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Southwest Gas Holdings, Inc. - Quarter Report: 2019 September (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 September 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    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.
 
 
 
Delaware
    
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
 
 
 
    
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Southwest Gas Holdings, Inc. Common Stock, $1 Par Value
 
SWX
 
New York Stock Exchange
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 each 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that each registrant was required to submit 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, 54,626,240 shares as of October 31, 2019.
All of the outstanding shares of common stock ($1 par value) of Southwest Gas Corporation were held by Southwest Gas Holdings, Inc. as of October 31, 2019.
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).

 
1
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2019


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, statements of cash flows, and statements of equity) for Southwest Gas Holdings, Inc. and Southwest Gas Corporation, in that order. The Notes to the Condensed 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
  
September 30, 2019


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)
 
 
September 30, 2019
 
December 31, 2018
ASSETS
 
 
 
 
Utility plant:
 
 
 
 
Gas plant
 
$
7,550,855

 
$
7,134,239

Less: accumulated depreciation
 
(2,303,864
)
 
(2,234,029
)
Construction work in progress
 
288,573

 
193,028

Net utility plant
 
5,535,564

 
5,093,238

Other property and investments
 
768,685

 
623,551

Current assets:
 
 
 
 
Cash and cash equivalents
 
28,480

 
85,361

Accounts receivable, net of allowances
 
434,153

 
413,926

Accrued utility revenue
 
35,800

 
77,200

Income taxes receivable
 
26,611

 
14,653

Deferred purchased gas costs
 
49,804

 
4,928

Prepaid and other current assets
 
190,554

 
243,701

Total current assets
 
765,402

 
839,769

Noncurrent assets:
 
 
 
 
Goodwill
 
339,948

 
359,045

Deferred income taxes
 
896

 
1,264

Deferred charges and other assets
 
429,716

 
440,862

Total noncurrent assets
 
770,560

 
801,171

Total assets
 
$
7,840,211

 
$
7,357,729

CAPITALIZATION AND LIABILITIES
 
 
 
 
Capitalization:
 
 
 
 
Common stock, $1 par (authorized - 120,000,000 shares; issued and outstanding - 54,624,090 and 53,026,848 shares)
 
$
56,254

 
$
54,656

         Additional paid-in capital
 
1,437,733

 
1,305,769

Accumulated other comprehensive income (loss), net
 
(47,775
)
 
(52,668
)
Retained earnings
 
977,498

 
944,285

Total Southwest Gas Holdings, Inc. equity
 
2,423,710

 
2,252,042

Noncontrolling interest
 

 
(452
)
Total equity
 
2,423,710

 
2,251,590

Redeemable noncontrolling interest
 
84,354

 
81,831

Long-term debt, less current maturities
 
2,462,116

 
2,107,258

Total capitalization
 
4,970,180

 
4,440,679

Current liabilities:
 
 
 
 
         Current maturities of long-term debt
 
38,165

 
33,060

Short-term debt
 
30,000

 
152,000

Accounts payable
 
188,896

 
248,993

Customer deposits
 
68,897

 
67,940

Income taxes payable
 
1,319

 
1,083

Accrued general taxes
 
52,361

 
43,560

Accrued interest
 
34,745

 
21,369

Deferred purchased gas costs
 
88,030

 
79,762

Other current liabilities
 
279,931

 
290,878

Total current liabilities
 
782,344

 
938,645

Deferred income taxes and other credits:
 
 
 
 
Deferred income taxes and investment tax credits
 
577,928

 
529,201

Accumulated removal costs
 
392,000

 
383,000

Other deferred credits and other long-term liabilities
 
1,117,759

 
1,066,204

Total deferred income taxes and other credits
 
2,087,687

 
1,978,405

Total capitalization and liabilities
 
$
7,840,211

 
$
7,357,729

The accompanying notes are an integral part of these statements.

 
3
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2019


SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Twelve Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Operating revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Gas operating revenues
 
$
209,980

 
$
217,523

 
$
989,368

 
$
987,515

 
$
1,359,581

 
$
1,354,000

Utility infrastructure services revenues
 
515,250

 
450,623

 
1,282,412

 
1,105,844

 
1,698,853

 
1,479,792

Total operating revenues
 
725,230

 
668,146

 
2,271,780

 
2,093,359

 
3,058,434

 
2,833,792

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Net cost of gas sold
 
35,068

 
49,903

 
292,854

 
319,101

 
393,141

 
412,307

Operations and maintenance
 
109,652

 
105,508

 
321,190

 
313,294

 
414,289

 
406,137

Depreciation and amortization
 
75,370

 
62,156

 
223,251

 
185,941

 
286,522

 
247,803

Taxes other than income taxes
 
15,308

 
15,036

 
46,640

 
44,959

 
61,579

 
59,580

Utility infrastructure services expenses
 
451,574

 
395,862

 
1,154,238

 
1,007,485

 
1,534,442

 
1,349,862

Total operating expenses
 
686,972

 
628,465

 
2,038,173

 
1,870,780

 
2,689,973

 
2,475,689

Operating income
 
38,258

 
39,681

 
233,607

 
222,579

 
368,461

 
358,103

Other income and (expenses):
 
 
 
 
 
 
 
 
 
 
 
 
Net interest deductions
 
(27,434
)
 
(24,548
)
 
(80,662
)
 
(70,831
)
 
(106,502
)
 
(92,032
)
Other income (deductions)
 
(1,158
)
 
889

 
6,827

 
(6,151
)
 
(4,448
)
 
(6,401
)
Total other income and (expenses)
 
(28,592
)
 
(23,659
)
 
(73,835
)
 
(76,982
)
 
(110,950
)
 
(98,433
)
Income before income taxes
 
9,666

 
16,022

 
159,772

 
145,597

 
257,511

 
259,670

Income tax expense
 
3,141

 
3,691

 
35,031

 
33,421

 
63,294

 
51,098

Net income
 
6,525

 
12,331

 
124,741

 
112,176

 
194,217

 
208,572

Net income (loss) attributable to noncontrolling interests
 
1,172

 

 
2,523

 
(797
)
 
2,695

 
(866
)
Net income attributable to Southwest Gas Holdings, Inc.
 
$
5,353

 
$
12,331

 
$
122,218

 
$
112,973

 
$
191,522

 
$
209,438

Basic earnings per share
 
$
0.10

 
$
0.25

 
$
2.26

 
$
2.31

 
$
3.60

 
$
4.30

Diluted earnings per share
 
$
0.10

 
$
0.25

 
$
2.26

 
$
2.31

 
$
3.59

 
$
4.29

Average number of common shares
 
54,670

 
49,493

 
53,996

 
48,916

 
53,219

 
48,728

Average shares (assuming dilution)
 
54,748

 
49,553

 
54,063

 
48,968

 
53,287

 
48,781

The accompanying notes are an integral part of these statements.


 
4
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2019


SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Thousands of dollars)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Twelve Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Net income
 
$
6,525

 
$
12,331

 
$
124,741

 
$
112,176

 
$
194,217

 
$
208,572

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
 
 
 
 
Defined benefit pension plans:
 
 
 
 
 
 
 
 
 
 
 
 
Net actuarial gain (loss)
 

 

 

 

 
(15,524
)
 
(32,701
)
Amortization of prior service cost
 
241

 
254

 
724

 
762

 
977

 
969

Amortization of net actuarial loss
 
4,442

 
6,387

 
13,325

 
19,161

 
19,713

 
23,105

Regulatory adjustment
 
(4,065
)
 
(5,746
)
 
(12,193
)
 
(17,236
)
 
(1,214
)
 
6,021

Net defined benefit pension plans
 
618

 
895

 
1,856

 
2,687

 
3,952

 
(2,606
)
Forward-starting interest rate swaps (“FSIRS”):
 
 
 
 
 
 
 
 
 
 
 
 
Amounts reclassified into net income
 
635

 
636

 
1,906

 
1,907

 
2,540

 
2,426

Net forward-starting interest rate swaps
 
635

 
636

 
1,906

 
1,907

 
2,540

 
2,426

Foreign currency translation adjustments
 
(447
)
 
599

 
1,131

 
(1,002
)
 
(877
)
 
(1,092
)
Total other comprehensive income (loss), net of tax
 
806

 
2,130

 
4,893

 
3,592

 
5,615

 
(1,272
)
Comprehensive income
 
7,331

 
14,461

 
129,634

 
115,768

 
199,832

 
207,300

Comprehensive income (loss) attributable to noncontrolling interests
 
1,172

 

 
2,523

 
(797
)
 
2,695

 
(866
)
Comprehensive income attributable to Southwest Gas Holdings, Inc.
 
$
6,159

 
$
14,461

 
$
127,111

 
$
116,565

 
$
197,137

 
$
208,166

The accompanying notes are an integral part of these statements.


 
5
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2019


SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
 
 
Nine Months Ended
September 30,
 
Twelve Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
CASH FLOW FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
 
Net income
 
$
124,741

 
$
112,176

 
$
194,217

 
$
208,572

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
223,251

 
185,941

 
286,522

 
247,803

Deferred income taxes
 
46,099

 
36,210

 
60,930

 
50,190

Changes in current assets and liabilities:
 
 
 
 
 
 
 
 
Accounts receivable, net of allowances
 
(19,615
)
 
(1,659
)
 
(33,818
)
 
(27,276
)
Accrued utility revenue
 
41,400

 
43,600

 
(1,200
)
 
(500
)
Deferred purchased gas costs
 
(36,608
)
 
100,763

 
(54,797
)
 
84,282

Accounts payable
 
(46,079
)
 
(48,618
)
 
14,317

 
(1,886
)
Accrued taxes
 
(2,841
)
 
(9,840
)
 
(4,956
)
 
(12,417
)
Other current assets and liabilities
 
74,048

 
1,245

 
18,730

 
(50,002
)
Gains on sale
 
(3,157
)
 
(997
)
 
(3,863
)
 
(3,741
)
Changes in undistributed stock compensation
 
6,067

 
4,686

 
7,492

 
6,375

Equity AFUDC
 
(3,179
)
 
(1,034
)
 
(5,772
)
 
(1,253
)
Changes in other assets and deferred charges
 
(15,855
)
 
(10,497
)
 
(11,096
)
 
(18,296
)
Changes in other liabilities and deferred credits
 
(9,786
)
 
(4,583
)
 
33,243

 
(3,747
)
Net cash provided by operating activities
 
378,486

 
407,393

 
499,949

 
478,104

CASH FLOW FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
Construction expenditures and property additions
 
(719,386
)
 
(560,165
)
 
(925,135
)
 
(733,816
)
Acquisition of businesses, net of cash acquired
 
(19,533
)
 
(4,209
)
 
(266,697
)
 
(98,413
)
Changes in customer advances
 
15,049

 
11,051

 
17,461

 
13,325

Miscellaneous inflows
 
12,862

 
3,827

 
13,376

 
11,312

Net cash used in investing activities
 
(711,008
)
 
(549,496
)
 
(1,160,995
)
 
(807,592
)
CASH FLOW FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
Issuance of common stock, net
 
129,341

 
92,234

 
391,509

 
121,826

Dividends paid
 
(86,345
)
 
(74,535
)
 
(112,050
)
 
(98,162
)
Issuance of long-term debt, net
 
482,614

 
480,993

 
566,793

 
783,748

Retirement of long-term debt
 
(127,175
)
 
(143,757
)
 
(221,176
)
 
(382,486
)
Change in short-term debt
 
(122,000
)
 
(183,000
)
 
(1,500
)
 
(79,000
)
Principal payments on finance lease obligations
 
(161
)
 
(422
)
 
(387
)
 
(606
)
Withholding remittance - share-based compensation
 
(1,858
)
 
(2,880
)
 
(2,088
)
 
(2,880
)
Other
 
1,167

 
(1,121
)
 
(456
)
 
(3,091
)
Net cash provided by financing activities
 
275,583

 
167,512

 
620,645

 
339,349

Effects of currency translation on cash and cash equivalents
 
58

 
139

 
(289
)
 
157

Change in cash and cash equivalents
 
(56,881
)
 
25,548

 
(40,690
)
 
10,018

Cash and cash equivalents at beginning of period
 
85,361

 
43,622

 
69,170

 
59,152

Cash and cash equivalents at end of period
 
$
28,480

 
$
69,170

 
$
28,480

 
$
69,170

Supplemental information:
 
 
 
 
 
 
 
 
Interest paid, net of amounts capitalized
 
$
62,165

 
$
49,568

 
$
99,159

 
$
75,740

Income taxes paid (received)
 
$
371

 
$
18,261

 
$
(16,669
)
 
$
20,247

The accompanying notes are an integral part of these statements.

 
6
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2019


SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except per share amounts)
(Unaudited)
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
 
2019
 
2018
 
2019
 
2018
Common stock shares
 
 
 
 
 
 
 
 
Beginning balances
54,321

 
49,126

 
53,026

 
48,090

 
 
Common stock issuances
303

 
297

 
1,598

 
1,333

 
Ending balances
54,624

 
49,423

 
54,624

 
49,423

Common stock amount
 
 
 
 
 
 
 
 
Beginning balances
$
55,951

 
$
50,756

 
$
54,656

 
$
49,720

 
 
Common stock issuances
303

 
297

 
1,598

 
1,333

 
Ending balances
56,254

 
51,053

 
56,254

 
51,053

Additional paid-in capital
 
 
 
 
 
 
 
 
Beginning balances
1,409,923

 
1,021,508

 
1,305,769

 
955,332

 
 
Common stock issuances
27,810

 
24,332

 
132,416

 
93,218

 
 
Change in ownership of noncontrolling interest

 

 
(452
)
 
(2,710
)
 
Ending balances
1,437,733

 
1,045,840

 
1,437,733

 
1,045,840

Accumulated other comprehensive income (loss)
 
 
 
 
 
 
 
 
Beginning balances
(48,581
)
 
(55,520
)
 
(52,668
)
 
(47,682
)
 
 
Foreign currency exchange translation adjustment
(447
)
 
599

 
1,131

 
(1,002
)
 
 
Net actuarial gain (loss) arising during period, less amortization of unamortized benefit plan cost, net of tax
618

 
895

 
1,856

 
2,687

 
 
FSIRS amounts reclassified to net income, net of tax
635

 
636

 
1,906

 
1,907

 
 
Reclassification of excess deferred taxes

 

 

 
(9,300
)
 
Ending balances
(47,775
)
 
(53,390
)
 
(47,775
)
 
(53,390
)
Retained earnings
 
 
 
 
 
 
 
 
Beginning balances
1,002,070

 
916,275

 
944,285

 
857,398

 
 
Net income
5,353

 
12,331

 
122,218

 
112,973

 
 
Dividends declared
(29,925
)
 
(25,876
)
 
(89,005
)
 
(76,941
)
 
 
Reclassification of excess deferred taxes

 

 

 
9,300

 
Ending balances
977,498

 
902,730

 
977,498

 
902,730

Total Southwest Gas Holdings, Inc. equity ending balances
2,423,710

 
1,946,233

 
2,423,710

 
1,946,233

Noncontrolling interest
 
 
 
 
 
 
 
 
Beginning balances

 
(452
)
 
(452
)
 
(2,365
)
 
 
Net income (loss)

 

 

 
(797
)
 
 
Change in ownership of noncontrolling interest

 

 
452

 
2,710

 
Ending balances

 
(452
)
 

 
(452
)
Total equity ending balances
$
2,423,710

 
$
1,945,781

 
$
2,423,710

 
$
1,945,781

Dividends declared per common share
$
0.545

 
$
0.52

 
$
1.635

 
$
1.56

The accompanying notes are an integral part of these statements.

 
7
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2019


SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
 
 
September 30, 2019
 
December 31, 2018
ASSETS
 
 
 
 
Utility plant:
 
 
 
 
Gas plant
 
$
7,550,855

 
$
7,134,239

Less: accumulated depreciation
 
(2,303,864
)
 
(2,234,029
)
Construction work in progress
 
288,573

 
193,028

Net utility plant
 
5,535,564

 
5,093,238

Other property and investments
 
127,774

 
116,146

Current assets:
 
 
 
 
Cash and cash equivalents
 
16,811

 
31,962

Accounts receivable, net of allowances
 
73,530

 
140,057

Accrued utility revenue
 
35,800

 
77,200

Income taxes receivable
 
26,663

 
13,444

Deferred purchased gas costs
 
49,804

 
4,928

Prepaid and other current assets
 
171,402

 
229,562

Total current assets
 
374,010

 
497,153

Noncurrent assets:
 
 
 
 
Goodwill
 
10,095

 
10,095

Deferred charges and other assets
 
410,512

 
424,952

Total noncurrent assets
 
420,607

 
435,047

Total assets
 
$
6,457,955

 
$
6,141,584

CAPITALIZATION AND LIABILITIES
 
 
 
 
Capitalization:
 
 
 
 
Common stock
 
$
49,112

 
$
49,112

         Additional paid-in capital
 
1,194,745

 
1,065,242

Accumulated other comprehensive income (loss), net
 
(45,287
)
 
(49,049
)
Retained earnings
 
731,036

 
717,155

Total equity
 
1,929,606

 
1,782,460

Long-term debt, less current maturities
 
2,115,870

 
1,818,669

Total capitalization
 
4,045,476

 
3,601,129

Current liabilities:
 
 
 
 
Short-term debt
 
30,000

 
152,000

Accounts payable
 
94,130

 
184,982

Customer deposits
 
68,897

 
67,940

Accrued general taxes
 
52,361

 
43,560

Accrued interest
 
34,623

 
20,243

Deferred purchased gas costs
 
88,030

 
79,762

Payable to parent
 
270

 
472

Other current liabilities
 
114,893

 
94,136

Total current liabilities
 
483,204

 
643,095

Deferred income taxes and other credits:
 
 
 
 
Deferred income taxes and investment tax credits, net
 
527,544

 
490,458

Accumulated removal costs
 
392,000

 
383,000

Other deferred credits and other long-term liabilities
 
1,009,731

 
1,023,902

Total deferred income taxes and other credits
 
1,929,275

 
1,897,360

Total capitalization and liabilities
 
$
6,457,955

 
$
6,141,584

The accompanying notes are an integral part of these statements.

 
8
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2019


SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands of dollars)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Twelve Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Gas operating revenues
 
$
209,980

 
$
217,523

 
$
989,368

 
$
987,515

 
$
1,359,581

 
$
1,354,000

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Net cost of gas sold
 
35,068

 
49,903

 
292,854

 
319,101

 
393,141

 
412,307

Operations and maintenance
 
109,039

 
104,657

 
319,572

 
312,055

 
412,330

 
404,549

Depreciation and amortization
 
52,372

 
47,924

 
159,327

 
145,549

 
205,594

 
193,828

Taxes other than income taxes
 
15,308

 
15,036

 
46,640

 
44,959

 
61,579

 
59,580

Total operating expenses
 
211,787

 
217,520

 
818,393

 
821,664

 
1,072,644

 
1,070,264

Operating income (loss)
 
(1,807
)
 
3

 
170,975

 
165,851

 
286,937

 
283,736

Other income and (expenses):
 
 
 
 
 
 
 
 
 
 
 
 
Net interest deductions
 
(23,619
)
 
(20,399
)
 
(70,063
)
 
(59,803
)
 
(92,000
)
 
(77,914
)
Other income (deductions)
 
(1,353
)
 
836

 
6,185

 
(5,861
)
 
(5,194
)
 
(6,425
)
Total other income and (expenses)
 
(24,972
)
 
(19,563
)
 
(63,878
)
 
(65,664
)
 
(97,194
)
 
(84,339
)
Income (loss) before income taxes
 
(26,779
)
 
(19,560
)
 
107,097

 
100,187

 
189,743

 
199,397

Income tax expense (benefit)
 
(6,767
)
 
(5,890
)
 
20,351

 
20,886

 
43,456

 
45,714

Net income (loss)
 
$
(20,012
)
 
$
(13,670
)
 
$
86,746

 
$
79,301

 
$
146,287

 
$
153,683

The accompanying notes are an integral part of these statements.


 
9
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2019


SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Thousands of dollars)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Twelve Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Net income (loss)
 
$
(20,012
)
 
$
(13,670
)
 
$
86,746

 
$
79,301

 
$
146,287

 
$
153,683

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
 
 
 
 
 
Defined benefit pension plans:
 
 
 
 
 
 
 
 
 
 
 
 
Net actuarial gain (loss)
 

 

 

 

 
(15,524
)
 
(32,701
)
Amortization of prior service cost
 
241

 
254

 
724

 
762

 
977

 
969

Amortization of net actuarial loss
 
4,442

 
6,387

 
13,325

 
19,161

 
19,713

 
23,105

Regulatory adjustment
 
(4,065
)
 
(5,746
)
 
(12,193
)
 
(17,236
)
 
(1,214
)
 
6,021

Net defined benefit pension plans
 
618

 
895

 
1,856

 
2,687

 
3,952

 
(2,606
)
Forward-starting interest rate swaps (“FSIRS”):
 
 
 
 
 
 
 
 
 
 
 
 
Amounts reclassified into net income
 
635

 
636

 
1,906

 
1,907

 
2,540

 
2,426

Net forward-starting interest rate swaps
 
635

 
636

 
1,906

 
1,907

 
2,540

 
2,426

Total other comprehensive income (loss), net of tax
 
1,253

 
1,531

 
3,762

 
4,594

 
6,492

 
(180
)
Comprehensive income (loss)
 
$
(18,759
)
 
$
(12,139
)
 
$
90,508

 
$
83,895

 
$
152,779

 
$
153,503

The accompanying notes are an integral part of these statements.


 
10
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2019


SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
 
 
Nine Months Ended
September 30,
 
Twelve Months Ended
September 30,
 
 
2019
 
2018
 
2019
 
2018
CASH FLOW FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
 
Net Income
 
$
86,746

 
$
79,301

 
$
146,287

 
$
153,683

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
159,327

 
145,549

 
205,594

 
193,828

Deferred income taxes
 
35,899

 
33,239

 
45,659

 
55,787

Changes in current assets and liabilities:
 
 
 
 
 
 
 
 
Accounts receivable, net of allowances
 
66,527

 
49,654

 
(3,436
)
 
(2,066
)
Accrued utility revenue
 
41,400

 
43,600

 
(1,200
)
 
(500
)
Deferred purchased gas costs
 
(36,608
)
 
100,763

 
(54,797
)
 
84,282

Accounts payable
 
(77,311
)
 
(53,217
)
 
(686
)
 
(2,700
)
Accrued taxes
 
(4,419
)
 
(16,026
)
 
(7,125
)
 
(9,735
)
Other current assets and liabilities
 
87,869

 
(35,154
)
 
31,579

 
(81,333
)
Changes in undistributed stock compensation
 
4,710

 
4,269

 
5,796

 
5,558

Equity AFUDC
 
(3,179
)
 
(1,034
)
 
(5,772
)
 
(1,253
)
Changes in other assets and deferred charges
 
(21,098
)
 
(11,025
)
 
(17,122
)
 
(19,082
)
Changes in other liabilities and deferred credits
 
(10,357
)
 
7,550

 
19,762

 
8,208

Net cash provided by operating activities
 
329,506

 
347,469

 
364,539

 
384,677

CASH FLOW FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
Construction expenditures and property additions
 
(587,405
)
 
(486,037
)
 
(784,237
)
 
(651,022
)
Changes in customer advances
 
15,049

 
11,051

 
17,461

 
13,325

Miscellaneous inflows (outflows)
 
(51
)
 
1,316

 
(1,353
)
 
1,650

Net cash used in investing activities
 
(572,407
)
 
(473,670
)
 
(768,129
)
 
(636,047
)
CASH FLOW FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
Contributions from parent
 
126,186

 
90,644

 
149,091

 
120,344

Dividends paid
 
(71,000
)
 
(65,000
)
 
(93,000
)
 
(86,000
)
Issuance of long-term debt, net
 
297,222

 
297,495

 
297,222

 
297,495

Change in short-term debt
 
(122,000
)
 
(182,000
)
 
21,000

 
(74,000
)
Withholding remittance - share-based compensation
 
(1,857
)
 
(2,880
)
 
(2,087
)
 
(2,880
)
Other
 
(801
)
 
(939
)
 
(890
)
 
(991
)
Net cash provided by financing activities
 
227,750

 
137,320

 
371,336

 
253,968

 
 
 
 
 
 
 
 
 
Change in cash and cash equivalents
 
(15,151
)
 
11,119

 
(32,254
)
 
2,598

Cash and cash equivalents at beginning of period
 
31,962

 
37,946

 
49,065

 
46,467

Cash and cash equivalents at end of period
 
$
16,811

 
$
49,065

 
$
16,811

 
$
49,065

Supplemental information:
 
 
 
 
 
 
 
 
Interest paid, net of amounts capitalized
 
$
51,720

 
$
42,986

 
$
82,539

 
$
67,025

Income taxes paid (received)
 
$
(22
)
 
$
11,286

 
$
(17,164
)
 
$
3,428

The accompanying notes are an integral part of these statements.


 
11
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2019


SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
(Unaudited)
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
 
2019
 
2018
 
2019
 
2018
Common stock shares
 
 
 
 
 
 
 
 
Beginning and ending balances
47,482

 
47,482

 
47,482

 
47,482

Common stock amount
 
 
 
 
 
 
 
 
Beginning and ending balances
$
49,112

 
$
49,112

 
$
49,112

 
$
49,112

Additional paid-in capital
 
 
 
 
 
 
 
 
Beginning balances
1,169,549

 
1,006,065

 
1,065,242

 
948,767

 
 
Share-based compensation
1,102

 
1,197

 
3,317

 
1,899

 
 
Contributions from Southwest Gas Holdings, Inc.
24,094

 
34,048

 
126,186

 
90,644

 
Ending balances
1,194,745

 
1,041,310

 
1,194,745

 
1,041,310

Accumulated other comprehensive income (loss)
 
 
 
 
 
 
 
 
Beginning balances
(46,540
)
 
(53,310
)
 
(49,049
)
 
(47,073
)
 
 
Net actuarial gain (loss) arising during period, less amortization of unamortized benefit plan cost, net of tax
618

 
895

 
1,856

 
2,687

 
 
FSIRS amounts reclassified to net income, net of tax
635

 
636

 
1,906

 
1,907

 
 
Reclassification of excess deferred taxes

 

 

 
(9,300
)
 
Ending balances
(45,287
)
 
(51,779
)
 
(45,287
)
 
(51,779
)
Retained earnings
 
 
 
 
 
 
 
 
Beginning balances
776,101

 
717,126

 
717,155

 
659,193

 
 
Net income (loss)
(20,012
)
 
(13,670
)
 
86,746

 
79,301

 
 
Share-based compensation
(153
)
 
(172
)
 
(465
)
 
(510
)
 
 
Dividends declared to Southwest Gas Holdings, Inc.
(24,900
)
 
(22,000
)
 
(72,400
)
 
(66,000
)
 
 
Reclassification of excess deferred taxes

 

 

 
9,300

 
Ending balances
731,036

 
681,284

 
731,036

 
681,284

Total Southwest Gas Corporation equity ending balances
$
1,929,606

 
$
1,719,927

 
$
1,929,606

 
$
1,719,927

The accompanying notes are an integral part of these statements.

 
12
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2019


Note 1 – Background, Organization, and Summary of Significant Accounting Policies
Nature of Operations. Southwest Gas Holdings, Inc. is a holding company, owning 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 Group, Inc. (“Centuri,” or the “utility infrastructure services” segment). At the annual meeting of shareholders of Southwest Gas Holdings, Inc., held on May 2, 2019, shareholders voted to approve changing the state of incorporation for Southwest Gas Holdings, Inc. from California to Delaware. The reincorporation became effective September 20, 2019.
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. 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 utility infrastructure services enterprise dedicated to delivering a diverse array of solutions to North America’s gas and electric providers. 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”), NPL Canada Ltd. (“NPL Canada”), New England Utility Constructors, Inc. (“Neuco”), and Linetec Services, LLC (“Linetec”). Utility infrastructure services activity is seasonal in most of Centuri’s operating areas. Peak periods are the summer and fall months in colder climate areas, such as the northeastern and midwestern United States (“U.S.”) and in Canada. In warmer climate areas, such as the southwestern and southeastern U.S., utility infrastructure services activity continues year round. In November 2017, Centuri acquired Neuco, thereby expanding its core services in the northeast region of the U.S. Additionally, in November 2018, Centuri expanded its operations in the southeast region of the U.S. through the acquisition of an 80% interest in Linetec. See Note 12 – Business Acquisitions for more information.
Basis of Presentation. The condensed consolidated financial statements of 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”). The year-end condensed balance sheet data was derived from audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. 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 acquisitions of Neuco and Linetec.
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 depiction 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 2018 Annual Report to Shareholders, which is incorporated by reference into the 2018 Form 10-K.
Fair Value Measurements. Certain assets and liabilities are reported at fair value, which is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
U.S. GAAP states that a fair value measurement should be based on the assumptions that market participants would use in pricing the asset or liability and establishes a fair value hierarchy that ranks the inputs used to measure fair value by their reliability. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to fair values derived from unobservable inputs (Level 3 measurements). Financial assets and liabilities are categorized in their entirety based on the lowest level of input that is significant to the fair value measurement. The three levels of the fair value hierarchy are as follows:
Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities that a company has the ability to access at the measurement date.
Level 2 – inputs other than quoted prices included within Level 1 that are observable for similar assets or liabilities, either directly or indirectly.
Level 3 – unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

 
13
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2019


The Company primarily used quoted market prices and other observable market pricing information in valuing cash and cash equivalents, derivatives, long-term debt outstanding, and assets of the qualified pension plan and postretirement benefit plans required to be recorded and/or disclosed at fair value.
Other Property and Investments. Other property and investments on the Condensed Consolidated Balance Sheets includes (thousands of dollars):
 
September 30, 2019
 
December 31, 2018
Southwest Gas Corporation:
 
 
 
Net cash surrender value of COLI policies
$
126,142

 
$
114,405

Other property
1,632

 
1,741

Total Southwest Gas Corporation
127,774

 
116,146

Centuri property, equipment, and intangibles
968,013

 
792,191

Centuri accumulated depreciation/amortization
(345,113
)
 
(298,939
)
Other property
18,011

 
14,153

Total Southwest Gas Holdings, Inc.
$
768,685

 
$
623,551


Included in the table above are the net cash surrender values of company-owned life insurance (“COLI”) policies. 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.
Cash and Cash Equivalents. For purposes of reporting consolidated cash flows, cash and cash equivalents include cash on hand and financial instruments with original maturities of three months or less. Such investments are carried at cost, which approximates market value. Cash and cash equivalents for Southwest and the Company also include money market fund investments totaling approximately $1.5 million and $10.2 million, respectively, at September 30, 2019, and $18 million and $59.9 million, respectively, at December 31, 2018, which fall within Level 2 of the fair value hierarchy, due to the asset valuation methods used by money market funds.
Typical non-cash investing activities for Southwest include customer advances applied as contributions toward utility construction activity and capital expenditures that were not paid as of quarter end that are included in accounts payable. Amounts related to such activities were immaterial for the periods presented herein. Non-cash investing activities for the twelve months ended September 30, 2019 included $26.2 million of purchase consideration related to the Linetec acquisition by Centuri, in the form of liabilities incurred that remained unpaid as of September 30, 2019; such amounts are included in Other current liabilities on the Condensed Consolidated Balance Sheets of the Company. Also, see Recent Accounting Standards Updates and Note 4 – Leases for information related to right-of-use assets obtained in exchange for lease liabilities, which are non-cash investing and financing activities.
Intercompany Transactions. Centuri recognizes revenues generated from contracts with Southwest (see Note 10 – Segment Information). Centuri’s accounts receivable for these services are presented in the table below (thousands of dollars):
 
September 30, 2019
 
December 31, 2018
Centuri accounts receivable for services provided to Southwest
$
16,757

 
$
18,830


The accounts receivable balance, revenues, and associated profits are included in the condensed consolidated financial statements of the Company and Southwest and were not eliminated during consolidation in accordance with accounting treatment for rate-regulated entities.
Income Taxes. In 2017, the Tax Cuts and Jobs Act (the “TCJA”) was enacted. The TCJA had significant impacts on the taxation of business entities, including specific provisions related to regulated public utilities. The more significant changes that impacted the Company and Southwest include the reduction in the corporate federal income tax rate from 35% to 21%, and limiting the utilization of net operating losses (“NOLs”) to 80% of taxable income, with the ability to indefinitely carryforward unutilized NOLs to reduce future taxable income.
Prepaid and Other Current Assets. Prepaid and other current assets includes gas pipe materials and operating supplies of $59 million at September 30, 2019 and $56 million at December 31, 2018 (carried at weighted average cost), in addition to $47 million at September 30, 2019 and $74 million at December 31, 2018 related to a regulatory asset associated with the Arizona decoupling mechanism (an alternative revenue program).

 
14
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2019


Goodwill. Goodwill is assessed as of October 1st each year for impairment, or more frequently, if circumstances indicate an impairment to the carrying value of goodwill may have occurred. Management of the Company and Southwest considered its reporting units and segments and determined that its segments and reporting units remain consistent between periods presented below, 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 nine months of 2019.
(Thousands of dollars)
Natural Gas
Operations
 
Utility Infrastructure
Services
 
Total Company
December 31, 2018
$
10,095

 
$
348,950

 
$
359,045

Measurement-period adjustments - Linetec acquisition (a)

 
(22,179
)
 
(22,179
)
Foreign currency translation adjustment

 
3,082

 
3,082

September 30, 2019
$
10,095

 
$
329,853

 
$
339,948

(a) See Note 12 – Business Acquisitions for details regarding Linetec measurement-period adjustments.
Other Current Liabilities. Other current liabilities for Southwest include $24.9 million and $23.5 million of dividends declared by Southwest Gas Corporation, but not yet paid to Southwest Gas Holdings, Inc. at September 30, 2019 and December 31, 2018, respectively. In addition, the balances in both periods include amounts payable under regulatory mechanisms in the next twelve months and miscellaneous other accrued liabilities. Amounts included in the Condensed Consolidated Balance Sheets of Southwest Gas Holdings, Inc. for both periods reflect unremitted consideration then outstanding associated with the business acquisition of Linetec.
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
 
Nine Months Ended
 
Twelve Months Ended
 
September 30,
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Southwest Gas Corporation - natural gas operations segment:
 
 
 
 
 
 
 
 
 
 
 
Change in COLI policies
$
200

 
$
4,700

 
$
11,200

 
$
6,000

 
$
2,000

 
$
9,500

Interest income
1,521

 
1,506

 
4,940

 
4,301

 
6,659

 
5,237

Equity AFUDC
1,212

 
448

 
3,179

 
1,034

 
5,772

 
1,253

Other components of net periodic benefit cost
(3,765
)
 
(5,265
)
 
(11,295
)
 
(15,794
)
 
(16,560
)
 
(20,650
)
Miscellaneous income and (expense)
(521
)
 
(553
)
 
(1,839
)
 
(1,402
)
 
(3,065
)
 
(1,765
)
Southwest Gas Corporation - total other income (deductions)
(1,353
)
 
836

 
6,185

 
(5,861
)
 
(5,194
)
 
(6,425
)
Utility infrastructure services segment:
 
 
 
 
 
 
 
 
 
 
 
Interest income

 
4

 

 
6

 
82

 
7

Foreign transaction gain (loss)
(6
)
 
(91
)
 
546

 
258

 
66

 
144

Miscellaneous income and (expense)
177

 
125

 
23

 
(595
)
 
514

 
(175
)
Centuri - total other income (deductions)
171

 
38

 
569

 
(331
)
 
662

 
(24
)
Corporate and administrative
24

 
15

 
73

 
41

 
84

 
48

Consolidated Southwest Gas Holdings, Inc. - total other income (deductions)
$
(1,158
)
 
$
889

 
$
6,827

 
$
(6,151
)
 
$
(4,448
)
 
$
(6,401
)
Included in the table above is the change in cash surrender values of COLI policies (including net death benefits recognized). 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.

 
15
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2019


Recent Accounting Standards Updates.
Accounting pronouncements adopted in 2019:
In February 2016, the Financial Accounting Standards Board (“FASB”) issued the update “Leases (Topic 842).” Under the update, lessees were required to recognize a lease liability for the obligation to make lease payments, measured on a discounted basis; and a right-of-use asset for the right to use, or control the use of, a specified asset for the lease term. The Company and Southwest adopted Topic 842 in the first quarter of 2019 through an optional transition method, which was elected, permitting the application of the provisions of the standard at the adoption date, rather than to earlier comparative periods. As a result, the Company and Southwest have not recast prior periods to reflect the adoption of this standard. See Note 4 – Leases.
Accounting pronouncements that will be effective after 2019:
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13 update “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The update requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The inputs currently used to estimate credit losses will still be used; however, they may be adapted to reflect the full amount of expected losses. 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 the Company’s and Southwest’s consolidated financial statements and disclosures.
In January 2017, the FASB issued ASU 2017-04 “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” Under the update, an entity will apply a one-step quantitative test as opposed to a two-step test as currently required, and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment. The amount of any goodwill impairment calculated under the update could vary from the calculation under existing guidance, largely due to the consideration to be given to unrecognized differences between the fair value and carrying values of the other assets and liabilities in the reporting unit under the new guidance. The amendments should be applied on a prospective basis. The update is effective for fiscal and interim periods beginning after December 15, 2019. Early adoption has been permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Management is evaluating the impacts this update might have on the Company’s and Southwest’s consolidated financial statements and disclosures.
In August 2018, the FASB issued ASU 2018-15 “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The update generally aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement (that is a service contract) with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Once capitalized, the update requires the entity to expense the amount capitalized over the term of the hosting arrangement, including reasonably certain renewal periods. The update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the amendments in this update is permitted for interim and related annual fiscal periods after December 15, 2018. Management is evaluating the impacts this update might have on the Company’s and Southwest’s consolidated financial statements and disclosures.
In August 2018, the FASB issued ASU 2018-14 “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.” This update removes disclosures that are no longer considered cost-beneficial, clarifies the specific requirements of disclosures, and adds disclosure requirements identified as relevant. The update applies to all employers that sponsor defined benefit pension or other postretirement plans. The update is effective for fiscal years ending after December 15, 2020. Upon adoption, the Company and Southwest will modify their disclosures to conform to the requirements of the update.
In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement: Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The update modifies the disclosure requirements on fair value measurements in Topic 820. The update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Upon adoption, the Company and Southwest will modify their disclosures to conform to the requirements of the update, as applicable.


 
16
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2019


Note 2 – Components of Net Periodic Benefit Cost
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.
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. 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. The other components of net periodic benefit cost are reflected in Other income (deductions) on the Condensed Consolidated Statements of Income of each entity.
 
Qualified Retirement Plan
 
Period Ended September 30,
 
Three Months
 
Nine Months
 
Twelve Months
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
(Thousands of dollars)
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
6,466

 
$
7,139

 
$
19,398

 
$
21,417

 
$
26,536

 
$
27,265

Interest cost
12,252

 
11,043

 
36,755

 
33,130

 
47,799

 
44,652

Expected return on plan assets
(15,061
)
 
(14,689
)
 
(45,183
)
 
(44,066
)
 
(59,872
)
 
(57,865
)
Amortization of net actuarial loss
5,589

 
8,029

 
16,767

 
24,086

 
24,796

 
30,087

Net periodic benefit cost
$
9,246

 
$
11,522

 
$
27,737

 
$
34,567

 
$
39,259

 
$
44,139

 
 
 
 
 
 
 
 
 
 
 
 
 
SERP
 
Period Ended September 30,
 
Three Months
 
Nine Months
 
Twelve Months
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
(Thousands of dollars)
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
66

 
$
61

 
$
199

 
$
183

 
$
261

 
$
260

Interest cost
440

 
415

 
1,320

 
1,244

 
1,734

 
1,714

Amortization of net actuarial loss
255

 
375

 
765

 
1,126

 
1,141

 
1,486

Net periodic benefit cost
$
761

 
$
851

 
$
2,284

 
$
2,553

 
$
3,136

 
$
3,460

 
 
 
 
 
 
 
 
 
 
 
 
 
PBOP
 
Period Ended September 30,
 
Three Months
 
Nine Months
 
Twelve Months
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
(Thousands of dollars)
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
319

 
$
368

 
$
957

 
$
1,105

 
$
1,325

 
$
1,472

Interest cost
761

 
687

 
2,285

 
2,061

 
2,972

 
2,869

Expected return on plan assets
(789
)
 
(929
)
 
(2,367
)
 
(2,789
)
 
(3,296
)
 
(3,629
)
Amortization of prior service costs
318

 
334

 
953

 
1,002

 
1,286

 
1,336

Net periodic benefit cost
$
609

 
$
460

 
$
1,828

 
$
1,379

 
$
2,287

 
$
2,048




 
17
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2019


Note 3 – Revenue
The following information about the Company’s revenues is presented by segment. Southwest encompasses one segment – natural gas operations.
Natural Gas Operations Segment:
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
 
Nine Months Ended
 
Twelve Months Ended
 
September 30,
 
September 30,
 
September 30,
(Thousands of dollars)
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Residential
$
124,169

 
$
120,249

 
$
706,270

 
$
631,562

 
$
961,928

 
$
864,128

Small commercial
39,725

 
40,020

 
179,519

 
183,616

 
250,986

 
253,330

Large commercial
10,945

 
11,360

 
36,030

 
39,934

 
49,288

 
54,462

Industrial/other
3,837

 
5,390

 
15,728

 
17,391

 
21,826

 
23,899

Transportation
21,580

 
19,818

 
68,297

 
64,591

 
90,696

 
88,115

Revenue from contracts with customers
200,256

 
196,837

 
1,005,844

 
937,094

 
1,374,724

 
1,283,934

Alternative revenue program revenues (deferrals)
7,957

 
9,094

 
(23,196
)
 
46,696

 
(23,913
)
 
67,017

Other revenues (a)
1,767

 
11,592

 
6,720

 
3,725

 
8,770

 
3,049

Total Gas operating revenues
$
209,980

 
$
217,523

 
$
989,368

 
$
987,515

 
$
1,359,581

 
$
1,354,000

(a) Comprised of various other revenue impacts, including $(0.8) million during the three months, and $(3.7) million for the nine and twelve months ending September 30, 2019, respectively; and, $(1) million during the three months, and $(13.5) million in both the nine and twelve months ending September 30, 2018 related to tax reform savings reserves/adjustments.
Utility Infrastructure Services Segment:
The following tables display Centuri’s revenue, reflected as Utility infrastructure services revenues on the Condensed Consolidated Statements of Income of the Company, representing revenue from contracts with customers disaggregated by service and contract types:
(Thousands of dollars)
Three Months Ended
 
Nine Months Ended
 
Twelve Months Ended
 
September 30,
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Service Types:
 
 
 
 
 
 
 
 
 
 
 
Gas infrastructure services
$
364,241

 
$
355,721

 
$
885,950

 
$
849,615

 
$
1,160,017

 
$
1,145,629

Electric power infrastructure services
70,610

 
4,666

 
184,277

 
14,062

 
202,844

 
19,304

Other
80,399

 
90,236

 
212,185

 
242,167

 
335,992

 
314,859

Total Utility infrastructure services revenues
$
515,250

 
$
450,623

 
$
1,282,412

 
$
1,105,844

 
$
1,698,853

 
$
1,479,792

(Thousands of dollars)
Three Months Ended
 
Nine Months Ended
 
Twelve Months Ended
 
September 30,
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Contract Types:
 
 
 
 
 
 
 
 
 
 
 
Master services agreement
$
410,283

 
$
348,274

 
$
1,021,798

 
$
832,813

 
$
1,291,397

 
$
1,101,216

Bid contract
104,967

 
102,349

 
260,614

 
273,031

 
407,456

 
378,576

Total Utility infrastructure services revenues
$
515,250

 
$
450,623

 
$
1,282,412

 
$
1,105,844

 
$
1,698,853

 
$
1,479,792

 
 
 
 
 
 
 
 
 
 
 
 
Unit price contracts
$
415,404

 
$
368,918

 
$
1,006,577

 
$
948,593

 
$
1,316,404

 
$
1,286,059

Fixed price contracts
37,539

 
45,461

 
80,503

 
44,911

 
152,890

 
31,487

Time and materials contracts
62,307

 
36,244

 
195,332

 
112,340

 
229,559

 
162,246

Total Utility infrastructure services revenues
$
515,250

 
$
450,623

 
$
1,282,412

 
$
1,105,844

 
$
1,698,853

 
$
1,479,792



 
18
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2019


The following table provides information about contracts receivable and revenue earned on contracts in progress in excess of billings (contract asset), which are both included within Accounts receivable, net of allowances, as well as amounts billed in excess of revenue earned on contracts (contract liability), which are included in Other current liabilities as of September 30, 2019 and December 31, 2018 on the Company’s Condensed Consolidated Balance Sheets:
(Thousands of dollars)
September 30, 2019
 
December 31, 2018
Contracts receivable, net
$
238,678

 
$
186,249

Revenue earned on contracts in progress in excess of billings
121,854

 
87,520

Amounts billed in excess of revenue earned on contracts
6,136

 
4,211


The revenue earned on contracts in progress in excess of billings (contract asset) primarily relates to Centuri’s rights to consideration for work completed but not billed and/or approved at the reporting date. These contract assets are transferred to contracts receivable when the rights become unconditional. The amounts billed in excess of revenue earned (contract liability) primarily relates to the advance consideration received from customers for which work has not yet been completed. The change in this contract liability balance from December 31, 2018 to September 30, 2019 is due to revenue recognized of $4.2 million that was included in this item as of January 1, 2019, after which time it became earned and the balance was reduced, and to increases due to cash received, net of revenue recognized during the period related to contracts that commenced during the period.
For contracts that have an original duration of one year or less, Centuri uses the practical expedient applicable to such contracts and does not consider/compute an interest component based on 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.
As of September 30, 2019, Centuri has 53 contracts with 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 September 30, 2019 was $103.3 million. Centuri expects to recognize the remaining performance obligations over approximately the next two 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.
Utility infrastructure services contracts receivable consists of the following:
(Thousands of dollars)
September 30, 2019
 
December 31, 2018
Billed on completed contracts and contracts in progress
$
238,117

 
$
184,100

Other receivables
1,156

 
2,588

Contracts receivable, gross
239,273

 
186,688

Allowance for doubtful accounts
(595
)
 
(439
)
Contracts receivable, net
$
238,678

 
$
186,249

 
 
 
 



 
19
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2019


Note 4 – Leases
The Company and Southwest adopted FASB Topic 842 as of January 1, 2019. In association with the adoption, the Company recorded adjustments to its Condensed Consolidated Balance Sheet to record right-of-use (“ROU”) assets and lease liabilities of $58.4 million and $60.8 million, respectively. Included in those amounts, Southwest recorded $1.9 million related to both its ROU assets and lease liabilities. Neither the Company nor Southwest experienced a material impact to the Condensed Consolidated Statements of Income from the adoption and no cumulative-effect adjustment to the opening balance of retained earnings was recognized. Management elected to adopt the standard under the optional transition method (refer to Recent Accounting Standards Updates in Note 1 – Background, Organization, and Summary of Significant Accounting Policies), and elected the following Topic 842 practical expedients and accounting policy elections:
To use the “package”, which is a set of three practical expedients that must be elected as a package and applied consistently to all of Southwest’s and Centuri’s leases. These include: not reassessing whether any expired or existing contracts are or contain leases; not reassessing the lease classification for expired or existing leases (that is, existing operating and capital leases in accordance with current lease guidance will in each case be classified as operating and finance leases, respectively, under the updated guidance); and not reassessing initial direct costs for any existing leases.
To utilize the practical expedient to exclude all easements in place prior to January 1, 2019 from treatment under Topic 842. However, Southwest will evaluate new easements entered into after the effective date of the standard to determine if the arrangements should be accounted for as leases.
To make an accounting policy election by asset class to include both the lease and non-lease components (as defined in the guidance) as a single component.
To make an accounting policy election to not apply Topic 842 to short-term leases, as permitted.
To not elect to use hindsight in determining the lease term and in assessing impairment of ROU assets.
To utilize a portfolio approach to effectively account for the operating lease ROU assets and liabilities with regard to certain equipment leases at Centuri.
Southwest and Centuri determine if an arrangement is a lease at inception. ROU assets represent the right to use an underlying asset for the lease term; lease liabilities represent obligations to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of Southwest’s and Centuri’s leases do not provide an implicit interest rate, an incremental borrowing rate based on information available at commencement is used in determining the present value of lease payments; an implicit rate, if readily determinable, is used. Lease terms utilized in the computations may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised.
Southwest’s leases are comprised primarily of operating leases of buildings, land, and equipment. Southwest has no finance leases and no significant short-term leases. Southwest’s leases have a remaining term of 1 to 10 years, some of which include options to extend the lease up to 3 years. Southwest is currently not a lessor in any significant lease arrangements. Southwest’s ROU assets are included in Gas plant, and its lease liabilities are included in, depending upon maturity, Other current liabilities or Other deferred credits and other long-term liabilities on the Company’s and Southwest’s Condensed Consolidated Balance Sheets as of September 30, 2019.
Centuri has operating and finance leases for corporate and field offices, construction equipment, and transportation vehicles. Centuri is currently not a lessor in any significant lease arrangements. Centuri’s leases have remaining lease terms of up to 19 years. Some of these include options to extend the leases, generally for optional terms of up to 5 years, and some include options to terminate the leases within 1 year. Centuri’s equipment leases may include variable payment terms in addition to the fixed lease payments if machinery is used in excess of the standard work periods. These variable payments are not probable of occurring under the current operating environment and have not been included in consideration of lease payments. Short-term leases of Centuri are not accounted for under the provisions of Topic 842, as permitted. Due to the seasonality of Centuri’s business, expense for short-term leases will fluctuate throughout the year with higher expense incurred during the warmer months. As of September 30, 2019 Centuri executed lease agreements that had not yet commenced. These lease agreements primarily relate to real estate leases that have terms ranging from December 2019 through August 2032. Total future lease payments over the lease terms are approximately $13.2 million. Centuri’s ROU assets are included in Other property and investments, and its lease liabilities for operating and finance leases are included, depending upon maturity, in Other current liabilities or Other deferred credits and other long-term liabilities on the Company’s Condensed Consolidated Balance Sheet as of September 30, 2019.

 
20
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2019


The components of lease expense were as follows:
(Thousands of dollars)
Three Months Ended September 30, 2019
Nine Months Ended September 30, 2019
Southwest:
 
 
Operating lease cost
$
350

$
1,165

 
 
 
Centuri:
 
 
Operating lease cost
$
3,026

$
9,069

 
 
 
Finance lease cost:
 
 
Amortization of ROU assets
$
34

$
103

Interest on lease liabilities
10

24

Total finance lease cost
44

127

Short-term lease cost
5,017

10,949

Total lease cost
$
8,437

$
21,310

 
 
 
Supplemental cash flow information related to leases for the nine months ended September 30, 2019 is as follows:
(Thousands of dollars)
Southwest
 
Centuri
 
Consolidated Total
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
 
 
Operating cash flows from operating leases
$
976

 
$
8,104

 
$
9,080

Operating cash flows from finance leases

 
24

 
24

Financing cash flows from finance leases

 
161

 
161

 
 
 
 
 
 
ROU assets obtained in exchange for lease obligations:
 
 
 
 
 
Operating leases
$
1,143

 
$
21,653

 
$
22,796

Finance leases

 
386

 
386