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 distribution” segment), all of the shares of common stock of Centuri Group, Inc. (“Centuri,” or the “utility infrastructure services” segment), and until February 14, 2023, all of the common stock of MountainWest Pipelines Holding Company (“MountainWest,” or the “pipeline and storage” segment). Southwest Gas Holdings, Inc. and its subsidiaries are collectively referred to as the “Company.”
In December 2022, the Company announced that its Board of Directors (the “Board”) unanimously determined to take strategic actions to simplify the Company’s portfolio of businesses. These actions included entering into a definitive agreement to sell 100% of MountainWest in an all-cash transaction to Williams Partners Operating LLC (“Williams”) for $1.5 billion in total enterprise value, subject to certain adjustments (collectively, the “MountainWest sale”). The MountainWest sale closed on February 14, 2023. Additionally, the Company determined it will pursue a spin-off of Centuri (the “Centuri spin-off”), to form a new independent publicly traded utility infrastructure services company. The Centuri spin-off is currently expected to be completed in the fourth quarter of 2023 or the first quarter of 2024 and to be tax free to the Company and its stockholders for U.S. federal income tax purposes. The Centuri spin-off will be subject to, among other things, finalizing the transaction structure, final approval by the Board, approval by the Arizona Corporation Commission (the “ACC”), the receipt of a favorable Internal Revenue Service (“IRS”) private letter ruling relating to the tax-free nature of the transaction, and the effectiveness of a registration statement that will be filed with the U.S. Securities and Exchange Commission (the “SEC”). The application for the private letter ruling was filed with the IRS in March 2023 and the application to the ACC was filed in April 2023. See Note 8 - Dispositions for more information.
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 and Nevada, and distributes and transports natural gas for customers in portions of California. Additionally, through its subsidiaries, Southwest operates two regulated interstate pipelines serving portions of Southwest’s service territories.
As of March 31, 2023, Southwest had 2,206,000 residential, commercial, industrial, and other natural gas customers, of which 1,182,000 customers were located in Arizona, 819,000 in Nevada, and 205,000 in California. Over the past twelve months, first-time meter sets were approximately 42,000, compared to 38,000 for the twelve months ended March 2022. Residential and small commercial customers represented over 99% of the total customer base. During the twelve months ended March 31, 2023, 54% of operating margin (Regulated operations revenues less the net cost of gas sold) was earned in Arizona, 35% in Nevada, and 11% in California. During this same period, Southwest earned 84% of its operating margin from residential and small commercial customers, 5% from other sales customers, and 11% from transportation customers. These patterns are expected to remain materially consistent for the foreseeable future.
Southwest recognizes operating revenues from the distribution and transportation of natural gas (and related services) to customers. Operating margin is a financial measure defined by management as Regulated operations 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 Regulated operations 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 relief may impact our earnings. Refer to the Summary Operating Results table below for a reconciliation of gross margin to operating margin, and refer to Rates and Regulatory Proceedings in this Management’s Discussion and Analysis, for details of various rate proceedings.
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 strategic infrastructure services company that partners with regulated utilities to build and maintain the energy network that powers millions of homes and businesses across the United States (“U.S.”) and Canada. With an unwavering commitment to serve as long-term partners to customers and communities, Centuri’s employees enable regulated utilities to safely and reliably deliver natural gas and electricity, as well as achieve their goals for environmental sustainability. Centuri
operates in 83 primary locations across 45 states and provinces in the U.S. and Canada. Centuri operates in the U.S., primarily as NPL, Neuco, Linetec, and Riggs Distler, and in Canada, primarily as NPL Canada.
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). Utilities continue to implement or modify system integrity management programs to enhance safety pursuant to federal and state mandates. These programs have resulted in multi-year utility system replacement projects throughout the U.S. Likewise, there has been similar attention placed on electric grid modernization through national infrastructure legislation and related initiatives. The Department of Energy estimates more than 70% of the nation’s grid transmission lines and power transformers are over 25 years old, creating vulnerability exacerbated by seasonal storm and extreme weather events. 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 cases of severe weather, such as following a regional storm, Centuri may be engaged to perform restoration activities related to above-ground utility infrastructure, and related results impacts are not solely within the control of management. In addition, 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 impact operating results.
MountainWest, which was sold on February 14, 2023, is an interstate natural gas transmission pipeline company that provides transportation and underground storage services to customers in Utah, Wyoming, and Colorado. During the period of ownership by the Company, its operations included a substantial portion of its revenue being derived from reservation charges, with variable rates also included as part of its primarily rate-regulated rate structures.
All of our businesses may be impacted by economic conditions that impact businesses generally, such as inflationary impacts on goods and services consumed in the business, rising interest rates, labor markets and costs (including in regard to contracted or professional services), and the availability of those resources. Certain of these impacts may be more predominant in certain of our operations, such as with regard to fuel costs for work equipment and skilled/trade labor costs at Centuri.
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 notes thereto included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto, as well as the MD&A included in the 2022 Annual Report to Stockholders, which is incorporated by reference into Southwest’s and the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “2022 Form 10-K), in addition to the Risk Factors included in these documents, and as updated from time to time.
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 and are covered in greater detail in later sections of the MD&A.
Summary Operating Results
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Period Ended March 31, |
| | | Three Months | | Twelve Months |
| (In thousands, except per share amounts) | | 2023 | | 2022 | | 2023 | | 2022 |
| Contribution to net income (loss) | | | | | | | | |
| Natural gas distribution | | $ | 134,696 | | | $ | 111,795 | | | $ | 177,281 | | | $ | 180,215 | |
| Utility infrastructure services | | (11,872) | | | (23,486) | | | 13,679 | | | 17,793 | |
| Pipeline and storage | | (16,288) | | | 16,930 | | | (316,951) | | | 16,930 | |
| Corporate and administrative | | (60,625) | | | (9,061) | | | (127,566) | | | (35,274) | |
| Net income (loss) | | $ | 45,911 | | | $ | 96,178 | | | $ | (253,557) | | | $ | 179,664 | |
| | | | | | | | |
| Weighted average common shares | | 68,265 | | | 60,737 | | | 67,413 | | | 59,919 | |
| Basic earnings (loss) per share | | | | | | | | |
| Consolidated | | $ | 0.67 | | | $ | 1.58 | | | $ | (3.76) | | | $ | 3.00 | |
| | | | | | | | |
| Natural Gas Distribution | | | | | | | | |
| Reconciliation of Gross Margin to Operating Margin (Non-GAAP measure) | | | | | | | | |
| Utility Gross Margin | | $ | 259,364 | | | $ | 233,882 | | | $ | 597,222 | | | $ | 571,051 | |
| Plus: | | | | | | | | |
| Operations and maintenance (excluding Admin. & General) expense | | 79,696 | | | 73,422 | | | 317,344 | | | 276,525 | |
| Depreciation and amortization expense | | 74,650 | | | 72,114 | | | 265,579 | | | 256,814 | |
| Operating margin | | $ | 413,710 | | | $ | 379,418 | | | $ | 1,180,145 | | | $ | 1,104,390 | |
1st Quarter 2023 Overview
Southwest Gas Holdings highlights include the following:
•Completed the MountainWest sale and paid down the remaining balance of the term loan used to initially fund the MountainWest acquisition
•Corporate and administrative expenses include additional loss on sale of MountainWest, including $28.4 million MountainWest Overthrust Pipeline settlement (pending FERC approval), and interest on the aforementioned MountainWest acquisition term loan
•Issued 4.1 million shares of common stock for net proceeds of $238.4 million
Natural gas distribution highlights include the following:
•42,000 first-time meters sets occurred over the past 12 months
•Operating margin increased $34 million in the first quarter of 2023, including Arizona rate relief
•$192 million capital investment during the quarter
•COLI results increased $4.4 million compared to the prior-year quarter
Utility infrastructure services highlights include the following:
•Record revenues of $653 million in the first quarter of 2023, an increase of $129 million, or 25%, compared to the first quarter of 2022
•Signed over $311 million of offshore wind and large gas customer contracts
•Costs continued to be impacted by inflation, including higher fuel, subcontractor, and equipment rental costs
Results of Natural Gas Distribution
Quarterly Analysis
| | | | | | | | | | | | | | |
| | Three Months Ended
March 31, |
| (Thousands of dollars) | | 2023 | | 2022 |
| Regulated operations revenues | | $ | 914,879 | | | $ | 676,539 | |
| Net cost of gas sold | | 501,169 | | | 297,121 | |
| Operating margin | | 413,710 | | | 379,418 | |
| Operations and maintenance expense | | 131,188 | | | 119,636 | |
| Depreciation and amortization | | 74,650 | | | 72,114 | |
| Taxes other than income taxes | | 22,740 | | | 21,652 | |
| Operating income | | 185,132 | | | 166,016 | |
| Other income (deductions) | | 18,443 | | | 1,315 | |
| Net interest deductions | | (38,622) | | | (26,610) | |
| Income before income taxes | | 164,953 | | | 140,721 | |
| Income tax expense | | 30,257 | | | 28,926 | |
| Contribution to consolidated results | | $ | 134,696 | | | $ | 111,795 | |
Results from natural gas distribution operations improved $23 million between the first quarters of 2023 and 2022. The improvement was primarily due to an increase in Operating margin and Other income (deductions), offset by an increase in Operations and maintenance, Depreciation and amortization, and Net interest deductions.
Operating margin increased $34.3 million quarter over quarter. Approximately $5 million of incremental margin was attributable to customer growth, including 42,000 first-time meter sets during the last twelve months. Combined rate relief added approximately $14 million of combined margin. Amounts collected from customers associated with previously unrecovered Vintage Steel Pipe (“VSP”) and Customer-Owned Yard Line (“COYL”) programs in Arizona ($4 million) also contributed to the improvement. Additionally, an $8 million out-of-period adjusting entry in the current quarter was made, which reduced Net cost of gas sold (See Basis of Presentation in Note 1 – Background, Organization, and Summary of Significant Accounting Policies in this Quarterly Report on Form 10-Q). Other differences include customer-provided fuel required for pipeline operations (offset in Operations and maintenance expense), and miscellaneous revenue and margin from customers outside the decoupling mechanisms.
Operations and maintenance expense increased $11.6 million between quarters, including approximately $4 million in fuel-related costs ($3 million of which is customer-provided fuel for pipeline operations, discussed above), $1.7 million in combined leak survey and line locating costs, $2.6 million primarily related to outside services/contractor costs in various areas of the business, as well as increases in insurance related claims ($1 million).
Depreciation and amortization expense increased $2.5 million, or 4%, between quarters, primarily due to a $533 million, or 6%, increase in average gas plant in service since the corresponding first quarter of 2022, offset by $647,000 in reduced amortization expense related to regulatory account balances. The increase in plant was attributable to pipeline capacity reinforcement work, franchise requirements, scheduled pipe replacement activities, and new infrastructure.
Other income increased $17 million. Interest income increased $9.7 million between quarters related to carrying charges associated with regulatory account balances, notably deferred purchased gas cost balances, which increased from $368 million existing as of March 31, 2022 to $970 million existing as of March 31, 2023. The non-service-related components of employee pension and other postretirement benefit costs decreased $5.3 million between quarters. Southwest also recognized a $4.4 million increase in COLI results in the current quarter compared to the comparable quarter in the prior year.
Net interest deductions increased $12 million in the first quarter of 2023, as compared to the prior-year quarter, primarily due to interest associated with $600 million of Senior Notes issued in March 2022, $300 million of Senior Notes issued in December 2022, and $300 million of Senior Notes issued in March 2023. Additionally, increased interest resulted from an increase in short-term debt, including a $450 million term loan issued in January 2023 (paid off in full in April 2023).
Results of Natural Gas Distribution
Twelve-Month Analysis
| | | | | | | | | | | | | | |
| | Twelve Months Ended March 31, |
| (Thousands of dollars) | | 2023 | | 2022 |
| Regulated operations revenues | | $ | 2,173,409 | | | $ | 1,676,397 | |
| Net cost of gas sold | | 993,264 | | | 572,007 | |
| Operating margin | | 1,180,145 | | | 1,104,390 | |
| Operations and maintenance expense | | 503,480 | | | 452,051 | |
| Depreciation and amortization | | 265,579 | | | 256,814 | |
| Taxes other than income taxes | | 84,285 | | | 81,308 | |
| Operating income | | 326,801 | | | 314,217 | |
| Other income (deductions) | | 10,244 | | | (3,794) | |
| Net interest deductions | | (127,892) | | | (102,004) | |
| Income before income taxes | | 209,153 | | | 208,419 | |
| Income tax expense | | 31,872 | | | 28,204 | |
| Contribution to consolidated results | | $ | 177,281 | | | $ | 180,215 | |
Contribution to consolidated net income from natural gas distribution operations decreased approximately $3 million between the twelve-month periods ended March 2023 and 2022. The decline was due primarily to increases in Operations and maintenance expense, Depreciation and amortization, and Net interest deductions, offset by an increase in Operating margin and Other income.
Operating margin increased $76 million between periods. Customer growth provided $15 million, and combined rate relief provided $27 million of incremental operating margin. Also contributing to the increase were customer late fees that were $2.4 million greater in the current period due to lifting the earlier moratorium on such fees in all jurisdictions. Approved VSP and COYL revenue in Arizona also contributed to the improvement between periods ($21 million). The $8 million out-of-period adjustment to Net cost of gas sold, noted earlier, also contributed to the increase. Offsetting these increases were lower recoveries associated with regulatory account balances ($4 million); an associated comparable decrease is also reflected in amortization expense between periods (discussed below).
Operations and maintenance expense increased $51 million between periods. In addition to general inflationary impacts and labor market challenges overall, specific increases include pipeline integrity, reliability, line location, and engineering services costs ($12 million), increased cost of fuel (nearly $8 million, almost half of which is used in our operations), an increase in the reserve for customer accounts deemed uncollectible ($7.8 million), approximately $8 million in contractor/professional services in various areas of the business, higher legal and claim-related costs ($6 million), employee travel and training costs ($2.5 million), and higher labor-related costs ($2.6 million).
Depreciation and amortization expense increased $8.8 million, or 3%, between periods primarily due to a $531 million, or 6%, increase in average gas plant in service since the corresponding period in the prior year, offset by a reduction ($4 million) in amortization of regulatory account balances, as discussed in regard to Operating margin above. The increase in gas plant was attributable to pipeline capacity reinforcement work, franchise requirements, scheduled pipe replacement activities, and new infrastructure.
Other income increased $14 million between the twelve-month periods of 2023 and 2022. Interest income increased $18.7 million between periods related to carrying charges associated with regulatory account balances, notably deferred purchased gas cost balances, which have increased substantially since the comparable period in the the prior year. Non-service-related components of employee pension and other postretirement benefit costs decreased $15.1 million between periods. Offsetting these impacts was a $5.1 million decline in COLI results between periods, a $9 million reserve for a software project deemed non-recoverable from utility operations, and a $3 million market adjustment on other property in 2022.
Net interest deductions increased $26 million between periods primarily due to $600 million of Senior Notes issued in March 2022, $300 million of Senior Notes issued in December 2022, and, to a lesser extent, $300 million of Senior Notes issued in March 2023. Other impacts include increased interest associated with a higher amount of short-term debt and higher rates on variable-rate debt overall, including under Southwest’s credit facility.
Income tax expense increased $3.7 million between the twelve-month periods ended March 31, 2023 and 2022, primarily due to amortization of excess accumulated deferred income taxes (“EADIT”) ($5.3 million), changes in Arizona and California state apportionment percentages of $3.2 million, and return to provision differences of $5.1 million. Income tax expense in both periods reflects that COLI results are recognized without tax consequences.
Results of Utility Infrastructure Services
Quarterly Analysis
| | | | | | | | | | | | | | |
| | Three Months Ended
March 31, |
| (Thousands of dollars) | | 2023 | | 2022 |
| Utility infrastructure services revenues | | $ | 653,293 | | | $ | 523,877 | |
| Operating expenses: | | | | |
| Utility infrastructure services expenses | | 603,680 | | | 503,232 | |
| Depreciation and amortization | | 37,870 | | | 37,612 | |
| Operating income (loss) | | 11,743 | | | (16,967) | |
| Other income (deductions) | | (680) | | | (486) | |
| Net interest deductions | | 22,376 | | | 11,131 | |
| Loss before income taxes | | (11,313) | | | (28,584) | |
| Income tax benefit | | (1,180) | | | (6,170) | |
| Net loss | | (10,133) | | | (22,414) | |
| Net income attributable to noncontrolling interests | | 1,739 | | | 1,072 | |
| Contribution to consolidated results | | $ | (11,872) | | | $ | (23,486) | |
Utility infrastructure services revenues increased $129.4 million in the first quarter of 2023 when compared to the prior-year quarter, driven primarily by a $51.7 million increase in electric infrastructure revenues and a $43.3 million increase in offshore wind revenue, which is reflected as a component of other revenues (refer to Note 3 – Revenue in this Quarterly Report on Form 10-Q). Offshore wind revenue stems from three multi-year contracts whereby Riggs Distler provides materials, subcontracts manufacturing, and self performs fabrication and assembly of secondary steel components onshore, with delivery at a port facility. The increase in electric infrastructure services revenues was due to growth from both new and existing customers as well as revenues of $30.6 million from emergency restoration services following tornado and other storm damage to customers’ above-ground utility infrastructure in and around the Gulf Coast and eastern regions of the U.S., compared to $14.1 million in storm restoration work in the prior-year quarter. Centuri’s revenues derived from storm-related services vary from period to period due to the unpredictable nature of weather-related events, and when this type of work is performed, it typically generates a higher profit margin than core infrastructure services, due to improved operating efficiencies related to equipment utilization and absorption of fixed costs. The current quarter also included increased gas infrastructure services revenues of $36.7 million primarily resulting from $29.7 million of revenue related to a new bid contract that commenced during the first quarter of 2023, as well as favorable weather in several operating locations, which allowed projects in those areas to be completed during an otherwise seasonally slow period.
Utility infrastructure services expenses increased $100.4 million in the first quarter of 2023 when compared to the prior year quarter, driven primarily by a higher volume of work. Subcontractor costs increased during the first quarter of 2023 compared to the prior-year quarter primarily due to increased work under offshore wind projects. Despite continued inflationary pressures, operating margin in the first quarter of 2023 improved due to changes in the mix of work and increased operating efficiencies related to emergency restoration services, as well as favorable weather conditions in other locations. Also included in total Utility infrastructure services expenses were general and administrative costs, which decreased approximately $0.1 million between quarters due to the full integration of Riggs Distler as well as the impact of cost saving measures implemented in 2022. Gains on sale of equipment in the first quarter of 2023 and 2022 (reflected as an offset to Utility infrastructure services expenses) were approximately $661,000 and $413,000, respectively.
The increase in net interest deductions of $11.2 million was primarily due to higher interest rates on outstanding variable-rate borrowings.
Income tax benefit decreased $5 million between quarters, primarily due to a reduction in pre-tax loss in 2023 and changes in state apportionment rates.
Results of Utility Infrastructure Services
Twelve-Month Analysis
| | | | | | | | | | | | | | |
| | Twelve Months Ended March 31, |
| (Thousands of dollars) | | 2023 | | 2022 |
| Utility infrastructure services revenues | | $ | 2,889,743 | | | $ | 2,318,563 | |
| Operating expenses: | | | | |
| Utility infrastructure services expenses | | 2,629,766 | | | 2,123,085 | |
| Depreciation and amortization | | 155,611 | | | 130,511 | |
| Operating income | | 104,366 | | | 64,967 | |
| Other income (deductions) | | (1,081) | | | 683 | |
| Net interest deductions | | 72,616 | | 30,508 | |
| Income before income taxes | | 30,669 | | | 35,142 | |
| Income tax expense | | 10,717 | | | 11,406 | |
| Net income | | 19,952 | | | 23,736 | |
| Net income attributable to noncontrolling interests | | 6,273 | | 5,943 | |
| Contribution to consolidated results | | $ | 13,679 | | | $ | 17,793 | |
Utility infrastructure services revenues increased $571.2 million in the current twelve-month period compared to the corresponding period of 2022, including a $408.4 million increase at Riggs Distler (acquired in August 2021), of which $132.9 million related to offshore wind projects that are reflected as a component of other revenues. Revenues from electric infrastructure services overall increased $216.6 million in the current twelve-month period when compared to the prior year, with $125.6 million attributable to Riggs Distler. Included in the incremental electric infrastructure revenues during the twelve-month period of 2023 was $86.1 million from emergency restoration services following storm damage to customers’ above-ground utility infrastructure in and around the Gulf Coast and eastern regions of the U.S. and Canada, as compared to $70.5 million in similar services during the twelve-month period in 2022. The remaining increase in revenue was attributable to continued growth with existing gas infrastructure customers under master service and bid agreements.
Utility infrastructure services expenses increased $506.7 million between periods. The overall increase included $373.7 million from Riggs Distler, and incremental costs related to the generally higher volume of work. Changes in the mix of work caused by customers’ supply chain challenges, as well as inflation, led to higher input costs including fuel and subcontractor expenses, as well as increased project-related travel and equipment rental costs incurred to fulfill electric infrastructure services. A loss of $7.5 million was incurred on a gas infrastructure bid project during the current twelve-month period due to higher costs than anticipated and scheduling delays. General and administrative costs, included in total Utility infrastructure services expenses, decreased approximately $3.4 million between comparative periods attributable to $13.9 million of professional fees incurred during the twelve-month period of 2022 in connection with the Riggs Distler acquisition that did not recur in 2023, offset by $6.1 million of strategic review and severance costs incurred in the current twelve-month period. Other administrative costs increased due to the growth in the business, including incremental costs incurred by Riggs Distler. Gains on sale of equipment (reflected as an offset to Utility infrastructure services expenses) were approximately $6.6 million and $5.8 million for the twelve-month periods of 2023 and 2022, respectively.
Depreciation and amortization expense increased $25.1 million between the current and prior-year twelve-month periods, of which $23.3 million relates to Riggs Distler.
Net interest deductions increased $42.1 million between periods due to incremental outstanding borrowings under Centuri’s $1.545 billion amended and restated secured revolving credit and term loan facility which funded the 2021 acquisition of Riggs Distler, in addition to higher interest rates on outstanding variable-rate borrowings.
Results of Pipeline and Storage
Quarterly Analysis
| | | | | | | | | | | | | | | | |
| | Three Months Ended
March 31, | | |
| (Thousands of dollars) | | 2023 | | 2022 | | |
| Regulated operations revenues | | $ | 35,132 | | | $ | 66,993 | | | |
| Operating expenses: | | | | | | |
| Net cost of gas sold | | 6,368 | | | 1,797 | | | |
| Operations and maintenance expense | | 11,378 | | | 24,312 | | | |
| Depreciation and amortization | | — | | | 12,920 | | | |
| Taxes other than income taxes | | 1,490 | | | 3,164 | | | |
| Goodwill impairment | | 21,215 | | | — | | | |
| Operating income (loss) | | (5,319) | | | 24,800 | | | |
| Other income (deductions) | | 486 | | | 543 | | | |
| Net interest deductions | | 2,200 | | | 4,382 | | | |
| Income (loss) before income taxes | | (7,033) | | | 20,961 | | | |
| Income tax expense | | 9,255 | | | 4,031 | | | |
| Contribution to consolidated results | | $ | (16,288) | | | $ | 16,930 | | | |
Operating results for the pipeline and storage segment for the first quarter of 2023 reflect activity from January 1, 2023 through February 13, 2023 (the last full day of ownership by the Company). Operating results included rate-regulated transmission and subscription storage revenues of $34 million and $62 million during the three months ended March 31, 2023 and 2022, respectively. Operating expenses include $2.6 million during the current quarter related to integration/stand-up costs leading up to the sale date. Depreciation and amortization was not recorded in 2023 as MountainWest was classified as held for sale during the holding period. Income tax expense includes the impact of book versus tax basis differences related to the sale completed in 2023. A discussion of the twelve months ended March 31, 2023 to the comparable prior-year period is omitted as the Company owned MountainWest for only three months of the twelve-month period ended March 31, 2022. For further impacts from the sale on MountainWest to Southwest Gas Holdings, Inc. in the post-closing period, refer to Note 7 – Segment Information.
Rates and Regulatory Proceedings
Southwest is subject to the regulation of the Arizona Corporation Commission (“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 changes (including the cost of natural gas purchased), 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 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 distribution operations are disclosed above.
Arizona Jurisdiction
Arizona General Rate Case. Southwest filed a general rate case application in December 2021, primarily to reflect in rates the substantial capital investments that were made since the end of the test year in an earlier case, including investments in a customer information system implemented in May 2021. At a hearing held in September 2022, Southwest, the Utilities Division Staff (the “Staff”), and the Residential Utility Consumer Office jointly stipulated to several issues, including a target capital structure consisting of 50% equity and 50% debt; a 9.30% return on equity; and foregoing an acquisition premium related to the
recent Graham County acquisition as well as recovery of $12 million of waived late fees on customer account balances that would have otherwise applied to delinquent accounts in the absence of a COVID-19 moratorium on such fees. Among the uncontested issues identified prior to the hearing were the continuation of the Delivery Charge Adjustment (“DCA”), Southwest’s full revenue decoupling mechanism, the continuation of the existing rate design (with the exception of an updated year-round Low Income Ratepayer Assistance program), and Southwest’s alternate property tax expense calculation, reflecting actual incurred property tax expense in 2021, instead of a pro-forma adjustment reflecting forecasted property tax expense. Approximately $12 million in costs related to the Liquefied Natural Gas facility deferred in an authorized regulatory asset will be amortized over four years. The ACC’s final order authorized a $54.3 million increase, with new rates effective February 1, 2023.
Delivery Charge Adjustment. The DCA is filed each April, which along with other reporting requirements, contemplates a rate to recover/return the over- or under-collected margin tracker (decoupling mechanism) balance. An April 2022 request proposed a rate to return $10.5 million, the over-collected balance existing at the end of the first quarter 2022, which became effective July 1, 2022. A filing was made prior to the end of April 2023 to request a rate to address the over-collected balance of $53.5 million as of March 31, 2023.
Tax Reform. A Tax Expense Adjustor Mechanism (“TEAM”) was approved in Southwest’s 2019 general rate case to timely recognize tax rate changes resulting from federal or state tax legislation following the TEAM implementation. In addition, the TEAM tracks and returns/recovers the revenue requirement impact of changes in amortization of EADIT (including that which resulted from 2017 U.S. federal tax reform) compared to the amount authorized in the most recently concluded rate case. Following inaugural surcredit rate establishment under the TEAM mechanism, in December 2022, Southwest filed its most recent TEAM rate application, proposing to update the TEAM surcredit to refund $6.5 million of estimated net EADIT savings, which was approved by the ACC and will be effective May 1, 2023.
Customer-Owned Yard Line (“COYL”) Program. Southwest originally 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. The COYL program has been subject to proceedings to recover investments since that time. In February 2023, Southwest requested approval to recover the outstanding revenue requirement of approximately $4.3 million associated with 2022 COYL investments, which will increase the COYL recovery rate. The new rate is anticipated to become effective June 1, 2023.
Vintage Steel Pipe (“VSP”) Program. Southwest received approval, in connection with its 2016 Arizona general rate case, to implement a VSP replacement program, due to having a substantial amount of pre-1970s vintage steel pipe in Arizona. However, as part of Southwest’s 2020 general rate case decision, the ACC ultimately decided to discontinue the accelerated VSP program. A filing in May 2021 proposed the recovery of previously unrecovered surcharge revenue relating to investments during 2019 and 2020, with approximately $60 million to be recovered over a three-year period. In November 2021, the ACC approved full recovery over the proposed three-year timeline with updated rates, which became effective in March 2022.
Graham County Utilities. In April 2021, Southwest and Graham County Utilities, Inc. (“GCU”) filed a joint application with the ACC for approval to transfer assets of GCU to Southwest and extend Southwest’s Certificate of Public Convenience and Necessity to serve the more than 5,000 associated customers, for a purchase price of $3.5 million. Approval of the application by the ACC was received in December 2021, with final transfer in mid-January 2022. Former GCU customers retained their existing rates while Southwest’s most recent rate case was processed; the customers moved to Southwest’s rates effective March 1, 2023.
PGA Modification. On March 1, 2023, Southwest filed a request to adjust the interest rate applicable to the outstanding Purchased Gas Adjustment (“PGA”) balance to more closely match the interest expense incurred to finance the balance. In the alternative, the filing requests an expansion of the current gas cost balancing account (“GCBA”) adjustment to clear the then existing $351 million balance over one year, which would result in an increase of the current GCBA adjustment rate of $0.10 per therm to more than $0.50 per therm until the balance drops below $10 million, at which time the GCBA adjustment rate would be set to $0.00 per therm. The GCBA is in addition to ongoing deferred energy rates updated monthly. Expedited treatment was requested with a proposed June 1, 2023 implementation.
California Jurisdiction
Attrition Filing. Following the 2021 implementation of rates approved as part of the general rate case, and the continuing annual Post Test Year (“PTY”) attrition increases of 2.75% indicated above, the first such increase following the rate case effective date began in January 2022, with the most recent annual attrition increase effective January 1, 2023. The PTY increase associated with the North Lake Tahoe Lateral revenue requirement became effective February 1, 2023.
Customer Data Modernization Initiative (“CDMI”). In April 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 related to the earlier multi-year project (including a new customer information system, ultimately implemented in May 2021). Effective October 2019, the CPUC granted a memorandum account, which allowed 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 (initially estimated at $19 million). The balance tracked in the memorandum account was transferred to the two-way balancing account in July 2020. A rate to begin recovering the balance accumulated through June 30, 2020 was established and made effective September 1, 2020, and updated multiple times since, including in January 2023. This rate is expected to be updated at least annually.
Carbon Offset Program. In March 2022, Southwest filed an application to seek approval to offer a voluntary program to California customers to purchase carbon offsets in an effort to provide customers additional options to offset their respective greenhouse gas (“GHG”) emissions. A request to establish a two-way balancing account to track program-related costs and revenues was included as part of the application. The CPUC issued a decision dismissing Southwest’s application without prejudice. Southwest anticipates filing a new application in 2023 addressing concerns raised by third parties as part of the earlier request, which included a request to demonstrate that purchased offsets would result in GHG emissions reductions.
Building Decarbonization. A CPUC decision was issued regarding the elimination of monetary allowances for gas line extensions, a 10-year refundable payment option, and the 50% discount payment option for both residential and non-residential customers of all California gas utilities. This applies to new applications for gas line extensions submitted on or after July 1, 2023. Although this decision eliminates the various allowances related to line extensions, it does not preclude extending natural gas service to customers.
Residential Disconnection Protections. A decision was issued by the CPUC establishing disconnection protections for residential customers of small and multi-jurisdictional utilities, including Southwest. A similar decision was adopted for four large California utilities in 2020. This decision imposes an annual disconnection cap and prohibits the utility from assessing credit deposits for residential customers establishing or re-establishing service, and prohibits the assessment of reconnection fees for residential customers, among other provisions. The decision, however, also provides authorization to establish a two-way balancing account to track residential uncollectible charges with the first rates expected to be implemented January 1, 2024. The decision also authorized a memorandum account to track uncollected reconnection charges for possible future recovery in Southwest’s next general rate case.
Nevada Jurisdiction
Nevada General Rate Case. Southwest concluded its most recent Nevada general rate case in February 2022, providing for a statewide revenue increase of $14.05 million, a return on common equity of 9.40% relative to a 50% target equity ratio, and continuation of Southwest’s full revenue decoupling mechanism, the General Revenues Adjustment (“GRA”). The stipulation was approved by the PUCN, and new rates became effective April 1, 2022. The PUCN’s order did not include recovery of the approximate $6.6 million in deferred late payment charges related to a regulatory asset associated with a COVID-19 moratorium on disconnections previously in place.
General Revenues Adjustment. As noted above, the continuation of the GRA was affirmed as part of Southwest’s most recent general rate case with an expansion to include a large customer class (with average monthly throughput requirements greater than 15,000 therms), effective April 2022. Southwest makes Annual Rate Adjustment (“ARA”) filings to update rates to recover or return amounts associated with various regulatory mechanisms, including the GRA. Southwest made its most recent ARA filing in November 2022 related to balances as of September 30, 2022. Given the magnitude of the outstanding balances, further discussion with the parties resulted in a settlement of the issues and utilizing a more current balance as of January 2023 to better align the rates implemented with the existing balance. Recovery rates and adjustments thereto as part of the ARA primarily impact cash flows but not net income overall.
Conservation and Energy Efficiency. 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 its November 2022 ARA filing, Southwest proposed an annualized revenue increase of $139,000 and a decrease of $290,000 for southern and northern Nevada, respectively. A stipulation related to the conservation and energy efficiency costs and other ARA-related mechanisms was reached with the parties and approved by the PUCN with rates effective July 1, 2023. Separately, in May 2022, Southwest filed an application seeking approval of its annual Conservation and Energy Efficiency Plan Report for 2021, with no proposed modifications to the previously approved $1.3 million annual budget for years 2022-2024. The parties reached a stipulation that was approved by the PUCN in July 2022.
Carbon Offset Program. In June 2021, Southwest filed an application to seek approval to offer a voluntary program to northern and southern Nevada customers to purchase carbon offsets in an effort to provide customers additional options to offset their
respective GHG emissions. A request to establish a regulatory asset to track program-related costs and revenues was included as part of the application. The parties reached a stipulation that was approved by the PUCN in December 2021, approving Southwest’s proposal. The program opened for customer participation in the fourth quarter of 2022.
FERC Jurisdiction
General Rate Case. Great Basin Gas Transmission Company (“Great Basin”), a wholly owned subsidiary of Southwest, reached an agreement in principle with the FERC Staff providing that its three largest transportation customers and all storage customers would be required to have primary service agreement terms of at least five years, that term-differentiated rates would continue generally, and included a 9.90% pre-tax rate of return. Interim rates were made effective February 2020. As part of the settlement, Great Basin will not file a rate case later than May 31, 2025.
MountainWest Overthrust Pipeline. On September 22, 2022, during the period of Southwest Gas Holdings’ ownership of the MountainWest entities, the FERC issued an order initiating an investigation, pursuant to section 5 of the Natural Gas Act, to determine whether rates charged by MountainWest Overthrust Pipeline, LLC, a subsidiary of MountainWest, were just and reasonable and setting the matter for hearing (the “Section 5 Rate Case”). Unless earlier settled by the parties, a hearing on the matter was to commence in August 2023 with an initial decision from the presiding administrative law judge due by November 14, 2023. Under the terms of the purchase and sale agreement entered into in connection with the MountainWest sale, the Company became obligated, for a period of four years following the closing of the MountainWest sale, to indemnify Williams and MountainWest for any damages and liabilities resulting from the Section 5 Rate Case, including any reduction to the current applicable rate, up to a cap of $75 million. Williams, in collaboration with the Company, agreed to a settlement of the Section 5 Rate Case, which is pending approval by the FERC. As a result of the settlement, the Company recorded a charge of $28.4 million, an amount for which it is now expected to be obligated, which is included in Goodwill impairment and loss on sale on the Company’s Consolidated Statements of Income for the three- and twelve- months ended March 31, 2023.
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. Balances are recovered from or refunded to customers on an ongoing basis with interest. As of March 31, 2023, under-collections in each of Southwest’s service territories resulted in an asset of $970 million on the Company’s and Southwest’s Condensed Consolidated Balance Sheets. See also Deferred Purchased Gas Costs in Note 1 – Background, Organization, and Summary of Significant Accounting Policies in this quarterly report on Form 10-Q.
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 operating margin. However, gas cost deferrals and recoveries can impact comparisons between periods of individual consolidated income statement components. These include Regulated operations revenues, Net cost of gas sold, Net interest deductions, and Other income (deductions).
The following table presents Southwest’s outstanding PGA balances receivable/(payable):
| | | | | | | | | | | | | | | | | | | | |
| (Thousands of dollars) | | March 31, 2023 | | December 31, 2022 | | March 31, 2022 |
| Arizona | | $ | 417,931 | | | $ | 292,472 | | | $ | 255,472 | |
| Northern Nevada | | 80,540 | | | 27,384 | | | 13,700 | |
| Southern Nevada | | 415,146 | | | 122,959 | | | 93,153 | |
| California | | 56,722 | | | 7,305 | | | 5,629 | |
| | $ | 970,339 | | | $ | 450,120 | | | $ | 367,954 | |
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, Southwest has undertaken significant pipe replacement activities to fortify system integrity and reliability, including on an accelerated basis in association with certain gas infrastructure replacement programs. This activity has necessitated the issuance of both debt and equity securities to supplement cash flows from operations. More recently, a number of conditions, such as winter storms and market forces (including historically low storage levels) have caused gas prices to spike and remain higher than previous historical levels. The
Company’s capitalization strategy is to maintain an appropriate balance of equity and debt to preserve investment-grade credit ratings, which help minimize interest costs.
Cash Flows
Southwest Gas Holdings, Inc.:
Operating Cash Flows. Cash flows from consolidated operating activities decreased $372 million in the first three months of 2023 as compared to the same period of 2022. The decline in cash flows primarily resulted from the change in purchased gas costs for Southwest, including amounts incurred and deferred, as well as impacts related to when amounts are incorporated in customer bills to recover or return deferred balances. Gas costs recovered from customers were higher in both periods compared to earlier historical periods, but amounts expended for gas purchases substantially increased in the first quarter of 2023, reflected also as higher Deferred purchased gas cost balances in advance of rates to recover the balance. Other impacts include changes in components of working capital overall.
Corporate and administrative expenses/outflows for Southwest Gas Holdings, Inc. in the three- and twelve-month periods ended March 31, 2023 mainly include charges related to the MountainWest sale that closed in February 2023.
Investing Cash Flows. Cash flows from consolidated investing activities increased $1 billion in the first three months of 2023 as compared to the same period of 2022. The overall increase related to $1.06 billion in proceeds received in connection with the MountainWest sale (which amount is net of cash sold), partially offset by an increase in capital expenditures in both the natural gas distribution and utility infrastructure services segments.
Financing Cash Flows. Cash flows from consolidated financing activities decreased $1.1 billion in the first three months of 2023 as compared to the same period of 2022. The overall decrease was primarily due to the repayment ($1.1 billion) of the term loan entered into by Southwest Gas Holdings, Inc. in November 2021 in connection with the acquisition of MountainWest. Other impacts that offset this decrease were proceeds from the issuance of common stock in an underwritten public offering in March 2023 and debt proceeds by Southwest from the 364-day $450 million term loan to address an escalation in gas purchases (entered into in January 2023 and repaid in full in April 2023). The first quarter of 2023 also included $300 million of Senior Notes (the “March 2023 Notes”) issued by Southwest compared to $600 million in the first quarter of 2022. Other cash flows relate to borrowings and repayment under the companies’ credit facilities.
The capital requirements and resources of the Company generally are determined independently for the individual business segments. Each business segment is generally responsible for securing its own debt financing sources. However, the holding company may raise funds through stock issuances or other external financing sources in support of each business segment.
Southwest Gas Corporation:
Operating Cash Flows. Cash flows from operating activities decreased $393 million in the first three months of 2023 as compared to the same period of 2022. The decline in operating cash flows was primarily attributable to Deferred purchased gas costs changes (as discussed above), as well as to other working capital changes.
Investing Cash Flows. Cash used in investing activities increased $64 million in the first three months of 2023 as compared to the same period of 2022. The change was primarily due to increases in capital expenditures in 2023 and decreases related to customer advances for construction (amounts collected and/or returned) as compared to the same period in the prior year. See also Gas Segment Construction Expenditures, and Debt Maturities, and Financing below.
Financing Cash Flows. Net cash provided by financing activities increased $31 million in the first three months of 2023 as compared to the same period of 2022. The increase was primarily due to Southwest’s $450 million term loan borrowing in January 2023 offset by $225 million payment of the term loan entered into in March 2021, along with the issuance of the March 2023 Notes noted above, and borrowing and repayment activity under the credit facility. See Note 5 – Debt.
Gas Segment Construction Expenditures, Debt Maturities, and Financing
During the twelve-month period ended March 31, 2023, construction expenditures for the natural gas distribution segment were $734 million (not including amounts incurred for capital expenditures not yet paid). The majority of these expenditures represented costs associated with the replacement of existing transmission and distribution pipeline facilities to fortify system integrity and reliability, as well as other general plant expenditures.
Management estimates natural gas segment construction expenditures during the three-year period ending December 31, 2025 will be approximately $2.0 billion. Of this amount, approximately $665 million to $685 million is expected to be incurred during calendar year 2023. Southwest plans to continue to request regulatory support to undertake projects, or to accelerate projects as necessary for the improvement of system flexibility and reliability, or to expand, where relevant, to unserved or underserved areas. Southwest may expand existing, or initiate new, programs. Significant replacement activities are expected to
continue well beyond the next few years. See also Rates and Regulatory Proceedings. During the three-year period ending December 31, 2025, cash flows from operating activities of Southwest are expected to provide approximately 77% of the funding for gas operations of Southwest and total construction expenditures and dividend requirements. During the quarter ended March 31, 2023, Southwest entered into a 364-day $450 million term loan agreement, and also fully paid off the March 2021 term loan, each of which were initiated to fund spikes in natural gas purchases. Additional cash requirements, including construction-related, and pay down or refinancing of debt, 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 additional external financings will be dependent on a number of factors, including the cost of gas purchases, conditions in capital markets, timing and amount of rate relief, timing and amount of surcharge collections from, or amounts returned to, customers related to other regulatory mechanisms and programs, as well as growth levels in Southwest’s service areas and earnings. External financings may include the issuance of debt securities, bank and other short-term borrowings, and other forms of financing.
Dividend Policy
Dividends are payable on the Company’s common stock at the discretion of the Board. In setting the dividend rate, the Board considers, among other factors, current and expected future earnings levels, our ongoing capital expenditure plans, expected external funding needs, and our ability to maintain investment-grade credit ratings and liquidity. The Company has paid dividends on its common stock since 1956. In February 2023, the Board determined to maintain the quarterly dividend at $0.62 per share, effective with the June 2023 payment.
Liquidity
Several factors (some of which are out of the control of the Company) that could significantly affect liquidity in the future include: variability of natural gas prices, changes in ratemaking policies of regulatory commissions, regulatory lag, customer growth in the natural gas distribution segment, 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.
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 March 31, 2023, the combined balance in the PGA accounts totaled an under-collection of $970 million. See PGA Filings for more information. The market price of natural gas spiked as a result of numerous market forces including historically low storage levels, unexpected upstream pipeline maintenance events, and cold weather conditions across the western region in the latter part of 2022 and continuing into January 2023. As a result of this increase in pricing, in January 2023, Southwest entered into a 364-day $450 million term loan in order to fund the incremental cost. This indebtedness was repaid in April 2023 (refer to Note 5 – Debt in this Quarterly Report on Form 10-Q). We may be required to incur additional indebtedness in connection with future spikes in natural gas prices as a result of extreme weather events or otherwise.
In March 2023, Southwest issued $300 million aggregate principal amount of 5.450% Senior Notes. The notes will mature in March 2028. Southwest used the net proceeds to repay amounts outstanding under Southwest’s credit facility and the remainder for general corporate purposes.
In April 2023, Southwest Gas Holdings, Inc. entered into a $550 million Term Loan Credit Agreement that matures in October 2024. Southwest Gas Holdings, Inc. utilized a majority of the proceeds to make an equity contribution to Southwest. On April 17, 2023, Southwest utilized the equity contribution to repay, in full, amounts outstanding under its $450 million 364-day term loan entered into in January 2023, with the remainder of the equity contribution used for working capital and general corporate purposes.
Southwest Gas Holdings, Inc. has a credit facility with a borrowing capacity of $300 million that expires in December 2026. This facility is intended for short-term financing needs. At March 31, 2023, $18 million was outstanding under this facility.
Southwest has a credit facility with a borrowing capacity of $400 million, which expires in April 2025. Southwest designates $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) during the first three months of 2023 was $150 million. The maximum amount outstanding on the short-term portion of the credit facility during the first three months of 2023 was $75 million. At March 31, 2023, no borrowings were outstanding on the long-term portion or the short-term portion of the facility. The credit facility can be used as necessary to meet liquidity requirements, including temporarily financing under-collected PGA balances, or meeting the refund needs of over-collected balances. The credit facility has generally been adequate for Southwest’s working capital needs outside of funds raised through operations and
other types of external financing. 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 is 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 March 31, 2023, there were no borrowings outstanding under this program.
Centuri has a senior secured revolving credit and term loan multi-currency facility. The line of credit portion comprises $400 million; associated amounts borrowed and repaid are available to be re-borrowed. The term loan facility portion provided approximately $1.145 billion in financing. The term loan facility expires on August 27, 2028 and the revolving credit facility expires on August 27, 2026. This multi-currency facility allows the borrower to request loan advances in either Canadian dollars or U.S. dollars. The obligations under the credit agreement are secured by present and future ownership interests in substantially all direct and indirect subsidiaries of Centuri, substantially all of the tangible and intangible personal property of each borrower, certain of their direct and indirect subsidiaries, and all products, profits, and proceeds of the foregoing. Centuri assets securing the facility at March 31, 2023 totaled $2.4 billion. The maximum amount outstanding on the combined facility during the first three months of 2023 was $1.074 billion. As of March 31, 2023, $19 million was outstanding on the revolving credit facility, in addition to $1.003 billion that was outstanding on the term loan portion of the facility. Also at March 31, 2023, there was approximately $312 million, net of letters of credit, available for borrowing under the line of credit.
In the first quarter of 2023, the Company paid down (primarily with proceeds from the MountainWest sale) the remaining balance on the $1.6 billion term loan entered into in November 2021 in connection with the acquisition of MountainWest.
In March 2023, the Company issued through a separate prospectus supplement under the Universal Shelf, an aggregate of 4.1 million shares of common stock, at an underwritten public offering price of $60.12 per share, resulting in net proceeds to the Company of $238.4 million, net of an underwriter’s discount of $8.3 million and estimated expenses of the offering. The Company used the net proceeds to repay outstanding amounts under the Company’s credit facility, with remaining amounts used to pay a residual portion of amounts outstanding under the term loan entered into in connection with the MountainWest acquisition, and the remainder of the proceeds were used for working capital and other general corporate purposes.
In April 2021, the Company entered into a Sales Agency Agreement between the Company and BNY Mellon Capital Markets, LLC and J.P. Morgan Securities LLC (the “Equity Shelf Program”) for the offer and sale of up to $500 million of common stock from time to time in at-the-market offerings under the related prospectus supplement filed with the SEC. There was no activity under this multi-year program during the first quarter of 2023. Net proceeds from the sale of shares of common stock under the Equity Shelf Program are intended for general corporate purposes, including the acquisition of property for the construction, completion, extension, or improvement of pipeline systems and facilities located in and around the communities served by Southwest, as well as for repayment or repurchase of indebtedness (including amounts outstanding from time to time under the credit facilities, senior notes, or other indebtedness), and to provide for working capital. The Company had approximately $341.8 million available under the program as of March 31, 2023. See Note 4 – Common Stock for more information.
Interest rates for Centuri’s term loan contain LIBOR-based rates. Certain LIBOR-based rates were discontinued as a benchmark or reference rate after 2021, while other LIBOR-based rates are scheduled to be discontinued after June 2023. As of March 31, 2023, the Company had $1.003 billion in aggregate outstanding borrowings under Centuri’s term loan facility. The conversion to an alternate rate is not expected to have a material impact on its financial condition or results of operations; however, the alternative rate may be less predictable or less attractive than LIBOR.
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 plans to refinance near-term maturities, to spin-off Centuri from the Company, those regarding operating margin patterns, customer growth, the composition of our customer base, price volatility, seasonal patterns, the ability to pay debt, the Company’s COLI strategy, the magnitude of future acquisition or divestiture purchase price true-ups or post-closing payments and related impairments or losses related thereto, estimates regarding contractual commitments for the MountainWest Overthrust Pipeline
rate case settlement, replacement market and new construction market, impacts from pandemics, including on our employees, customers, business, financial position, earnings, bad debt expense, work deployment and related uncertainties, expected impacts of valuation adjustments associated with any redeemable noncontrolling interests, the profitability of storm work, mix of work, or absorption of fixed costs by larger infrastructure services customers including Southwest, the impacts of U.S. tax reform including disposition in any regulatory proceeding and bonus depreciation tax deductions, the impact of recent Pipeline and Hazardous Materials Safety Administration rulemaking, the amounts and timing for completion of estimated future construction expenditures, plans to pursue infrastructure programs or programs under SB 151 legislation, forecasted operating cash flows and results of operations, net earnings impacts or recovery of costs from gas infrastructure replacement and VSP programs and surcharges, funding sources of cash requirements, amounts generally expected to be reflected in future period revenues from regulatory rate proceedings including amounts requested or settled from recent and ongoing general rate cases or other regulatory proceedings, rates and surcharges, PGA administration, recovery and timing, and other rate adjustments, sufficiency of working capital and current credit facilities or the ability to cure negative working capital balances, 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 existing at-the-market equity program or otherwise, future dividends or increases and the Board’s current payout strategy, pension and postretirement benefits, certain impacts of tax acts, the effect of any other rate changes or regulatory proceedings, contract or construction change order negotiations, impacts of accounting standard updates, statements regarding future gas prices, gas purchase contracts and pipeline imbalance charges or claims related thereto, recoverability of regulatory assets, the impact of certain legal proceedings or claims, and the timing and results of future rate hearings, including any ongoing or future general rate cases and other proceedings, and statements regarding pending 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, inflation, interest rates and related government actions, sufficiency of labor markets and ability to timely hire qualified employees or similar resources, acquisition and divestiture decisions including prices paid or received, adjustments related thereto, and their impacts to impairments, write-downs, or losses generally, the impacts of pandemics including that which may result from a restriction by government officials or otherwise, including impacts on employment in our territories, the health impacts to our customers and employees, the ability to collect on customer accounts due to the suspension or lifted moratorium on late fees or service disconnection or otherwise in any or all jurisdictions, the ability to obtain regulatory recovery of related costs, the ability of the infrastructure services business to conduct work and the impact of a delay or termination of work, and decisions of Centuri customers (including Southwest) as to whether to pursue capital projects due to economic impacts resulting from a pandemic or otherwise, the ability to recover and timing thereof related to costs associated with the PGA mechanisms or other regulatory assets or programs, the effects of regulation/deregulation, governmental or regulatory policy regarding pipeline safety, greenhouse gas emissions, natural gas, including potential prohibitions on the use of natural gas by customers or potential customers, including related to electric generation or natural gas appliances, or regarding alternative energy, the regulatory support for ongoing infrastructure programs or expansions, the timing and amount of rate relief, the impact of other regulatory proceedings, including with regard to the MountainWest Overthrust Section 5 rate case before the FERC, 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 credit rating actions and conditions in the capital markets on financing costs, the impact of variable rate indebtedness with a discontinuance of LIBOR including in relation to amounts of indebtedness then outstanding, changes in construction expenditures and financing, levels of or changes in operations and maintenance expenses, or other costs, including fuel costs and other costs impacted by inflation or otherwise, geopolitical influences on the business or its costs, effects of pension or other postretirement benefit expense forecasts or plan modifications, accounting changes and regulatory treatment related thereto, currently unresolved and future liability claims and disputes, 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, projections about acquired business’ earnings, or those that may be planned, future acquisition-related costs, differences between the actual experience and projections in costs to integrate or stand-up portions of newly acquired business operations, impacts of changes in the value of any redeemable noncontrolling interests 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 and impacts from work awarded or failing to be awarded from significant customers (collectively, including from Southwest) or related to significant projects, the mix of work awarded, the amount of work awarded to Centuri following the lifting of work stoppages or reduction, the result of productivity inefficiencies from regulatory requirements, customer supply chain challenges, or otherwise, delays or challenges in commissioning individual projects, acquisitions and management’s plans related thereto, the ability of management to
successfully finance, close, and assimilate any acquired businesses, the timing and ability of management to successfully consummate the Centuri spin-off, the impact on our stock price or our credit ratings due to undertaking or failing to undertake acquisition or divestiture activities or other strategic endeavors, the impact on our stock price, costs, actions or disruptions or continuation thereof related to significant stockholders and their activism, 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 or plans relating to its financing and operating expenses will continue, proceed as planned, or cease to continue, or fail to be alleviated, 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, 2022.
All forward-looking statements in this quarterly report are made as of the date hereof, based on information available to the Company and Southwest as of the date hereof, and the Company and Southwest assume 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).
