829 shares as of July 31, 2018.

All of the outstanding shares of common stock ($1 par value) of Southwest Gas Corporation were held by Southwest Gas Holdings, Inc. as of January 1, 2017.

SOUTHWEST GAS CORPORATION MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION (H)(1)(a) and (b) OF FORM 10-Q AND IS THEREFORE FILING THIS REPORT WITH THE REDUCED DISCLOSURE FORMAT AS PERMITTED BY GENERAL INSTRUCTION H(2).

 

 

 


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

FILING FORMAT

This quarterly report on Form 10-Q is a combined report being filed by two separate registrants: Southwest Gas Holdings, Inc. and Southwest Gas Corporation. Except where the content clearly indicates otherwise, any reference in the report to “we,” “us” or “our” is to the holding company or the consolidated entity of Southwest Gas Holdings, Inc. and all of its subsidiaries, including Southwest Gas Corporation, which is a distinct registrant that is a wholly owned subsidiary of Southwest Gas Holdings, Inc. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company makes representations only as to itself and makes no other representation whatsoever as to any other company.

Part I—Financial information in this Quarterly Report on Form 10-Q includes separate financial statements (i.e., balance sheets, statements of income, statements of comprehensive income, and statements of cash flows) for Southwest Gas Holdings, Inc. and Southwest Gas Corporation, in that order. The Notes to Consolidated Financial Statements are presented on a combined basis for both entities. All Items other than Part I – Item 1 are combined for the reporting companies.

 

2


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Thousands of dollars, except par value)

(Unaudited)

 

     JUNE 30,     DECEMBER 31,  
     2018     2017  
ASSETS     

Utility plant:

    

Gas plant

   $ 6,810,737     $ 6,629,644  

Less: accumulated depreciation

     (2,260,793     (2,231,242

Construction work in progress

     167,114       125,248  
  

 

 

   

 

 

 

Net utility plant

     4,717,058       4,523,650  
  

 

 

   

 

 

 

Other property and investments

     462,236       428,180  
  

 

 

   

 

 

 

Current assets:

    

Cash and cash equivalents

     34,730       43,622  

Accounts receivable, net of allowances

     357,881       347,375  

Accrued utility revenue

     34,200       78,200  

Income taxes receivable, net

     18,256       7,960  

Deferred purchased gas costs

     —         14,581  

Prepaids and other current assets

     250,992       165,294  
  

 

 

   

 

 

 

Total current assets

     696,059       657,032  
  

 

 

   

 

 

 

Noncurrent assets:

    

Goodwill

     174,233       179,314  

Deferred income taxes

     1,252       1,480  

Deferred charges and other assets

     425,555       447,410  
  

 

 

   

 

 

 

Total noncurrent assets

     601,040       628,204  
  

 

 

   

 

 

 

Total assets

   $ 6,476,393     $ 6,237,066  
  

 

 

   

 

 

 
CAPITALIZATION AND LIABILITIES     

Capitalization:

    

Common stock, $1 par (authorized - 60,000,000 shares; issued and outstanding - 49,126,254 and 48,090,470 shares)

   $ 50,756     $ 49,720  

Additional paid-in capital

     1,021,508       955,332  

Accumulated other comprehensive income (loss), net

     (55,520     (47,682

Retained earnings

     916,275       857,398  
  

 

 

   

 

 

 

Total Southwest Gas Holdings, Inc. equity

     1,933,019       1,814,768  

Noncontrolling interest

     (452     (2,365
  

 

 

   

 

 

 

Total equity

     1,932,567       1,812,403  

Long-term debt, less current maturities

     2,037,743       1,798,576  
  

 

 

   

 

 

 

Total capitalization

     3,970,310       3,610,979  
  

 

 

   

 

 

 

Current liabilities:

    

Current maturities of long-term debt

     31,928       25,346  

Short-term debt

     22,500       214,500  

Accounts payable

     188,156       228,315  

Customer deposits

     69,247       69,781  

Income taxes payable

     —         5,946  

Accrued general taxes

     42,826       43,879  

Accrued interest

     20,512       17,870  

Deferred purchased gas costs

     26,365       6,841  

Other current liabilities

     262,113       203,403  
  

 

 

   

 

 

 

Total current liabilities

     663,647       815,881  
  

 

 

   

 

 

 

Deferred income taxes and other credits:

    

Deferred income taxes and investment tax credits

     510,536       476,960  

Accumulated removal costs

     319,000       315,000  

Other deferred credits and other long-term liabilities

     1,012,900       1,018,246  
  

 

 

   

 

 

 

Total deferred income taxes and other credits

     1,842,436       1,810,206  
  

 

 

   

 

 

 

Total capitalization and liabilities

   $ 6,476,393     $ 6,237,066  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

3


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

 

     THREE MONTHS ENDED     SIX MONTHS ENDED     TWELVE MONTHS ENDED  
     JUNE 30,     JUNE 30,     JUNE 30,  
     2018     2017     2018     2017     2018     2017  

Operating revenues:

            

Gas operating revenues

   $ 275,679     $ 260,162     $ 769,992     $ 722,764     $ 1,349,536     $ 1,263,428  

Construction revenues

     395,204       300,307       655,221       492,442       1,409,263       1,133,272  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     670,883       560,469       1,425,213       1,215,206       2,758,799       2,396,700  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

            

Net cost of gas sold

     83,466       69,421       269,198       216,300       407,943       328,405  

Operations and maintenance

     105,435       98,203       207,786       202,498       398,051       394,802  

Depreciation and amortization

     61,307       58,082       123,785       130,560       244,176       271,773  

Taxes other than income taxes

     14,666       14,497       29,923       29,279       58,590       54,655  

Construction expenses

     352,671       272,001       611,623       463,957       1,296,629       1,031,072  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     617,545       512,204       1,242,315       1,042,594       2,405,389       2,080,707  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     53,338       48,265       182,898       172,612       353,410       315,993  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income and (expenses):

            

Net interest deductions

     (23,652     (18,655     (46,283     (37,369     (86,978     (75,087

Other income (deductions)

     (2,706     (2,810     (7,040     (3,800     (9,270     (8,401
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income and (expenses)

     (26,358     (21,465     (53,323     (41,169     (96,248     (83,488
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     26,980       26,800       129,575       131,443       257,162       232,505  

Income tax expense

     5,429       8,679       29,730       44,317       50,501       76,778  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     21,551       18,121       99,845       87,126       206,661       155,727  

Net income (loss) attributable to noncontrolling interest

     —         257       (797     (46     (650     903  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Southwest Gas Holdings, Inc.

   $ 21,551     $ 17,864     $ 100,642     $ 87,172     $ 207,311     $ 154,824  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.44     $ 0.38     $ 2.07     $ 1.83     $ 4.29     $ 3.26  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.44     $ 0.37     $ 2.07     $ 1.82     $ 4.28     $ 3.24  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share

   $ 0.520     $ 0.495     $ 1.040     $ 0.990     $ 2.030     $ 1.890  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average number of common shares

     48,826       47,571       48,622       47,550       48,338       47,516  

Average shares (assuming dilution)

     48,880       47,884       48,671       47,874       48,387       47,857  

The accompanying notes are an integral part of these statements.

 

4


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Thousands of dollars)

(Unaudited)

 

     THREE MONTHS ENDED     SIX MONTHS ENDED     TWELVE MONTHS ENDED  
     JUNE 30,     JUNE 30,     JUNE 30,  
     2018     2017     2018     2017     2018     2017  

Net income

   $ 21,551     $ 18,121     $ 99,845     $ 87,126     $ 206,661     $ 155,727  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

            

Defined benefit pension plans:

            

Net actuarial gain (loss)

     —         —         —         —         (32,701     (14,118

Amortization of prior service cost

     254       207       508       414       922       828  

Amortization of net actuarial loss

     6,387       3,944       12,774       7,888       20,662       16,279  

Regulatory adjustment

     (5,744     (3,556     (11,490     (7,112     8,212       (2,982
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net defined benefit pension plans

     897       595       1,792       1,190       (2,905     7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Forward-starting interest rate swaps:

            

Amounts reclassified into net income

     636       518       1,271       1,036       2,308       2,073  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net forward-starting interest rate swaps

     636       518       1,271       1,036       2,308       2,073  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustments

     (690     629       (1,601     849       (679     158  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     843       1,742       1,462       3,075       (1,276     2,238  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     22,394       19,863       101,307       90,201       205,385       157,965  

Comprehensive income (loss) attributable to noncontrolling interests

     —         279       (797     (17     (668     908  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Southwest Gas Holdings, Inc.

   $ 22,394     $ 19,584     $ 102,104     $ 90,218     $ 206,053     $ 157,057  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

5


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands of dollars)

(Unaudited)

 

     SIX MONTHS ENDED     TWELVE MONTHS ENDED  
     JUNE 30,     JUNE 30,  
     2018     2017     2018     2017  

CASH FLOW FROM OPERATING ACTIVITIES:

        

Net income

   $ 99,845     $ 87,126     $ 206,661     $ 155,727  

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation and amortization

     123,785       130,560       244,176       271,773  

Deferred income taxes

     33,318       47,836       48,871       70,652  

Changes in current assets and liabilities:

        

Accounts receivable, net of allowances

     (12,704     3,545       (57,196     (19,266

Accrued utility revenue

     44,000       42,600       (600     (1,100

Deferred purchased gas costs

     34,105       (73,196     11,693       (111,627

Accounts payable

     (44,465     (50,447     25,943       4,606  

Accrued taxes

     (17,350     (6,100     (9,138     32,361  

Other current assets and liabilities

     (16,806     20,390       (45,399     (14,803

Gains on sale

     (250     (1,427     (3,019     (5,833

Changes in undistributed stock compensation

     3,300       7,731       6,457       9,673  

AFUDC

     (586     (1,109     (1,773     (2,116

Changes in other assets and deferred charges

     (5,122     (11,521     (15,870     5,216  

Changes in other liabilities and deferred credits

     5,952       2,204       7,979       (13,741
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     247,022       198,192       418,785       381,522  
  

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOW FROM INVESTING ACTIVITIES:

        

Construction expenditures and property additions

     (339,011     (262,234     (700,426     (526,893

Acquisition of businesses, net of cash acquired

     (4,209     —         (98,413     —    

Changes in customer advances

     8,158       (1,430     9,911       4,318  

Miscellaneous inflows

     2,564       6,905       12,304       15,818  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (332,498     (256,759     (776,624     (506,757
  

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOW FROM FINANCING ACTIVITIES:

        

Issuance of common stock, net

     69,139       (96     110,390       (111

Dividends paid

     (48,985     (44,949     (96,166     (87,683

Centuri distribution to redeemable noncontrolling interest

     —         (204     —         (544

Issuance of long-term debt, net

     455,398       80,579       781,882       408,397  

Retirement of long-term debt

     (100,776     (60,041     (379,704     (262,348

Change in credit facility and commercial paper

     (102,000     87,000       (44,000     89,500  

Change in short-term debt

     (192,000     2,500       20,000       2,500  

Principal payments on capital lease obligations

     (316     (573     (723     (1,092

Redemption of Centuri shares from noncontrolling parties

     —         —         (23,000     —    

Withholding remittance - share-based compensation

     (2,854     (3,120     (2,910     (3,271

Other

     (898     (1,036     (2,936     (2,481
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     76,708       60,060       362,833       142,867  
  

 

 

   

 

 

   

 

 

   

 

 

 

Effects of currency translation on cash and cash equivalents

     (124     143       34       (56
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in cash and cash equivalents

     (8,892     1,636       5,028       17,576  

Cash and cash equivalents at beginning of period

     43,622       28,066       29,702       12,126  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 34,730     $ 29,702     $ 34,730     $ 29,702  
  

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental information:

        

Interest paid, net of amounts capitalized

   $ 40,082     $ 35,182     $ 76,843     $ 69,398  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income taxes paid (received)

   $ 16,507     $ 3,043     $ 19,137     $ (20,726
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

6


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

SOUTHWEST GAS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Thousands of dollars)

(Unaudited)

 

     JUNE 30,     DECEMBER 31,  
     2018     2017  

ASSETS

    

Utility plant:

    

Gas plant

   $ 6,810,737     $ 6,629,644  

Less: accumulated depreciation

     (2,260,793     (2,231,242

Construction work in progress

     167,114       125,248  
  

 

 

   

 

 

 

Net utility plant

     4,717,058       4,523,650  
  

 

 

   

 

 

 

Other property and investments

     120,476       119,114  
  

 

 

   

 

 

 

Current assets:

    

Cash and cash equivalents

     20,900       37,946  

Accounts receivable, net of allowances

     83,645       119,748  

Accrued utility revenue

     34,200       78,200  

Income taxes receivable, net

     6,752       —    

Deferred purchased gas costs

     —         14,581  

Prepaids and other current assets

     233,441       153,771  
  

 

 

   

 

 

 

Total current assets

     378,938       404,246  
  

 

 

   

 

 

 

Noncurrent assets:

    

Goodwill

     10,095       10,095  

Deferred charges and other assets

     410,553       425,564  
  

 

 

   

 

 

 

Total noncurrent assets

     420,648       435,659  
  

 

 

   

 

 

 

Total assets

   $ 5,637,120     $ 5,482,669  
  

 

 

   

 

 

 
CAPITALIZATION AND LIABILITIES             

Capitalization:

    

Common stock

   $ 49,112     $ 49,112  

Additional paid-in capital

     1,006,065       948,767  

Accumulated other comprehensive income (loss), net

     (53,310     (47,073

Retained earnings

     717,126       659,193  
  

 

 

   

 

 

 

Total Southwest Gas Corporation equity

     1,718,993       1,609,999  

Long-term debt, less current maturities

     1,716,307       1,521,031  
  

 

 

   

 

 

 

Total capitalization

     3,435,300       3,131,030  
  

 

 

   

 

 

 

Current liabilities:

    

Short-term debt

     —         191,000  

Accounts payable

     102,579       158,474  

Customer deposits

     69,247       69,781  

Income taxes payable, net

     —         4,971  

Accrued general taxes

     42,826       43,879  

Accrued interest

     20,441       17,171  

Deferred purchased gas costs

     26,365       6,841  

Payable to parent

     285       194  

Other current liabilities

     162,207       108,785  
  

 

 

   

 

 

 

Total current liabilities

     423,950       601,096  
  

 

 

   

 

 

 

Deferred income taxes and other credits:

    

Deferred income taxes and investment tax credits, net

     473,581       445,243  

Accumulated removal costs

     319,000       315,000  

Other deferred credits and other long-term liabilities

     985,289       990,300  
  

 

 

   

 

 

 

Total deferred income taxes and other credits

     1,777,870       1,750,543  
  

 

 

   

 

 

 

Total capitalization and liabilities

   $ 5,637,120     $ 5,482,669  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

7


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

SOUTHWEST GAS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Thousands of dollars)

(Unaudited)

 

     THREE MONTHS ENDED     SIX MONTHS ENDED     TWELVE MONTHS ENDED  
     JUNE 30,     JUNE 30,     JUNE 30,  
     2018     2017     2018     2017     2018     2017  

Continuing operations:

            

Gas operating revenues

   $ 275,679     $ 260,162     $ 769,992     $ 722,764     $ 1,349,536     $ 1,263,428  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

            

Net cost of gas sold

     83,466       69,421       269,198       216,300       407,943       328,405  

Operations and maintenance

     105,208       97,644       207,398       201,468       397,251       393,772  

Depreciation and amortization

     47,664       46,254       97,625       107,449       192,098       222,935  

Taxes other than income taxes

     14,666       14,497       29,923       29,279       58,590       54,655  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     251,004       227,816       604,144       554,496       1,055,882       999,767  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     24,675       32,346       165,848       168,268       293,654       263,661  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income and (expenses):

            

Net interest deductions

     (20,149     (16,991     (39,404     (34,201     (74,936     (68,407

Other income (deductions)

     (2,094     (2,805     (6,697     (4,049     (9,036     (9,843
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income and (expenses)

     (22,243     (19,796     (46,101     (38,250     (83,972     (78,250
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     2,432       12,550       119,747       130,018       209,682       185,411  

Income tax expense (benefit)

     (190     3,028       26,776       43,558       46,353       59,469  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     2,622       9,522       92,971       86,460       163,329       125,942  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations - construction services:

            

Income before income taxes

     —         —         —         —         —         45,669  

Income tax expense

     —         —         —         —         —         16,550  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income

     —         —         —         —         —         29,119  

Noncontrolling interests

     —         —         —         —         —         949  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income - discontinued operations

     —         —         —         —         —         28,170  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 2,622     $ 9,522     $ 92,971     $ 86,460     $ 163,329     $ 154,112  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

8


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

SOUTHWEST GAS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Thousands of dollars)

(Unaudited)

 

     THREE MONTHS ENDED     SIX MONTHS ENDED     TWELVE MONTHS ENDED  
     JUNE 30,     JUNE 30,     JUNE 30,  
     2018     2017     2018     2017     2018     2017  

Continuing operations:

            

Net income from continuing operations

   $ 2,622     $ 9,522     $ 92,971     $ 86,460     $ 163,329     $ 125,942  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

            

Defined benefit pension plans:

            

Net actuarial gain (loss)

     —         —         —         —         (32,701     (14,118

Amortization of prior service cost

     254       207       508       414       922       828  

Amortization of net actuarial loss

     6,387       3,944       12,774       7,888       20,662       16,279  

Regulatory adjustment

     (5,744     (3,556     (11,490     (7,112     8,212       (2,982
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net defined benefit pension plans

     897       595       1,792       1,190       (2,905     7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Forward-starting interest rate swaps:

            

Amounts reclassified into net income

     636       518       1,271       1,036       2,308       2,073  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net forward-starting interest rate swaps

     636       518       1,271       1,036       2,308       2,073  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax from continuing operations

     1,533       1,113       3,063       2,226       (597     2,080  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income from continuing operations

     4,155       10,635       96,034       88,686       162,732       128,022  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations - construction services:

            

Net income

     —         —         —         —         —         28,170  

Foreign currency translation adjustments

     —         —         —         —         —         (691
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     —         —         —         —         —         27,479  

Comprehensive income (loss) attributable to noncontrolling interests

     —         —         —         —         —         (24
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to discontinued operations - construction services

     —         —         —         —         —         27,503  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 4,155     $ 10,635     $ 96,034     $ 88,686     $ 162,732     $ 155,525  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

9


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

SOUTHWEST GAS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands of dollars)

(Unaudited)

 

     SIX MONTHS ENDED     TWELVE MONTHS ENDED  
     JUNE 30,     JUNE 30,  
     2018     2017     2018     2017  

CASH FLOW FROM OPERATING ACTIVITIES:

        

Net Income

   $ 92,971     $ 86,460     $ 163,329     $ 155,061  

Income from discontinued operations

     —         —         —         29,119  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     92,971       86,460       163,329       125,942  

Adjustments to reconcile net income to net cash provided by operating activities:

        

Depreciation and amortization

     97,625       107,449       192,098       222,935  

Deferred income taxes

     27,371       46,874       47,666       74,241  

Changes in current assets and liabilities:

        

Accounts receivable, net of allowances

     36,104       37,484       (9,282     (973

Accrued utility revenue

     44,000       42,600       (600     (1,100

Deferred purchased gas costs

     34,105       (73,196     11,693       (111,627

Accounts payable

     (52,095     (55,707     8,157       3,157  

Accrued taxes

     (12,776     (2,823     430       23,024  

Other current assets and liabilities

     (24,366     24,265       (62,357     (14,022

Changes in undistributed stock compensation

     3,220       6,931       5,577       8,873  

AFUDC

     (586     (1,109     (1,773     (2,116

Changes in other assets and deferred charges

     (5,490     (11,801     (16,607     4,761  

Changes in other liabilities and deferred credits

     5,477       1,695       7,323       (14,250
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     245,560       209,122       345,654       318,845  
  

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOW FROM INVESTING ACTIVITIES:

        

Construction expenditures and property additions

     (285,999     (224,085     (622,362     (466,780

Changes in customer advances

     8,158       (1,430     9,911       4,318  

Miscellaneous inflows

     778       1,354       2,165       2,546  

Dividends received

     —         —         —         9,660  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (277,063     (224,161     (610,286     (450,256
  

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOW FROM FINANCING ACTIVITIES:

        

Issuance of common stock, net

     —         —         —         (15

Contributions from parent

     56,596       —         97,955       —    

Dividends paid

     (43,000     (39,896     (84,601     (82,630

Issuance of long-term debt, net

     297,495       —         297,495       296,469  

Retirement of long-term debt

     —         (25,000     —         (149,855

Change in credit facility and commercial paper

     (102,000     87,000       (44,000     89,500  

Change in short-term debt

     (191,000     —         —         —    

Withholding remittance - share-based compensation

     (2,855     (3,120     (2,911     (3,271

Other

     (779     (525     (850     (1,970
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     14,457       18,459       263,088       148,228  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by discontinued operating activities

     —         —         —         73,607  

Net cash used in discontinued investing activities

     —         —         —         (23,903

Net cash used in discontinued financing activities

     —         —         —         (46,962

Effects of currency translation on cash and cash equivalents

     —         —         —         (199
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in cash and cash equivalents

     (17,046     3,420       (1,544     19,360  

Change in cash and cash equivalents of discontinued operations included in discontinued operations construction services assets

     —         —         —         (2,543
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in cash and cash equivalents of continuing operations

     (17,046     3,420       (1,544     16,817  

Cash and cash equivalents at beginning of period

     37,946       19,024       22,444       5,627  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 20,900     $ 22,444     $ 20,900     $ 22,444  
  

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental information:

        

Interest paid, net of amounts capitalized

   $ 33,452     $ 32,205     $ 66,037     $ 63,221  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income taxes paid (received)

   $ 10,886     $ 19     $ 3,013     $ (32,885
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

10


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

Note 1 – Nature of Operations and Basis of Presentation

Nature of Operations. Southwest Gas Holdings, Inc., is a holding company, owning all of the shares of common stock of Southwest Gas Corporation and, prior to August 2017, 96.6% of the shares of common stock of Centuri Construction Group, Inc. (“Centuri” or the “construction services” segment). During August 2017, Southwest Gas Holdings, Inc. acquired the remaining 3.4% equity interest in Centuri that was held by the previous owners.

Southwest Gas Corporation (“Southwest” or the “natural gas operations segment”) is engaged in the business of purchasing, distributing, and transporting natural gas for customers in portions of Arizona, Nevada, and California. Public utility rates, practices, facilities, and service territories of Southwest are subject to regulatory oversight. The timing and amount of rate relief can materially impact results of operations. Natural gas purchases and the timing of related recoveries can materially impact liquidity. Results for the natural gas operations segment are higher during winter periods due to the seasonality incorporated in its regulatory rate structures. Centuri is a comprehensive construction services enterprise dedicated to meeting the growing demands of North American utilities, energy, and industrial markets. Centuri derives revenue from installation, replacement, repair, and maintenance of energy distribution systems, and developing industrial construction solutions. Centuri operations are generally conducted under the business names of NPL Construction Co. (“NPL”), Canyon Pipeline Construction, Inc. (“Canyon”), NPL Canada Ltd. (“NPL Canada”), W.S. Nicholls Construction, Inc. (“W.S. Nicholls”), and Canyon Special Projects, Inc. (“Special Projects,” formerly Brigadier Pipelines Inc.). Typically, Centuri revenues are lowest during the first quarter of the year due to unfavorable winter weather conditions. Operating revenues typically improve as more favorable weather conditions occur during the summer and fall months. Centuri acquired New England Utility Constructors, Inc. (“Neuco”) in November 2017, thereby expanding its core services in the Northeast region of the United States. See Note 11 – Acquisition of Construction Services Business for more information.

Basis of Presentation. The condensed consolidated financial statements for Southwest Gas Holdings, Inc. and subsidiaries (the “Company”) and Southwest included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. In connection with a holding company reorganization in January 2017, Centuri ceased to be a subsidiary of Southwest and became a subsidiary of Southwest Gas Holdings, Inc. To give effect to this change, the separate condensed consolidated financial statements related to Southwest Gas Corporation, which are included in this Form 10-Q, depict Centuri-related amounts for periods prior to January 1, 2017 as discontinued operations.

No substantive change has occurred with regard to the Company’s business segments on the whole, or in the primary businesses comprising those segments as a result of the foregoing organizational changes, or due to the acquisition of Neuco. Following the organizational changes, Centuri operations continue to be part of continuing operations and included in the consolidated financial statements of Southwest Gas Holdings, Inc.

The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments, consisting of normal recurring items and estimates necessary for a fair statement of results for the interim periods, have been made. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the 2017 Annual Report to Shareholders, which is incorporated by reference into the 2017 Form 10-K.

Early Adoption of Accounting Standards Update (“ASU”) No. 2018-02. In January 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-02 “Income Statement—Reporting Comprehensive Income (Topic 220)—Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” Early adoption of the amendments in this update is permitted, including adoption in any interim period. Therefore, the Company and Southwest chose to adopt the update early, as permitted, as of January 1, 2018. The adoption of this

 

11


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

update is considered a change in accounting principle. The update addresses issues resulting from the December 22, 2017 enactment of the Tax Cuts and Jobs Act (“TCJA”). Stakeholders raised a narrow-scope financial reporting issue that arose as a consequence of the TCJA related to the fact that when deferred tax balances were remeasured in December 2017, those deferred tax balances were to be reduced, but related amounts historically accumulated in Accumulated other comprehensive income (“AOCI”) prior to the enactment of the TCJA, were required to be recognized as income tax expense rather than being relieved from AOCI. The amendments in this update allow a reclassification from AOCI to retained earnings for those otherwise “stranded” tax effects in AOCI following enactment of the TCJA. Accordingly, approximately $9.3 million of previously stranded tax effects resulting from the TCJA were reclassified to retained earnings from AOCI on the Condensed Consolidated Balance Sheets of Southwest and the Company effective with the early adoption date. Also in association with the adoption, the Company and Southwest elected an accounting policy for releasing income tax effects from AOCI, such that the release of any income tax effects from AOCI will occur as individual items in AOCI are sold or liquidated, to the extent that the related income tax effects are material. See Note 9 – Equity, Other Comprehensive Income, and Accumulated Other Comprehensive Income for more information.

Prepaids and other current assets. Prepaids and other current assets includes gas pipe materials and operating supplies of $55 million at June 30, 2018 and $33 million at December 31, 2017 (carried at weighted average cost), as well as $69 million at June 30, 2018 and $40 million at December 31, 2017 related to a regulatory asset associated with the Arizona decoupling mechanism (an alternative revenue program). In May 2018, El Paso Natural Gas, L.L.C. (“EPNG”), was ordered to refund approximately $49 million to Southwest related to transmission services with EPNG. The refund (which was received by Southwest in July 2018) relates to rates authorized by the Federal Energy Regulatory Commission (“FERC”) to be in effect subject to refund provisions from EPNG’s 2010 rate case. Southwest will dispense the funds received through rate adjustments associated with its purchased gas adjustment (“PGA”) mechanisms. As the refund was outstanding at June 30, 2018, it did not impact cash flows; however, it is reflected in Prepaids and other current assets and a corresponding amount is reflected in a regulatory liability included within Other current liabilities in the balance sheets of both Southwest and the Company as of that date.

Income Taxes. On December 22, 2017, the TCJA legislation was enacted. Substantially all of the provisions of the TCJA are effective for taxable years beginning after December 31, 2017. The TCJA includes extensive changes which significantly impact the taxation of business entities, including specific provisions related to regulated public utilities. The more significant change that impacts the Company includes the reduction in the corporate federal income tax rate from 35% to 21%. The tax rate reduction created excess deferred taxes, resulting in the required remeasurement of deferred tax balances, which when remeasured during the fourth quarter of 2017, reduced income tax expense. The regulated operations of Southwest experienced other impacts due to its rate-regulation and the accounting treatment prescribed by U.S. GAAP to reflect the economics of that regulation. The remeasurement for Southwest reduced the net deferred income tax liability and caused the creation of a regulatory liability with appropriate tax gross-up. Both deferred tax liabilities and excess deferred tax liabilities (included within regulatory liabilities) reduce utility rate base. The TCJA includes provisions that stipulate how these excess deferred taxes are to be passed back to customers, and ultimate facilitation will occur in conjunction with appropriate regulatory commissions. During the six months ended June 30, 2018, tax expense for the Company and Southwest reflects the lower U.S. federal income tax rate now in effect (as applicable to earnings in 2018). Amounts recorded by the Company and Southwest associated with the measurement and accounting for the effects of the TCJA are provisional reasonable estimates. Management is continuing to evaluate and finalize all provisional items during the measurement period permitted by the SEC and the FASB, which is not to exceed one year from the enactment date.

In the first quarter of 2018, management recorded a regulatory liability and reduced utility revenues by approximately $14 million for potential regulatory rate reductions to customers resulting from the reduced cost-of-service levels during the period. Based on regulatory activity in the second quarter of 2018, management has updated its estimated reserve to approximately $12.5 million.

In July 2018, the Arizona Corporation Commission (“ACC”) staff issued a recommended opinion and order that would require Southwest to return to customers amounts related to excess cost-of-service rates as a result of customer rates having been authorized prior to the reduction in federal tax expense from tax reform. Also in July, the ACC issued a decision (the “Decision”) based on the staff recommendation. The Decision provides for bill credits for excess amounts experienced through July 2018. Additionally, starting in August 2018, surcredits applied to volumes would be implemented in consideration of lower tax rates impacting tax expense on an ongoing basis. Based on these recent

 

12


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

actions of the ACC, the $12.5 million reserve is reflected in Other current liabilities. During the first quarter of 2018, related amounts were included in Other deferred credits and other long-term liabilities pending resolution of regulatory outcome and timing.

Other current liabilities. Other current liabilities for both Southwest and the Company include the $49 million regulatory liability associated with the EPNG refund (noted previously) and the $12.5 million reserve associated with tax reform noted above. This caption on Southwest’s Condensed Consolidated Balance Sheets also includes $22 million of dividends declared by Southwest Gas Corporation, but not yet paid to Southwest Gas Holdings, Inc. at June 30, 2018.

Cash and Cash Equivalents. For purposes of reporting consolidated cash flows, cash and cash equivalents include cash on hand and financial instruments with a purchase-date maturity of three months or less. In general, cash and cash equivalents fall within Level 1 (quoted prices for identical financial instruments) of the three-level fair value hierarchy that ranks the inputs, used to measure fair value, by their reliability. However, cash and cash equivalents for Southwest and the Company also includes money market fund investments totaling approximately $1.9 million and $13.2 million, respectively, which fall within Level 2 (significant other observable inputs) of the fair value hierarchy, due to the asset valuation methods used by money market funds.

Significant non-cash investing and financing activities included the following: Upon contract expiration, customer advances of approximately $512,000 and $1.6 million, during the first six months of 2018 and 2017, respectively, were applied as contributions toward utility construction activity and represent non-cash investing activity.

Goodwill. Goodwill is assessed as of October 1st each year for impairment, or otherwise, if circumstances indicate an impairment to the carrying value of goodwill may have occurred. In consideration of the holding company reorganization, management of the Company considered its reporting units and segments and determined that historic judgments regarding its segments and reporting units continue to apply, and that no change was necessary with regard to the level at which goodwill is assessed for impairment. No impairment was deemed to have occurred in the first six months of 2018.

Goodwill:

 

(Thousands of dollars)    Natural
Gas
Operations
     Construction
Services
     Consolidated  

December 31, 2017

   $ 10,095      $ 169,219      $ 179,314  

Additional goodwill from Neuco acquisition

     —          182        182  

Foreign currency translation adjustment

     —          (5,263      (5,263
  

 

 

    

 

 

    

 

 

 

June 30, 2018

   $ 10,095      $ 164,138      $ 174,233  
  

 

 

    

 

 

    

 

 

 

Intercompany Transactions. Centuri recognizes revenues generated from contracts with Southwest (see Note 4 - Segment Information). Centuri’s accounts receivable for these services are presented in the table below (thousands of dollars):

 

     June 30, 2018      December 31, 2017  

Centuri accounts receivable for services provided to Southwest

   $ 13,899      $ 12,987  
  

 

 

    

 

 

 

The accounts receivable balance, revenues, and associated profits are included in the condensed consolidated financial statements of the Company and were not eliminated during consolidation in accordance with accounting treatment for rate-regulated entities.

 

13


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

Other Property and Investments. Other property and investments on the Condensed Consolidated Balance Sheets includes (thousands of dollars):

 

     June 30, 2018      December 31, 2017  

Southwest Gas Corporation:

     

Net cash surrender value of COLI policies

   $ 118,733      $ 117,341  

Other property

     1,743        1,773  
  

 

 

    

 

 

 

Total Southwest Gas Corporation

     120,476        119,114  

Centuri property, equipment, and intangibles

     606,750        554,730  

Centuri accumulated depreciation/amortization

     (278,209      (258,906

Other property

     13,219        13,242  
  

 

 

    

 

 

 

Total Southwest Gas Holdings, Inc.

   $ 462,236      $ 428,180  
  

 

 

    

 

 

 

Other Income (Deductions). The following table provides the composition of significant items included in Other income (deductions) in the Condensed Consolidated Statements of Income (thousands of dollars):

 

     Three Months Ended     Six Months Ended     Twelve Months Ended  
     June 30,     June 30,     June 30,  
     2018     2017     2018     2017     2018     2017  

Southwest Gas Corporation - natural gas operations segment:

            

Change in COLI policies

   $ 2,000     $ 1,900     $ 1,300     $ 4,700     $ 6,900     $ 9,000  

Interest income

     1,377       614       2,795       1,178       4,401       2,269  

Equity AFUDC

     357       633       586       1,109       1,773       2,116  

Other components of net periodic benefit cost

     (5,264     (4,857     (10,529     (9,712     (20,241     (19,591

Miscellaneous income and (expense)

     (564     (1,095     (849     (1,324     (1,869     (3,637
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Southwest Gas Corporation - total other income (deductions)

     (2,094     (2,805     (6,697     (4,049     (9,036     (9,843
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Construction services segment:

            

Interest income

     1       1       2       1       4       1  

Foreign transaction gain (loss)

     202       (197     349       (198     (207     (201

Miscellaneous income and (expense)

     (835     190       (720     445       (69     1,641  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Centuri - total other income (deductions)

     (632     (6     (369     248       (272     1,441  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Corporate and administrative

     20       1       26       1       38       1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated Southwest Gas Holdings, Inc. - total other income (deductions)

   $ (2,706   $ (2,810   $ (7,040   $ (3,800   $ (9,270   $ (8,401
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Included in the table above is the change in cash surrender values of company-owned life insurance (“COLI”) policies (including net death benefits recognized). These life insurance policies on members of management and other key employees are used by Southwest to indemnify itself against the loss of talent, expertise, and knowledge, as well as to provide indirect funding for certain nonqualified benefit plans. Current tax regulations provide for tax-free treatment of life insurance (death benefit) proceeds. Therefore, changes in the cash surrender values of COLI policies, as they progress towards the ultimate death benefits, are also recorded without tax consequences. Refer also to Note 2 – Components of Net Periodic Benefit Cost.

Recently Issued Accounting Standards Updates.

In February 2016, the FASB issued the update “Leases (Topic 842).” Under the update, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date:

 

   

A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and

 

   

A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, “Revenue from Contracts with Customers.” Though companies have historically been required to make disclosures regarding leases and of associated contractual obligations, leases with terms longer than a year will no longer exist off-balance sheet. Lessees (for capital

 

14


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. Early application is permitted. Management currently plans to adopt the update at the required adoption date, which is for interim and annual reporting periods commencing January 1, 2019. Existing leases have been historically documented under traditional leasing arrangements by both segments. Management is in the process of evaluating other types of arrangements that have the potential to meet the definition of a lease under the new standard. The FASB recently issued guidance that will allow the election of a practical expedient to not apply the new standard to existing easement contracts that were not previously assessed as leases under historic guidance. However, the Company and Southwest would still be required to evaluate any new easements entered into after the effective date of the standard to determine if the arrangements should be accounted for as leases. In July 2018, the FASB issued narrow-scope improvements to the standard, which include, among other things, guidance on lease classification reassessments, that reference index changes, and on their own, do not constitute resolution of a contingency requiring remeasurement of lease payments, and clarification that lessor-controlled options to terminate a lease are considered in the lease term. Management is currently in the process of implementing a new software system to comply with Topic 842 including amendments thereto, and continues to evaluate the guidance in light of its customary leasing arrangements (and other arrangements in association with the new guidance) to determine the effect the new standard, and its amendments, will have on its financial position, results of operations, cash flows, and business processes.

In June 2016, the FASB issued the update “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The update amends guidance on reporting credit losses for financial assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, the update eliminates the “probable” threshold for initial recognition of credit losses in current U.S. GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current U.S. GAAP; however, the update will require that credit losses be presented as an allowance rather than as a write-down. This update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The update affects loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt the amendments in this update earlier as of fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Management is evaluating what impact, if any, this update might have on its consolidated financial statements and disclosures.

 

15


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

Note 2 – Components of Net Periodic Benefit Cost

As of January 1, 2018, the Company and Southwest adopted “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The update requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations and be appropriately described. The update also allows only the service cost component (and not the other components of periodic benefit costs) to be eligible for capitalization when applicable, making no exception for specialized industries, including rate-regulated industries. This guidance is required to be applied on a retrospective basis for the presentation of the service cost component and the other components of net benefit cost and on a prospective basis for the capitalization of only the service cost component of net benefit cost. Amounts capitalized as part of assets prior to the date of adoption were not adjusted through a cumulative effect adjustment. The guidance allows a practical expedient for the retrospective application that permits use of the amounts disclosed for the various components of net benefit cost in the pension and other postretirement benefit plans footnote as the basis for the retrospective application. This is in lieu of determining how much of the various components of net benefit cost were actually reflected in the income statement each period as a result of capitalization of certain costs into assets and their subsequent amortization. The Company and Southwest have elected to utilize the practical expedient. Therefore, upon adoption, amounts presented in the Condensed Consolidated Statements of Income for operations and maintenance for the three-, six-, and twelve-month periods ended June 30, 2017 were reclassified. The Operations and maintenance line item of the Southwest Gas Holdings, Inc. Condensed Consolidated Statements of Income was revised from $103.1 million to $98.2 million for the three months ended June 30, 2017, from $212.2 million to $202.5 million for the six months ended June 30, 2017, and from $414.4 million to $394.8 million for the twelve months ended June 30, 2017. The Operations and maintenance line item of the Southwest Gas Corporation Condensed Consolidated Statements of Income was revised from $102.5 million to $97.6 million for the three months ended June 30, 2017, from $211.2 million to $201.5 million for the six months ended June 30, 2017, and from $413.4 million to $393.8 million for the twelve months ended June 30, 2017. The Other income (deductions) line item of the Southwest Gas Holdings, Inc. Condensed Consolidated Statements of Income was revised from $2.1 million to ($2.8) million for the three months ended June 30, 2017, from $5.9 million to ($3.8) million for the six months ended June 30, 2017, and from $11.2 million to ($8.4) million for the twelve months ended June 30, 2017. The Other income (deductions) line item of the Southwest Gas Corporation Condensed Consolidated Statements of Income was revised from $2.1 million to ($2.8) million for the three months ended June 30, 2017, from $5.7 million to ($4.0) million for the six months ended June 30, 2017, and from $9.8 million to ($9.8) million for the twelve months ended June 30, 2017. Net income overall was not impacted by this reclassification for either the Company or Southwest.

Southwest has a noncontributory qualified retirement plan with defined benefits covering substantially all employees and a separate unfunded supplemental retirement plan (“SERP”) which is limited to officers. Southwest also provides postretirement benefits other than pensions (“PBOP”) to its qualified retirees for health care, dental, and life insurance.

During the first quarter of 2018, qualifying term-vested participants were offered a lump-sum present value payout of their pensions. The offer was primarily intended to reduce insurance and ongoing maintenance costs associated with qualifying participant balances. About one-quarter of the approximate 385 eligible participants accepted the offer, resulting in an approximate $6.8 million payment from pension assets in July 2018. The lump sum payout will have no impact on net periodic benefit cost or pension funding requirements during 2018.

The service cost component of net periodic benefit costs included in the table below are components of an overhead loading process associated with the cost of labor (refer to discussion above related to the update to Topic 715). The overhead process ultimately results in allocation of that portion of overall net periodic benefit costs to the same accounts to which productive labor is charged. As a result, service costs become components of various accounts, primarily operations and maintenance expense, net utility plant, and deferred charges and other assets for both the Company and Southwest. Refer also to the practical expedient elected related to amounts capitalized as part of assets prior to the adoption date.

 

16


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

     Qualified Retirement Plan  
     Period Ended June 30,  
     Three Months     Six Months     Twelve Months  
     2018     2017     2018     2017     2018     2017  
(Thousands of dollars)                                     

Service cost

   $ 7,139     $ 5,848     $ 14,278     $ 11,696     $ 25,974     $ 23,112  

Interest cost

     11,044       11,521       22,087       23,041       45,129       46,055  

Expected return on plan assets

     (14,688     (13,799     (29,377     (27,598     (56,975     (55,877

Amortization of net actuarial loss

     8,028       6,001       16,057       12,002       28,059       24,635  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 11,523     $ 9,571     $ 23,045     $ 19,141     $ 42,187     $ 37,925  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     SERP  
     Period Ended June 30,  
     Three Months     Six Months     Twelve Months  
     2018     2017     2018     2017     2018     2017  
(Thousands of dollars)                                     

Service cost

   $ 61     $ 77     $ 122     $ 155     $ 276     $ 321  

Interest cost

     414       471       829       942       1,770       1,871  

Amortization of net actuarial loss

     376       360       751       720       1,472       1,411  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 851     $ 908     $ 1,702     $ 1,817     $ 3,518     $ 3,603  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     PBOP  
     Period Ended June 30,  
     Three Months     Six Months     Twelve Months  
     2018     2017     2018     2017     2018     2017  
(Thousands of dollars)                                     

Service cost

   $ 369     $ 367     $ 737     $ 734     $ 1,471     $ 1,484  

Interest cost

     687       808       1,374       1,616       2,990       3,205  

Expected return on plan assets

     (930     (839     (1,860     (1,679     (3,539     (3,253

Amortization of prior service costs

     334       334       668       668       1,335       1,335  

Amortization of net actuarial loss

     —         —         —         —         —         209  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 460     $ 670     $ 919     $ 1,339     $ 2,257     $ 2,980  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

17


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

Note 3 – Revenue

Effective January 2018, the Company and Southwest adopted the FASB Accounting Standards Codification update, Topic 606, “Revenue from Contracts with Customers”, using the modified retrospective transition method. Under the modified retrospective approach, the information for periods prior to the adoption date has not been restated and continues to be reported under the accounting standards in effect for those periods. As permitted under the standard, the Company and Southwest have elected to apply the guidance retrospectively only to those contracts that were not completed at January 1, 2018. Management assessed the effects the new guidance has on the Company’s (and Southwest’s, in the case of utility operations) financial position, results of operations, and cash flows. Based on these assessments, the adoption of Topic 606 had no material impact on any of the financial statements of Southwest or the Company.

The following information about the Company’s revenues is presented by segment. Southwest comprises one segment – natural gas operations.

Natural Gas Operations Segment:

Southwest is engaged in the business of purchasing, distributing, and transporting natural gas for customers in portions of Arizona, Nevada, and California. Public utility rates, practices, facilities, and service territories of Southwest are subject to regulatory oversight. Southwest recognizes revenue when it satisfies its performance by transferring gas to the customer. Revenues also include the net impacts of margin tracker/decoupling accruals based on criteria in U.S. GAAP for rate-regulated entities associated with alternative revenue programs. Revenues from customer arrangements and from alternative revenue programs are described below.

Southwest acts as an agent for state and local taxing authorities in the collection and remission of a variety of taxes, including sales and use taxes and surcharges. These taxes are not included in gas operating revenues. Management uses the net classification method to report taxes collected from customers to be remitted to governmental authorities.

Southwest generally has two types of services to its customers: tariff sales and transportation–only service. Tariff sales encompass sales to many types of customers (primarily residential) under various rate schedules, subject to cost-of-service ratemaking, which is based on the rate-regulation of state commissions and the FERC. Southwest provides both the commodity and the related distribution service to nearly all of its approximate 2 million customers, and only several hundred customers (who are eligible to secure their own gas) subscribe to transportation-only service. Also, only a few hundred customers have contracts with stated periods. Southwest recognizes revenue when it satisfies its performance requirement by transferring volumes of gas to the customer. Natural gas is delivered and consumed by the customer simultaneously. The provision of service is represented by the turn of the meter dial and is the primary representation of the satisfaction of performance obligations of Southwest. The amount billable via regulated rates (both volumetric and fixed monthly rates as part of rate design) corresponds to the value to the customer, and management believes that the amount billable under the “invoice practical expedient” (amount Southwest has the right to invoice) is appropriate to utilize for purposes of recognizing revenue. Estimated amounts remaining unbilled since the last meter read date are restricted from being billed due only to the passage of time and therefore are also recognized for service provided through the balance sheet date. While natural gas service is typically recurring, there is generally not a contract term for utility service. Therefore, the contract term is not generally viewed to extend beyond the service provided to date, and customers can generally terminate service at will.

Transportation-only service is also governed by tariff rate provisions. Transportation-only service is generally only available to very large customers under requirements of Southwest’s various tariffs. With this service, customers secure their own gas supply and Southwest provides transportation services to move the customer-supplied gas to the intended location. Southwest concluded that transportation/transmission service is suitable to an “over time” model. Rate structures under Southwest’s regulation for transportation customers include a combination of volumetric charges and monthly “fixed” charges (including charges commonly referred to as capacity charges, demand charges, or reservation charges) as part of the rate design of regulated jurisdictions. These types of fixed charges represent a separate performance obligation associated with standing ready over the period of the month to deliver quantities of gas, regardless of whether the customer takes delivery of any quantity of gas. The performance obligations under these circumstances are satisfied over the course of the month under an output measure of progress based on time, which correlates to the period for which the charges are eligible to be invoiced.

 

18


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

Under its regulation, Southwest enters into negotiated rate contracts for those customers located in proximity to another pipeline, which pose a threat of bypassing its distribution system. Southwest may also enter into similar contracts for customers otherwise able to satisfy their energy needs by means of alternative fuel to natural gas. Less than two dozen customers are party to contracts with rate components subject to negotiation. Many rate provisions and terms of service for these less common types of contracts are also subject to regulatory oversight and tariff provisions. The performance obligations for these customers are satisfied similar to those for other customers by means of transporting/delivering natural gas to the customer. Many or most of the rate components, and structures, for these types of customers are the same as those for similar customers without negotiated rate components; and the negotiated rates are within the parameters of the tariff guidelines. Management determined that these arrangements qualify for the invoice practical expedient for recognizing revenue. Furthermore, while some of these contracts include contract periods extending over time, including multiple years, as amounts billable under the contract are based on rates in effect for the customer for service provided to date, no significant financing component is deemed to exist.

As indicated above, revenues also include the net impacts of margin tracker/decoupling accruals. All of Southwest’s service territories have decoupled rate structures (also referred to as alternative revenue programs) that are designed to eliminate the direct link between volumetric sales and revenue, thereby mitigating the impacts of unusual weather variability and conservation on margin. The primary alternative revenue programs involve permissible adjustments for differences between stated tariff benchmarks and amounts billable through revenue from contracts with customers via existing rates. Such adjustments are recognized monthly in revenue and in the associated regulatory asset/liability in advance of rate adjustments intended to collect or return amounts recognized. Revenues recognized for the adjustment to the benchmarks noted are required to be presented separately from revenues from contracts from customers, and as such, are provided below and identified as alternative revenue program revenue.

Gas operating revenues on the Condensed Consolidated Statements of Income of both the Company and Southwest include revenue from contracts with customers, which is shown below disaggregated by customer type, and various categories of revenue:

 

     Three Months Ended      Six Months Ended      Twelve Months Ended  
     June 30,      June 30,      June 30,  
(Thousands of dollars)    2018      2017      2018     2017      2018     2017  

Residential

   $ 166,702      $ 158,442      $ 511,313     $ 501,179      $ 867,338     $ 850,344  

Small commercial

     55,653        51,018        143,596       132,143        254,966       235,684  

Large commercial

     13,134        12,781        28,574       26,376        54,577       49,561  

Industrial/other

     5,491        5,043        12,001       10,494        23,533       20,157  

Transportation

     20,719        20,958        44,773       43,690        88,842       86,457  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Revenue from contracts with customers

     261,699        248,242        740,257       713,882        1,289,256       1,242,203  

Alternative revenue program revenues (deferrals)

     10,393        10,135        37,602       5,903        67,046       17,280  

Other revenues (a)

     3,587        1,785        (7,867     2,979        (6,766     3,945  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total Gas operating revenues

   $ 275,679      $ 260,162      $ 769,992     $ 722,764      $ 1,349,536     $ 1,263,428  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(a)

Includes various other revenues, including $1.6 million during the three months, and an offset of $12.5 million in both the six months and twelve months ending June 30, 2018 related to tax reform savings adjustments. Refer to Income Taxes in Note 1 – Nature of Operations and Basis of Presentation.

Construction Services Segment:

The majority of Centuri contracts are performed under unit-price contracts. Generally, these contracts state prices per unit of installation. Typical installations are accomplished in a few weeks or less. Revenues are recorded as installations are completed. Revenues are recorded for long-term fixed-price contracts in a pattern that reflects the transfer of control of promised goods and services to the customer over time. The amount of revenue recognized on fixed-price contracts is based on costs expended to date relative to anticipated final contract costs. Some unit-price contracts contain caps that if encroached, trigger revenue and loss recognition similar to a fixed-price contract model.

Centuri is required to collect taxes imposed by various governmental agencies on the work performed by Centuri for its customers. These taxes are not included in construction revenues. Management uses the net classification method to report taxes collected from customers to be remitted to governmental authorities.

 

19


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

Centuri derives revenue from the installation, replacement, repair, and maintenance of energy distribution systems, and in developing industrial construction solutions. Centuri has operations in the U.S. and Canada. The majority of Centuri’s revenues are related to construction contracts for natural gas pipeline replacement and installation work for natural gas utilities. In addition, Centuri performs certain industrial construction activities for various customers and industries. Centuri has two types of agreements with its customers: master services agreements (“MSAs”) and bid contracts. Most of Centuri’s customers supply many of their own materials in order for Centuri to complete its work under the contracts.

An MSA identifies most of the terms describing each party’s rights and obligations that will govern future work authorizations. An MSA is often effective for multiple years. A work authorization is issued by the customer to describe the location, timing, and any additional information necessary to complete the work for the customer. The combination of the MSA and the work authorization determines when a contract exists and revenue recognition may begin. Each work authorization is generally a single performance obligation as Centuri is performing a significant integration service. Centuri has elected to use the portfolio method practical expedient at the customer level as the terms and conditions of the work performed under MSAs are similar in nature with each customer but vary significantly between customers.

A bid contract is typically a one-time agreement for a specific project that has all necessary terms defining each party’s rights and obligations. Each bid contract is evaluated for revenue recognition individually. Control of assets created under bid contracts generally passes to the customer over time. Bid contracts often have a single performance obligation as Centuri is providing a significant integration service.

Centuri’s MSA and bid contracts are characterized as either fixed-price contracts or unit-price contracts for revenue recognition purposes. The cost-to-cost input method is used to measure progress towards the satisfaction of a performance obligation for fixed-price contracts. Input methods result in the recognition of revenue based on the entity’s effort to satisfy the performance obligation relative to the total expected effort to satisfy the performance obligation. For unit-price contracts, an output method is used to measure progress towards satisfaction of a performance obligation. Also with regard to unit-price contracts, the output measurement will be the completion of each unit that is required under the contract.

Actual revenues and project costs can vary, sometimes substantially, from previous estimates due to changes in a variety of factors including unforeseen circumstances not originally contemplated. These factors, along with other risks inherent in performing fixed-price contracts may cause actual revenues and gross profit for a project to differ from previous estimates and could result in reduced profitability or losses on projects. Changes in these factors may result in revisions to costs and earnings, the impacts for which are recognized in the period in which the changes are identified. Once identified, these types of conditions continue to be evaluated for each project throughout the project term and ongoing revisions in management’s estimates of contract value, contract cost, and contract profit are recognized as necessary in the period determined.

Centuri categorizes work performed under MSAs and bid contracts into three primary service types: replacement gas construction, new gas construction, and other construction. Replacement gas construction includes work involving previously existing gas pipelines. New gas construction involves the installation of new pipelines or service lines to areas that do not already have gas services. Other construction includes all other work and can include industrial construction, water infrastructure construction, electric infrastructure construction, etc.

Contracts can have compensation/consideration that is variable. For MSAs, variable consideration is evaluated at the customer level as the terms creating variability in pricing are included within the MSA and are not specific to a work authorization. For multi-year MSAs, variable consideration items are typically determined for each year of the contract and not for the full contract term. For bid contracts, variable consideration is evaluated at the individual contract level. The expected value method or most likely amount method is used based on the nature of the variable consideration. Types of variable consideration include liquidated damages, delay penalties, performance incentives, safety bonuses, payment discounts, and volume rebates. Centuri will typically estimate variable consideration and adjust financial information, as necessary.

 

20


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

Change orders involve the modification in scope, price, or both to the current contract, requiring approval by both parties. The existing terms of the contract continue to be accounted for under the current contract until such time as a change order is approved. Once approved, the change order is either treated as a separate contract or as part of the existing contract, as appropriate, under the circumstances. When the scope is agreed upon in the change order but not the price, Centuri estimates the change to the transaction price.

The following tables display Centuri’s revenue from contracts with customers disaggregated by service type and contract type:

 

(Thousands of dollars)    Three Months Ended      Six Months Ended      Twelve Months Ended  
     June 30,      June 30,      June 30,  
     2018      2017      2018      2017      2018      2017  

Service Types:

                 
Replacement gas construction      $256,070        $181,512        $413,421        $301,950        $899,537        $733,927  
New gas construction      44,276        40,226        80,473        73,305        172,545        197,100  
Other construction      94,858        78,569        161,327        117,187        337,181        202,245  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Construction revenues

     $395,204        $300,307        $655,221        $492,442        $1,409,263        $1,133,272  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(Thousands of dollars)    Three Months Ended      Six Months Ended      Twelve Months Ended  
     June 30,      June 30,      June 30,  
     2018      2017      2018      2017      2018      2017  

Contract Types:

                 
Master services agreement      $290,075        $208,361        $484,539        $355,553        $1,014,517        $825,980  
Bid contract      105,129        91,946        170,682        136,889        394,746        307,292  

Total Construction revenues

     $395,204        $300,307        $655,221        $492,442        $1,409,263        $1,133,272  
Unit priced contracts      $345,390        $272,427        $579,675        $450,098        $1,249,602        $974,107  
Fixed priced contracts      49,814        27,880        75,546        42,344        159,661        159,165  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Construction revenues

     $395,204        $300,307        $655,221        $492,442        $1,409,263        $1,133,272  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table provides information about receivables, revenue earned on contracts in progress in excess of billings, which are included within accounts receivable, net of allowances, and amounts billed in excess of revenue earned on contracts, which is included in other current liabilities as of June 30, 2018 and December 31, 2017 on the Company’s Condensed Consolidated Balance Sheets:

 

(Thousands of dollars)    June 30, 2018      December 31, 2017  

Contracts receivable, net

   $ 187,485      $ 221,859  

Revenue earned on contracts in progress in excess of billings

     86,750        5,768  

Amounts billed in excess of revenue earned on contracts

     8,592        9,602  

The revenue earned on contracts in progress in excess of billings primarily relates to Centuri’s rights to consideration for work completed but not billed and/or approved at the reporting date. The revenue earned on contracts in progress in excess of billings are transferred to contracts receivable when the rights become unconditional. The amounts billed in excess of revenue earned on contracts primarily relates to the advance consideration received from customers for which work has not yet been completed. The amount of revenue recognized in 2018 from performance obligations satisfied (or partially satisfied) in previous periods under these contracts is $34.7 million for the three months ended June 30, 2018 and $88.7 million for the six months ended June 30, 2018.

For Centuri’s contracts that have an original duration of one year or less, Centuri uses the practical expedient applicable to such contracts and does not consider the time value of money. Further, because of the short duration of these contracts, Centuri has not disclosed the transaction price for the remaining performance obligations as of the end of each reporting period or when the Company expects to recognize the revenue.

Centuri has sixteen contracts that had an original duration of more than one year. The aggregate amount of the transaction price allocated to the unsatisfied performance obligations of these contracts as of June 30, 2018 is $86 million. Centuri expects to recognize the remaining performance obligations over the next four years, however, the timing of that recognition is largely within the control of the customer, including when the necessary equipment and materials required to complete the work are provided by the customer.

 

21


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

Construction services contracts receivable consists of the following:

 

(Thousands of dollars)    June 30, 2018  

Billed on completed contracts and contracts in progress

   $ 185,911  

Other receivables

     1,660  
  

 

 

 

Contracts receivable, gross

     187,571  

Allowance for doubtful accounts

     (86
  

 

 

 

Contracts receivable, net

   $ 187,485  
  

 

 

 

The balance of contracts receivable above is included in Accounts Receivable, net of allowances in the Southwest Gas Holdings, Inc. Condensed Consolidated Balance Sheet at June 30, 2018.

Management recognizes revenue on contracts in progress in excess of billings (a contract asset) within Accounts receivable, net of allowances in the Company’s Condensed Consolidated Balance Sheets, and amounts billed in excess of revenue earned (a contract liability) in Other current liabilities. However, the following shows the significant changes in these asset and liability balances associated with Centuri since January 1, 2018:

 

(Thousands of dollars)    June 30, 2018  
     Revenue earned on
contracts in progress
in excess of billings
     Amounts billed in
excess of revenue
earned on contracts
 

Revenue recognized that was included in the amounts billed in excess of revenue earned on contracts balance at the beginning of the period

   $ —        $ (9,602

Increases due to amounts billed to customers in excess of revenue earned during the period

     —          8,592  

Transferred to contracts receivable from revenue earned on contracts in progress in excess of billings recognized at the beginning of the period

     (5,768      —    

Increases from the reclassification of contract assets due to the adoption of topic 606

     51,744        —    

Increases from contract assets, contingent on a future event occurring

     35,006        —    

In regards to the table above, prior to the adoption of ASC Topic 606, revenue earned on contracts in progress in excess of billings was only used to recognize contract assets related to fixed-price contracts under previous accounting guidance. This balance now includes any conditional contract assets for both fixed-price contracts and unit-price contracts. Centuri considers retention and unbilled amounts to customers to be conditional contract assets, as payment is contingent on the occurrence of a future event. Contracts receivable, net, included in Accounts receivable, net of allowances, includes only amounts that are unconditional in nature, which means only the passage of time remains and Centuri has invoiced the customer. Similarly, amounts billed in excess of revenue earned on contracts, which is included in the Other current liabilities line item on the Company’s Condensed Consolidated Balance Sheets, was only used to recognize contract liabilities related to fixed-price contracts under previous accounting guidance. This line item now includes contract liabilities related to both fixed-price contracts and unit-price contracts. In the event a contract asset or contract liability is expected to be recognized for greater than one year from the financial statement date, Centuri classifies those amounts as long-term contract assets or contract liabilities, included in Other deferred credits and other long-term liabilities on the Company’s Condensed Consolidated Balance Sheets.

 

22


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

Note 4 – Segment Information

The Company has two reportable segments: natural gas operations and construction services. Southwest has a single reportable segment that is referred to herein as the natural gas operations segment of the Company. In order to reconcile to net income as disclosed in the Condensed Consolidated Statements of Income, an Other column is included associated with impacts related to corporate and administrative activities related to Southwest Gas Holdings, Inc. The following tables present revenues from external customers, intersegment revenues, and segment net income for the two reportable segments (thousands of dollars):

 

     Natural Gas
Operations
     Construction
Services
     Other      Total  

Three months ended June 30, 2018

           

Revenues from external customers

   $ 275,679      $ 362,132      $ —        $ 637,811  

Intersegment revenues

     —          33,072        —          33,072  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 275,679      $ 395,204      $ —        $ 670,883  
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment net income (loss)

   $ 2,622      $ 19,236      $ (307    $ 21,551  
  

 

 

    

 

 

    

 

 

    

 

 

 

Three months ended June 30, 2017

           

Revenues from external customers

   $ 260,162      $ 277,384      $ —        $ 537,546  

Intersegment revenues

     —          22,923        —          22,923  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 260,162      $ 300,307      $ —        $ 560,469  
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment net income (loss)

   $ 9,522      $ 8,716      $ (374    $ 17,864  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Natural Gas
Operations
     Construction
Services
     Other      Total  

Six months ended June 30, 2018

           

Revenues from external customers

   $ 769,992      $ 594,991      $ —        $ 1,364,983  

Intersegment revenues

     —          60,230        —          60,230  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 769,992      $ 655,221      $ —        $ 1,425,213  
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment net income (loss)

   $ 92,971      $ 8,235      $ (564    $ 100,642  
  

 

 

    

 

 

    

 

 

    

 

 

 

Six months ended June 30, 2017

           

Revenues from external customers

   $ 722,764      $ 448,223      $ —        $ 1,170,987  

Intersegment revenues

     —          44,219        —          44,219  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 722,764      $ 492,442      $ —        $ 1,215,206  
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment net income (loss)

   $ 86,460      $ 1,382      $ (670    $ 87,172  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Natural Gas
Operations
     Construction
Services
     Other      Total  

Twelve months ended June 30, 2018

           

Revenues from external customers

   $ 1,349,536      $ 1,296,093      $ —        $ 2,645,629  

Intersegment revenues

     —          113,170        —          113,170  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,349,536      $ 1,409,263      $ —        $ 2,758,799  
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment net income (loss)

   $ 163,329      $ 45,213      $ (1,231    $ 207,311  
  

 

 

    

 

 

    

 

 

    

 

 

 

Twelve months ended June 30, 2017

           

Revenues from external customers

   $ 1,263,428      $ 1,038,876      $ —        $ 2,302,304  

Intersegment revenues

     —          94,396        —          94,396  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,263,428      $ 1,133,272      $ —        $ 2,396,700  
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment net income (loss)

   $ 125,942      $ 29,552      $ (670    $ 154,824  
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 5 – Derivatives and Fair Value Measurements

Derivatives. In managing its natural gas supply portfolios, Southwest has historically entered into fixed- and variable-price contracts, which qualify as derivatives. Additionally, Southwest utilizes fixed-for-floating swap contracts (“Swaps”) to supplement its fixed-price contracts. The fixed-price contracts, firm commitments to purchase a fixed amount of gas in the future at a fixed price, qualify for the normal purchases and normal sales exception that is allowed

 

23


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

for contracts that are probable of delivery in the normal course of business, and are exempt from fair value reporting. The variable-price contracts have no significant market value. The Swaps are recorded at fair value.

The fixed-price contracts and Swaps are utilized by Southwest under its volatility mitigation programs to effectively fix the price on a portion (up to 25% in the Arizona and California jurisdictions) of its natural gas supply portfolios. The maturities of the Swaps highly correlate to forecasted purchases of natural gas, during time frames ranging from July 2018 through October 2019. Under such contracts, Southwest pays the counterparty a fixed rate and receives from the counterparty a floating rate per MMBtu (“dekatherm”) of natural gas. Only the net differential is actually paid or received. The differential is calculated based on the notional amounts under the contracts, which are detailed in the table below (thousands of dekatherms):

 

     June 30, 2018      December 31, 2017  

Contract notional amounts

     13,035        10,929  
  

 

 

    

 

 

 

Southwest does not utilize derivative financial instruments for speculative purposes, nor does it have trading operations.

The following table sets forth the gains and (losses) recognized on the Swaps (derivatives) for the three-, six-, and twelve-month periods ended June 30, 2018 and 2017 and their location in the Condensed Consolidated Statements of Income for both the Company and Southwest:

Gains (losses) recognized in income for derivatives not designated as hedging instruments:    

 

(Thousands of dollars)

 

                 
          Three Months Ended      Six Months Ended      Twelve Months Ended  
    

Location of Gain or (Loss)

Recognized in Income on Derivative

   June 30      June 30      June 30  

Instrument

   2018      2017      2018      2017      2018      2017  

Swaps

  

Net cost of gas sold

   $ 870      $ (1,168    $ (4,326     

$(6,305)

      

$(9,593)

     $ (5,624

Swaps

  

Net cost of gas sold

     (870 )*       1,168      4,326      6,305      9,593      5,624
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

      $ —        $ —        $ —        $        $ —        $ —    
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

*

Represents the impact of regulatory deferral accounting treatment under U.S. GAAP for rate-regulated entities.

No gains (losses) were recognized in net income or other comprehensive income during the periods presented for derivatives designated as cash flow hedging instruments. Previously, Southwest entered into two forward-starting interest rate swaps (“FSIRS”), both of which were designated cash flow hedges, to partially hedge the risk of interest rate variability during the period leading up to the planned issuance of debt. The first FSIRS terminated in December 2010. The second FSIRS terminated in March 2012. Losses on both FSIRS are being amortized over ten-year periods from Accumulated other comprehensive income (loss) into interest expense.

The following table sets forth the fair values of the Swaps and their location in the Condensed Consolidated Balance Sheets for both the Company and Southwest (thousands of dollars):

Fair values of derivatives not designated as hedging instruments:

 

June 30, 2018

Instrument        

  

Balance Sheet Location

   Asset
Derivatives
     Liability
Derivatives
     Net
Total
 

Swaps

   Other current liabilities    $ 654      $ (5,901    $ (5,247

Swaps

   Other deferred credits      83        (1,016      (933
     

 

 

    

 

 

    

 

 

 

Total

      $ 737      $ (6,917    $ (6,180
     

 

 

    

 

 

    

 

 

 

December 31, 2017

Instrument             

  

Balance Sheet Location

   Asset
Derivatives
     Liability
Derivatives
     Net
Total
 

Swaps

   Other current liabilities    $ 11      $ (4,468    $ (4,457

Swaps

   Other deferred credits      19        (1,342      (1,323
     

 

 

    

 

 

    

 

 

 

Total

      $ 30      $ (5,810    $ (5,780
     

 

 

    

 

 

    

 

 

 

 

24


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

The estimated fair values of the natural gas derivatives were determined using future natural gas index prices (as more fully described below). Master netting arrangements exist with each counterparty that provide for the net settlement (in the settlement month) of all contracts through a single payment. As applicable, management has elected to reflect the net amounts in its balance sheets. There was no outstanding collateral associated with the Swaps during either period shown in the above table.

Pursuant to regulatory deferral accounting treatment for rate-regulated entities, unrealized gains and losses in fair value of the Swaps are recorded as a regulatory asset and/or liability. When the Swaps mature, any prior positions held are reversed and the settled position is recorded as an increase or decrease of purchased gas under the related PGA mechanism in determining its deferred PGA balances. Neither changes in fair value nor settled amounts of Swaps have a direct effect on earnings or other comprehensive income.

The following table shows the amounts Southwest paid to and received from counterparties for settlements of matured Swaps.

 

     Three Months Ended      Six Months Ended      Twelve Months Ended  
(Thousands of dollars)    June 30, 2018      June 30, 2018      June 30, 2018  

Paid to counterparties

   $ 1,216      $ 3,931      $ 5,620  
  

 

 

    

 

 

    

 

 

 

Received from counterparties

   $ 6      $ 6      $ 6  
  

 

 

    

 

 

    

 

 

 

The following table details the regulatory assets/(liabilities) offsetting the derivatives at fair value in the Condensed Consolidated Balance Sheets for both the Company and Southwest (thousands of dollars).

 

June 30, 2018

Instrument       

  

Balance Sheet Location

   Net Total  

Swaps

  

Prepaids and other current assets

   $ 5,247  

Swaps

  

Deferred charges and other assets

     933  

December 31, 2017

Instrument       

  

Balance Sheet Location

   Net Total  

Swaps

  

Prepaids and other current assets

   $ 4,457  

Swaps

  

Deferred charges and other assets

     1,323  

Fair Value Measurements. The estimated fair values of Southwest’s Swaps were determined at June 30, 2018 and December 31, 2017 using futures settlement prices, published by the CME Group, for the delivery of natural gas at Henry Hub adjusted by the price of future settlement bases, which reflect the difference between the price of natural gas at a given delivery basin and the Henry Hub pricing points. These Level 2 inputs (inputs, other than quoted prices, for similar assets or liabilities) are observable in the marketplace throughout the full term of the Swaps, but have been credit-risk adjusted with no significant impact to the overall fair value measurement.

The following table sets forth, by level within the three-level fair value hierarchy that ranks the inputs used to measure fair value by their reliability, the financial assets and liabilities that were accounted for at fair value by both the Company and Southwest:

Level 2 - Significant other observable inputs

 

(Thousands of dollars)    June 30, 2018      December 31, 2017  

Liabilities at fair value:

     

Other current liabilities - Swaps

   $ (5,247    $ (4,457

Other deferred credits - Swaps

     (933      (1,323
  

 

 

    

 

 

 

Net Assets (Liabilities)

   $ (6,180    $ (5,780
  

 

 

    

 

 

 

 

25


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

No financial assets or liabilities associated with the Swaps, which were accounted for at fair value, fell within Level 1 (quoted prices in active markets for identical financial assets) or Level 3 (significant unobservable inputs) of the fair value hierarchy.

With regard to the fair values of assets associated with pension and postretirement benefit plans, asset values were last updated as required as of December 2017. Refer to Note 11 – Pension and Other Post Retirement Benefits in the 2017 Annual Report to Shareholders on Form 10-K, which is incorporated by reference into the 2017 Form 10-K.

Note 6 – Common Stock

On March 29, 2017, the Company filed with the SEC an automatic shelf registration statement on Form S-3 (File No. 333-217018), which became effective upon filing, for the offer and sale of up to $150 million of common stock from time to time in at-the-market offerings under the prospectus included therein and in accordance with the Sales Agency Agreement, dated March 29, 2017, between the Company and BNY Mellon Capital Markets, LLC (the “Equity Shelf Program”). During the three months ending June 30, 2018, the Company sold, through the continuous equity offering program with BNY Mellon Capital Markets, LLC as agent, an aggregate of 748,932 shares of the Company’s common stock in the open market at a weighted average price of $74.10 per share, resulting in proceeds to the Company of $54,940,503 net of $554,954 in agent commissions. During the six months ending June 30, 2018, the Company sold, through the continuous equity offering program with BNY Mellon Capital Markets, LLC as agent, an aggregate of 886,232 shares of the Company’s common stock in the open market at a weighted average price of $73.00 per share, resulting in proceeds to the Company of $64,048,167 net of $646,951 in agent commissions. During the twelve months ended June 30, 2018, the Company sold, through this continuous equity offering program with the same party acting as agent, an aggregate of 1,391,939 shares of the Company’s common stock in the open market at a weighted average price of $76.49 per share, resulting in proceeds to the Company of $105,407,194, net of $1,064,719 in agent commissions. As of June 30, 2018, the Company had up to $43,528,087 of common stock available for sale under the program. Net proceeds from the sale of shares of common stock under the Equity Shelf Program are intended for general corporate purposes, including the acquisition of property for the construction, completion, extension, or improvement of pipeline systems and facilities located in and around the communities served by Southwest.

During the six months ended June 30, 2018, the Company issued approximately 77,000 shares of common stock through the Restricted Stock/Unit Plan and Management Incentive Plan.

Also during the six months ended June 30, 2018, the Company issued 73,000 shares of common stock through the Dividend Reinvestment and Stock Purchase Plan (“DRSPP”), raising approximately $5 million.

Note 7 – Long-Term Debt

Carrying amounts of long-term debt and related estimated fair values as of June 30, 2018 and December 31, 2017 are disclosed in the following table. Southwest’s revolving credit facility (including commercial paper) and the variable-rate Industrial Development Revenue Bonds (“IDRBs”) approximate their carrying values, as they are repaid quickly (in the case of credit facility borrowings) and have interest rates that reset frequently. These are categorized as Level 1 due to Southwest’s ability to access similar debt arrangements at measurement dates with comparable terms, including variable/market rates. The fair values of Southwest’s debentures, senior notes, and fixed-rate IDRBs were determined utilizing a market-based valuation approach, where fair values are determined based on evaluated pricing data, such as broker quotes and yields for similar securities adjusted for observable differences. Significant inputs used in the valuation generally include benchmark yield curves, credit ratings and issuer spreads. The external credit rating, coupon rate, and maturity of each security are considered in the valuation, as applicable. The fair values of debentures and fixed-rate IDRBs are categorized as Level 2 (observable market inputs based on market prices of similar securities). The Centuri secured revolving credit and term loan facility and Centuri other debt obligations (not actively traded) are categorized as Level 3, based on significant unobservable inputs to their fair values. Because Centuri’s debt is not publicly traded, fair values for the secured revolving credit and term loan facility and other debt obligations were based on a conventional discounted cash flow methodology and utilized current market pricing yield curves, across Centuri’s debt maturity spectrum, of other industrial bonds with an assumed credit rating comparable to the Company’s.

 

26


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

     June 30, 2018      December 31, 2017  
     Carrying      Fair      Carrying      Fair  
     Amount      Value      Amount      Value  

(Thousands of dollars)

           

Southwest Gas Corporation:

           

Debentures:

           

Notes, 4.45%, due 2020

   $ 125,000      $ 127,258      $ 125,000      $ 129,273  

Notes, 6.1%, due 2041

     125,000        150,816        125,000        158,304  

Notes, 3.875%, due 2022

     250,000        252,108        250,000        256,163  

Notes, 4.875%, due 2043

     250,000        267,985        250,000        283,243  

Notes, 3.8%, due 2046

     300,000        281,028        300,000        302,970  

Notes, 3.7%, due 2028

     300,000        298,068        —          —    

8% Series, due 2026

     75,000        95,789        75,000        96,063  

Medium-term notes, 7.78% series, due 2022

     25,000        27,984        25,000        28,714  

Medium-term notes, 7.92% series, due 2027

     25,000        30,228        25,000        31,542  

Medium-term notes, 6.76% series, due 2027

     7,500        8,740        7,500        8,882  

Unamortized discount and debt issuance costs

     (12,259         (9,350   
  

 

 

       

 

 

    
     1,470,241           1,173,150     
  

 

 

       

 

 

    

Revolving credit facility and commercial paper

     48,000        48,000        150,000        150,000  
  

 

 

       

 

 

    

Industrial development revenue bonds:

           

Variable-rate bonds:

           

Tax-exempt Series A, due 2028

     50,000        50,000        50,000        50,000  

2003 Series A, due 2038

     50,000        50,000        50,000        50,000  

2008 Series A, due 2038

     50,000        50,000        50,000        50,000  

2009 Series A, due 2039

     50,000        50,000        50,000        50,000  

Unamortized discount and debt issuance costs

     (1,934         (2,119   
  

 

 

       

 

 

    
     198,066           197,881     
  

 

 

       

 

 

    

Less: current maturities

     —             —       
  

 

 

       

 

 

    

Long-term debt, less current maturities - Southwest Gas Corporation

   $ 1,716,307         $ 1,521,031     
  

 

 

       

 

 

    

Centuri:

           

Centuri term loan facility

   $ 189,876      $ 190,524      $ 199,578      $ 207,588  

Unamortized debt issuance costs

     (999         (1,111   
  

 

 

       

 

 

    
     188,877           198,467     

Centuri secured revolving credit facility

     87,952        87,998        56,472        56,525  

Centuri other debt obligations

     76,535        76,419        47,952        48,183  

Less: current maturities

     (31,928         (25,346   
  

 

 

       

 

 

    

Long-term debt, less current maturities - Centuri

   $ 321,436         $ 277,545     
  

 

 

       

 

 

    

Consolidated Southwest Gas Holdings, Inc.:

           

Southwest Gas Corporation long-term debt

   $ 1,716,307         $ 1,521,031     

Centuri long-term debt

     353,364           302,891     

Less: current maturities

     (31,928         (25,346   
  

 

 

       

 

 

    

Long-term debt, less current maturities - Southwest Gas Holdings, Inc.

   $ 2,037,743         $ 1,798,576     
  

 

 

       

 

 

    

Southwest has a $400 million credit facility that is scheduled to expire in March 2022. Southwest designates $150 million of capacity related to the facility as long-term debt and has designated the remaining $250 million for working capital purposes. Interest rates for the credit facility are calculated at either the London Interbank Offered Rate (“LIBOR”) or an “alternate base rate,” plus in each case an applicable margin that is determined based on Southwest’s senior unsecured debt rating. At June 30, 2018, the applicable margin is 1% for loans bearing interest with reference to LIBOR and 0% for loans bearing interest with reference to the alternative base rate. At June 30, 2018, $48 million was outstanding on the long-term portion (not including the commercial paper program, discussed below) and no borrowings were outstanding on the short-term portion of this credit facility.

 

27


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

Southwest has a $50 million commercial paper program. Any issuance under the commercial paper program is supported by Southwest’s current revolving credit facility and, therefore, does not represent additional borrowing capacity. Borrowings under the commercial paper program are designated as long-term debt. Interest rates for the program are calculated at the then current commercial paper rate. At June 30, 2018, no borrowings were outstanding under the commercial paper program.

In March 2018, Southwest issued $300 million in 3.7% Senior Notes at a discount of 0.185%. The notes will mature in April 2028. A portion of the proceeds were used to repay amounts then outstanding under the revolving portion of the credit facility and the remainder to repay amounts then outstanding under the commercial paper program.

Centuri has a $450 million senior secured revolving credit and term loan facility that is scheduled to expire in November 2022. This facility includes a revolving credit facility and a term loan facility. The line of credit portion of the facility is $250 million; amounts borrowed and repaid under the revolving credit facility are available to be re-borrowed. The term loan facility portion has a limit of approximately $200 million. The limit on the term loan facility was reached in November 2017. No further borrowing is permitted under the term loan facility. The $450 million revolving credit and term loan facility is secured by substantially all of Centuri’s assets except those explicitly excluded under the terms of the agreement (including owned real estate and certain certificated vehicles). Centuri assets securing the facility at June 30, 2018 totaled $659 million. At June 30, 2018, $278 million in borrowings were outstanding under the Centuri facility. Additionally, for the quarter ended June 30, 2018, Centuri entered into equipment loans for approximately $40 million with a maturity date of May 2023 under an existing agreement.

Note 8 – Short-Term Debt

The Company has a $100 million credit facility that is scheduled to expire in March 2022. The Company had $22.5 million in short-term borrowings outstanding at June 30, 2018 under this facility.

Note 9 – Equity, Other Comprehensive Income, and Accumulated Other Comprehensive Income

The table below provides details of activity in equity and the noncontrolling interest for Southwest Gas Holdings, Inc. on a consolidated basis during the six months ended June 30, 2018.

 

    Southwest Gas Holdings, Inc. Equity              
                      Accumulated                    
                Additional     Other           Non-        
    Common Stock     Paid-in     Comprehensive     Retained     controlling        

(In thousands, except per share amounts)

  Shares     Amount     Capital     Income (Loss)     Earnings     Interest     Total  

DECEMBER 31, 2017

    48,090     $ 49,720     $ 955,332     $ (47,682   $ 857,398     $ (2,365   $ 1,812,403  

Common stock issuances

    1,036       1,036       68,886             69,922  

Net income (loss)

            100,642       (797     99,845  

Foreign currency exchange translation adj.

          (1,601         (1,601

Other comprehensive income (loss):

             

Net actuarial gain arising during period, less amortization of unamortized benefit plan cost, net of tax

          1,792           1,792  

Amounts reclassified to net income, net of tax (FSIRS)

          1,271           1,271  

Reclassification of excess deferred taxes (a)

          (9,300     9,300         —    

Elimination of shares from noncontrolling interest (b)

        (2,710         2,710       —    

Dividends declared

             

Common: $0.52 per share

            (51,065       (51,065
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

JUNE 30, 2018

    49,126     $ 50,756     $ 1,021,508     $ (55,520   $ 916,275     $ (452   $ 1,932,567  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Release of excess deferred taxes accumulated prior to December 22, 2017 (date of enactment of the TCJA), as a result of the adoption of ASU 2018-02, which permitted such release.

(b)

Centuri, through its subsidiary, NPL, has historically held a 65% ownership interest in IntelliChoice Energy, LLC (“ICE”). A residual interest of 35% has been held by a third party. During the second quarter of 2018, an additional $1 million of capital was contributed by NPL, thereby increasing NPL’s ownership interest to 95%. The carrying amount

 

28


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

 

of the noncontrolling interest has been adjusted with a corresponding charge to Additional paid-in capital on the Company’s Condensed Consolidated Balance Sheet.

The table below provides details of activity in equity for Southwest Gas Corporation during the six months ended June 30, 2018. Only equity shares of the Company are publicly traded, under the ticker symbol “SWX.”

 

    Southwest Gas Corporation Equity        
                      Accumulated              
                Additional     Other              
    Common Stock     Paid-in     Comprehensive     Retained        

(In thousands)

  Shares     Amount     Capital     Income (Loss)     Earnings     Total  

DECEMBER 31, 2017

    47,482     $ 49,112     $ 948,767     $ (47,073   $ 659,193     $ 1,609,999  

Net income

            92,971       92,971  

Other comprehensive income (loss):

           

Net actuarial gain (loss) arising during period, less amortization of unamortized benefit plan cost, net of tax

          1,792         1,792  

Amounts reclassified to net income, net of tax (FSIRS)

          1,271         1,271  

Reclassification of excess deferred taxes (a)

          (9,300     9,300       —    

Stock-based compensation (b)

        702         (338     364  

Dividends declared to Southwest Gas Holdings, Inc.

            (44,000     (44,000

Contributions from Southwest Gas Holdings, Inc.

        56,596           56,596  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

JUNE 30, 2018

    47,482     $ 49,112     $ 1,006,065     $ (53,310   $ 717,126     $ 1,718,993  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Release of excess deferred taxes accumulated prior to December 22, 2017 (date of enactment of the TCJA), as a result of the adoption of ASU 2018-02, which permitted such release.

(b)

Stock-based compensation is based on stock awards of Southwest Gas Corporation to be issued in shares of Southwest Gas Holdings, Inc.

The following information provides insight into amounts impacting the Company’s Other Comprehensive Income (Loss), both before and after-tax impacts, within the Condensed Consolidated Statements of Comprehensive Income, which also impact Accumulated other comprehensive income in the Condensed Consolidated Balance Sheets and the associated column in the equity table above. See Note 5 – Derivatives and Fair Value Measurements for additional information on the FSIRS.

 

29


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

Related Tax Effects Allocated to Each Component of Other Comprehensive Income (Loss)

(Thousands of dollars)

 

     Three Months Ended     Three Months Ended  
     June 30, 2018     June 30, 2017  
     Before-     Tax     Net-of-     Before-     Tax     Net-of-  
     Tax     (Expense)     Tax     Tax     (Expense)     Tax  
     Amount     or Benefit (1)     Amount     Amount     or Benefit (1)     Amount  

Defined benefit pension plans:

            

Amortization of prior service cost

   $ 334     $ (80   $ 254     $ 334     $ (127   $ 207  

Amortization of net actuarial (gain)/loss

     8,404       (2,017     6,387       6,361       (2,417     3,944  

Regulatory adjustment

     (7,559     1,815       (5,744     (5,735     2,179       (3,556
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pension plans other comprehensive income

     1,179       (282     897       960       (365     595  

FSIRS (designated hedging activities):

            

Amounts reclassifed into net income

     836       (200     636       836       (318     518  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FSIRS other comprehensive income

     836       (200     636       836       (318     518  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income - Southwest Gas Corporation

     2,015       (482     1,533       1,796       (683     1,113  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustments:

            

Translation adjustments

     (690     —         (690     629       —         629  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency other comprehensive income (loss)

     (690     —         (690     629       —         629  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income - Southwest Gas Holdings, Inc.

   $ 1,325     $ (482   $ 843     $ 2,425     $ (683   $ 1,742  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Six Months Ended     Six Months Ended  
     June 30, 2018     June 30, 2017  
     Before-     Tax     Net-of-     Before-     Tax     Net-of-  
     Tax     (Expense)     Tax     Tax     (Expense)     Tax  
     Amount     or Benefit (1)     Amount     Amount     or Benefit (1)     Amount  

Defined benefit pension plans:

            

Amortization of prior service cost

   $ 668     $ (160   $ 508     $ 668     $ (254   $ 414  

Amortization of net actuarial (gain)/loss

     16,808       (4,034     12,774       12,722       (4,834     7,888  

Regulatory adjustment

     (15,119     3,629       (11,490     (11,470     4,358       (7,112
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pension plans other comprehensive income

     2,357       (565     1,792       1,920       (730     1,190  

FSIRS (designated hedging activities):

            

Amounts reclassifed into net income

     1,673       (402     1,271       1,672       (636     1,036  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FSIRS other comprehensive income

     1,673       (402     1,271       1,672       (636     1,036  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income - Southwest Gas Corporation

     4,030       (967     3,063       3,592       (1,366     2,226  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustments:

            

Translation adjustments

     (1,601     —         (1,601     849       —         849  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency other comprehensive income (loss)

     (1,601     —         (1,601     849       —         849  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income - Southwest Gas Holdings, Inc.

   $ 2,429     $ (967   $ 1,462     $ 4,441     $ (1,366   $ 3,075  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Twelve Months Ended     Twelve Months Ended  
     June 30, 2018     June 30, 2017  
     Before-     Tax     Net-of-     Before-     Tax     Net-of-  
     Tax     (Expense)     Tax     Tax     (Expense)     Tax  
     Amount     or Benefit (1)     Amount     Amount     or Benefit (1)     Amount  

Defined benefit pension plans:

            

Net actuarial gain/(loss)

   $ (43,027   $ 10,326     $ (32,701   $ (22,770   $ 8,652     $ (14,118

Amortization of prior service cost

     1,335       (413     922       1,335       (507     828  

Amortization of net actuarial (gain)/loss

     29,531       (8,869     20,662       26,255       (9,976     16,279  

Regulatory adjustment

     8,691       (479     8,212       (4,808     1,826       (2,982
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pension plans other comprehensive income (loss)

     (3,470     565       (2,905     12       (5     7  

FSIRS (designated hedging activities):

            

Amounts reclassifed into net income

     3,345       (1,037     2,308       3,344       (1,271     2,073  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FSIRS other comprehensive income

     3,345       (1,037     2,308       3,344       (1,271     2,073  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss) - Southwest Gas Corporation

     (125     (472     (597     3,356       (1,276     2,080  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustments:

            

Translation adjustments

     (679     —         (679     158       —         158  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency other comprehensive income (loss)

     (679     —         (679     158       —         158  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss) - Southwest Gas Holdings, Inc.

   $ (804   $ (472   $ (1,276   $ 3,514     $ (1,276   $ 2,238  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

30


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

(1)

Tax amounts are calculated using a 24% rate following the December 22, 2017 enactment date of the TCJA. For periods prior to the enactment date (and included in specific line items of the tables for the twelve months ended June 30, 2018 and 2017), tax amounts were calculated using a 38% rate. The tax effect of before-tax amounts remaining in the balance of Accumulated other comprehensive income as of June 30, 2018 is effectively computed using a 24% tax rate overall after the reclassification of previously stranded excess deferred taxes existing as a result of the TCJA (see table for Accumulated other comprehensive income, including the balance, below). With regard to foreign currency translation adjustments, the Company has elected to indefinitely reinvest the earnings of Centuri’s Canadian subsidiaries in Canada, thus preventing deferred taxes on such earnings. As a result of this assertion, the Company is not recognizing any tax effect or presenting a tax expense or benefit for the currency translation adjustment amount reported in Other Comprehensive Income, as repatriation of earnings is not anticipated.

Approximately $2.5 million of realized losses (net of tax) related to the FSIRS, reported in Accumulated other comprehensive income at June 30, 2018, will be reclassified into interest expense within the next 12 months as the related interest payments on long-term debt occur.

The following table represents a rollforward of AOCI, presented on the Company’s Condensed Consolidated Balance Sheets:

AOCI - Rollforward    

(Thousands of dollars)

 

    Defined Benefit Plans     FSIRS     Foreign Currency Items              
    Before-Tax     Tax
(Expense)
Benefit (5)
    After-Tax     Before-Tax     Tax
(Expense)
Benefit (5)
    After-Tax     Before-Tax     Tax
(Expense)
Benefit
    After-Tax     Other     AOCI  

Beginning Balance AOCI
December 31, 2017

  $ (61,520   $ 22,293     $ (39,227   $ (12,655   $ 4,809     $ (7,846   $ (609   $ —       $ (609   $ —       $ (47,682
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Translation adjustments

    —         —         —         —         —         —         (1,601     —         (1,601     —         (1,601
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income before reclassifications

    —         —         —         —         —         —         (1,601     —         (1,601     —         (1,601

FSIRS amounts reclassified from AOCI (1)

    —         —         —         1,673       (402     1,271       —         —         —         —         1,271  

Amortization of prior service cost (2)

    668       (160     508       —         —         —         —         —         —         —         508  

Amortization of net actuarial loss (2)

    16,808       (4,034     12,774       —         —         —         —         —         —         —         12,774  

Regulatory adjustment (3)

    (15,119     3,629       (11,490     —         —         —         —         —         —         —         (11,490
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss) attributable to Southwest Gas Holdings, Inc.

    2,357       (565     1,792       1,673       (402     1,271       (1,601     —         (1,601     —         1,462  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reclassification of excess deferred taxes (4)

    —         —         —         —         —         —         —         —         —         (9,300     (9,300
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance AOCI June 30, 2018

  $ (59,163   $ 21,728     $ (37,435   $ (10,982   $ 4,407     $ (6,575   $ (2,210   $ —       $ (2,210   $ (9,300   $ (55,520
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

The FSIRS reclassification amounts are included in the Net interest deductions line item on the Company’s Condensed Consolidated Statements of Income.

(2)

These AOCI components are included in the computation of net periodic benefit cost (see Note 2 – Components of Net Periodic Benefit Cost for additional details).

(3)

The regulatory adjustment represents the portion of the activity above that is expected to be recovered through rates in the future (the related regulatory asset is included in the Deferred charges and other assets line item on the Company’s Condensed Consolidated Balance Sheets).

(4)

Release of excess deferred taxes accumulated prior to December 22, 2017 (date of enactment of the TCJA), as a result of the adoption of ASU 2018-02, which permitted such release.

(5)

Tax amounts related to the before-tax balance at June 30, 2018 are calculated using a 24% rate after the release of previously stranded excess deferred taxes existing as a result of the TCJA; amounts prior to the December 22, 2017 enactment of the TCJA were calculated using a 38% rate.

 

31


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

The following table represents a rollforward of AOCI, presented on Southwest’s Condensed Consolidated Balance Sheets:

AOCI - Rollforward

(Thousands of dollars)

 

     Defined Benefit Plans     FSIRS              
     Before-Tax     Tax
(Expense)
Benefit (10)
    After-Tax     Before-Tax     Tax
(Expense)
Benefit (10)
    After-Tax     Other     AOCI  

Beginning Balance AOCI
December 31, 2017

   $ (61,520   $ 22,293     $ (39,227   $ (12,655   $ 4,809     $ (7,846   $ —       $ (47,073
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FSIRS amounts reclassified from AOCI (6)

     —         —         —         1,673       (402     1,271       —         1,271  

Amortization of prior service cost (7)

     668       (160     508       —         —         —         —         508  

Amortization of net actuarial loss (7)

     16,808       (4,034     12,774       —         —         —         —         12,774  

Regulatory adjustment (8)

     (15,119     3,629       (11,490     —         —         —         —         (11,490
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income attributable to Southwest Gas Corporation

     2,357       (565     1,792       1,673       (402     1,271       —         3,063  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reclassification of excess deferred taxes (9)

     —         —         —         —         —         —         (9,300     (9,300
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance AOCI June 30, 2018

   $ (59,163   $ 21,728     $ (37,435   $ (10,982   $ 4,407     $ (6,575   $ (9,300   $ (53,310
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(6)

The FSIRS reclassification amounts are included in the Net interest deductions line item on Southwest’s Condensed Consolidated Statements of Income.

(7)

These AOCI components are included in the computation of net periodic benefit cost (see Note 2 – Components of Net Periodic Benefit Cost for additional details).

(8)

The regulatory adjustment represents the portion of the activity above that is expected to be recovered through rates in the future (the related regulatory asset is included in the Deferred charges and other assets line item on Southwest’s Condensed Consolidated Balance Sheets).

(9)

Release of excess deferred taxes accumulated prior to December 22, 2017 (date of enactment of the TCJA), as a result of the adoption of ASU 2018-02, which permitted such release.

(10)

Tax amounts related to the before-tax balance at June 30, 2018 are calculated using a 24% rate after the release of previously stranded excess deferred taxes existing as a result of the TCJA; amounts prior to the December 22, 2017 enactment of the TCJA were calculated using a 38% rate.

The following table represents amounts (before income tax impacts) included in AOCI (in the tables above), that have not yet been recognized in net periodic benefit cost:

Amounts Recognized in AOCI (Before Tax)

(Thousands of dollars)

 

     June 30, 2018      December 31, 2017  

Net actuarial (loss) gain

   $ (431,747    $ (448,555

Prior service cost

     (3,700      (4,368

Less: amount recognized in regulatory assets

     376,284        391,403  
  

 

 

    

 

 

 

Recognized in AOCI

   $ (59,163    $ (61,520
  

 

 

    

 

 

 

Note 10 – Reorganization Impacts – Discontinued Operations Solely Related to Southwest Gas Corporation

As a result of a holding company structure in January 2017, no substantive change occurred with regard to the Company’s business segments on the whole, or in the primary businesses comprising those segments (Centuri operations continue to be part of continuing operations of the controlled group of companies), and financial information related to Centuri continues to be included in condensed consolidated financial statements of Southwest Gas Holdings, Inc.

However, as part of the holding company reorganization effective January 2017, Centuri is no longer a subsidiary of Southwest; whereas historically, Centuri had been a direct subsidiary of Southwest. To give effect to this change, the condensed consolidated financial statements related to Southwest Gas Corporation, which are separately included in this Form 10-Q, depict Centuri-related amounts as discontinued operations for periods prior to January 2017.

Due to the discontinued operations accounting reflection, the following disclosures provide additional information regarding the revenues and expenses of Centuri which are shown as discontinued operations on the condensed consolidated financial statements of Southwest Gas Corporation for periods prior to the beginning of 2017.

 

32


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

The following table presents the major income statement components of discontinued operations – construction services reported in the Condensed Consolidated Statements of Income Southwest Gas Corporation:

Results of Construction Services

 

(Thousands of dollars)    Twelve
Months Ended
June 30, 2017
 

Construction revenues

   $ 640,830  

Operating expenses:

  

Construction expenses

     567,115  

Depreciation and amortization

     25,727  
  

 

 

 

Operating income

     47,988  

Other income (deductions)

     1,193  

Net interest deductions

     3,512  
  

 

 

 

Income before income taxes

     45,669  

Income tax expense

     16,550  
  

 

 

 

Net income

     29,119  

Net income attributable to noncontrolling interests

     949  
  

 

 

 

Discontinued operations - construction services - net income

   $ 28,170  
  

 

 

 

Note 11 – Acquisition of Construction Services Business

In November 2017, the Company, through its subsidiaries, led principally by Centuri, completed the acquisition of a privately held construction business, New England Utility Constructors, Inc. (“Neuco”) for approximately $99 million, less assumed debt. See the Company’s 2017 Form 10-K for additional information about this acquisition. While refinements were made to the estimated fair values of assets acquired and liabilities assumed when the final purchase accounting was completed during the first quarter of 2018, no subsequent adjustments were made to acquisition-date values, and no acquisition-related costs were incurred during 2018.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Southwest Gas Holdings, Inc. is a holding company that owns all of the shares of common stock of Southwest Gas Corporation (“Southwest” or the “natural gas operations” segment) and all of the shares of common stock of Centuri Construction Group Inc. (“Centuri” or the “construction services” segment). Prior to August 2017, only 96.6% of Centuri shares were owned. During August 2017, Southwest Gas Holdings, Inc. acquired the remaining 3.4% equity interest in Centuri that was held by the previous owners (and reflected as a redeemable noncontrolling interest). As part of a holding company reorganization effective January 2017, designed to provide further separation between regulated and unregulated businesses, Centuri and Southwest are now subsidiaries of Southwest Gas Holdings, Inc.; whereas historically, Centuri had been a direct subsidiary of Southwest. To give effect for this change, the separate consolidated financial statements of Southwest Gas Corporation depict Centuri-related amounts for periods prior to January 2017 as discontinued operations of Southwest. Southwest Gas Holdings, Inc. and its subsidiaries (the “Company”) have two business segments (natural gas operations and construction services), which are discussed below.

Southwest is engaged in the business of purchasing, distributing, and transporting natural gas for customers in portions of Arizona, Nevada, and California. Southwest is the largest distributor of natural gas in Arizona, selling and transporting natural gas in most of central and southern Arizona, including the Phoenix and Tucson metropolitan areas. Southwest is also the largest distributor of natural gas in Nevada, serving the Las Vegas metropolitan area and northern Nevada. In addition, Southwest distributes and transports natural gas for customers in portions of California, including the Lake Tahoe area and the high desert and mountain areas in San Bernardino County.

 

33


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

As of June 30, 2018, Southwest had 2,027,000 residential, commercial, industrial, and other natural gas customers, of which 1,080,000 customers were located in Arizona, 752,000 in Nevada, and 195,000 in California. Residential and commercial customers represented over 99% of the total customer base. During the twelve months ended June 30, 2018, 54% of operating margin was earned in Arizona, 35% in Nevada, and 11% in California. During this same period, Southwest earned 85% of its operating margin (gas operating revenues less the net cost of gas sold) from residential and small commercial customers, 3% from other sales customers, and 12% from transportation customers. These general patterns are expected to remain materially consistent for the foreseeable future.

Southwest recognizes operating revenues from the distribution and transportation of natural gas (and related services) to customers. Gas cost is a tracked cost, which is passed through to customers without markup under purchased gas adjustment (“PGA”) mechanisms, impacting revenues and net cost of gas sold on a dollar-for-dollar basis, thereby having no impact on Southwest’s profitability. Therefore, management routinely uses operating margin, defined as operating revenues less the net cost of gas sold, in its analysis of Southwest’s financial performance. Operating margin also forms a basis for Southwest’s various regulatory decoupling mechanisms. Operating margin is not, however, specifically defined in accounting principles generally accepted in the United States (“U.S. GAAP”) and is considered a non-GAAP measure. Management believes operating margin provides investors and other interested parties with useful and relevant information to analyze Southwest’s financial performance in a rate-regulated environment. (Refer to the Summary Operating Results table for a reconciliation of revenues to operating margin.)

The principal factors affecting changes in operating margin are general rate relief (including impacts of infrastructure trackers) and customer growth. The demand for natural gas is seasonal, with greater demand in the colder winter months and decreased demand in the warmer summer months. All of Southwest’s service territories have decoupled rate structures (alternative revenue programs), which are designed to eliminate the direct link between volumetric sales and revenue, thereby mitigating the impacts of weather variability and conservation on operating margin, allowing Southwest to pursue energy efficiency initiatives.

Centuri is a comprehensive construction services enterprise dedicated to meeting the growing demands of North American utilities, energy, and industrial markets. Centuri derives revenue from installation, replacement, repair, and maintenance of energy distribution systems, and developing industrial construction solutions. Centuri operates in 23 major markets in the United States (primarily as NPL) and in 2 major markets in Canada (as NPL Canada and W.S. Nicholls).

Construction activity is cyclical and can be significantly impacted by changes in weather, general and local economic conditions (including the housing market), interest rates, employment levels, job growth, pipe replacement programs of utilities, and local and federal regulation (including tax rates and incentives). During the past few years, utilities have implemented or modified pipeline integrity management programs to enhance safety pursuant to federal and state mandates. These programs have resulted in a significant increase in multi-year pipeline replacement projects throughout the U.S. Centuri has focused its efforts on obtaining pipe replacement work under both blanket contracts and incremental bid projects. For both the twelve months ended June 30, 2018 and 2017, revenues from replacement work provided over 65% of total revenues. Generally, Centuri revenues are lowest during the first quarter of the year due to less favorable winter weather conditions. Revenues typically improve as more favorable weather conditions occur during the summer and fall months. This is expected in both the U.S. and Canadian markets. In certain circumstances, such as with large bid contracts (especially those of a longer duration), or unit-price contracts with revenue caps, results may be impacted by differences between costs incurred and those anticipated when the work was originally bid. Work awarded or not awarded by individual large customers can significantly impact operating results.

This Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and the notes thereto, as well as MD&A included in the 2017 Annual Report to Shareholders, which is incorporated by reference into the 2017 Form 10-K.

Executive Summary

The items discussed in this Executive Summary are intended to provide an overview of the results of the Company’s operations. As needed, certain items are covered in greater detail in later sections of management’s discussion and analysis. As reflected in the table below, the natural gas operations segment accounted for an average of 80% of twelve-month-to-date consolidated net income over the past two years. As such, management’s discussion

 

34


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

and analysis is primarily focused on that segment. Natural gas sales are seasonal, peaking during the winter months; therefore, results of operations for interim periods are not necessarily indicative of results for a full year.

Summary Operating Results

 

    Period Ended June 30,  
    Three Months     Six Months     Twelve Months  
    2018     2017     2018     2017     2018     2017  
    (In thousands, except per share amounts)  

Contribution to net income

           

Natural gas operations

  $ 2,622     $ 9,522     $ 92,971     $ 86,460     $ 163,329     $ 125,942  

Construction services

    19,236       8,716       8,235       1,382       45,213       29,552  

Corporate and administrative

    (307     (374     (564     (670     (1,231     (670
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 21,551     $ 17,864     $ 100,642     $ 87,172     $ 207,311     $ 154,824  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average number of common shares

    48,826       47,571       48,622       47,550       48,338       47,516  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

           

Consolidated

  $ 0.44     $ 0.38     $ 2.07     $ 1.83     $ 4.29     $ 3.26  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Natural Gas Operations

           

Reconciliation of Revenue to Operating Margin (Non-GAAP measure)

           

Gas operating revenues

  $ 275,679     $ 260,162     $ 769,992     $ 722,764     $ 1,349,536     $ 1,263,428  

Less: Net cost of gas sold

    83,466       69,421       269,198       216,300       407,943       328,405  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

  $ 192,213     $ 190,741     $ 500,794     $ 506,464     $ 941,593     $ 935,023  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

35


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

2nd Quarter 2018 Overview

Natural gas operations highlights:

 

   

33,000 net new customers (1.6% growth rate)

   

Filed Nevada general rate case, requesting approximately $33 million

   

Filed Gas Infrastructure Replacement (“GIR”) Advance Application with annualized revenue requirement of $22 million

   

Received order from PUCN approving expansion into Mesquite, Nevada

   

Operating margin reflects estimated regulatory impacts of tax reform and associated Arizona Corporation Commission decision

Construction services highlights:

 

   

Revenues increased $94.9 million compared to the prior-year quarter; twelve-month revenues surpassed $1.4 billion

   

Construction expenses increased $80.7 million compared to the prior-year quarter

   

Depreciation and amortization expense increased $1.8 million compared to the prior-year quarter

   

Net interest deductions increased $1.7 million compared to the prior-year quarter

 

36


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

Results of Natural Gas Operations

Quarterly Analysis

 

     Three Months Ended  
     June 30,  
     2018      2017  
     (Thousands of dollars)  

Gas operating revenues

   $ 275,679      $ 260,162  

Net cost of gas sold

     83,466        69,421  
  

 

 

    

 

 

 

Operating margin

     192,213        190,741  

Operations and maintenance expense

     105,208        97,644  

Depreciation and amortization

     47,664        46,254  

Taxes other than income taxes

     14,666        14,497  
  

 

 

    

 

 

 

Operating income

     24,675        32,346  

Other income (deductions)

     (2,094      (2,805

Net interest deductions

     20,149        16,991  
  

 

 

    

 

 

 

Income before income taxes

     2,432        12,550  

Income tax expense (benefit)

     (190      3,028  
  

 

 

    

 

 

 

Contribution to consolidated net income

   $ 2,622      $ 9,522  
  

 

 

    

 

 

 

Contribution to consolidated net income from natural gas operations decreased $6.9 million between the second quarters of 2018 and 2017. The decline was primarily due to higher operating expenses and net interest deductions, partially offset by a decrease in income tax expense. U.S. federal tax reform impacted both revenue and tax expense. The amounts above reflect a reclassification of $4.9 million for 2017 from Operations and maintenance expense to Other income (deductions) related to the non-service cost components of net periodic benefit costs, as a result of the adoption of the update to FASB Topic 715 (refer to Note 2 to the condensed consolidated financial statements in this Form 10-Q), with no impact to net income overall. The reclassification in the 2017 period is intended to make that information comparable to the current period presentation.

Operating margin increased $1.5 million between quarters, due in part to a net $1.6 million decrease in the reserve related to U.S. tax reform, based on expectations in the rate jurisdictions in which Southwest and its subsidiaries operate. Refer to discussion of Income Taxes in Note 1 – Nature of Operations and Basis of Presentation of this Form 10-Q and Rates and Regulatory Proceedings below. Approximately $2 million in increased operating margin was attributable to customer growth, as 33,000 net new customers were added during the last twelve months, with another $500,000 attributable to rate relief in California. These increases were offset by an approximate $2.6 million reduction in miscellaneous revenues (including a $2 million reduction in surcharge recoveries associated with Nevada Conservation and Energy Efficiency (“CEE”) programs, offset in Depreciation and amortization expense).

Operations and maintenance expense increased $7.6 million between quarters. Approximately $2 million of the increase was due to higher pension and employee medical costs. The remaining increase was primarily due to higher injuries and damages expense, incremental expenditures for pipeline integrity management and damage prevention programs, and general cost increases.

Depreciation and amortization expense increased $1.4 million between quarters primarily due to an increase of $448 million, or 7%, increase in average gas plant in service for the current quarter as compared to the corresponding quarter a year ago. The increase in gas plant was attributable to pipeline capacity reinforcement work, franchise requirements, scheduled and accelerated pipe replacement activities, and new infrastructure. See also discussion above regarding surcharge recoveries (including Nevada CEE programs), which provide offsetting impacts in this category.

Other income (deductions) improved $711,000 between quarters primarily due to an increase in interest income related to the GIR mechanism in Nevada. See the Rates and Regulatory Proceedings section for more information about the GIR. Amounts in both periods reflect the non-service cost components of employee pension and other post-retirement benefits.

 

37


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

Net interest deductions increased $3.2 million in the second quarter of 2018, as compared to the prior-year quarter, primarily due to higher interest associated with credit facility borrowings during the current-year quarter and the issuance of $300 million of senior notes in March 2018.

Income taxes were impacted in 2018 by the pre-tax earnings impacts discussed above as well as by the December 2017 enactment of tax reform. Among other things, tax reform reduced the corporate federal income tax rate from 35% to 21%, effective January 2018.

 

38


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

Results of Natural Gas Operations

Six-Month Analysis

 

     Six Months Ended  
     June 30,  
     2018      2017  
     (Thousands of dollars)  

Gas operating revenues

   $ 769,992      $ 722,764  

Net cost of gas sold

     269,198        216,300  
  

 

 

    

 

 

 

Operating margin

     500,794        506,464  

Operations and maintenance expense

     207,398        201,468  

Depreciation and amortization

     97,625        107,449  

Taxes other than income taxes

     29,923        29,279  
  

 

 

    

 

 

 

Operating income

     165,848        168,268  

Other income (deductions)

     (6,697      (4,049

Net interest deductions

     39,404        34,201  
  

 

 

    

 

 

 

Income before income taxes

     119,747        130,018  

Income tax expense

     26,776        43,558  
  

 

 

    

 

 

 

Contribution to consolidated net income

   $ 92,971      $ 86,460  
  

 

 

    

 

 

 

Contribution to consolidated net income from natural gas operations increased $6.5 million between the first six months of 2018 and 2017. The improvement was primarily due to rate relief and customer growth, lower depreciation expense, and the combined impacts of tax reform, partially offset by increases in Operations and maintenance expense, and Net interest deductions. The amounts above for Operations and maintenance expense and Other income (deductions) for the 2017 period reflect a $9.7 million reclassification related to the non-service cost components of employee pensions and other post-retirement benefits, as a result of the adoption of the update to FASB Topic 715. The reclassification is intended to make the prior period comparable to the current period, but did not impact net income overall.

Operating margin decreased $5.7 million between the comparative six-month periods, due to a $12.5 million reserve recognized due to the enactment of U.S. tax reform in December 2017. The reserve contemplates a pending reduction in rates to reflect the reduced cost of service during 2018, resulting from tax reform (see Rates and Regulatory Proceedings below). However, the decline in applicable U.S. income tax rates also significantly reduced income tax expense (see discussion below). Operating margin was favorably impacted by rate relief in the Arizona and California jurisdictions, which collectively provided $5.6 million in operating margin. Approximately $6 million in increased operating margin was attributable to customer growth. An approximate $5.5 million reduction in surcharge recoveries associated with Nevada CEE programs (offset in Depreciation and amortization expense below), as well as other surcharge variances and variability in other miscellaneous revenues and customers outside the decoupling mechanisms, comprise the residual variance.

Operations and maintenance expense increased $5.9 million between periods due primarily to higher pension service-cost related and other employee benefit expenses, higher injuries and damages expenses, incremental expenditures for pipeline integrity management and damage prevention programs, and other general cost increases, partially offset by lower expense for incentive compensation programs.

Depreciation and amortization expense decreased $9.8 million between periods primarily due to reduced depreciation rates in Arizona, a result of the April 2017 Arizona general rate case decision, and to the impacts of surcharge recoveries for regulatory mechanisms, as discussed above. Partially offsetting the decline was additional depreciation associated with a $444 million, or 7%, increase in average gas plant in service for the current period as compared to the prior period. The increase was attributable to pipeline capacity reinforcement work, franchise requirements, scheduled and accelerated pipe replacement activities, and new infrastructure.

 

39


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

Taxes other than income taxes increased $644,000 between periods primarily due to higher property taxes in Arizona, including the impacts of the Arizona property tax tracking mechanism.

Other income decreased $2.6 million between periods primarily due to a decline in income from company-owned life insurance (“COLI”) policies. The current period reflects a $1.3 million increase in COLI policy cash surrender values, while the prior-year period reflected $4.7 million of COLI-related income. Additionally, amounts in both periods reflect the non-service cost components of employee pension and post-retirement benefits.

Net interest deductions increased $5.2 million between periods, primarily due to higher interest associated with credit facility borrowings during the current period and the issuance of $300 million of senior notes in the first quarter of 2018. The increase was partially offset by reductions in interest expense associated with deferred purchased gas adjustments (“PGA”) balances as compared to the prior-year period.

Income taxes were favorably impacted in 2018 due to the December 2017 enactment of tax reform.

 

40


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

Results of Natural Gas Operations

Twelve-Month Analysis

 

     Twelve Months Ended  
     June 30,  
     2018      2017  
     (Thousands of dollars)  

Gas operating revenues

   $ 1,349,536      $ 1,263,428  

Net cost of gas sold

     407,943        328,405  
  

 

 

    

 

 

 

Operating margin

     941,593        935,023  

Operations and maintenance expense

     397,251        393,772  

Depreciation and amortization

     192,098        222,935  

Taxes other than income taxes

     58,590        54,655  
  

 

 

    

 

 

 

Operating income

     293,654        263,661  

Other income (deductions)

     (9,036      (9,843

Net interest deductions

     74,936        68,407  
  

 

 

    

 

 

 

Income before income taxes

     209,682        185,411  

Income tax expense

     46,353        59,469  
  

 

 

    

 

 

 

Contribution to consolidated net income

   $ 163,329      $ 125,942  
  

 

 

    

 

 

 

Contribution to consolidated net income from natural gas operations increased by $37.4 million between the twelve-month periods of 2018 and 2017. The improvement was primarily due to higher operating margin, lower Depreciation and amortization expense, and lower Income tax expense, partially offset by an increase in Taxes other than income taxes and higher Net interest deductions. The amounts above for Operations and maintenance expense and Other income (deductions) for the 2017 period reflect a $19.6 million reclassification related to the non-service cost components of employee pensions and other post-retirement benefits, as a result of the adoption of the update to FASB Topic 715. The reclassification is intended to make the prior period comparable to the current period, but did not impact net income overall.

Operating margin increased $7 million between periods including a combined $15 million of rate relief in the Arizona and California jurisdictions. Customer growth provided $10 million in operating margin, while operating margin associated with recoveries of regulatory assets, infrastructure replacement mechanisms, customers outside the decoupling mechanisms, and other miscellaneous revenues decreased $6 million. The $12.5 million reserve, described earlier, associated with tax reform, decreased operating margin in the current period. However, net income overall was not unfavorably impacted, as favorable impacts from tax reform are reflected in income tax expense.

Operations and maintenance expenses in the 2018 period were within 1% of the prior year period. The overall increase of $3.5 million primarily relates to higher service-cost-related pension expense and expenditures for pipeline damage prevention programs.

Depreciation and amortization expense decreased $30.8 million between periods primarily due to reduced depreciation rates in Arizona, a result of the April 2017 Arizona general rate case decision. Partially offsetting the decline was depreciation associated with a $391 million, or 6%, increase in average gas plant in service for the current period as compared to the prior period. The increase in gas plant was attributable to pipeline capacity reinforcement work, franchise requirements, scheduled and accelerated pipe replacement activities, and new infrastructure.

Taxes other than income taxes increased $3.9 million between periods primarily due to higher property taxes associated with net plant additions and increased property taxes in Arizona, including the impact of the property tax regulatory tracking mechanism.

Other income (deductions) improved $807,000 between the twelve-month periods of 2018 and 2017. The current period reflects a $6.9 million increase in COLI policy cash surrender values, while the prior-year period included $9 million of COLI-related income. Interest income increased $2.1 million including interest related to the GIR mechanism in Nevada. See the Rates and Regulatory Proceedings section for more information about the GIR

 

41


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

mechanism. Amounts in both periods reflect the non-service cost components of employee pension and post-retirement benefits, which increased between periods.

Net interest deductions increased $6.5 million between the current and prior-year period, primarily due to the issuance of $300 million of senior notes in September 2016, higher interest associated with credit facility borrowings during late 2017 and early 2018, and the issuance of the $300 million senior notes in the first quarter of 2018. The increase was substantially offset by reductions in interest expense associated with deferred PGA balances and debt redemptions during the second half of 2016.

Income taxes were favorably impacted during the twelve months ending June 30, 2018 due to the December 2017 enactment of tax reform, which reduced the corporate federal income tax rate from 35% to 21%, effective January 2018. Approximately $8 million of one-time tax benefits, related to the remeasurement of deferred tax liabilities, were recorded in the fourth quarter of 2017 in addition to the lower rate utilized in the first half of 2018.

 

42


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

Results of Construction Services

Quarterly Analysis

 

     Three Months Ended  
     June 30,  
     2018      2017  
     (Thousands of dollars)  

Construction revenues

   $ 395,204      $ 300,307  

Operating expenses:

     

Construction expenses

     352,671        272,001  

Depreciation and amortization

     13,643        11,828  
  

 

 

    

 

 

 

Operating income

     28,890        16,478  

Other income (deductions)

     (632      (6

Net interest deductions

     3,308        1,629  
  

 

 

    

 

 

 

Income before income taxes

     24,950        14,843  

Income tax expense

     5,714        5,870  
  

 

 

    

 

 

 

Net income

     19,236        8,973  

Net income attributable to noncontrolling interest

     —          257  
  

 

 

    

 

 

 

Contribution to consolidated net income attributable to Centuri

   $ 19,236      $ 8,716  
  

 

 

    

 

 

 

In November 2017, Centuri acquired New England Utility Constructors, Inc. (“Neuco”). Line items in the table above reflect the results of Neuco only for the 2018 period as the acquisition occurred in November 2017.

Revenues increased $94.9 million in the second quarter of 2018 when compared to the prior-year quarter, primarily due to a higher volume of pipe replacement work under blanket and bid contracts, and $34 million of revenues contributed by Neuco. In addition, revenues reflect a $9 million negotiated settlement of an outstanding contract dispute from 2017 associated with a water pipe replacement project.

Construction expenses increased $80.7 million between quarters. The increase in Construction expenses is due to additional pipe replacement work and greater operating expenses to support increased growth in operations. Approximately $30 million of construction expenses associated with Neuco are included in the three months ended June 30, 2018. Gains on sale of equipment (reflected as an offset to construction expenses) were approximately $20,000 and $1.1 million for the second quarters of 2018 and 2017, respectively.

Depreciation and amortization expense increased $1.8 million between quarters, primarily due to incremental amortization of finite-lived intangible assets recognized from the Neuco acquisition and to depreciation on additional equipment purchased to support the growing volume of work being performed, partially offset by a $1.9 million reduction in depreciation associated with the extension of the estimated useful lives of certain depreciable equipment.

Net interest deductions increased by $1.7 million between quarters. The increase was due primarily to higher average debt outstanding under the existing $450 million secured revolving credit and term loan facility in 2018.

Income taxes were relatively flat between periods; however, 2018 tax expense reflects lower U.S. federal income tax rates following tax reform applied to an increased level of earnings.

 

43


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

Results of Construction Services

Six-Month Analysis

 

     Six Months Ended  
     June 30,  
     2018      2017  
     (Thousands of dollars)  

Construction revenues

   $ 655,221      $ 492,442  

Operating expenses:

     

Construction expenses

     611,623        463,957  

Depreciation and amortization

     26,160        23,111  
  

 

 

    

 

 

 

Operating income

     17,438        5,374  

Other income (deductions)

     (369      248  

Net interest deductions

     6,504        3,133  
  

 

 

    

 

 

 

Income before income taxes

     10,565        2,489  

Income tax expense

     3,127        1,153  
  

 

 

    

 

 

 

Net income

     7,438        1,336  

Net income (loss) attributable to noncontrolling interest

     (797      (46
  

 

 

    

 

 

 

Contribution to consolidated net income attributable to Centuri

   $ 8,235      $ 1,382  
  

 

 

    

 

 

 

Line items in the table above reflect the results of Neuco only for the 2018 period as the acquisition occurred in November 2017.

Revenues increased $162.8 million during the first six months of 2018 when compared to the same period in the prior year due to an increased volume of replacement work for many natural gas distribution customers, the contribution of $48 million in revenue from Neuco in 2018, the absence of a customer’s temporary work stoppage that impacted prior-year performance, and the settlement of an outstanding contract dispute associated with a water pipe replacement project.

Construction expenses increased $147.7 million between periods. The increase in Construction expenses is due to additional pipe replacement work and higher labor costs incurred to complete work during inclement weather conditions during the first quarter. Approximately $44 million of construction expenses associated with Neuco are included in the six months ended June 30, 2018. Gains on sale of equipment (reflected as an offset to construction expenses) were approximately $250,000 and $1.4 million for the first six months of 2018 and 2017, respectively.

Depreciation and amortization increased $3 million between periods, primarily due to incremental amortization of finite-lived intangible assets recognized from the Neuco acquisition and to depreciation on additional equipment purchased to support the growing volume of work being performed, partially offset by a $3.9 million reduction in depreciation associated with the extension of the estimated useful lives of certain depreciable equipment.

Net interest deductions increased by $3.4 million between periods. The increase was due primarily to higher average debt outstanding under the existing $450 million secured revolving credit and term loan facility in 2018.

Income tax expense reflects both the impacts of lower income tax rates in 2018 following U.S. federal tax reform and the changes in earnings, discussed above, on which new rates are applied.

 

44


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

Results of Construction Services

Twelve-Month Analysis

 

     Twelve Months Ended  
     June 30,  
     2018      2017  
     (Thousands of dollars)  

Construction revenues

   $ 1,409,263      $ 1,133,272  

Operating expenses:

     

Construction expenses

     1,296,629        1,031,072  

Depreciation and amortization

     52,078        48,838  
  

 

 

    

 

 

 

Operating income

     60,556        53,362  

Other income (deductions)

     (272      1,441  

Net interest deductions

     11,357        6,645  
  

 

 

    

 

 

 

Income before income taxes

     48,927        48,158  

Income tax expense

     4,364        17,703  
  

 

 

    

 

 

 

Net income

     44,563        30,455  

Net income (loss) attributable to noncontrolling interest

     (650      903  
  

 

 

    

 

 

 

Contribution to consolidated net income attributable to Centuri

   $ 45,213      $ 29,552  
  

 

 

    

 

 

 

Line items in the table above reflect the results of Neuco only since the November 2017 acquisition date.

Revenues increased $276 million in the current twelve-month period compared to the same period of 2017, primarily due to a higher volume of pipe replacement work under blanket contracts and the contribution of approximately $65 million in revenue from Neuco since the November 2017 acquisition date. In addition, Centuri performed work on a multi-year water pipe replacement program, which began in late 2016, that contributed incremental revenues of $55.3 million and $30.8 million during the twelve-month periods ended June 30, 2018 and 2017, respectively.

Construction expenses increased $265.6 million between periods, primarily due to higher labor costs experienced due to changes in the mix of work with existing customers, lower relative productivity resulting from inclement weather, and greater operating expenses to support increased growth in operations. In addition, results were negatively impacted by higher construction costs and an unfavorable mix of work performed during the period related to the water pipe replacement program noted above. Approximately $57 million of construction expenses from Neuco are included in the twelve months ended June 30, 2018. Gains on sale of equipment (reflected as an offset to construction expenses) were $3 million and $5.8 million for the twelve-month periods of 2018 and 2017, respectively.

Depreciation and amortization expense increased $3.2 million between the current and prior-year periods primarily due to incremental amortization of finite-lived intangible assets recognized from the Neuco acquisition and to depreciation on additional equipment purchased to support the growing volume of work being performed, partially offset by a $5.9 million reduction in depreciation associated with the extension of the estimated useful lives of certain depreciable equipment.

Net interest deductions increased $4.7 million between periods. The increase was due primarily to higher average debt outstanding under the existing $450 million secured revolving credit and term loan facility in the current twelve-month period.

Income tax expense decreased $13.3 million between periods, primarily due to approximately $12 million of one-time tax benefits related to the remeasurement of Centuri’s deferred tax liabilities that were recorded in the fourth quarter of 2017, and to lower income tax rates in effect in 2018 (collectively, the result of U.S. tax reform).

 

45


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

Rates and Regulatory Proceedings

Arizona Jurisdiction

Arizona General Rate Case. In May 2016, Southwest filed a general rate application with the Arizona Corporation Commission (“ACC”). Following undertakings associated with the filing, a settlement hearing was held in February 2017, and the ACC approved the settlement in April 2017 (with new rates effective the same month), providing for, among other things, rate changes that would result in a combined net annual operating income increase of $60.7 million (including $16 million in additional operating revenue and a $44.7 million decrease in depreciation expense). The decision included a 7.82% rate of return on original cost rate base of $1.336 billion, a 9.5% return on common equity, and a capital structure utilizing 52% common equity. Other key elements included the approval of the continuation of the Customer-Owned Yard Line (“COYL”) program, the implementation of a vintage steel pipe (“VSP”) replacement program, and a continuation of the current decoupled rate design, excluding the previous winter-period adjustment to rates, making the mechanism fundamentally similar to that which exists in Nevada. The settlement also included a property tax tracking mechanism, which will defer changes in related expense for recovery in the next general rate case. It also included a three-year moratorium on filing another general rate application prior to May 2019.

Tax Reform. In January 2018, the ACC held a workshop specifically to address U.S. tax reform with all jurisdictional public service corporations and directed ACC staff (“the Staff”) to prepare a recommended order for consideration at an open meeting. The Staff-recommended order provided that all utilities apply regulatory accounting treatment to address impacts from the enactment of tax reform beginning January 1, 2018. Additionally, the Staff recommended that all jurisdictional utilities file an application to address savings associated with tax reform within 60 days of the open meeting through a tax expense adjustor mechanism, a notice of intent to file a rate case within 90 days, or to file an application to address the impacts of tax reform. At the referenced open meeting in February, the ACC issued an order adopting the Staff’s recommendations. In April 2018, Southwest filed an application with the ACC, requesting approval for a tax refund process or, in the alternative, the authority to file a general rate case to reflect tax reform. The tax refund process was designed to ensure customers receive the benefits from tax reform through an ACC-approved earnings test whereby a tax refund application will be made annually to refund to customers any margin contributing to earnings above the ACC-authorized rate of return. The Staff drafted another order (the “subsequent draft order”), recommending that Southwest refund customers a one-time credit to reflect the tax savings from January through July 2018, effective with Southwest’s August 2018 billing cycles and that, effective August 2018, surcredits be established on a per-therm basis until new cost-of-service rates become effective following the Company’s next general rate case. Other recommendations included supplemental compliance reports related to excess deferred income taxes and an annual true-up to account for differences between the actual tax savings and the amount authorized by the ACC. In July 2018 the ACC issued a decision (the “Decision”) approving the Staff’s subsequent draft order. While the ACC Decision addressed current tax reductions due to tax reform, it did not direct refunding to commence with regard to excess amounts from the remeasurement of deferred tax balances, which continue to be recognized in a regulatory liability since the enactment date of tax reform in December 2017.

LNG (“Liquefied Natural Gas”) Facility. In January 2014, Southwest filed an application with the ACC seeking preapproval to construct, operate and maintain a 233,000 dekatherm LNG facility in southern Arizona. This facility is intended to enhance service reliability and flexibility in natural gas deliveries in the southern Arizona area by providing a local storage option, to be operated by Southwest and connected directly to its distribution system. In December 2014, Southwest received an order from the ACC granting pre-approval of Southwest’s application to construct the LNG facility and the deferral of costs, up to $50 million, which was later approved (December 2016) to be modified not to exceed $80 million, following land purchase and bid solicitation for the engineering, procurement and construction of the facility. Construction commenced during the third quarter of 2017 and is expected to be completed by the end of 2019. Through June 2018, Southwest has incurred approximately $45 million in capital expenditures toward the project (including land acquisition costs).

COYL Program. Southwest received approval, in connection with an earlier Arizona general rate case, to implement a program to conduct leak surveys, and if leaks were present, to replace and relocate service lines and meters for Arizona customers whose meters were set off from the customer’s home, which is not a traditional configuration. “Phase II” of the COYL program included the replacement of non-leaking COYLs. The surcharge is revised annually as the program progresses. In the annual COYL filing made in February 2017, Southwest requested to establish an annual surcharge to collect $1.8 million related to the revenue requirement associated with $12.1 million in capital

 

46


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

projects completed under both phases during 2016. In June 2017, the ACC issued a decision approving the surcharge application. All capital work completed in earlier years was incorporated in Southwest’s Arizona rate base in connection with the recently completed general rate case proceeding, as discussed above. In the annual COYL filing made in February 2018, Southwest requested surcharge revenue of $4.2 million (an increase of $2.4 million from $1.8 million) related to 2017 expenditures of $18 million. ACC Staff issued a recommended order approving the proposed surcharge application, while modifying the surcharge revenue to $3.5 million (an increase of $1.7 million) to reflect the impact of tax reform on the revenue requirement calculation. ACC consideration is expected during the third quarter of 2018.

VSP Program. Southwest received approval, in connection with its most recent Arizona general rate case, to implement a VSP replacement program. Southwest currently has approximately 6,000 miles of pre-1970s vintage steel pipe in Arizona. Southwest proposed to start replacing the pipe on an accelerated basis and to recover the costs through an annual surcharge filing that will be made in February of each year. The surcharge is designed to be revised annually as the program progresses. Southwest replaced approximately 40 miles of VSP during 2017 totaling approximately $27 million and is targeting replacement projects during 2018 of approximately $100 million. In the annual VSP filing made in February 2018, Southwest requested an increase in surcharge revenue to collect $3.1 million related to 2017 expenditures. ACC Staff issued a recommended order approving the proposal surcharge application, while modifying the surcharge revenue to $2.4 million to reflect the impact of tax reform on the revenue requirement calculation. ACC consideration is expected during the third quarter of 2018.

California Jurisdiction

California General Rate Case. In December 2016, Southwest filed to modify the most recent general rate case decision to extend the current rate case cycle by two years, including extension of the annual post-test year (“PTY”) attrition adjustments through 2020 from 2018. That latest rate case decision would have otherwise required Southwest to file its next general rate application by September 2017. Expedited consideration was requested and in June 2017, the California Public Utilities Commission (“CPUC”) approved the request, thereby extending the rate case filing deadline to September 2019. Southwest believes this extension is in the public interest as it provides rate stability to customers for two additional years consistent with the current reasonable rates approved as part of the last general rate case, and the continuation of the currently approved 2.75% PTY attrition adjustment for the two additional years. Also see Attrition Filing below.

Tax Reform. In its 2017 decision approving Southwest’s request to extend the filing date of its next general rate case, the CPUC directed Southwest to track income tax expenses resulting from mandatory or elective changes in tax law, procedure or policy. The purpose is to identify differences between Southwest’s authorized income tax expenses and its actual incurred income tax expenses, the result of which would be reviewed in Southwest’s next general rate case. Southwest does not currently anticipate making an ad hoc filing in advance of the next general rate case filing to implement any changes resulting from tax reform.

Attrition Filing. In November 2017, Southwest made its latest annual PTY attrition filing, requesting annual revenue increases of $2 million in southern California, $527,000 in northern California, and $263,000 for South Lake Tahoe. This filing was approved in December 2017 and rates were made effective in January 2018. At the same time, rates were updated to recover the regulatory asset associated with the revenue decoupling mechanism, or margin tracker.

Greenhouse Gas (“GHG”) Compliance. California Assembly Bill Number 32 and the regulations promulgated by the California Air Resources Board, require Southwest, as a covered entity, to comply with all applicable requirements associated with California GHG emissions reporting and the California Cap and Trade Program. The CPUC issued a decision in March 2018 adopting an allocation methodology to distribute the net revenues or costs for years 2015-2017 beginning in the second quarter of 2018. Southwest has a net cost balance, which will be amortized over a 12-month period in rates for all applicable rate schedules, effective July 2018. In addition, for years 2019-2020, the decision adopted an allocation methodology to distribute the revenue proceeds through a California Climate Credit to active residential customers in April of each year. GHG compliance costs will be recovered through rates (including transportation rates) as prescribed by Decision D.15-10-032. There is no impact on earnings.

 

47


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

Nevada Jurisdiction

Nevada General Rate Case. The currently effective general rate case decision was received from the Public Utilities Commission of Nevada (“PUCN”) in November 2012 as amended in a Rehearing Decision in April 2013. Southwest filed its most recent general rate case with the PUCN in May 2018. The filing requests a statewide overall general rate increase of approximately $32.5 million to account for changes in the cost of service ($14.4 million) since the last general rate case, including those resulting from the TCJA, and another $18.1 million associated with the inclusion in rate base of GIR projects previously approved by the PUCN under the ongoing program. The application also requests a return on common equity of 10.30%, and a capital structure utilizing a 49.3% equity ratio. In association with the proposed changes, depreciation expense is expected to increase by approximately $4 million, for a net operating income impact of approximately $28 million. Southwest also seeks to adjust the GIR rate as part of the rate case process in lieu of filing a separate GIR rate application later this year. That adjustment would result in estimated incremental margin of $6.5 million for southern Nevada and $136,000 for northern Nevada.

In addition to the foregoing, Southwest is requesting to implement a pension tracker to account for the changes in pension expense between rate cases. Southwest also proposes to include two new tariff schedules (1) compression service and (2) biogas and renewable natural gas service. There are no changes to rate design overall, and a request to continue the general revenues adjustment (“GRA”) mechanism (revenue decoupling mechanism) is included. Management currently expects that an order will be received during the fourth quarter of 2018 and that new rates will become effective no later than January 1, 2019. See also Tax Reform and Infrastructure Replacement Mechanisms below.

Tax Reform. The PUCN opened an investigation into the TCJA, requiring comments to be filed by April 2018. Southwest filed comments, whereby it described its plan to address the tax changes in its upcoming general rate case that was filed in May 2018. In addition, PUCN Staff and the Bureau of Consumer Protection (“BCP”) filed reply comments, whereby both the PUCN Staff and the BCP agreed that the pending Nevada rate case is the appropriate forum for addressing the impact of the TCJA on ratepayers, and recommended that the Company refrain from amortizing any excess accumulated deferred tax balances until the rate case is resolved.

General Revenues Adjustment. As part of the Annual Rate Adjustment (“ARA”) filing in 2016, the PUCN authorized rate adjustments associated with the GRA. The rate adjustment collected $13.6 million from customers during 2017, a decrease in collections of $11.8 million, as compared to 2016. For the 2017 filing, with rates effective January 2018, the PUCN authorized rate adjustments that are expected to result in a decrease in collections from customers of $15.4 million, as compared to the 2017 levels. In association with the most recent annual submission in June 2018, Southwest filed to adjust the GRA surcharge effective January 2019, to result in an increase in collections from customers of $5.6 million. While there is no impact to net income overall from this rate adjustment, operating cash flows will be increased as the associated regulatory balance is reduced.

Infrastructure Replacement Mechanism. In January 2014, the PUCN approved final rules for a mechanism to defer and recover certain costs associated with accelerated replacement of infrastructure that would not otherwise currently provide incremental revenues. Associated with the replacement of various types of pipe infrastructure under the mechanism (Early Vintage Plastic Pipe, COYL and VSP), each year Southwest files a GIR “Advance Application” requesting authorization to replace qualifying infrastructure. Approximately $57.3 million of replacement work was approved for 2017 with an annualized revenue requirement estimated at approximately $5.3 million. In May 2017, Southwest filed its Advance Application for projects totaling approximately $66 million that are expected to be completed during 2018. The PUCN issued an order on that Advance Application in September 2017, approving approximately $66 million of replacement work with an annualized revenue requirement estimated at $6 million.

In June 2018, Southwest filed its Advance Application with projects totaling $228 million to be completed over a three-year period, with a total annualized revenue requirement (following the three-year replacement period) of approximately $21.7 million. Historically, Southwest has requested approval of projects on an annual basis; however, it is requesting to move to a multi-year approval process for projects to improve operational flexibility and enhance coordination with contractors and governmental agencies. A final decision is expected during the fourth quarter of 2018.

 

48


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

Filed separately, as part of each GIR filing, Southwest requests authorization to reset the GIR recovery surcharge related to previously approved and completed projects, with new rates becoming effective each January. In November 2017, for projects approved in 2016 and completed by July 2017, a deferred annualized revenue requirement of $8.7 million was approved to be recovered from customers through updated rates effective January 2018. The updated surcharge is expected to result in incremental annual margin of $4.2 million. If the above noted transition to a three-year project plan is approved as requested, management would continue to update surcharges annually under the GIR program.

Conservation and Energy Efficiency(“CEE”). In June 2015, Southwest requested recovery of energy efficiency and conservation development and implementation costs, including promotions and incentives for various programs, as originally approved for deferral by the PUCN effective November 2009. While recovery of initial program costs was approved as part of the most recent general rate case, amounts incurred subsequent to May 2012 (the certification period) continued to be deferred. Approved rates for the post-May 2012 costs deferred (including previously expected program expenditures for 2016) became effective January 2016. The 2017 ARA filing approved in November 2017, with modified rates effective January 2018, is expected to result in annualized margin decreases of $8.2 million in southern Nevada and $1.4 million in northern Nevada to return over-collected balances. As part of the 2018 ARA filing, Southwest requested modified rates, effective January 2019, authorizing an annualized margin decrease of $4 million in southern Nevada and $100,000 increase in northern Nevada. There is, however, no anticipated impact to net income overall from these decreases as amortization expense will also be reduced.

Expansion and Economic Development Legislation. In January 2016, final regulations were approved by the PUCN associated with legislation (“SB 151”) previously introduced and signed into law in Nevada. The legislation authorized natural gas utilities to expand their infrastructure. This includes providing gas service to unserved and underserved areas in Nevada.

In November 2017, Southwest filed for preapproval of a project to extend service to Mesquite, Nevada, in accordance with the SB 151 regulations. Hearings took place in April 2018, and in May, the PUCN issued an order approving the Southwest proposal to expand natural gas infrastructure to Mesquite. The order approves a capital investment of approximately $28 million and the construction of approximately 37 miles of distribution pipeline (including the approach main). The cost is expected to be recovered through volumetric rates from all southern Nevada customers (including new customers in Mesquite). The annual revenue requirement associated with the project is $2.8 million.

Federal Energy Regulatory Commission (“FERC”) Jurisdiction

General Rate Case. Paiute Pipeline Company (“Paiute”), a wholly owned subsidiary of Southwest, filed its most recent general rate case with the FERC in February 2014, and following settlement proceedings, tariff changes were filed in March 2015. The settlement implied an 11.5% pre-tax rate of return, and as part of the agreement, Paiute agreed to file a rate case no later than May 2019. See Tax Reform below.

2018 Expansion. In response to growing demand in the Carson City and South Lake Tahoe areas of northern California and northern Nevada, Paiute evaluated shipper interest in acquiring additional transportation capacity and executed precedent agreements for incremental transportation capacity with Southwest during the third quarter of 2016. In October 2016, Paiute initiated a pre-filing review process with the FERC for an expansion project, which was approved during the same month. In July 2017, a certificate application was filed, which included an applicant environmental assessment. In May 2018, the FERC issued a Certificate of Public Convenience and Necessity authorizing Paiute to construct the project. Construction work began in July 2018 and will consist of 8.5 miles of additional transmission pipeline infrastructure. The project is expected to be completed by the end of 2018 at a cost of approximately $22 million.

Tax Reform. The FERC issued a Notice of Proposed Rulemaking (“NOPR”) on whether the federal income tax changes of the TCJA cause pipeline rates to no longer be just and reasonable. The NOPR provided for pipelines to file a FERC Form No. 501-G to evaluate the impact of tax reform on their revenue requirement. In addition to filing the form, pipelines would select one of the following four options: 1) make a limited “Section 4” filing to reduce its rates by the percentage reduction in its cost of service shown in its FERC Form No. 501-G; 2) commit to file either a prepackaged uncontested rate settlement or a general Section 4 rate case; 3) file a statement explaining why no change in rates is necessary; or 4) file the new FERC form without taking any other action. The FERC would also ultimately consider whether to initiate an investigation of any pipeline that would not have submitted a limited Section 4 rate

 

49


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2018

 

reduction filing or committed to file a general rate case. In July 2018, the FERC issued a final rule (Order No. 849) adopting procedures for determining which jurisdictional pipelines may be collecting unjust and unreasonable rates in light of tax reform. The rule becomes effective 45 days after publication in the Federal Register. Paiute Pipeline Company and Southwest Gas Transmission Company, the Company’s FERC-regulated subsidiaries are each expected to file a Form No. 501-G during the fourth quarter of 2018.

PGA Filings

The rate schedules in all of Southwest’s service territories contain provisions that permit adjustments to rates as the cost of purchased gas changes. These deferred energy provisions and purchased gas adjustment clauses are collectively referred to as “PGA” clauses. Differences between gas costs recovered from customers and amounts paid for gas by Southwest result in over- or under-collections. At June 30, 2018, over-collections in all jurisdictions resulted in a liability of $26.4 million on the Company’s and Southwest’s Condensed Consolidated Balance Sheets. Filings to change rates in accordance with PGA clauses are subject to audit by state regulatory commission staffs. PGA changes impact cash flows but have no direct impact on profit margin. However, gas cost deferrals and recoveries can impact comparisons between periods of individual consolidated income statement components. These include Gas operating revenues, Net cost of gas sold, Net interest deductions, and Other income (deductions).

The following table presents Southwest’s outstanding PGA balances receivable/(payable) (in thousands):

 

     June 30, 2018      December 31, 2017      June 30, 2017  

Arizona

   $ (9,167    $ 5,069      $ 4,822  

Northern Nevada

     (4,555      8,189        1,134  

Southern Nevada

     (7,364      (6,841      (17,741

California

     (5,279      1,323        (2,887
  

 

 

    

 

 

    

 

 

 
   $ (26,365    $ 7,740      $ (14,672
  

 

 

    

 

 

    

 

 

 

As discussed in Note 1 – Nature of Operations and Basis of Presentation in this Form 10-Q, in July 2018, a refund of