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 Group, Inc. (“Centuri,” or the “utility infrastructure services” segment). Southwest Gas Holdings, Inc. and its subsidiaries are collectively referred to as the “Company.”
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 majority of southern Nevada, including the Las Vegas metropolitan area, and portions of 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.
As of June 30, 2020, Southwest had 2,102,000 residential, commercial, industrial, and other natural gas customers, of which 1,121,000 customers were located in Arizona, 781,000 in Nevada, and 200,000 in California. Over the past twelve months, first time meter sets were approximately 36,000, compared to 33,000 for the twelve months ending June 2019. The remaining increase in active customer accounts compared to the June 30, 2019 total of 2,061,000 was primarily due to a management-initiated moratorium on disconnections as a result of the COVID-19 pandemic. As utility service is an essential service to the residents in the states in which Southwest operates, it implemented the temporary moratorium in March 2020 and also ceased charging late fees until further notice. We can provide no assurances as to when the moratorium will be lifted. Residential and small commercial customers represented over 99% of the total customer base. During the twelve months ended June 30, 2020, 53% of operating margin (gas operating revenues less the net cost of gas sold) was earned in Arizona, 36% in Nevada, and 11% in California. During this same period, Southwest earned 85% of its operating margin from residential and small commercial customers, 3% from other sales customers, and 12% from transportation customers. While these general patterns are expected to remain materially consistent for the foreseeable future, the global COVID-19 pandemic, as discussed further below, could impact these statistics and associated patterns in the short term.
Southwest recognizes operating revenues from the distribution and transportation of natural gas (and related services) to customers. Operating margin is a financial measure defined by management as gas operating revenues less the net cost of gas sold. However, operating margin is not specifically defined in accounting principles generally accepted in the United States (“U.S. GAAP”). Thus operating margin is considered a non-GAAP measure. Management uses this financial measure because natural gas operating revenues include the net cost of gas sold, which is a tracked cost that is passed through to customers without markup under purchased gas adjustment (“PGA”) mechanisms. Fluctuations in the net cost of gas sold impact revenues on a dollar-for-dollar basis, but do not impact operating margin or operating income. Therefore, 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. The principal factors affecting changes in operating margin are general rate relief (including impacts of infrastructure trackers) and customer growth. Commission decisions on the amount and timing of such relief may impact our earnings, such as with the current Arizona general rate case, whereby hearings were deferred amidst the current pandemic, and both a decision and new rate establishment are expected to occur later than originally expected. Refer to the Summary Operating Results table for a reconciliation of revenues to operating margin, and refer to Rates and Regulatory Proceedings in this Management’s Discussion and Analysis.
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 unusual weather variability and conservation on operating margin, allowing Southwest to pursue energy efficiency initiatives.
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 primarily from installation, replacement, repair, and maintenance of energy distribution systems. Centuri operates in 54 primary locations across 40 states and provinces in the United States (“U.S.”) and Canada. Centuri operates in the U.S. primarily as NPL, Neuco, and Linetec, and in Canada primarily as NPL Canada.
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SOUTHWEST GAS HOLDINGS, INC.
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Form 10-Q
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SOUTHWEST GAS CORPORATION
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June 30, 2020
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Utility infrastructure services activity can be impacted by changes in infrastructure replacement programs of utilities, weather, and local and federal regulation (including tax rates and incentives). During the past few years, utilities have implemented or modified system integrity management programs to enhance safety pursuant to federal and state mandates. These programs have resulted in a significant increase following those mandates in multi-year utility system replacement projects throughout the U.S. 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. 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 failing to be awarded, by individual large customers can significantly impact operating results.
COVID-19 Pandemic
In March 2020, the World Health Organization categorized the novel coronavirus (“COVID-19”) as a pandemic, and President Donald Trump declared the COVID-19 outbreak a national emergency. The outbreak resulted in government officials implementing stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions, business curtailments, school closures, and other measures. Certain jurisdictions have begun re-opening only to return to further restrictions in the face of new COVID-19 cases. In addition, governments and central banks in several parts of the world enacted fiscal and monetary stimulus measures to mitigate financial impacts of COVID-19 on individuals and businesses.
Our utility operations are considered an essential service and Southwest continues to provide services to meet the demand of its customers, even while many other types of businesses were or are closed. Consistent with federal and state guidelines, Southwest has continued to operate across its territories. Similarly, the majority of Centuri’s largest clients issued essential service letters to Centuri businesses in keeping with the federal definition of “essential” set out by the Department of Homeland Security. This allowed Centuri to similarly continue nearly all operations from the outset of the pandemic in the U.S., and demand has not significantly diminished. The ability to work may be impacted by individuals contracting or being exposed to COVID-19, governmental requirements to postpone certain non-essential services, or by management imposed restrictions for safety precautions; to date, these factors have not had a significant impact on the Company’s ability to maintain operations. The Company has instructed employees at many offices (including corporate headquarters) to work from home on a temporary basis and implemented travel restrictions. Both segments implemented business continuity plans, including the deployment of technology to conduct administrative and critical functions remotely, where possible, and employees and management teams have been in place to communicate and respond to changes quickly and effectively. To date, there has not been a significant disruption in the Company’s supply chains, transportation network, or ability to serve customers.
As an essential service provider, Southwest implemented several important measures with regard to its customers. As noted above, it initiated a temporary moratorium on natural gas disconnections for non-payment; it is working with customers who are experiencing financial hardship through flexible payment arrangements; and it also ceased charging late fees until further notice. Management does not expect a material increase to the allowance for uncollectibles from such measures as during warmer months, such as the summer season, monthly utility bills for natural gas are substantially reduced. Should the pandemic continue into the winter season, the potential impact could be more significant. See Accounts receivable, net of allowances in Note 1 – Background, Organization, and Summary of Significant Accounting Policies. In the utility infrastructure services segment, a limited number of Centuri customers delayed some projects primarily in response to local governmental restrictions. Project delays, whether due to governmental restrictions or reassessments of timing by Centuri’s customers, resulted in temporary reductions of workforce crews. Some crew reductions are ongoing in specific areas and the associated revenue impacts have not been significant. Management is monitoring the dynamic nature of these circumstances, the full future impacts of which are not currently known, including the impact from business curtailments, weak market conditions, or governmental restrictions, including any restrictions which could limit the fulfillment by Centuri of its contractual obligations.
The Company has incurred additional expenses in connection with its response to these conditions, including costs of disinfecting work locations and equipment, costs related to enabling employees to support customers while working remotely, and impacts from the moratorium on customer disconnection and late fee assessment. These additional costs were not material to the Company’s fiscal 2020 results to date, and certain of Southwest’s regulatory commissions have implemented measures to mitigate impacts of these conditions on Southwest. See Rates and Regulatory Proceedings below for additional detail.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was enacted, as discussed in Note 1 – Background, Organization, and Summary of Significant Accounting Policies. The CARES Act to date has not, and management anticipates that it will not, have a material effect on the Company’s or Southwest’s results of operations, financial position, or liquidity. In Canada, Centuri received $3.4 million of wage subsidies from the Canadian government as part of a COVID-19 relief program. Management does not expect these subsidies, if any, to be significant in future periods.
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SOUTHWEST GAS HOLDINGS, INC.
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Form 10-Q
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SOUTHWEST GAS CORPORATION
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June 30, 2020
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The extent to which COVID-19 may adversely impact the Company’s business depends on future developments, including the timing of, or continued deferment by government officials related to, the resumption of commerce across the service territories of all our businesses, the magnitude of further spread of the virus in advance of and following such resumption, impacts of these conditions on our customers, the state of the North American economy following that resumption, and possibly other unmitigated effects related to the virus. Management does not currently expect the impact of these conditions to be material to the Company’s liquidity and financial position; however, the current level of uncertainty over the economic and operational impacts of COVID-19 means the related financial impact cannot be fully estimated at this time, and management cannot predict whether future periods will be impacted differently than the impacts reflected in the six months ended June 30, 2020. In anticipation of a redeployment of employees to their normal work locations, management has created a multi-phase reintegration plan to safeguard the well-being of our teams, including hygiene, sanitization, and social distancing practices, as well as the use of personal protective equipment for employees and visitors. Management will continue to monitor developments affecting the Company’s employees, customers, and operations, and take additional steps to address the COVID-19 pandemic and its impacts, as necessary. Events and changes in circumstances arising after June 30, 2020, including those resulting from the impacts of COVID-19, will be reflected in management’s estimates for future periods.
This Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q and the audited financial statements and the notes thereto, as well as MD&A, included in the 2019 Annual Report to Shareholders, which is incorporated by reference into the 2019 Form 10-K.
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SOUTHWEST GAS HOLDINGS, INC.
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Form 10-Q
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SOUTHWEST GAS CORPORATION
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June 30, 2020
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Executive Summary
The items discussed in this Executive Summary are intended to provide an overview of the results of the Company’s and Southwest’s operations. As needed, certain items are covered in greater detail in later sections of MD&A. As reflected in the table below, the natural gas operations segment accounted for an average of 75% of twelve-month-to-date consolidated net income over the past two years. As such, MD&A 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
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Period Ended June 30,
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Three Months
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Six Months
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Twelve Months
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(In thousands, except per share amounts)
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2020
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2019
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2020
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2019
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2020
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2019
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Contribution to net income
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Natural gas operations
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$
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11,942
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$
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3,369
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$
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95,541
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$
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106,758
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$
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151,954
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$
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152,629
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Utility infrastructure services
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26,267
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18,918
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16,063
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10,887
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57,581
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47,629
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Corporate and administrative
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(244)
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(231)
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(1,097)
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(780)
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(1,957)
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(1,758)
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Net income
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$
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37,965
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$
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22,056
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$
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110,507
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$
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116,865
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$
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207,578
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$
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198,500
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Weighted average common shares
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55,462
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53,935
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55,386
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53,654
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55,105
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51,914
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Basic earnings per share
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Consolidated
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$
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0.68
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$
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0.41
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$
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2.00
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$
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2.18
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$
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3.77
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$
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3.82
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Natural Gas Operations
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Reconciliation of Revenue to Operating Margin (Non-GAAP measure)
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Gas operating revenues
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$
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262,434
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$
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258,711
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$
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765,261
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$
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779,388
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$
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1,354,812
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$
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1,367,124
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Less: Net cost of gas sold
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67,473
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65,182
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228,294
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257,786
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355,672
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407,976
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Operating margin
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$
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194,961
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$
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193,529
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$
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536,967
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$
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521,602
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$
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999,140
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$
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959,148
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2nd Quarter 2020 Overview
Natural gas operations highlights include the following:
•36,000 first-time meters sets (1.7% growth rate) occurred over the past 12 months
•Operations and maintenance expense decreased $5.7 million
•Company-Owned Life Insurance (“COLI”) income increased $8.6 million between quarters
•Issued $450 million in 2.2% 10-year Notes (a record low fixed rate for Southwest)
Utility infrastructure services highlights include the following:
•Record second quarter net income of $26.3 million
•Utility infrastructure services revenues increased $41 million, or 8.9%
•Utility infrastructure services expenses increased $28 million, or 7.0%
•Equipment purchases during the past 12 months resulted in a $3 million increase in depreciation
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SOUTHWEST GAS HOLDINGS, INC.
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Form 10-Q
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SOUTHWEST GAS CORPORATION
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June 30, 2020
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Results of Natural Gas Operations
Quarterly Analysis
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Three Months Ended
June 30,
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(Thousands of dollars)
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2020
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2019
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Gas operating revenues
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$
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262,434
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$
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258,711
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Net cost of gas sold
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67,473
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65,182
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Operating margin
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194,961
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193,529
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Operations and maintenance expense
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99,320
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104,991
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Depreciation and amortization
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53,198
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49,343
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Taxes other than income taxes
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15,342
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|
15,126
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Operating income
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27,101
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|
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24,069
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Other income (deductions)
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7,838
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|
|
1,592
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Net interest deductions
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23,991
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|
|
23,345
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Income before income taxes
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10,948
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|
|
2,316
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Income tax benefit
|
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(994)
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(1,053)
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Contribution to consolidated net income
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$
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11,942
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$
|
3,369
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Contribution from natural gas operations to consolidated net income increased $8.6 million between the second quarters of 2020 and 2019. The increase was primarily due to an increase in Other income, customer growth, and lower Operations and maintenance expense, offset by an increase in Depreciation and amortization.
Operating margin increased $1.4 million. Customer growth provided approximately $2.5 million of incremental margin from 36,000 first-time meter sets during the last twelve months. Rate relief contributed approximately $400,000 in incremental operating margin. Offsetting the increase were other items, including the impact of the temporary moratorium on late fees and lower connection/re-connection charges during the COVID-19 pandemic.
Operations and maintenance expense decreased $5.7 million between quarters primarily due to the impacts of COVID-19 on training and travel costs and reductions in other service and maintenance costs. Overall, the variance between 2019 and 2020 is expected to narrow in the second half of 2020.
Depreciation and amortization expense increased $3.9 million, or 8%, between quarters, primarily due to a $684 million, or 9%, increase in average gas plant in service compared to the corresponding quarter a year ago, offset by a decrease in regulatory account amortization. The increase in gas plant was attributable to pipeline capacity reinforcement work, franchise requirements, scheduled pipe replacement activities, and new infrastructure.
Other income improved $6.2 million between quarters primarily due to an increase in income from company-owned life insurance (“COLI”) policies. The current quarter reflects a $12 million increase in COLI policy cash surrender values, while the prior-year quarter reflected a $3.4 million increase in COLI policy cash surrender values. These values are significantly impacted by fluctuations in the values of equity securities associated with the cash surrender values, and values in both periods were impacted directionally consistent with the broader securities markets. Offsetting these impacts were higher non-service-related costs associated with employee pension and other postretirement benefits and lower interest income on regulatory account balances.
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SOUTHWEST GAS HOLDINGS, INC.
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Form 10-Q
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SOUTHWEST GAS CORPORATION
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June 30, 2020
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Results of Natural Gas Operations
Six-Months Analysis
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|
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Six Months Ended
June 30,
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(Thousands of dollars)
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2020
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2019
|
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Gas operating revenues
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$
|
765,261
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|
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$
|
779,388
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Net cost of gas sold
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228,294
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|
|
257,786
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|
|
Operating margin
|
|
536,967
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|
|
521,602
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|
Operations and maintenance expense
|
|
202,408
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|
|
210,533
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|
|
Depreciation and amortization
|
|
117,923
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|
|
106,955
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|
|
Taxes other than income taxes
|
|
31,720
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|
|
31,332
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|
|
Operating income
|
|
184,916
|
|
|
172,782
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|
|
Other income (deductions)
|
|
(12,698)
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|
|
7,538
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|
|
Net interest deductions
|
|
49,049
|
|
|
46,444
|
|
|
Income before income taxes
|
|
123,169
|
|
|
133,876
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|
|
Income tax expense
|
|
27,628
|
|
|
27,118
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|
|
Contribution to consolidated net income
|
|
$
|
95,541
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|
|
$
|
106,758
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|
Contribution from natural gas operations to consolidated net income decreased $11.2 million between the first six months of 2020 and 2019. The decline was primarily due to a decrease in Other income and increases in Depreciation and amortization, partially offset by an increase in Operating margin and lower Operations and maintenance expense.
Operating margin increased $15 million, including $8 million attributable to customer growth. Rate relief, primarily in California, contributed an additional $1 million in operating margin. The prior-year period included an approximate $5 million reduction in margin resulting from a one-time adjustment by the Arizona Corporation Commission to reflect the impacts of U.S. tax reform on the Arizona decoupling mechanism. The remaining increase primarily resulted from the net recovery of regulatory program balances (collectively, having an offsetting impact in amortization expense), in addition to margin from customers outside the decoupling mechanisms, offset by lower late fees and connect/re-connect charges during the current moratorium noted previously.
Operations and maintenance expense decreased $8.1 million, or 4%, between periods. Reductions in training and travel costs due to the COVID-19 environment, as well as lower legal claims-related costs, and decreases in other service and maintenance costs contributed to the decline between periods. Overall, the variance between 2019 and 2020 is expected to narrow in the second half of 2020.
Depreciation and amortization expense increased $11 million, or 10%, between periods primarily due to a $684 million, or 9%, increase in average gas plant in service between periods. The increase in gas plant was attributable to pipeline capacity reinforcement work, franchise requirements, scheduled pipe replacement activities, and new infrastructure. Regulatory account surcharges, as noted above, also resulted in increases in amortization expense in the current period.
Other income decreased $20.2 million overall between periods. The current period reflects a $3.5 million decline in COLI policy cash surrender values, while the prior-year period reflected $11 million of COLI-related income. The non-service cost components of employee pension and other postretirement benefits costs were $2.5 million higher between periods. Additionally, lower interest on regulatory balances contributed to the decrease between periods.
Net interest deductions increased $2.6 million between periods, primarily due to higher interest associated with the issuance of $300 million of Senior Notes in May 2019 and higher debt balances outstanding in the current period.
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SOUTHWEST GAS HOLDINGS, INC.
|
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Form 10-Q
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SOUTHWEST GAS CORPORATION
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June 30, 2020
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Results of Natural Gas Operations
Twelve-Month Analysis
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended June 30,
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|
|
|
(Thousands of dollars)
|
|
2020
|
|
2019
|
|
Gas operating revenues
|
|
$
|
1,354,812
|
|
|
$
|
1,367,124
|
|
|
Net cost of gas sold
|
|
355,672
|
|
|
407,976
|
|
|
Operating margin
|
|
999,140
|
|
|
959,148
|
|
|
Operations and maintenance expense
|
|
414,049
|
|
|
407,948
|
|
|
Depreciation and amortization
|
|
226,588
|
|
|
201,146
|
|
|
Taxes other than income taxes
|
|
62,716
|
|
|
61,307
|
|
|
Operating income
|
|
295,787
|
|
|
288,747
|
|
|
Other income (deductions)
|
|
(10,719)
|
|
|
(3,005)
|
|
|
Net interest deductions
|
|
97,631
|
|
|
88,780
|
|
|
Income before income taxes
|
|
187,437
|
|
|
196,962
|
|
|
Income tax expense
|
|
35,483
|
|
|
44,333
|
|
|
Contribution to consolidated net income
|
|
$
|
151,954
|
|
|
$
|
152,629
|
|
Contribution to consolidated net income from natural gas operations decreased $700,000 between the twelve-month periods ended June 2020 and 2019. The decline was primarily due to higher Depreciation and amortization expense, Net interest deductions, and lower Other income, partially offset by an increase in operating margin.
Operating margin increased $40 million between periods. Customer growth provided $13 million, and combined rate relief, primarily in Nevada and California, provided $7 million of incremental operating margin. The prior-year period included an approximate $5 million reduction in margin resulting from a one-time adjustment to reflect the impacts of U.S. tax reform on the Arizona decoupling mechanism. The remaining net increase resulted from recoveries of regulatory assets (approximately $10 million, offset in amortization expense below), infrastructure replacement mechanisms, and customers outside the decoupling mechanisms.
Operations and maintenance expense increased $6.1 million (or 1%) between periods primarily due to incremental expenditures for pipeline damage prevention programs and higher legal claim-related costs, partially offset by lower training and travel costs due to the current COVID-19 environment.
Depreciation and amortization expense increased $25.4 million, or 13%, between periods primarily due to a $651 million, or 9%, increase in average gas plant in service since the corresponding period in the prior year. Amortization related to regulatory account recoveries increased approximately $10 million between periods.
Other income decreased $7.7 million between the twelve-month periods of 2020 and 2019 primarily due to a decline in COLI policy values. The current period reflects a $2.9 million increase in COLI policy cash surrender values, while the prior year period reflected a $6.5 million increase. Lower interest on regulatory account balances and lower amounts associated with the allowance for equity funds applied to projects during construction also impacted the variance between periods.
Net interest deductions increased $8.9 million between periods primarily due to interest associated with the issuance of $300 million of Senior Notes in May 2019.
The reduction in income taxes between periods reflects lower earnings, as well as lower state income taxes (due to apportionment changes) and an additional $1.2 million in amortization of excess accumulated deferred income taxes following U.S. tax reform, which reduces tax expense.
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|
SOUTHWEST GAS HOLDINGS, INC.
|
|
Form 10-Q
|
|
SOUTHWEST GAS CORPORATION
|
|
June 30, 2020
|
Results of Utility Infrastructure Services
Quarterly Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
(Thousands of dollars)
|
|
2020
|
|
2019
|
|
Utility infrastructure services revenues
|
|
$
|
494,813
|
|
|
$
|
454,300
|
|
|
Operating expenses:
|
|
|
|
|
|
Utility infrastructure services expenses
|
|
430,224
|
|
|
402,199
|
|
|
Depreciation and amortization
|
|
24,019
|
|
|
20,999
|
|
|
Operating income
|
|
40,570
|
|
|
31,102
|
|
|
Other income (deductions)
|
|
86
|
|
|
(477)
|
|
|
Net interest deductions
|
|
2,239
|
|
|
3,457
|
|
|
Income before income taxes
|
|
38,417
|
|
|
27,168
|
|
|
Income tax expense
|
|
10,234
|
|
|
7,474
|
|
|
Net income
|
|
28,183
|
|
|
19,694
|
|
|
Net income attributable to noncontrolling interest
|
|
1,916
|
|
|
776
|
|
|
Contribution to consolidated net income attributable to Centuri
|
|
$
|
26,267
|
|
|
$
|
18,918
|
|
Utility infrastructure services revenues increased $40.5 million in the second quarter of 2020 when compared to the prior-year quarter, due to a higher volume of electric infrastructure and pipe replacement work under blanket and bid contracts. Included in this improvement were revenues of $7.3 million in the second quarter of 2020 from storm-related electric services work that did not occur during the same quarter in the prior year. Centuri achieved the overall increase in revenues despite a temporary shut-down for certain crews in response to local government requirements to postpone non-essential business services and precautions to ensure employee safety during the COVID-19 outbreak.
Utility infrastructure services expenses increased $28 million in the second quarter of 2020 when compared to the prior-year quarter, due primarily to costs to complete additional electric infrastructure and pipe replacement work, partially offset by increased productivity and efficiencies on electrical infrastructure projects and lower fuel and overtime costs. Additionally, Centuri’s mix of work was favorably impacted by certain restrictions on service-line related work due to COVID-19, which allowed for an increase in main line replacement work, and resulted in greater production efficiency and reduced travel time. Centuri also benefited from $3.4 million in wage subsidies from the Canadian government amidst the COVID-19 environment. These funds were recorded as a reduction in wage-related expenses, included within this line item. Offsetting some of these improvements were certain increased costs and workforce inefficiencies associated with the continued impact of the COVID-19 pandemic.
Depreciation and amortization expense increased $3 million between quarters attributable to additional equipment purchased to support the growing volume of work being performed, primarily at Linetec.
Net interest deductions decreased $1.2 million between periods due primarily to lower rates associated with outstanding borrowings under the $590 million secured revolving credit and term loan facility.
|
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|
|
|
|
|
SOUTHWEST GAS HOLDINGS, INC.
|
|
Form 10-Q
|
|
SOUTHWEST GAS CORPORATION
|
|
June 30, 2020
|
Results of Utility Infrastructure Services
Six-Month Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
(Thousands of dollars)
|
|
2020
|
|
2019
|
|
Utility infrastructure services revenues
|
|
$
|
828,306
|
|
|
$
|
767,162
|
|
|
Operating expenses:
|
|
|
|
|
|
Utility infrastructure services expenses
|
|
749,538
|
|
|
702,664
|
|
|
Depreciation and amortization
|
|
46,947
|
|
|
40,926
|
|
|
Operating income
|
|
31,821
|
|
|
23,572
|
|
|
Other income (deductions)
|
|
(156)
|
|
|
398
|
|
|
Net interest deductions
|
|
5,138
|
|
|
6,726
|
|
|
Income before income taxes
|
|
26,527
|
|
|
17,244
|
|
|
Income tax expense
|
|
8,085
|
|
|
5,006
|
|
|
Net income
|
|
18,442
|
|
|
12,238
|
|
|
Net income attributable to noncontrolling interest
|
|
2,379
|
|
|
1,351
|
|
|
Contribution to consolidated net income attributable to Centuri
|
|
$
|
16,063
|
|
|
$
|
10,887
|
|
Utility infrastructure services revenues increased $61.1 million during the first six months of 2020 when compared to the same period in the prior year due to a higher volume of electric infrastructure and pipe replacement work under blanket and bid contracts. Electric infrastructure work composed $53.9 million of that increase, including the storm-related work noted earlier. The improvement was achieved despite a temporary shut-down for certain crews in response to local government requirements to postpone non-essential business services and precautions to ensure employee safety during the COVID-19 outbreak. Results during the first six months of 2019 reflected incremental profit from customer requested strike support that did not recur in 2020.
Utility infrastructure services expenses increased $46.9 million during the first six months of 2020 when compared to the same period in the prior year, due primarily to increased costs to complete additional electric infrastructure and pipe replacement work, partially offset by the increased productivity and efficiencies on electrical infrastructure projects and lower fuel and overtime costs noted for the second quarter of 2020. Additionally, the improved mix of work during the second quarter for main line replacements provided cost efficiencies. Offsetting these favorable impacts were certain increased costs and workforce inefficiencies associated with the continued impact of the COVID-19 pandemic.
Depreciation and amortization expense increased $6 million between periods attributable to additional equipment purchased to support the growing volume of work being performed, primarily at Linetec.
Net interest deductions were lower during 2020 due to lower rates associated with outstanding borrowings under the $590 million secured revolving credit and term loan facility.
|
|
|
|
|
|
|
|
|
|
|
SOUTHWEST GAS HOLDINGS, INC.
|
|
Form 10-Q
|
|
SOUTHWEST GAS CORPORATION
|
|
June 30, 2020
|
Results of Utility Infrastructure Services
Twelve-Month Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended June 30,
|
|
|
|
(Thousands of dollars)
|
|
2020
|
|
2019
|
|
Utility infrastructure services revenues
|
|
$
|
1,812,122
|
|
|
$
|
1,634,226
|
|
|
Operating expenses:
|
|
|
|
|
|
Utility infrastructure services expenses
|
|
1,620,101
|
|
|
1,478,730
|
|
|
Depreciation and amortization
|
|
93,638
|
|
|
72,162
|
|
|
Operating income
|
|
98,383
|
|
|
83,334
|
|
|
Other income (deductions)
|
|
(88)
|
|
|
529
|
|
|
Net interest deductions
|
|
12,498
|
|
14,412
|
|
|
Income before income taxes
|
|
85,797
|
|
|
69,451
|
|
|
Income tax expense
|
|
24,477
|
|
20,299
|
|
|
Net income
|
|
61,320
|
|
|
49,152
|
|
|
Net income attributable to noncontrolling interest
|
|
3,739
|
|
1,523
|
|
|
Contribution to consolidated net income attributable to Centuri
|
|
$
|
57,581
|
|
|
$
|
47,629
|
|
Utility infrastructure services revenues increased $177.9 million overall in the current twelve-month period compared to the corresponding period of 2019, primarily due to incremental revenues from Linetec (acquired in November 2018) of $165.5 million, as well as continued growth with existing customers under master service and bid agreements. Partially offsetting these increases were decreased revenues from certain non-routine or non-recurring projects, including customer-requested support in 2018 and early 2019 during strike-related and emergency response situations, in addition to a multi-year water pipe replacement project that expired in July 2019 and was not renewed. The prior-year period also included the settlement of an earlier contract dispute related to that project ($9 million). Implementation of new professional engineering stamp requirements for operating locations within certain eastern states in the U.S. resulted in lower revenues during the current period as Centuri worked with customers to adopt the new requirements.
Utility infrastructure services expenses increased $141.4 million between periods, primarily due to incremental expenses related to Linetec of $137.7 million, along with additional electric infrastructure and pipe replacement work and higher labor-related operating expenses to support growth. Included in total Utility infrastructure services expenses were general and administrative costs, which increased $2 million in the twelve-month period ended June 2020 when compared to the corresponding period ended June 2019. Offsetting impacts include deal costs from the acquisition of Linetec during 2018 ($6.9 million). Net gains on sale of equipment (reflected as an offset to Utility infrastructure services expenses) were $4.9 million and $2.3 million for the twelve-month periods of 2020 and 2019, respectively.
Depreciation and amortization expense increased $21.5 million between the current and prior-year period. The increase was primarily attributable to the incremental assets related to the acquisition of Linetec, providing $15.5 million of the increase in this category. Depreciation on additional property and equipment purchased to support the growing volume of work being performed composes the remainder of the increase.
Net interest deductions decreased $1.9 million between periods due primarily to lower rates associated with outstanding borrowings under the $590 million secured revolving credit and term loan facility.
|
|
|
|
|
|
|
|
|
|
|
SOUTHWEST GAS HOLDINGS, INC.
|
|
Form 10-Q
|
|
SOUTHWEST GAS CORPORATION
|
|
June 30, 2020
|
Rates and Regulatory Proceedings
Southwest is subject to the regulation of the Arizona Corporation Commission (the “ACC”), the Public Utilities Commission of Nevada (the “PUCN”), the California Public Utilities Commission (the “CPUC”), and the Federal Energy Regulatory Commission (the “FERC”).
General Rate Relief and Rate Design
Rates charged to customers vary according to customer class and rate jurisdiction and are set by the individual state and federal regulatory commissions that govern Southwest’s service territories. Southwest makes periodic filings for rate adjustments as the cost of providing service (including the cost of natural gas purchased) changes, and as additional investments in new or replacement pipeline and related facilities are made. Rates are intended to provide for recovery of all commission-approved costs and a reasonable return on investment. The mix of fixed and variable components in rates assigned to various customer classes (rate design) can significantly impact the operating margin actually realized by Southwest. Management has worked with its regulatory commissions in designing rate structures that strive to provide affordable and reliable service to its customers while mitigating volatility in prices to customers and stabilizing returns to investors. Such rate structures were in place in all of Southwest’s operating areas during all periods for which results of natural gas operations are disclosed above.
Arizona Jurisdiction
Arizona General Rate Case. On May 1, 2019, Southwest filed a general rate case application requesting to increase revenue by approximately $57 million to update the cost of service to reflect recent U.S. tax reform changes, including the return of excess deferred income taxes to customers, and to reflect capital investments of approximately $670 million, including certain post-test year additions, including the southern Arizona LNG facility discussed below. The application also includes a proposed 10.3% return on equity (“ROE”) relative to a capital structure of 51.1% equity. At the time of the filing, the Company estimated the return of approximately $20.6 million of excess accumulated deferred income taxes. Following the original filing, in October 2019, Southwest filed an amendment to its application, updating for $5.7 million in actual amortization of accumulated excess deferred income taxes known after the Company’s 2018 federal income tax return was filed in 2019. It was at such point that the actual amount could be computed based on the prescribed methodology for determining the amount that could be returned to customers. The difference of $14.9 million would result in an increase in revenue and income tax expense, thereby having no impact on earnings overall. In association with the amendment, Southwest also included additional post-test year plant in the amount of $124.5 million associated with its COYL and VSP programs, discussed further below. The amendment overall increased the deficiency by $36 million, to $93 million. Through the discovery and testimony exchanges, Southwest updated certain aspects of its cost of service, including a revised proposed ROE of 10.15%, resulting in an updated proposed increase of $90.6 million. The request overall includes the retention of a fully decoupled rate design, other previously approved regulatory mechanisms, and a new infrastructure tracking mechanism for specific plastic pipe. It also includes a proposal for a renewable natural gas program that authorizes Southwest to purchase renewable natural gas for its customers and to recover the cost as part of its purchased gas adjustment mechanism. A hearing in this matter was previously scheduled for April 2020; however, due to the COVID-19 pandemic, the hearing was conducted during June and July. Prior to the start of the hearing, Southwest entered into a stipulation with the parties to the case on a number of issues. As part of the stipulation, the parties agreed to continue the COYL program; to establish a Tax Expense Adjustor Mechanism to track annual changes in the amortization of excess accumulated deferred income taxes (“EADIT”) as well as any future changes in the federal tax rate; to incorporate various tariff proposals; and to include a resolution for a 10-year amortization period for EADIT associated with deemed “unprotected” plant. EADIT associated with “protected” plant relates to timing differences from using accelerated depreciation for tax purposes and another method for book purposes and “unprotected” amounts relate to all other timing differences. Legal briefs will continue through mid-September, with a Commission decision expected during the fourth quarter.
Delivery Charge Adjustment. The annual Delivery Charge Adjustment (“DCA”) is filed each April, which along with other reporting requirements, contemplates a rate to recover the over- or under-collected margin tracker amounts based on the balance at the end of the preceding calendar year. The DCA rate adjustment request filed in April 2018 reflected the December 31, 2017 balance, but was later updated to include the balance at December 31, 2018. After a one-time modification to reflect benefits attributable to the impact of U.S. tax reform on the balance then existing, the ACC approved an annualized recovery of $69 million, with the associated rate effective in May 2019. In the process to address the 2019 activity, in April 2020, Southwest filed a request to adjust the existing rate to consider the 14-month period of January 1, 2019 through February 29, 2020, proposing a rate of $0.00655 per therm based on an ending balance of approximately $3.5 million. Although Commission Staff concurred with Southwest’s proposed rate, the ACC ultimately elected to reduce the rate to zero in an effort to provide some measure of customer relief in light of current issues related to the COVID-19 pandemic, and at the time of both the April filing and the ACC decision, the balance was a liability (in an over-recovered status). Any over-or under-collection will be addressed in Southwest’s next annual filing.
|
|
|
|
|
|
|
|
|
|
|
SOUTHWEST GAS HOLDINGS, INC.
|
|
Form 10-Q
|
|
SOUTHWEST GAS CORPORATION
|
|
June 30, 2020
|
Tax Reform. In February 2018, the ACC directed all Arizona utilities to address tax savings from the enactment of U.S. tax reform beginning January 1, 2018, through one of various means. 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 the impacts of tax reform. Ultimately, Southwest was instructed to refund customers $20 million annually, as compared to rate levels established in the previously concluded general rate case, until cost-of-service rates are updated in association with the pending general rate case. The current method to return this amount (in advance of the conclusion of the current general rate proceeding) is through a per-therm surcredit. Southwest has been tracking monthly differences between amounts expected to be returned and amounts actually returned to customers during 2018 and 2019, and continuing in 2020, which has resulted in an asset balance of $1.6 million as of June 30, 2020.
Liquefied Natural Gas (“LNG”) 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 related to 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. Southwest was ultimately granted approval for construction and deferral of costs not to exceed $80 million. Construction began during the third quarter of 2017 and the facility was placed in service in December 2019. Southwest incurred approximately $75.3 million in capital expenditures toward the project (including land acquisition costs), which are considered as part of Southwest’s pending rate case. In addition to tracking the revenue requirement associated with the capital investment in a regulatory asset, operating expenses associated with the plant are also authorized to be included in a regulatory asset, which is also being addressed as part of the pending general rate case.
Customer-Owned Yard Line (“COYL”) Program. Southwest received approval, in connection with its 2010 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, representing a non-traditional configuration. “Phase II” of the COYL program included the replacement of non-leaking COYLs. The surcharge is designed to collect the annual revenue requirement as the program progresses. In the filing made in February 2019, Southwest requested to increase its surcharge to recover a revenue requirement of $6.7 million (an increase of $3.2 million) related to the revenue requirement associated with $26.6 million in capital projects completed in 2018. The ACC ultimately issued an Order in October 2019 authorizing Southwest to retain the existing annual surcharge of $3.5 million and indicating it would review the program as part of the pending general rate case. As discussed above, the parties to the pending rate case stipulated to continue the COYL program. Southwest also proposed to have the ACC review an estimated $21.1 million of 2019 COYL capital projects, and if authorized, to also render a decision regarding cost recovery as part of the pending rate case. As part of their filed testimony in the current case, the ACC Staff and the consumer advocate recommended recovery of this plant as part of Southwest’s filed post-test year plant adjustment, with inclusion of related amounts in base rates, and also support the continuation of the COYL program.
Vintage Steel Pipe (“VSP”) Program. Southwest received approval, in connection with its 2016 Arizona general rate case, to implement a VSP replacement program. Southwest currently has a substantial amount of pre-1970s vintage steel pipe in Arizona. As part of the program, Southwest proposed to start replacing the pipe on an accelerated basis and to recover the costs through an annual surcharge filing. A surcharge related thereto has been customarily designed to be revised annually as the program progresses to collect the annual revenue requirement associated with the related capital expenditures. In the most recent VSP filing, in February 2019, Southwest requested to increase its surcharge revenue by $9.5 million (to $11.9 million) related to 2018 expenditures. Southwest replaced approximately $100 million of VSP in connection with 2018 VSP capital projects. The ACC issued an Order in October 2019 authorizing Southwest to retain the current annual surcharge of $2.4 million and indicated it would review the program as part of the pending rate general case. Southwest also proposed to have the ACC review an estimated $103.4 million of 2019 VSP capital projects, and if authorized, to also render a decision regarding cost recovery as part of the pending rate case. As part of their filed testimony in the current case, the ACC Staff and the consumer advocate recommended recovery of this plant as part of Southwest’s filed post-test year plan adjustment, with inclusion of related amounts in base rates. The continuation of the VSP is pending a decision in the current general rate proceeding.
Customer Data Modernization Initiative. Southwest has embarked on an initiative to replace its customer service system and gas transaction systems, each of which is utilized to support all Southwest service territories. Combined, these undertakings are referred to as the Customer Data Modernization Initiative (the “CDMI”). In March 2019, Southwest filed an application with the ACC seeking an accounting order which, if approved, would authorize Southwest to track and defer all costs associated with the CDMI to mitigate adverse financial implications associated with this multi-year initiative. The total cost for the CDMI is estimated at $174 million, approximately $96 million of which would be allocable to the Arizona rate jurisdiction. The initiative is currently expected to be completed in the first half of 2021. A hearing in this matter was held in June 2020. Legal briefs will continue through mid-September, with a Commission decision expected in the fourth quarter.
|
|
|
|
|
|
|
|
|
|
|
SOUTHWEST GAS HOLDINGS, INC.
|
|
Form 10-Q
|
|
SOUTHWEST GAS CORPORATION
|
|
June 30, 2020
|
California Jurisdiction
California General Rate Case. Southwest’s existing rates became effective June 2014, and included a Post-Test Year (“PTY”) Ratemaking Mechanism, which allowed for attrition increases of 2.75% annually for 2015 through 2018, after which time new rates from a subsequent rate case cycle would have been expected to be in effect. In December 2016, Southwest filed to modify the earlier (2014) general rate case decision to extend the rate case cycle by two years, and received CPUC approval in June 2017, including extension of the annual 2.75% PTY attrition adjustments for 2019 and 2020.
On August 30, 2019, Southwest filed the previously deferred general rate case, based on a test year of 2021, seeking authority to increase rates in its California rate jurisdictions. The proposed combined revenue increase of $12.8 million was net of a $10.9 million revenue reduction associated with changes from U.S. tax reform, which included the amortization of $9.8 million (approximately $2 million annually over five years) associated with the difference in authorized income tax expense and actual incurred income tax expense for years 2019 and 2020, which when returned will impact cash flows but would not be expected to have an impact on earnings overall. Southwest has been tracking those amounts, as directed, and reserving them for return to customers. The overall revenue request also included $1.6 million of excess accumulated deferred income taxes proposed to be returned to customers each year until the amount is reset as part of a future rate case. Southwest’s proposal included an ROE of 10.5%, relative to a 53% equity ratio; continuation of annual post-test year margin adjustments of 2.75%; implementation of various safety-related programs, including a targeted pipe replacement program and a meter protection program (with a combination of measures, such as snow sheds, excess flow valves, upgraded meter set piping and upgraded Encoder Receiver Transmitter protocol); as well as an expansion of the COYL replacement program. Ahead of hearings scheduled to begin in late June, Southwest reached an agreement in principle with the Public Advocate’s Office for settlement of the pending general rate case.
The agreement in principle includes a $6.4 million total combined revenue increase with a 10% ROE, relative to a 52% equity ratio. Approximately $4 million of the original proposed increase of $12.8 million is associated with a North Lake Tahoe project that will not be completed by the beginning of 2021; consequently, the parties agreed to remove it from the base rate increase and instead Southwest will recover the cost of the project through a surcharge as described below. The agreement also maintains Southwest’s existing 2.75% annual attrition adjustments, the continuation of the pension balancing account, and approves the proposed increase in the residential basic service charge from the existing $5.00 to $5.75 per month. The parties also agreed to a cumulative total of $119 million over the five-year rate cycle to implement the proposed risk-informed decision making proposals, which consist of a COYL replacement, meter protection and pipe replacement programs. Southwest is also authorized to implement a surcharge annually to recover the cost of these programs. The agreement in principle was filed in early August 2020, and if approved, new rates would be expected to become effective in January 2021.
Attrition Filing. In November 2019, Southwest made its latest annual PTY attrition filing, requesting annual revenue increases of $2.06 million in southern California, $556,000 in northern California, and $278,000 for South Lake Tahoe. This filing was approved in December 2019 and rates were made effective in January 2020. 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 began amortizing its then existing net cost balance over a 12-month period with recovery rates effective July 2018 for all applicable rate schedules. 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, following initial required credits in October 2018. Amounts distributed in April 2019 and 2020 were comparable. GHG compliance costs recovered through rates (including transportation customer rates) have no impact on earnings.
Renewable Natural Gas. In February 2019, Southwest filed an application that, among other provisions, seeks to formally allow the inclusion of renewable natural gas (or biomethane) as a potential component of Southwest’s gas supply portfolio through the Biomethane Gas Program (“BGP”). This proposal is designed to further the goals of the California Global Warming Solutions Act of 2006, the California Low Carbon Fuel Standard, Senate Bills 1383 and 1440, as well as current or future legislative or regulatory efforts to reduce greenhouse gas emissions. Implementation of the BGP addresses cost recovery as part of Southwest’s existing Gas Cost Incentive Mechanism related to the purchase or sale of biomethane. The CPUC issued a final decision approving the proposal in March 2020.
Customer Data Modernization Initiative. On April 26, 2019, Southwest filed an application with the CPUC seeking authority to establish a two-way, interest bearing balancing account to record costs associated with the CDMI to mitigate adverse financial implications associated with this multi-year project. Approximately $19 million of the estimated $174 million cost for the
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SOUTHWEST GAS HOLDINGS, INC.
|
|
Form 10-Q
|
|
SOUTHWEST GAS CORPORATION
|
|
June 30, 2020
|
CDMI would be allocable to the California rate jurisdiction. Southwest filed a separate request to establish a memorandum account while the CPUC considered its application request to establish a two-way balancing account. Effective October 2019, the CPUC granted Southwest’s memorandum account request, which would allow Southwest to track costs, including operations and maintenance costs and capital-related costs, such as depreciation, taxes, and return associated with California’s portion of the CDMI. The balance tracked in the memorandum account would be transferred to the two-way balancing account, if approved. In January 2020, Southwest and the Public Advocates Office reached a settlement agreement to adopt Southwest’s Application for Authority to Implement the CDMI. The CPUC issued a final decision approving the settlement agreement as filed in July 2020.
Emergency Relief Program Related to COVID-19. On March 25, 2020, Southwest filed an Advice Letter to establish a memorandum account to track costs related to customer protections under Emergency Relief regulations implemented in 2019 in the event of a state or federal declared emergency or disaster. The CPUC passed an emergency resolution on April 16, 2020 authorizing and directing utilities to implement customer protections and to establish memorandum accounts to track the financial impacts of complying with the resolution. On May 1, 2020, Southwest filed an Advice Letter to establish a COVID-19 Pandemic Protections Memorandum Account (“CPPMA”) to record all incremental costs and lost revenues incurred by Southwest associated with its implementation of the COVID-19 customer protections as outlined in the CPUC resolution. The customer protections were retroactively applied to March 4, 2020, the date Governor Gavin Newsom declared a state of emergency related to COVID-19. The CPPMA is effective March 4, 2020 through April 16, 2021. These customer protections focus on flexible payment plan options, additional protections for income-qualified customers, as well as the suspension of disconnections for non-payment and the waiver of deposit and late fee requirements. Tracked amounts will be considered by the CPUC for future recovery.
Nevada Jurisdiction
Nevada General Rate Case. Southwest filed a general rate case application with the PUCN on February 28, 2020, which requested a statewide overall general rate increase of approximately $38.3 million. The request seeks an ROE of 10% relative to a proposed capital structure of 50% equity and continuation of the General Revenues Adjustment (“GRA”) mechanism (full revenue decoupling). The request also proposes the recovery of previously excluded costs attributable to several software applications. On June 26, 2020, Southwest submitted its certification filing to update certain balances through May 31, 2020, which increased its overall proposed rate increase to $38.5 million. Commission Staff and the Bureau of Consumer Protection filed testimony on July 24, 2020, recommending an overall increase of approximately $21.6 million and approximately $20 million, respectively. A substantial portion of the difference between Southwest’s request and the proposals of these parties relates to differences in the recommended ROE. No party contested the recovery of the remaining balances of the previously excluded software applications or the continuation of the GRA. Included in the Commission’s Staff recommended increase is approximately $585,000 related to incremental operation and maintenance expenses related to Southwest’s CDMI (discussed below), providing an opportunity for recovery of these costs following the denial of Southwest’s request for deferred accounting treatment in 2019. A hearing in this matter is scheduled for August 2020.
In December 2018, the PUCN issued a rate case decision in the previous general rate case application, which authorized a ROE of 9.25% relative to the Company’s proposed capital structure of 49.66% equity applicable to both southern and northern Nevada and provided for an overall revenue increase of $9.5 million in southern Nevada and a revenue decrease in northern Nevada of $2 million. Rates from this proceeding originally became effective in January 2019.
As part of that proceeding, management filed a request for reconsideration of several rate case issues during the same month of effective rates, and the PUCN Staff also filed for reconsideration, related to technical clarifications on the calculation of the intended results of the decision. The PUCN issued a decision regarding both petitions in February 2019 that modified certain parts of the original order, but granted no further rate relief. The modified final decision resulted in a revenue increase of $9.2 million in southern Nevada and a revenue decrease in northern Nevada of $2.1 million. The decision included a reduction in depreciation expense of $800,000 and an increase in operating income of $7.9 million. The modified rates became effective in March 2019. Management decided to seek judicial review of the PUCN’s rate order, which was considered in January 2020. The District Court Judge deferred to the PUCN’s original findings. In March 2020, Southwest filed an appeal with the Nevada Supreme Court, the resolution of which will likely take 12-24 months. Southwest expects consideration of the appeal to occur concurrently with the proceedings of the 2020 general rate case, a decision which is currently pending.
General Revenues Adjustment. The continuation of the GRA was affirmed as part of the December 2018 rate case decision and is again being requested as part of Southwest’s pending general rate case application filed in February 2020. In June 2019, Southwest made its 2019 Annual Rate Adjustment (“ARA”) filing in which it requested to update the GRA to reflect the current balances in both southern and northern Nevada. This filing provided for a decrease of approximately $8 million for an over-collected balance in southern Nevada and an increase of approximately $2 million in northern Nevada. The proposed changes were approved, with rates effective January 2020. While there is no impact to net income overall from adjustments to recovery
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SOUTHWEST GAS HOLDINGS, INC.
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Form 10-Q
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SOUTHWEST GAS CORPORATION
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June 30, 2020
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rates associated with the related regulatory balances, operating cash flows are impacted by such changes. In May 2020, Southwest made its 2020 ARA filing, which proposes annualized margin decreases of $5.3 million in southern Nevada and an increase of $1.6 million in northern Nevada.
Infrastructure Replacement Mechanism. In 2014, the PUCN approved final rules for the Gas Infrastructure Replacement (“GIR”) mechanism which defers and recovers certain costs associated with accelerated replacement of qualifying 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), the related regulations provide Southwest with the opportunity to file a GIR “Advance Application” annually, generally in May, to seek preapproval of qualifying replacement projects.
Furthermore, a GIR Rate Application is generally filed each October to reset the GIR recovery surcharge rate related to previously approved and completed projects, with new rates typically becoming effective each January. On October 1, 2019, Southwest filed a Rate Application to reset the recovery surcharge to include cumulative deferrals through August 31, 2019. This surcharge rate became effective February 1, 2020 and is expected to result in a reduction in annual revenue of approximately $5.3 million in southern Nevada and no incremental revenue in northern Nevada
Conservation and Energy Efficiency (“CEE”). The PUCN allows deferral (and later recovery) of approved conservation and energy efficiency costs, recovery rates for which are adjusted in association with ARA filings. In June 2019, Southwest made its 2019 ARA filing, which proposed annualized margin increases of $3.2 million and $880,000 in southern and northern Nevada, respectively. However, Southwest entered into a stipulation and agreement to modify these amounts to $6.2 million and $1.1 million in southern and northern Nevada, respectively, which reflected the recovery of a related but separate program balance to be rolled into customer rates with the same effective date. The modification was approved, and rates became effective January 2020. In May 2020, Southwest made its 2020 ARA filing which proposes annualized margin decreases of $313,000 and $55,000 for southern and northern Nevada, respectively.
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 to provide 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. Ultimately, the PUCN issued an order approving Southwest’s proposal to expand natural gas infrastructure and service to Mesquite. The order approved a capital investment of approximately $28 million and the construction of approximately 37 miles of distribution pipeline (including the approach main). The annual revenue requirement associated with the project is $2.8 million. A volumetric rate was implemented October 1, 2019 to recover the cost and is applicable to all southern Nevada customers (including new customers in Mesquite). In May 2020, Southwest made its 2020 ARA filing, which proposes an annualized margin increase of $185,000, which reflects the cumulative deferred revenue requirement associated with the Mesquite facilities that have been placed in service through April 30, 2020. Following preliminary design, in February 2019, Southwest began serving certain customers with an approved virtual pipeline network, providing temporary natural gas supply using portions of the approved distribution system and compressed natural gas. It is estimated that construction of the remaining approved distribution system to bring the permanent supply to Mesquite will be placed in service in the first quarter of 2021.
In June 2019, Southwest filed for preapproval to construct the infrastructure necessary to expand natural gas service to Spring Creek, Nevada, and to implement a cost recovery methodology to timely recover the associated revenue requirement consistent with the SB 151 regulations. Expansion to the Spring Creek area near Elko, Nevada consists of a high-pressure approach main and associated regulator stations, an interior backbone, and the extension of the distribution system from the interior backbone system. The total capital investment is estimated to be $61.9 million. A stipulation in this matter was reached with the parties and approved by the PUCN in December 2019, which largely accepted Southwest’s proposal with modifications reflected in the rate recovery allocations split amongst northern Nevada, Elko, and Spring Creek expansion customers. Initial ground-breaking is expected in the summer of 2020.
Customer Data Modernization Initiative. In March 2019, Southwest filed a request seeking authority to establish a regulatory asset to defer the revenue requirement related to the CDMI to mitigate the financial attrition associated with this multi-year project. Approximately $59 million of the estimated $174 million cost of the CDMI would be allocable to the Nevada rate jurisdictions. A hearing on this matter was held in August 2019 and the PUCN issued its decision in September 2019, denying Southwest’s request for regulatory asset treatment, finding that a general rate case is the most appropriate venue to address such costs. In response to the PUCN’s decision, Southwest filed a Petition for Reconsideration in October 2019, which was denied. Southwest proposed to establish a level of expense of approximately $1.2 million in rates as part of its pending general rate case
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SOUTHWEST GAS HOLDINGS, INC.
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Form 10-Q
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SOUTHWEST GAS CORPORATION
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June 30, 2020
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filing. The project is expected to be moved to production in 2021. As described above, Southwest has a proposal to provide an opportunity to recover these costs as part of its pending rate case.
Regulatory Asset Related to COVID-19. The PUCN issued an order directing utilities within the state to establish regulatory asset accounts to track the financial impacts associated with maintaining service for customers affected by COVID-19, including those whose service would have been otherwise terminated/disconnected, effective March 12, 2020, the date Governor Steve Sisolak declared a state of emergency related to COVID-19. These costs will be considered by the PUCN for future recovery.
FERC Jurisdiction
General Rate Case. Paiute Pipeline Company (“Paiute”), a wholly owned subsidiary of Southwest, filed a general rate case with the FERC in May 2019. The filing fulfilled an obligation from the settlement agreement reached in the 2014 Paiute general rate case. In January 2020, Paiute reached an agreement in principle with the FERC Staff and intervenors to settle its general rate case. In addition to continuing the term-differentiated rate structures with its shippers, the agreement requires Paiute’s three largest transportation customers and all of its storage customers to extend their service agreements to have primary terms of at least five years. The settlement will result in a revenue reduction of approximately $700,000 and is based on a 9.90% pre-tax rate of return. Also, as part of this agreement, Paiute agreed not to file a rate case prior to January 1, 2022, but no later than May 31, 2025.
In January 2020, Paiute requested, and was granted, the authority to place the settlement rates into effect on an interim basis effective February 2020. On March 30, 2020, Paiute filed the proposed settlement agreement with the FERC for review and approval. On July 6, 2020, the FERC issued a letter order approving the settlement. If no party requests rehearing within 30 days, the order will become final on August 5, 2020.
PGA Filings
The rate schedules in all of Southwest’s service territories contain provisions that permit adjustment 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. As of June 30, 2020, over-collections in each of Southwest’s service territories resulted in a liability of $69.9 million on the Company’s and Southwest’s Condensed Consolidated Balance Sheets.
Filings to change rates in accordance with PGA clauses are subject to audit by state regulatory commission staffs. PGA changes impact cash flows but have no direct impact on profit margin. However, gas cost deferrals and recoveries can impact comparisons between periods of individual consolidated income statement components. These include Gas operating revenues, Net cost of gas sold, Net interest deductions, and Other income (deductions).
The following table presents Southwest’s outstanding PGA balances receivable/(payable):
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(Thousands of dollars)
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June 30, 2020
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December 31, 2019
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June 30, 2019
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Arizona
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$
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(18,598)
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$
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(59,259)
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$
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(87,692)
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Northern Nevada
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(13,648)
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11,894
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9,967
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Southern Nevada
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(32,867)
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32,518
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48,273
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California
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(4,825)
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(1,496)
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(2,041)
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$
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(69,938)
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$
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(16,343)
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$
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(31,493)
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Capital Resources and Liquidity
Historically, cash on hand and cash flows from operations have provided a substantial portion of cash used in investing activities (primarily for construction expenditures and property additions). In recent years, the Company has accelerated pipe replacement activities to fortify system integrity and reliability, notably in association with gas infrastructure replacement programs as discussed previously. This accelerated activity has necessitated the issuance of both debt and equity securities to supplement cash flows from operations. The Company endeavors to maintain an appropriate balance of equity and debt to maintain investment-grade credit ratings, which should minimize interest costs.
Cash Flows
Southwest Gas Holdings, Inc.:
Operating Cash Flows. Cash flows provided by consolidated operating activities increased $97 million in the first six months of 2020 as compared to the same period of 2019. The improvement in cash flows primarily resulted from collections of amounts under purchased gas adjustment mechanisms (compared to amounts refunded in the prior year), an increase in
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SOUTHWEST GAS HOLDINGS, INC.
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Form 10-Q
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SOUTHWEST GAS CORPORATION
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June 30, 2020
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collections ($39 million) related to the Arizona decoupling mechanism balance between six-month periods, as well as increases from other working capital components. These impacts were partially offset by a $50 million supplemental contribution for pension funding made in January 2020 (included in Changes in other liabilities and deferred credits in the Condensed Consolidated Statements of Cash Flows of both the Company and Southwest). Customarily, differences between amounts Southwest pays to gas suppliers and amount included in customer rates to recover the cost of purchased gas under the purchased gas cost mechanisms has provided significant variability in operating cash flows between periods.
Investing Cash Flows. Cash used in consolidated investing activities decreased $66 million in the first six months of 2020 as compared to the same period of 2019. The change was primarily due to a decrease in capital expenditures in both reportable segments in the first six months of 2020. Additionally, the prior-year period included $19.5 million for the remittance of purchase consideration previously held back in association with the 2018 Linetec acquisition.
Financing Cash Flows. Net cash provided by consolidated financing activities increased $35 million in the first six months of 2020 as compared to the same period of 2019. The change was primarily due to net proceeds of $447 million (after discount and fees) from the issuance of $450 million Senior Notes in June 2020 by Southwest, in which the funds were partially used to reduce the amounts then outstanding under its credit facility ($309 million); and in the prior year, Southwest used a portion of the net proceeds from the $300 million Senior Notes issued in May 2019 to reduce amounts then outstanding under its credit facility and commercial paper program. Additionally, there was a decrease ($48 million) in issuances of common stock under the Company’s Equity Shelf Program in the first half of 2020 compared to issuances under programs in the prior-year period. See Note 4 – Common Stock and Note 5 – Debt. Other outflows include the combined impacts of repayment and borrowings by Centuri under its secured credit and revolving credit facility, offset by $70 million in equipment loan proceeds.
During the six months ended June 30, 2020, the Company issued 86,000 shares of common stock through the Dividend Reinvestment and Stock Purchase Plan, raising approximately $6 million, similar to amounts raised in the prior year period.
The capital requirements and resources of the Company generally are determined independently for the natural gas operations and utility infrastructure services segments. Each business activity is generally responsible for securing its own external debt financing sources. However, the holding company may raise funds through stock issuance or other external financing sources. See Note 4 – Common Stock.
Southwest Gas Corporation:
Operating Cash Flows. Cash flows provided by operating activities increased $92 million in the first six months of 2020 as compared to the same period of 2019. The improvement in operating cash flows was attributable to collections of deferred purchased gas costs and recoveries related to the Arizona decoupling mechanism noted above, as well as other working capital components overall, partially offset by the supplemental contribution for pension funding described earlier.
Investing Cash Flows. Cash used in investing activities decreased $6 million in the first six months of 2020 as compared to the same period of 2019. The change was primarily due to a decrease in capital expenditures in 2020 offset by a decrease in utility customer advances toward capital projects.
Financing Cash Flows. Net cash provided by financing activities increased $53 million in the first six months of 2020 as compared to the same period of 2019. The increase was primarily due to the issuance of $450 million Senior Notes in the current period, net of amounts used to reduce the amounts outstanding under Southwest’s credit facility, compared to the prior year $300 million Senior Notes issuance and related credit facility and commercial paper program repayments. See Note 5 – Debt. The combined impact of dividends and contributions to/from the parent holding company resulted in a reduction in financing cash flows.
Gas Segment Construction Expenditures and Financing
During the twelve-month period ended June 30, 2020, construction expenditures for the natural gas operations segment were $768 million. The majority of these expenditures represented costs associated with scheduled and accelerated replacement of existing transmission, distribution, and general plant. Cash flows from operating activities of Southwest were $460 million during this time, and provided approximately 53% of construction expenditures and dividend requirements.
Management estimates natural gas segment construction expenditures during the three-year period ending December 31, 2022 will be approximately $2.1 billion. Of this amount, approximately $700 million is scheduled to be incurred in 2020. Southwest plans to continue to request regulatory support as necessary and appropriate to accelerate projects that improve system flexibility and reliability. Southwest may expand existing, or initiate new, programs. Significant replacement activities are currently expected to continue well beyond the next few years. See also Rates and Regulatory Proceedings for discussion of Nevada infrastructure, Arizona COYL and VSP programs, and Spring Creek in Nevada. During the three-year period, cash flows from operating activities of Southwest are expected to provide approximately 50% of the funding for gas operations total
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SOUTHWEST GAS HOLDINGS, INC.
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Form 10-Q
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SOUTHWEST GAS CORPORATION
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June 30, 2020
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construction expenditures and dividend requirements. Any additional cash requirements are expected to be provided by existing credit facilities, equity contributions from the Company, and/or other external financing sources. The timing, types, and amounts of any additional external financings will be dependent on a number of factors, including the cost of gas purchases, conditions in the capital markets, timing and amounts of rate relief, timing differences between U.S. federal taxes embedded in customer rates and amounts implemented under tax reform, as well as growth levels in Southwest’s service areas and earnings. External financings could include the issuance of debt securities, bank and other short-term borrowings, and other forms of financing.
As noted earlier, in June 2020, Southwest issued $450 million aggregate principal amount of 2.20% Senior Notes at a discount of 0.126%. The notes will mature in June 2030. A portion of the net proceeds was used to reduce borrowings under Southwest’s credit facility. Additionally, Southwest intends to use a portion of the net proceeds from the issuance to redeem the 4.45% Notes. On July 31, 2020, holders of the 4.45% Notes due in December 2020 were notified of Southwest’s intention to redeem the notes in full on September 1, 2020 at a redemption price of 100% plus accrued and unpaid interest.
In May 2019, the Company filed with the SEC an automatic shelf registration statement for the offer and sale of up to $300 million of common stock from time to time in at-the-market offerings under the prospectus included therein in accordance with the Sales Agency Agreement, dated May 8, 2019, between the Company and BNY Mellon Capital Markets, LLC (the “Equity Shelf Program”). The Company issued $50 million under this multi-year program during the second quarter of 2020; approximately $126 million is available under the program as of June 30, 2020. Net proceeds from the sales 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 twelve months ended June 30, 2020, 1,325,796 shares were issued in at-the-market offerings at an average price of $74.93 per share with gross proceeds of $99.3 million, agent commissions of $993,000, and net proceeds of $98.3 million under the Company’s Equity Shelf Program.
Bonus Depreciation
In 2017, with the enactment of U.S. tax reform, the bonus depreciation deduction percentage changed from 50% to 100% for “qualified property” placed in service after September 27, 2017 and before 2023. The bonus depreciation tax deduction phases out starting in 2023, by 20% for each of the five following years. Qualified property excludes most public utility property. The Company estimates bonus depreciation will defer the payment of approximately $10 million of federal income taxes for 2020, none of which relates to utility operations.
Dividend Policy
Dividends are payable on the Company’s common stock at the discretion of the Board of Directors (the “Board”). In setting the dividend rate, the Board currently targets a payout ratio of 55% to 65% of consolidated earnings per share and considers, among other factors, current and expected future earnings levels, our ongoing capital expenditure plans and expected external funding needs, in addition to our ability to maintain strong credit ratings and liquidity. The Company has paid dividends on its common stock since 1956 and has increased that dividend each year since 2007. In February 2020, the Board elected to increase the quarterly dividend from $0.545 to $0.570 per share, representing a 4.6% increase, effective with the June 2020 payment.
Liquidity
Liquidity refers to the ability of an enterprise to generate sufficient amounts of cash through its operating activities and external financing to meet its cash requirements. Several general factors (some of which are out of the control of the Company) that could significantly affect liquidity in future years include: variability of natural gas prices, changes in the ratemaking policies of regulatory commissions, regulatory lag, customer growth in the natural gas segment’s service territories, the ability to access and obtain capital from external sources, interest rates, changes in income tax laws, pension funding requirements, inflation, and the level of earnings. Natural gas prices and related gas cost recovery rates, as well as plant investment, have historically had the most significant impact on liquidity.
The Company remains focused on the safety and well-being of our employees and on the service to our customers. The Company continues to review and assess the ongoing impacts of the COVID-19 pandemic, including those on our customers, suppliers, and business. As of June 30, 2020, the Company’s Cash and cash equivalents were $200 million (which is intended to redeem Southwest’s $125 million 4.45% Notes on September 1, 2020), and the Company had access to $679 million of borrowing capacity under the Company’s various credit facilities, which management believes will help manage the impacts of the COVID-19 pandemic on its business and address related liquidity needs if they should arise.
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SOUTHWEST GAS HOLDINGS, INC.
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Form 10-Q
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SOUTHWEST GAS CORPORATION
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June 30, 2020
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On an interim basis, Southwest defers over- or under-collections of gas costs to PGA balancing accounts. In addition, Southwest uses this mechanism to either refund amounts over-collected or recoup amounts under-collected as compared to the price paid for natural gas during the period since the last PGA rate change went into effect. At June 30, 2020, the combined balance in the PGA accounts totaled an over-collection of $70 million. See PGA Filings for more information.
Southwest Gas Holdings, Inc. has a credit facility with a borrowing capacity of $100 million; on April 10, 2020, the existing credit facility was amended to extend the maturity date to April 10, 2025, while maintaining the borrowing capacity at $100 million. The Company intends to utilize this facility for short-term financing needs. At June 30, 2020, $58 million was outstanding under this facility.
Southwest has a credit facility, with a borrowing capacity of $400 million; on April 10, 2020, Southwest amended the credit facility agreement which extended the maturity date to April 10, 2025. The revolving borrowing capacity under the amended credit facility agreement remains at $400 million following that amendment. Southwest designated $150 million of the facility for long-term borrowing needs and the remaining $250 million for working capital purposes. The maximum amount outstanding on the long-term portion of the credit facility (including a commercial paper program, as noted below) during the first six months of 2020 was $150 million. As of June 30, 2020, no amount was outstanding under the long-term portion of the facility. Additionally, the maximum amount outstanding on the short-term portion of the credit facility during the first six months of 2020 was $161 million. As of June 30, 2020, no amount was outstanding on the short-term portion of this credit facility. The credit facility can be used as necessary to meet liquidity requirements, including temporarily financing under-collected PGA balances, if any, or meeting the refund needs of over-collected balances. It has been adequate for Southwest’s working capital needs outside of funds raised through operations and other types of external financing. As indicated, any additional cash requirements would include the existing credit facility, equity contributions from the Company, and/or other external financing sources.
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. Any borrowing under the commercial paper program during 2020 will be designated as long-term debt. Interest rates for the commercial paper program are calculated at the current commercial paper rate during the borrowing term. At June 30, 2020, there were no borrowings outstanding under this program.
Centuri has a senior secured revolving credit and term loan facility with borrowing capacity of $590 million (refer to Note 5 – Debt). The line of credit portion of the facility is $325 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 $265 million. The $590 million credit and term loan facility expires in November 30, 2023. It 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, 2020 totaled $1.3 billion. The maximum amount outstanding on the facility during the first six months of 2020 was $312 million, of which $235 million was outstanding on the term portion. As of June 30, 2020, $77 million was outstanding on the revolving credit facility and $231 million was outstanding on the term loan portion of the facility. Also at June 30, 2020, there was approximately $237 million, net of letters of credit, available under the line of credit.
On April 10, 2020, the holding company and Southwest amended their respective credit facility agreements (see above). Interest rates for the amended credit facilities are calculated at either LIBOR or an “alternate base rate,” plus in each case an applicable margin that is determined based on each entities’ respective senior unsecured long-term debt rating. Upon the occurrence of certain events providing for a transition away from LIBOR, or if LIBOR is no longer a widely recognized benchmark rate, each entity may amend their respective credit facility with a replacement rate as set forth in the amended credit facility agreement. It is currently anticipated that LIBOR may be discontinued as a benchmark or reference rate after 2021. As of June 30, 2020, $58 million borrowings were outstanding for the holding company under its credit facility (see Note 5 – Debt), and $188 million of Centuri’s indebtedness under its facility have interest rates with reference to LIBOR and maturity dates that extend beyond 2021. Southwest had no borrowings outstanding under its amended credit facility as of June 30, 2020. The above amounts that were outstanding for the holding company and for Centuri reflect approximately 9% of total debt (including current maturities) for the Company overall. In order to mitigate the impact of the discontinuation on the Company’s financial condition and results of operations, management will continue to monitor developments with respect to alternative rates and work with lenders to determine the appropriate alternative reference rate for variable rate indebtedness. However, at this time the Company and Southwest can provide no assurances as to the impact a LIBOR discontinuation will have on their financial condition or results of operations. Any alternative rate may be less predictable or less attractive than LIBOR.
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SOUTHWEST GAS HOLDINGS, INC.
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Form 10-Q
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SOUTHWEST GAS CORPORATION
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June 30, 2020
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Forward-Looking Statements
This quarterly report contains statements which constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (“Reform Act”). All statements other than statements of historical fact included or incorporated by reference in this quarterly report are forward-looking statements, including, without limitation, statements regarding the Company’s plans, objectives, goals, intentions, projections, strategies, future events or performance, negotiations, and underlying assumptions. The words “may,” “if,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “continue,” “forecast,” “intend,” “endeavor,” “promote,” “seek,” and similar words and expressions are generally used and intended to identify forward-looking statements. For example, statements regarding operating margin patterns, customer growth, the composition of our customer base, price volatility, seasonal patterns, payment of debt, the Company’s COLI strategy, replacement market and new construction market, impacts from the novel Coronavirus (COVID-19), including on our employees, customers, supply chain, transportation network, our financial position, revenue, earnings, cash flows, debt covenants, operations, regulatory recovery, work deployment or resumption and related uncertainties stemming from this pandemic, expected impacts of valuation adjustments associated with the redeemable noncontrolling interest in Linetec, the impacts of U.S. tax reform including disposition in regulatory proceedings and bonus depreciation tax deductions, the impact of recent PHMSA rulemaking, the amounts and timing for completion of estimated future construction expenditures, plans to pursue infrastructure programs or programs under SB151 legislation, forecasted operating cash flows and results of operations, net earnings impacts from gas infrastructure replacement surcharges, funding sources of cash requirements, amounts generally expected to be reflected in 2020 or future period revenues from regulatory rate proceedings including amounts requested or preliminarily settled from the recently filed and ongoing general rate cases, the outcome of judicial review of the previous Nevada rate case, rates and surcharges, PGA, and other rate adjustments, sufficiency of working capital and current credit facilities, bank lending practices, the Company’s views regarding its liquidity position, ability to raise funds and receive external financing capacity and the intent and ability to issue various financing instruments and stock under the Equity Shelf Program or otherwise, future dividend increases and the Board’s current target dividend payout ratio, pension and postretirement benefits, certain impacts of tax acts, the effect of any rate changes or regulatory proceedings, contract or construction change order negotiations, impacts of accounting standard updates, infrastructure replacement mechanisms and COYL programs, statements regarding future gas prices, gas purchase contracts and derivative financial instruments, recoverability of regulatory assets, the impact of certain legal proceedings, and the timing and results of future rate hearings, including the ongoing general rate cases and the final resolution for recovery of the CDMI in all jurisdictions, and statements regarding approvals are forward-looking statements. All forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act.
A number of important factors affecting the business and financial results of the Company could cause actual results to differ materially from those stated in the forward-looking statements. These factors include, but are not limited to, customer growth rates, conditions in the housing market, the impacts of COVID-19 including that which may result from a sustained restriction on commerce by government officials or otherwise, including impacts on employment in our territories, the health impacts to our customers and employees due to the persistence of the virus, the ability to collect on customer accounts due to the current or an extended moratorium on late fees or service disconnection, the ability to obtain regulatory recovery of all costs and financial impacts resulting from this pandemic, the ability of infrastructure services business to resume work with all customers and the impact of a delay or termination of work as a result thereof, the impacts of future restrictions placed on our business by government regulation or otherwise (such as self-imposed restrictions for the safety of employees and customers), including related to personal distancing, investment in personal protective equipment and other protocols, the impact of a resurgence of the virus following the resumption of commerce in our territories, and decisions of Centuri customers as to whether to pursue capital projects due to economic impacts resulting from the pandemic or otherwise, the ability to recover costs through the PGA mechanisms or other regulatory assets, the effects of regulation/deregulation, governmental or regulatory policy regarding natural gas or alternative energy, the regulatory support for ongoing infrastructure programs, the timing and amount of rate relief, the timing and methods determined by regulators to refund amounts to customers resulting from U.S. tax reform, changes in rate design, variability in volume of gas or transportation service sold to customers, changes in gas procurement practices, changes in capital requirements and funding, the impact of conditions in the capital markets on financing costs, the impact of variable rate indebtedness associated with a discontinuance of LIBOR including in relation to amounts of indebtedness then outstanding, changes in construction expenditures and financing, changes in operations and maintenance expenses, effects of pension expense forecasts, accounting changes and regulatory treatment related thereto, currently unresolved and future liability claims, changes in pipeline capacity for the transportation of gas and related costs, results of Centuri bid work, the impact of weather on Centuri’s operations, future acquisition-related costs, impacts of changes in value of the redeemable noncontrolling interest if at other than fair value, Centuri utility infrastructure expenses, differences between actual and originally expected outcomes of Centuri bid or other fixed-price construction agreements, outcomes from contract and change order negotiations, ability to successfully procure new work, impacts from work awarded or failing to be awarded from significant customers, the mix of work awarded, the amount of work awarded to Centuri following the lifting of work stoppages or reduction, the result of
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SOUTHWEST GAS HOLDINGS, INC.
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Form 10-Q
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SOUTHWEST GAS CORPORATION
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June 30, 2020
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productivity inefficiencies from regulatory requirements or otherwise, delays in commissioning individual projects, acquisitions, and management’s plans related thereto, competition, our ability to raise capital in external financings, our ability to continue to remain within the ratios and other limits subject to our debt covenants, and ongoing evaluations in regard to goodwill and other intangible assets. In addition, the Company can provide no assurance that its discussions regarding certain trends relating to its financing and operating expenses will continue or cease to continue in future periods. For additional information on the risks associated with the Company’s business, see Item 1A. Risk Factors and Item 7A. Quantitative and Qualitative Disclosures About Market Risk in the Annual Report on Form 10-K for the year ended December 31, 2019, and Item 1A. Risk Factors, as updated in association with the Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.
All forward-looking statements in this quarterly report are made as of the date hereof, based on information available to the Company as of the date hereof, and the Company assumes no obligation to update or revise any of its forward-looking statements, even if experience or future changes show that the indicated results or events will not be realized. We caution you not to unduly rely on any forward-looking statement(s).