10-Q 1 d401099d10q.htm 10-Q 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

Form 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

 

Commission

File Number

  

Exact name of registrant as specified in its charter and

principal office address and telephone number

  

State of

Incorporation

    

I.R.S.

Employer Identification No.

 
001-37976   

Southwest Gas Holdings, Inc.

     California        81-3881866  
  

5241 Spring Mountain Road

     
  

Post Office Box 98510

     
  

Las Vegas, Nevada 89193-8510

     
    

(702) 876-7237

                 

1-7850

  

Southwest Gas Corporation

    

California

      

88-0085720

 
  

5241 Spring Mountain Road

     
  

Post Office Box 98510

     
  

Las Vegas, Nevada 89193-8510

     
   (702) 876-7237      

 

 

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

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

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

Southwest Gas Holdings, Inc.:

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

Smaller reporting company

 

Emerging growth company

 

    

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

Southwest Gas Corporation:

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

Smaller reporting company

 

Emerging growth company

 

    

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

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

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

Southwest Gas Holdings, Inc. Common Stock, $1 Par Value, 47,583,119 shares as of July 28, 2017.

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

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

 

 

 

 


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

FILING FORMAT

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

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

 

2


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Thousands of dollars, except par value)

(Unaudited)

 

     JUNE 30,
2017
    DECEMBER 31,
2016
 

ASSETS

    

Utility plant:

    

Gas plant

   $ 6,349,303     $ 6,193,564  

Less: accumulated depreciation

     (2,202,909     (2,172,966

Acquisition adjustments, net

     119       196  

Construction work in progress

     111,041       111,177  
  

 

 

   

 

 

 

Net utility plant

     4,257,554       4,131,971  
  

 

 

   

 

 

 

Other property and investments

     362,891       342,343  
  

 

 

   

 

 

 

Current assets:

    

Cash and cash equivalents

     29,702       28,066  

Accounts receivable, net of allowances

     281,882       285,145  

Accrued utility revenue

     33,600       76,200  

Income taxes receivable, net

     6,253       4,455  

Deferred purchased gas costs

     5,956       2,608  

Prepaids and other current assets

     126,192       136,833  
  

 

 

   

 

 

 

Total current assets

     483,585       533,307  
  

 

 

   

 

 

 

Noncurrent assets:

    

Goodwill

     143,583       139,983  

Deferred income taxes

     1,365       1,288  

Deferred charges and other assets

     416,261       432,234  
  

 

 

   

 

 

 

Total noncurrent assets

     561,209       573,505  
  

 

 

   

 

 

 

Total assets

   $ 5,665,239     $ 5,581,126  
  

 

 

   

 

 

 

CAPITALIZATION AND LIABILITIES

    

Capitalization:

    

Common stock, $1 par (authorized—60,000,000 shares; issued and outstanding—47,583,119 and 47,482,068 shares)

   $ 49,213     $ 49,112  

Additional paid-in capital

     911,095       903,123  

Accumulated other comprehensive income (loss), net

     (44,962     (48,008

Retained earnings

     801,222       759,263  
  

 

 

   

 

 

 

Total Southwest Gas Holdings, Inc. equity

     1,716,568       1,663,490  

Noncontrolling interest

     (2,312     (2,217
  

 

 

   

 

 

 

Total equity

     1,714,256       1,661,273  

Redeemable noncontrolling interest

     20,149       22,590  

Long-term debt, less current maturities

     1,685,698       1,549,983  
  

 

 

   

 

 

 

Total capitalization

     3,420,103       3,233,846  
  

 

 

   

 

 

 

Current liabilities:

    

Current maturities of long-term debt

     27,236       50,101  

Short-term debt

     2,500       —    

Accounts payable

     135,738       184,669  

Customer deposits

     71,195       72,296  

Income taxes payable

     —         1,909  

Accrued general taxes

     40,545       42,921  

Accrued interest

     17,150       17,939  

Deferred purchased gas costs

     20,628       90,476  

Other current liabilities

     175,043       168,064  
  

 

 

   

 

 

 

Total current liabilities

     490,035       628,375  
  

 

 

   

 

 

 

Deferred income taxes and other credits:

    

Deferred income taxes and investment tax credits

     891,217       840,653  

Accumulated removal costs

     310,000       308,000  

Other deferred credits and other long-term liabilities

     553,884       570,252  
  

 

 

   

 

 

 

Total deferred income taxes and other credits

     1,755,101       1,718,905  
  

 

 

   

 

 

 

Total capitalization and liabilities

   $ 5,665,239     $ 5,581,126  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

 

3


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

 

     THREE MONTHS ENDED     SIX MONTHS ENDED     TWELVE MONTHS ENDED  
     JUNE 30,     JUNE 30,     JUNE 30,  
     2017     2016     2017     2016     2017     2016  

Operating revenues:

            

Gas operating revenues

   $ 260,162     $ 255,648     $ 722,764     $ 780,748     $ 1,263,428     $ 1,395,629  

Construction revenues

     300,307       292,100       492,442       498,248       1,133,272       1,074,168  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     560,469       547,748       1,215,206       1,278,996       2,396,700       2,469,797  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

            

Net cost of gas sold

     69,421       71,416       216,300       285,016       328,405       486,048  

Operations and maintenance

     103,060       98,744       212,210       199,541       414,393       397,886  

Depreciation and amortization

     58,082       72,559       130,560       147,919       271,773       283,608  

Taxes other than income taxes

     14,497       12,987       29,279       27,000       54,655       50,982  

Construction expenses

     272,001       263,926       463,957       457,308       1,031,072       955,332  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     517,061       519,632       1,052,306       1,116,784       2,100,298       2,173,856  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     43,408       28,116       162,900       162,212       296,402       295,941  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income and (expenses):

            

Net interest deductions

     (18,655     (18,221     (37,369     (35,942     (75,087     (72,127

Other income (deductions)

     2,047       2,470       5,912       4,191       11,190       4,636  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income and (expenses)

     (16,608     (15,751     (31,457     (31,751     (63,897     (67,491
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     26,800       12,365       131,443       130,461       232,505       228,450  

Income tax expense

     8,679       3,266       44,317       46,007       76,778       81,508  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     18,121       9,099       87,126       84,454       155,727       146,942  

Net income (loss) attributable to noncontrolling interests

     257       156       (46     65       903       1,168  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Southwest Gas Holdings, Inc.

   $ 17,864     $ 8,943     $ 87,172     $ 84,389     $ 154,824     $ 145,774  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 0.38     $ 0.19     $ 1.83     $ 1.78     $ 3.26     $ 3.08  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 0.37     $ 0.19     $ 1.82     $ 1.77     $ 3.24     $ 3.06  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share

   $ 0.495     $ 0.450     $ 0.990     $ 0.900     $ 1.890     $ 1.710  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average number of common shares outstanding

     47,571       47,473       47,550       47,455       47,516       47,347  

Average shares outstanding (assuming dilution)

     47,884       47,811       47,874       47,787       47,857       47,693  

 

4


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Thousands of dollars)

(Unaudited)

 

     THREE MONTHS ENDED     SIX MONTHS ENDED     TWELVE MONTHS ENDED  
     JUNE 30,     JUNE 30,     JUNE 30,  
     2017     2016     2017     2016     2017     2016  

Net income

   $ 18,121     $ 9,099     $ 87,126     $ 84,454     $ 155,727     $ 146,942  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

            

Defined benefit pension plans:

            

Net actuarial gain (loss)

     —         —         —         —         (14,118     (18,922

Amortization of prior service cost

     207       207       414       414       828       828  

Amortization of net actuarial loss

     3,944       4,194       7,888       8,390       16,279       19,048  

Regulatory adjustment

     (3,556     (3,796     (7,112     (7,592     (2,982     (1,436
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net defined benefit pension plans

     595       605       1,190       1,212       7       (482
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Forward-starting interest rate swaps:

            

Amounts reclassified into net income

     518       519       1,036       1,038       2,073       2,074  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net forward-starting interest rate swaps

     518       519       1,036       1,038       2,073       2,074  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustments

     629       70       849       852       158       (39
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income, net of tax

     1,742       1,194       3,075       3,102       2,238       1,553  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     19,863       10,293       90,201       87,556       157,965       148,495  

Comprehensive income (loss) attributable to noncontrolling interests

     279       159       (17     94       908       1,166  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Southwest Gas Holdings, Inc.

   $ 19,584     $ 10,134     $ 90,218     $ 87,462     $ 157,057     $ 147,329  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

5


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands of dollars)

(Unaudited)

 

     SIX MONTHS ENDED     TWELVE MONTHS ENDED  
     JUNE 30     JUNE 30  
     2017     2016     2017     2016  

CASH FLOW FROM OPERATING ACTIVITIES:

        

Net income

   $ 87,126     $ 84,454     $ 155,727     $ 146,942  

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

        

Depreciation and amortization

     130,560       147,919       271,773       283,608  

Deferred income taxes

     47,836       45,916       70,652       90,805  

Changes in current assets and liabilities:

        

Accounts receivable, net of allowances

     3,545       52,907       (19,266     7,039  

Accrued utility revenue

     42,600       42,200       (1,100     (700

Deferred purchased gas costs

     (73,196     84,289       (111,627     102,834  

Accounts payable

     (50,447     (33,358     4,606       1,622  

Accrued taxes

     (6,100     (12,121     32,361       (28,140

Other current assets and liabilities

     20,390       7,761       (14,803     22,696  

Gains on sale

     (1,427     (2,742     (5,833     (3,281

Changes in undistributed stock compensation

     7,731       3,514       9,673       4,916  

AFUDC

     (1,109     (1,282     (2,116     (3,157

Changes in other assets and deferred charges

     (11,521     223       5,216       1,296  

Changes in other liabilities and deferred credits

     2,204       (2,502     (13,741     5,407  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     198,192       417,178       381,522       631,887  
  

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOW FROM INVESTING ACTIVITIES:

        

Construction expenditures and property additions

     (262,234     (264,872     (526,893     (549,232

Acquisition of businesses, net of cash acquired

     —         (17,000     —         (17,000

Changes in customer advances

     (1,430     2,152       4,318       10,763  

Miscellaneous inflows

     6,905       4,126       15,818       7,588  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (256,759     (275,594     (506,757     (547,881
  

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOW FROM FINANCING ACTIVITIES:

        

Issuance of common stock, net

     (96     487       (111     15,170  

Dividends paid

     (44,949     (40,583     (87,683     (78,830

Centuri distribution to redeemable noncontrolling interest

     (204     (99     (544     (198

Issuance of long-term debt, net

     80,579       96,128       408,397       138,779  

Retirement of long-term debt

     (60,041     (52,966     (262,348     (162,530

Change in credit facility and commercial paper

     87,000       (147,500     89,500       (27,500

Change in short-term debt

     2,500       (18,000     2,500       —    

Principal payments on capital lease obligations

     (573     (835     (1,092     (1,533

Withholding remittance—share-based compensation

     (3,120     (1,968     (3,271     (3,766

Other

     (1,036     (124     (2,481     451  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     60,060       (165,460     142,867       (119,957
  

 

 

   

 

 

   

 

 

   

 

 

 

Effects of currency translation on cash and cash equivalents

     143       5       (56     (832
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in cash and cash equivalents

     1,636       (23,871     17,576       (36,783

Cash and cash equivalents at beginning of period

     28,066       35,997       12,126       48,909  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 29,702     $ 12,126     $ 29,702     $ 12,126  
  

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental information:

        

Interest paid, net of amounts capitalized

   $ 35,182     $ 33,224     $ 69,398     $ 65,634  

Income taxes paid (received)

     3,043       4,737       (20,726     19,483  

The accompanying notes are an integral part of these statements.

 

 

6


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

SOUTHWEST GAS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Thousands of dollars)

(Unaudited)

 

     JUNE 30,     DECEMBER 31,  
     2017     2016  

ASSETS

    

Utility plant:

    

Gas plant

   $ 6,349,303     $ 6,193,564  

Less: accumulated depreciation

     (2,202,909     (2,172,966

Acquisition adjustments, net

     119       196  

Construction work in progress

     111,041       111,177  
  

 

 

   

 

 

 

Net utility plant

     4,257,554       4,131,971  
  

 

 

   

 

 

 

Other property and investments

     113,326       108,569  
  

 

 

   

 

 

 

Current assets:

    

Cash and cash equivalents

     22,444       19,024  

Accounts receivable, net of allowances

     74,361       111,845  

Accrued utility revenue

     33,600       76,200  

Income taxes receivable, net

     4,902       4,455  

Deferred purchased gas costs

     5,956       2,608  

Receivable from parent

     288       —    

Prepaids and other current assets

     108,990       126,363  
  

 

 

   

 

 

 

Total current assets

     250,541       340,495  
  

 

 

   

 

 

 

Noncurrent assets:

    

Goodwill

     10,095       10,095  

Deferred charges and other assets

     399,628       410,625  

Discontinued operations—construction services—assets

     —         579,371  
  

 

 

   

 

 

 

Total noncurrent assets

     409,723       1,000,091  
  

 

 

   

 

 

 

Total assets

   $ 5,031,144     $ 5,581,126  
  

 

 

   

 

 

 

CAPITALIZATION AND LIABILITIES

    

Capitalization:

    

Common stock

   $ 49,112     $ 49,112  

Additional paid-in capital

     904,715       897,346  

Accumulated other comprehensive income (loss), net

     (43,413     (45,639

Retained earnings

     631,226       767,061  
  

 

 

   

 

 

 

Total Southwest Gas Corporation equity

     1,541,640       1,667,880  

Discontinued operations—construction services non-owner equity

     —         15,983  

Long-term debt, less current maturities

     1,462,552       1,375,080  
  

 

 

   

 

 

 

Total capitalization

     3,004,192       3,058,943  
  

 

 

   

 

 

 

Current liabilities:

    

Current maturities of long-term debt

     —         25,000  

Accounts payable

     82,522       138,229  

Customer deposits

     71,195       72,296  

Accrued general taxes

     40,545       42,921  

Accrued interest

     16,826       17,395  

Deferred purchased gas costs

     20,628       90,476  

Payable to parent

     2,262       —    

Other current liabilities

     98,681       95,999  
  

 

 

   

 

 

 

Total current liabilities

     332,659       482,316  
  

 

 

   

 

 

 

Deferred income taxes and other credits:

    

Deferred income taxes and investment tax credits, net

     855,253       806,109  

Accumulated removal costs

     310,000       308,000  

Other deferred credits and other long-term liabilities

     529,040       545,143  

Discontinued operations—construction services—liabilities

     —         380,615  
  

 

 

   

 

 

 

Total deferred income taxes and other credits

     1,694,293       2,039,867  
  

 

 

   

 

 

 

Total capitalization and liabilities

   $ 5,031,144     $ 5,581,126  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

7


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

SOUTHWEST GAS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands)

(Unaudited)

 

     THREE MONTHS ENDED     SIX MONTHS ENDED     TWELVE MONTHS ENDED  
     JUNE 30,     JUNE 30,     JUNE 30,  
     2017     2016     2017     2016     2017     2016  

Continuing operations:

            

Gas operating revenues

   $ 260,162     $ 255,648     $ 722,764     $ 780,748     $ 1,263,428     $ 1,395,629  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

            

Net cost of gas sold

     69,421       71,416       216,300       285,016       328,405       486,048  

Operations and maintenance

     102,501       98,744       211,180       199,541       413,363       397,886  

Depreciation and amortization

     46,254       57,232       107,449       117,977       222,935       224,845  

Taxes other than income taxes

     14,497       12,987       29,279       27,000       54,655       50,982  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     232,673       240,379       564,208       629,534       1,019,358       1,159,761  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     27,489       15,269       158,556       151,214       244,070       235,868  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income and (expenses):

            

Net interest deductions

     (16,991     (16,561     (34,201     (32,791     (68,407     (65,041

Other income (deductions)

     2,052       2,436       5,663       4,191       9,748       3,569  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income and (expenses)

     (14,939     (14,125     (28,538     (28,600     (58,659     (61,472
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     12,550       1,144       130,018       122,614       185,411       174,396  

Income tax expense (benefit)

     3,028       (1,214     43,558       42,673       59,469       61,094  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     9,522       2,358       86,460       79,941       125,942       113,302  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations—construction services:

            

Income before income taxes

     —         11,221       —         7,847       45,669       54,054  

Income tax expense

     —         4,480       —         3,334       16,550       20,414  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income

     —         6,741       —         4,513       29,119       33,640  

Noncontrolling interests

     —         156       —         65       949       1,168  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income—discontinued operations

     —         6,585       —         4,448       28,170       32,472  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 9,522     $ 8,943     $ 86,460     $ 84,389     $ 154,112     $ 145,774  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

 

8


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

SOUTHWEST GAS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

     THREE MONTHS ENDED     SIX MONTHS ENDED     TWELVE MONTHS ENDED  
     JUNE 30,     JUNE 30,     JUNE 30,  
     2017     2016     2017     2016     2017     2016  

Continuing operations:

            

Net income from continuing operations

   $ 9,522     $ 2,358     $ 86,460     $ 79,941     $ 125,942     $ 113,302  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

            

Defined benefit pension plans:

            

Net actuarial gain (loss)

     —         —         —         —         (14,118     (18,922

Amortization of prior service cost

     207       207       414       414       828       828  

Amortization of net actuarial loss

     3,944       4,194       7,888       8,390       16,279       19,048  

Regulatory adjustment

     (3,556     (3,796     (7,112     (7,592     (2,982     (1,436
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net defined benefit pension plans

     595       605       1,190       1,212       7       (482
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Forward-starting interest rate swaps:

            

Amounts reclassified into net income

     518       519       1,036       1,038       2,073       2,074  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net forward-starting interest rate swaps

     518       519       1,036       1,038       2,073       2,074  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income, net of tax from continuing operations

     1,113       1,124       2,226       2,250       2,080       1,592  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income from continuing operations

     10,635       3,482       88,686       82,191       128,022       114,894  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations—construction services:

            

Net income

     —         6,585       —         4,448       28,170       32,472  

Foreign currency translation adjustments

     —         70       —         852       (691     (39
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     —         6,655       —         5,300       27,479       32,433  

Comprehensive income (loss) attributable to noncontrolling interests

     —         3       —         29       (24     (2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to discontinued operations—construction services

     —         6,652       —         5,271       27,503       32,435  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 10,635     $ 10,134     $ 88,686     $ 87,462     $ 155,525     $ 147,329  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

9


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

SOUTHWEST GAS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands of dollars)

(Unaudited)

 

     SIX MONTHS ENDED     TWELVE MONTHS ENDED  
     JUNE 30     JUNE 30  
     2017     2016     2017     2016  

CASH FLOW FROM OPERATING ACTIVITIES:

        

Net Income

   $ 86,460     $ 84,454     $ 155,061     $ 146,942  

Income (loss) from discontinued operations

     —         4,513       29,119       33,640  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     86,460       79,941       125,942       113,302  

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

        

Depreciation and amortization

     107,449       117,977       222,935       224,845  

Deferred income taxes

     46,874       40,592       74,241       83,140  

Changes in current assets and liabilities:

        

Accounts receivable, net of allowances

     37,484       79,188       (973     22,324  

Accrued utility revenue

     42,600       42,200       (1,100     (700

Deferred purchased gas costs

     (73,196     84,289       (111,627     102,834  

Accounts payable

     (55,707     (42,681     3,157       (3,529

Accrued taxes

     (2,823     (6,456     23,024       (17,334

Other current assets and liabilities

     24,265       4,791       (14,022     11,614  

Changes in undistributed stock compensation

     6,931       3,514       8,873       4,916  

AFUDC

     (1,109     (1,282     (2,116     (3,157

Changes in other assets and deferred charges

     (11,801     49       4,761       603  

Changes in other liabilities and deferred credits

     1,695       (2,502     (14,250     5,407  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     209,122       399,620       318,845       544,265  
  

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOW FROM INVESTING ACTIVITIES:

        

Construction expenditures and property additions

     (224,085     (214,424     (466,780     (474,596

Changes in customer advances

     (1,430     2,152       4,318       10,763  

Miscellaneous inflows

     1,354       1,790       2,546       3,660  

Dividends received

     —         2,801       9,660       5,602  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (224,161     (207,681     (450,256     (454,571
  

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOW FROM FINANCING ACTIVITIES:

        

Issuance of common stock, net

     —         487       (15     15,170  

Dividends paid

     (39,896     (40,583     (82,630     (78,830

Issuance of long-term debt, net

     —         —         296,469       —    

Retirement of long-term debt

     (25,000     —         (149,855     (20,000

Change in credit facility and commercial paper

     87,000       (147,500     89,500       (27,500

Change in short-term debt

     —         (18,000     —         —    

Withholding remittance—share-based compensation

     (3,120     (1,968     (3,271     (3,766

Other

     (525     (124     (1,970     502  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     18,459       (207,688     148,228       (114,424
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by discontinued operating activities

     —         17,558       73,607       87,622  

Net cash used in discontinued investing activities

     —         (67,913     (23,903     (93,310

Net cash provided by (used in) discontinued financing activities

     —         42,228       (46,962     (5,533

Effects of currency translation on cash and cash equivalents

     —         5       (199     (832
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in cash and cash equivalents

     3,420       (23,871     19,360       (36,783

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

     —         8,122       (2,543     12,053  
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in cash and cash equivalents of continuing operations

     3,420       (15,749     16,817       (24,730

Cash and cash equivalents at beginning of period

     19,024       21,376       5,627       30,357  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 22,444     $ 5,627     $ 22,444     $ 5,627  
  

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental information:

        

Interest paid, net of amounts capitalized

   $ 32,205     $ 30,485     $ 63,221     $ 60,101  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income taxes paid (received)

   $ 19     $ 1,893     $ (32,885   $ (3,063
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

 

10


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

Note 1 – Nature of Operations and Basis of Presentation

Nature of Operations. Southwest Gas Holdings, Inc. is a holding company, owning all of the shares of common stock of Southwest Gas Corporation and 96.6% of the common stock of Centuri Construction Group Inc. In January 2017, a previously contemplated and approved reorganization under a holding company structure was made effective. The reorganization is designed to provide further separation between regulated and unregulated businesses, and to provide additional financing flexibility. Coincident with the effective date of the reorganization, existing shareholders of Southwest Gas Corporation became shareholders of Southwest Gas Holdings, Inc., on a one-for-one basis, with the same number of shares and same ownership percentage as they held immediately prior to the reorganization. At the same time, Southwest Gas Corporation and Centuri Construction Group Inc. (“Centuri” or the “construction services” segment) each became subsidiaries of the publicly traded holding company; whereas, historically, Centuri had been a direct subsidiary of Southwest Gas Corporation.

Southwest Gas Corporation (“Southwest” or the “natural gas operations segment”) is engaged in the business of purchasing, distributing, and transporting natural gas for customers in portions of Arizona, Nevada, and California. Public utility rates, practices, facilities, and service territories of Southwest are subject to regulatory oversight. The timing and amount of rate relief can materially impact results of operations. Natural gas purchases and the timing of related recoveries can materially impact liquidity. Results for the natural gas operations segment are higher during winter periods due to the seasonality incorporated in its regulatory rate structures. Centuri is a comprehensive construction services enterprise dedicated to meeting the growing demands of North American utilities, energy and industrial markets. Centuri derives revenue from installation, replacement, repair, and maintenance of energy distribution systems, and developing industrial construction solutions primarily for energy services utilities. Centuri operations are generally conducted under the business names of NPL Construction Co. (“NPL”), NPL Canada Ltd. (“NPL Canada”, formerly Link-Line Contractors Ltd.), W.S. Nicholls Construction, Inc. and related companies (“W.S. Nicholls”), and Brigadier Pipelines Inc. (“Brigadier”). Typically, Centuri revenues are lowest during the first quarter of the year due to unfavorable winter weather conditions. Operating revenues typically improve as more favorable weather conditions occur during the summer and fall months.

Basis of Presentation. The condensed consolidated financial statements for Southwest Gas Holdings, Inc. and subsidiaries (the “Company”) and Southwest included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. As indicated above, in connection with the holding company reorganization, Centuri ceased to be a subsidiary of Southwest and became a subsidiary of Southwest Gas Holdings, Inc. To give effect to this change, the separate condensed consolidated financial statements related to Southwest Gas Corporation, which are included in this Form 10-Q, depict Centuri-related amounts for periods prior to January 1, 2017 as discontinued operations. Because the transfer of Centuri from Southwest Gas Corporation to Southwest Gas Holdings, Inc. was effectuated as an equity transaction and not a sale, assets and liabilities subject to the discontinued operations presentation have been reflected as noncurrent on the Southwest Gas Corporation Balance Sheet. Those assets and liabilities are detailed in Note 10 – Reorganization Impacts – Discontinued Operations Solely Related to Southwest Gas Corporation, and include both current and non-current amounts.

No substantive change has occurred with regard to the Company’s business segments on the whole, or in the primary businesses comprising those segments. Centuri operations continue to be part of continuing operations and of the consolidated financial statements of Southwest Gas Holdings, Inc.

The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments, consisting of normal recurring items and estimates necessary for a fair presentation of results for the interim periods, have been made. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the 2016 Annual Report to Shareholders, which is incorporated by reference into the 2016 Form 10-K.

 

11


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

Prepaids and other current assets. Prepaids and other current assets includes gas pipe materials and operating supplies of $39 million at June 30, 2017 and $30 million at December 31, 2016 (carried at weighted average cost), and also includes natural gas stored underground and liquefied natural gas, in addition to prepaid assets.

Cash and Cash Equivalents. For purposes of reporting consolidated cash flows, cash and cash equivalents include cash on hand and financial instruments with a purchase-date maturity of three months or less. In general, cash and cash equivalents fall within Level 1 (quoted prices for identical financial instruments) of the three-level fair value hierarchy that ranks the inputs, used to measure fair value, by their reliability. However, cash and cash equivalents at June 30, 2017 and December 31, 2016 also includes money market fund investments of approximately $7.7 million and $5.3 million, respectively, which falls within Level 2 (significant other observable inputs) of the fair value hierarchy, due to the asset valuation methods used by money market funds.

Significant non-cash investing and financing activities for the natural gas operations segment included the following: Upon contract expiration, customer advances of approximately $1.6 million and $2.5 million, during the first six months of 2017 and 2016, respectively, were applied as contributions toward utility construction activity and represent non-cash investing activity.

Adoption of Accounting Standards Update (“ASU”) No. 2016-09. As of January 1, 2017, the Company adopted Financial Accounting Standards Board (“FASB”) ASU No. 2016-09 “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The adoption of this update is considered a change in accounting principle. Among other things, the update clarifies that all cash payments made to taxing authorities on the employees’ behalf for withheld shares should be presented as financing activities on the statement of cash flows. This change is required to be presented in the cash flow statement retrospectively. A new category, Withholding remittance – share-based compensation has been added to the Cash Flow from Financing Activities section of the Condensed Consolidated Statements of Cash Flows for both Southwest Gas Holdings, Inc. and Southwest Gas Corporation. The withheld taxes were included in the Other current assets and liabilities line item of the Condensed Consolidated Statement of Cash Flows in previous periods. Therefore, upon adoption, amounts presented as cash inflows from Other current assets and liabilities under the Cash Flow from Operating Activities section of the Southwest Gas Holdings, Inc. Consolidated Cash Flow Statements were revised from $5.8 million to $7.8 million for the six months ended June 30, 2016 and inflows in the same category for the twelve months ended June 30, 2016 were revised from $18.9 million to $22.7 million. In addition, while standalone financial statements were not previously presented for natural gas operations, for reasons related to the holding company reorganization discussed above, they are now presented. Therefore, upon adoption of this standard, the Cash Flow from Operating Activities section of the Southwest Gas Corporation Cash Flow Statements reflects a reclassification of cash inflows from Other current assets and liabilities from $2.8 million to $4.8 million for the six months ended June 31, 2016 and cash inflows in the same category were revised from $7.8 million to $11.6 million for the twelve months ended June 30, 2016.

Under the new guidance, the Company can withhold any amount between the minimum and maximum individual statutory tax rates and still treat the entire award as equity. The Company intends to administer withholding such that awards under stock compensation programs will continue to be treated as equity awards.

In addition to the above, the update requires all income tax-related cash flows resulting from share-based payments (unrelated to employee withholding) be reported as operating activities on the statement of cash flows, a change from the previous requirement to present windfall tax benefits as an inflow from financing activities and an outflow from operating activities. The Company chose to apply this presentation requirement of the update prospectively as permitted. Therefore, prior periods were not impacted in implementing this provision of the update.

Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value are required to be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. The Company had no previously unrecognized tax benefits as a result of these changes; therefore, no cumulative effect adjustment to the Company’s opening retained earnings was required.

Goodwill. Goodwill is assessed each October for impairment (required annually by U.S. GAAP), or otherwise, if circumstances indicate impairment to the carrying value of goodwill may have occurred. In consideration of the holding company reorganization, management of the Company considered its reporting units and segments and determined that historic judgments regarding its segments and

 

12


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

reporting units continue to apply, and that no change was necessary with regard to the level at which goodwill is assessed for impairment. No impairment was deemed to have occurred in the first six months of 2017.

 

(In thousands of dollars)    Natural Gas
Operations
     Construction
Services
     Consolidated  

December 31, 2016

   $ 10,095      $ 129,888      $ 139,983  

Foreign currency translation adjustment

     —          3,600        3,600  
  

 

 

    

 

 

    

 

 

 

June 30, 2017

   $ 10,095      $ 133,488      $ 143,583  
  

 

 

    

 

 

    

 

 

 

Intercompany Transactions. Centuri recognizes revenues generated from contracts with Southwest (see Note 3—Segment Information). Centuri’s accounts receivable for these services are presented in the table below (thousands of dollars):

 

     June 30, 2017      December 31, 2016  

Centuri accounts receivable for services provided to Southwest

   $ 10,265      $ 10,585  
  

 

 

    

 

 

 

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

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

 

     June 30, 2017      December 31, 2016  

Centuri property and equipment

   $ 478,247      $ 451,114  

Centuri accumulated provision for depreciation and amortization

     (240,182      (228,374

Net cash surrender value of COLI policies

     111,523        106,744  

Other property

     13,303        12,859  
  

 

 

    

 

 

 

Total

   $ 362,891      $ 342,343  
  

 

 

    

 

 

 

Other Income (Deductions). The following table provides the composition of significant items included in Other income (deductions) in the condensed consolidated statements of income (thousands of dollars):

 

     Three Months Ended     Six Months Ended     Twelve Months Ended  
     June 30     June 30     June 30  
     2017     2016     2017     2016     2017     2016  

Southwest Gas Corporation - natural gas operations segment:

            

Change in COLI policies

   $ 1,900     $ 2,200     $ 4,700     $ 3,100     $ 9,000     $ 1,300  

Interest income

     614       390       1,178       757       2,269       1,766  

Equity AFUDC

     633       750       1,109       1,282       2,116       3,157  

Miscellaneous income and (expense)

     (1,095     (904     (1,324     (948     (3,637     (2,654
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Southwest Gas Corporation - total other income (deductions)

     2,052       2,436       5,663       4,191       9,748       3,569  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Construction services segment:

            

Interest income

     1       1       1       1       1       414  

Foreign transaction gain (loss)

     (197     (9     (198     (19     (201     (271

Miscellaneous income and (expense)

     190       42       445       18       1,641       924  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Centuri - total other income (deductions)

     (6     34       248       —         1,441       1,067  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Corporate and administrative

     1       —         1       —         1       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 2,047     $ 2,470     $ 5,912     $ 4,191     $ 11,190     $ 4,636  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

13


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

Recently Issued Accounting Standards Updates. In May 2014, the FASB issued the update “Revenue from Contracts with Customers (Topic 606).” The update replaces much of the current guidance regarding revenue recognition including most industry-specific guidance. In accordance with the update, an entity will be required to identify the contract with the customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the entity satisfies a performance obligation. In addition to the new revenue recognition requirements, entities will be required to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Entities may choose between two retrospective transition methods when applying the update. In July 2015, the FASB approved a one-year deferral of the effective date (annual periods beginning after December 15, 2017). In March, April, May, and December of 2016, the FASB issued updates to Topic 606 related to “Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”, “Identifying Performance Obligations and Licensing,” “Narrow-Scope Improvements and Practical Expedients”, and certain “Technical Corrections and Improvements.” The amendments in the first two updates, respectively, provide guidance when another party, along with the entity, is involved in providing a good or service to a customer, and provide clarification with regard to identifying performance obligations and of the licensing implementation guidance in Topic 606. The third update includes improvements to the guidance on collectability, noncash consideration, and completed contracts at transition. In addition, a practical expedient is provided for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. The fourth update affects narrow aspects of the guidance as issued to date. Management plans to adopt all of these updates at the required adoption date, which is for interim and annual reporting periods commencing January 2018.

Management has substantially completed the evaluation of the sources of revenue and is currently assessing the effect of the new guidance on its financial position, results of operations and cash flows. The final assessment is contingent, in part, upon the completion of reviews related to customers with negotiated and unique billing terms. Deliberations have been ongoing by the utility industry, notably in connection with efforts to produce an accounting guide intended to be developed by the American Institute of Certified Public Accountants (“AICPA”). In association with this undertaking, the AICPA formed a number of industry task forces, including a Power & Utilities (“P&U”) Task Force, on which Company personnel actively participate via formal membership. Industry representatives and organizations, the largest auditing firms, the AICPA’s Revenue Recognition Working Group and its Financial Reporting Executive Committee have undertaken, and continue to undertake, consideration of several items relevant to the utility industry. Where applicable or necessary, the FASB’s Transition Resource Group (“TRG”) is also participating. Through the P&U Task Force undertakings to date, general determinations have been made that contributions received in aid of construction (“CIAC”) efforts related to the industry’s pipe distribution and transmission systems are reimbursements of expenditures rather than revenue (consistent with current accounting practices). Furthermore, regarding the “collectibility” criterion in the update that must be met for revenue recognition, general determinations have been made that contracts for utility service (including service to lower income or lower credit quality customers) represent genuine and valid contracts for which revenue is able to be recognized when service is rendered (consistent with current accounting practices). These determinations by the P&U industry are based on the various measures the industry takes to help ensure collectibility (e.g., proof of creditworthiness, customer deposits, late fee assessment, disconnection, service re-establishment fees, collection processes, etc.), in addition to the regulatory mechanisms established under rate regulation to mitigate the impacts of individual customer nonpayment. A timeline for the resolution of all deliberations of P&U efforts has not been established. Southwest continues to actively work with its peers in the rate-regulated natural gas industry and with the public accounting profession to finalize the accounting treatment for several other issues that are not being separately addressed by the P&U Task Force.

 

14


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

As of June 30, 2017, the construction services segment has substantially completed the evaluation of sources of revenue and continues to assess the effect of the new guidance on financial position, results of operations and cash flows. The principals of the new revenue recognition guidance are very similar to existing guidance for construction contractors. Similar to the P&U Task Force noted above, the AICPA formed the Engineering and Construction Contractors Task Force to assist the construction industry with implementing the new guidance. The accounting guide the AICPA intends to release is expected to provide implementation guidance related to several issues including 1) combining contracts and separating performance obligations; 2) estimating change orders, incentives, penalties, liquidated damages and other variable consideration items and 3) acceptable measures of progress when recognizing revenue over time.

Given the uncertainty with respect to the conclusions that might arise from the ongoing deliberations on issues associated with both the natural gas and construction services segments, the Company is currently unable to determine the effect the new guidance will have on its financial position, results of operations, cash flows, business processes, or the transition method it will utilize to adopt the new guidance. However, conclusions reached regarding CIAC and collectability criterion with regard to utility service are significant and are aligned with current practices and recognition.

In January 2016, the FASB issued the update “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” in order to improve the recognition and measurement of financial instruments. The update makes targeted improvements to existing U.S. GAAP by: 1) requiring equity investments to be measured at fair value with changes in fair value recognized in net income; 2) requiring the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 3) requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; 4) eliminating the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and 5) requiring a reporting entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in instrument-specific credit risk when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. All entities can early adopt the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. Management is evaluating what impact, if any, this update might have on its consolidated financial statements and disclosures.

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

 

   

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

 

   

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

Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. Though companies have historically been required to make disclosures regarding leases and of contractual obligations, leases (with terms longer than a year) will no longer exist off-balance sheet. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. Early application is permitted. Management currently plans to adopt the update at the required adoption date, which is for interim and annual reporting periods commencing January 1, 2019. Existing leases have been documented by both segments and management is in the process of determining if special software will be necessary to implement the standard. In addition, management is evaluating the potential impacts of various natural gas industry-related issues in light of the leasing standard. Given the uncertainty with respect to

 

15


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

the conclusions that might arise from these deliberations, management is currently unable to determine the effect the new guidance will have on its financial position, results of operations, cash flows, or business processes.

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

In August 2016, the FASB issued the update “Classification of Certain Cash Receipts and Cash Payments.” This update addresses the following specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance (“COLI”) policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows, including identification of the predominant nature in cases where cash receipts and payments have aspects of more than one class of cash flows. The update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. Management is evaluating the impacts this update might have on its consolidated cash flow statements and disclosures.

In October 2016, the FASB issued the update “Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory.” This update eliminates the current U.S. GAAP exception for all intra-entity sales of assets other than inventory. As a result, a reporting entity would recognize the tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. The update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted; however, the guidance can only be adopted in the first interim period of a fiscal year. No such election to adopt early was made by management. The modified retrospective approach will be required for transition to the new guidance, with a cumulative-effect adjustment recorded in retained earnings as of the beginning of the period of adoption. Management is evaluating the impacts this update might have on its consolidated financial statements.

In January 2017, the FASB issued the update “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The update eliminates Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The update also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments should be applied on a prospective basis. The update is effective for fiscal and interim periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Management has determined that this update would have had no impact on the consolidated financial statements for the periods presented if it had been effective during those periods.

 

16


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

In March 2017, the FASB issued the update “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The update applies to all employers that offer to their employees defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715, Compensation – Retirement Benefits. The update requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented, and be appropriately described (or disclosed in the notes when one is not presented). The update also allows only the service cost component (and not the other components of periodic benefit costs) to be eligible for capitalization when applicable, making no exception for specialized industries, including rate-regulated industries. Southwest is a rate-regulated utility offering pension and postretirement benefits to retired employees. Rate-regulated entities providing utility and transmission services have historically capitalized a portion of periodic benefit costs (including non-service cost components) in utility infrastructure (for instance, when productive labor is also charged to capital work orders). The portion capitalized becomes a component of depreciation rate development by efforts of companies and their regulatory commissions. The industry is currently evaluating whether this update could cause a difference (not currently existing), between accounting reflected in general purpose financial statements versus financial statements and information utilized for regulatory reporting and ratemaking purposes. Deliberations center on whether companies will be able to implement the provisions of the update for all purposes, only for general purpose financial reporting purposes, or whether regulatory reporting and economics will give effect to other related changes necessary in general purpose financial statements. If the provisions of the update cannot be implemented for all purposes, substantial effort could be required to maintain separate records and to provide reasonable reconciliation means for users of both. The update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. Due to the industry deliberations noted above, management has not fully completed its evaluation at this time. As efforts continue, management will be evaluating the various impacts this update will have on its consolidated financial statements and disclosures.

 

17


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

Note 2 – Components of Net Periodic Benefit Cost

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

Net periodic benefit costs included in the table below are components of an overhead loading process associated with the cost of labor. The overhead process ultimately results in allocation of net periodic benefit costs to the same accounts to which productive labor is charged. As a result, net periodic benefit costs become components of various accounts, primarily operations and maintenance expense, net utility plant, and deferred charges and other assets for both the Company and Southwest.

 

     Qualified Retirement Plan  
     Period Ended June 30,  
     Three Months     Six Months     Twelve Months  
     2017     2016     2017     2016     2017     2016  

(Thousands of dollars)

            

Service cost

   $ 5,848     $ 5,708     $ 11,696     $ 11,417     $ 23,112     $ 23,979  

Interest cost

     11,521       11,507       23,041       23,013       46,055       45,127  

Expected return on plan assets

     (13,799     (14,139     (27,598     (28,279     (55,877     (57,183

Amortization of net actuarial loss

     6,001       6,316       12,002       12,633       24,635       29,005  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 9,571     $ 9,392     $ 19,141     $ 18,784     $ 37,925     $ 40,928  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     SERP  
     Period Ended June 30,  
     Three Months     Six Months     Twelve Months  
     2017     2016     2017     2016     2017     2016  

(Thousands of dollars)

            

Service cost

   $ 77     $ 83     $ 155     $ 165     $ 321     $ 325  

Interest cost

     471       465       942       930       1,871       1,778  

Amortization of net actuarial loss

     360       346       720       692       1,411       1,338  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 908     $ 894     $ 1,817     $ 1,787     $ 3,603     $ 3,441  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     PBOP  
     Period Ended June 30,  
     Three Months     Six Months     Twelve Months  
     2017     2016     2017     2016     2017     2016  

(Thousands of dollars)

            

Service cost

   $ 367     $ 375     $ 734     $ 749     $ 1,484     $ 1,569  

Interest cost

     808       795       1,616       1,591       3,205       3,091  

Expected return on plan assets

     (839     (787     (1,679     (1,575     (3,253     (3,307

Amortization of prior service costs

     334       334       668       668       1,335       1,336  

Amortization of net actuarial loss

     —         104       —         208       209       380  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 670     $ 821     $ 1,339     $ 1,641     $ 2,980     $ 3,069  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

Note 3 – Segment Information

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

 

     Natural Gas
Operations
     Construction
Services
     Other      Total  

Three months ended June 30, 2017

           

Revenues from external customers

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

Intersegment revenues

     —          22,923        —          22,923  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 

Segment net income (loss)

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

 

 

    

 

 

    

 

 

    

 

 

 

Three months ended June 30, 2016

           

Revenues from external customers

   $ 255,648      $ 266,343      $ —        $ 521,991  

Intersegment revenues

     —          25,757        —          25,757  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 255,648      $ 292,100      $ —        $ 547,748  
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment net income

   $ 2,358      $ 6,585      $ —        $ 8,943  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Natural Gas
Operations
     Construction
Services
     Other      Total  

Six months ended June 30, 2017

           

Revenues from external customers

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

Intersegment revenues

     —          44,219        —          44,219  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 

Segment net income (loss)

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

 

 

    

 

 

    

 

 

    

 

 

 

Six months ended June 30, 2016

           

Revenues from external customers

   $ 780,748      $ 450,304      $ —        $ 1,231,052  

Intersegment revenues

     —          47,944        —          47,944  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 780,748      $ 498,248      $ —        $ 1,278,996  
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment net income

   $ 79,941      $ 4,448      $ —        $ 84,389  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Natural Gas
Operations
     Construction
Services
     Other      Total  

Twelve months ended June 30, 2017

           

Revenues from external customers

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

Intersegment revenues

     —          94,396        —          94,396  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 

Segment net income (loss)

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

 

 

    

 

 

    

 

 

    

 

 

 

Twelve months ended June 30, 2016

           

Revenues from external customers

   $ 1,395,629      $ 964,973      $ —        $ 2,360,602  

Intersegment revenues

     —          109,195        —          109,195  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,395,629      $ 1,074,168      $ —        $ 2,469,797  
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment net income

   $ 113,302      $ 32,472      $ —        $ 145,774  
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 4 – Derivatives and Fair Value Measurements

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

 

19


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

The variable-price contracts have no significant market value. The Swaps are recorded at fair value.

The fixed-price contracts and Swaps are utilized by Southwest under its volatility mitigation programs to effectively fix the price on a portion (up to 25% in the Arizona and California jurisdictions) of its natural gas supply portfolios. The maturities of the Swaps highly correlate to forecasted purchases of natural gas, during time frames ranging from July 2017 through March 2019. Under such contracts, Southwest pays the counterparty a fixed rate and receives from the counterparty a floating rate per MMBtu (“dekatherm”) of natural gas. Only the net differential is actually paid or received. The differential is calculated based on the notional amounts under the contracts, which are detailed in the table below (thousands of dekatherms):

 

     June 30, 2017      December 31, 2016  

Contract notional amounts

     11,035        10,543  
  

 

 

    

 

 

 

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

The following table sets forth the gains and (losses) recognized on the Swaps (derivatives) for the three-, six-, and twelve-month periods ended June 30, 2017 and 2016 and their location in the Condensed Consolidated Statements of Income for both the Company and Southwest:

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

(Thousands of dollars)

 

          Three Months Ended     Six Months Ended     Twelve Months Ended  
     Location of Gain or (Loss)    June 30     June 30     June 30  

Instrument

  

Recognized in Income on Derivative

   2017     2016     2017     2016     2017     2016  

Swaps

   Net cost of gas sold    $ (1,168   $ 5,537     $ (6,305   $ 4,325     $ (5,624   $ (1,866

Swaps

   Net cost of gas sold      1,168     (5,537 )*      6,305     (4,325 )*      5,624     1,866
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $ —       $ —       $ —       $ —       $ —       $ —    
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

*

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

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

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

Fair values of derivatives not designated as hedging instruments:

 

June 30, 2017

Instrument

  

Balance Sheet Location

   Asset
Derivatives
     Liability
Derivatives
     Net Total  

Swaps

   Other current liabilities    $ 25      $ (1,575    $ (1,550

Swaps

   Other deferred credits      29        (681      (652
     

 

 

    

 

 

    

 

 

 

Total

      $ 54      $ (2,256    $ (2,202
     

 

 

    

 

 

    

 

 

 

December 31, 2016

Instrument

  

Balance Sheet Location

   Asset
Derivatives
     Liability
Derivatives
     Net Total  

Swaps

   Deferred charges and other assets    $ 899      $ (54    $ 845  

Swaps

   Prepaids and other current assets      3,551        (19      3,532  
     

 

 

    

 

 

    

 

 

 

Total

      $ 4,450      $ (73    $ 4,377  
     

 

 

    

 

 

    

 

 

 

The estimated fair values of the natural gas derivatives were determined using future natural gas index prices (as more fully described below). Master netting arrangements exist with each counterparty that provide for the net settlement (in the settlement month) of all contracts through a single payment. As applicable, management has elected to reflect

 

20


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

the net amounts in its balance sheets. There was no outstanding collateral associated with the Swaps during either period shown in the above table.

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

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

 

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

Paid to counterparties

   $ 111      $ 1,412      $ 2,512  
  

 

 

    

 

 

    

 

 

 

Received from counterparties

   $ —        $ 1,685      $ 2,411  
  

 

 

    

 

 

    

 

 

 

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

 

June 30, 2017

Instrument

  

Balance Sheet Location

   Net Total  
Swaps    Prepaids and other current assets    $ 1,550  
Swaps    Deferred charges and other assets      652  

December 31, 2016
Instrument

  

Balance Sheet Location

   Net Total  
Swaps    Other deferred credits    $ (845
Swaps    Other current liabilities      (3,532

Fair Value Measurements. The estimated fair values of Southwest’s Swaps were determined at June 30, 2017 and December 31, 2016 using New York Mercantile Exchange (“NYMEX”) futures settlement prices for delivery of natural gas at Henry Hub adjusted by the price of NYMEX ClearPort basis Swaps, which reflect the difference between the price of natural gas at a given delivery basin and the Henry Hub pricing points. These Level 2 inputs (inputs, other than quoted prices, for similar assets or liabilities) are observable in the marketplace throughout the full term of the Swaps, but have been credit-risk adjusted with no significant impact to the overall fair value measurement.

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

Level 2—Significant other observable inputs

 

(Thousands of dollars)

   June 30,
2017
     December 31,
2016
 

Assets at fair value:

     

Prepaids and other current assets - Swaps

   $ —        $ 3,532  

Deferred charges and other assets - Swaps

     —          845  

Liabilities at fair value:

     

Other current liabilities - Swaps

     (1,550      —    

Other deferred credits - Swaps

     (652      —    
  

 

 

    

 

 

 

Net Assets (Liabilities)

   $ (2,202    $ 4,377  
  

 

 

    

 

 

 

 

21


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

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

With regard to the fair values of assets associated with pension and postretirement benefit plans, asset values were last updated as required as of December 2016. Refer to Note 10 – Pension and Other Post Retirement Benefits in the 2016 Annual Report to Shareholders on Form 10-K.

Note 5 – Common Stock

In January 2017, the holding company reorganization was made effective and each outstanding share of Southwest Gas Corporation common stock was converted into a share of common stock in Southwest Gas Holdings, Inc., on a one-for-one basis. The ticker symbol of the stock, “SWX,” remained unchanged, and Southwest Gas Corporation became a wholly owned subsidiary of Southwest Gas Holdings, Inc.

On March 29, 2017, the Company filed with the Securities Exchange Commission (“SEC”) an automatic shelf registration statement on Form S-3 (File No. 333-217018), which became effective upon filing, for the offer and sale of up to $150 million of common stock from time to time in at-the-market offerings under the prospectus included therein and in accordance with the Sales Agency Agreement, dated March 29, 2017, between the Company and BNY Mellon Capital Markets, LLC (the “Equity Shelf Program”). No shares of the Company’s common stock have been sold under that registration statement.

During the six months ended June 30, 2017, the Company issued approximately 101,000 shares of common stock through the Restricted Stock/Unit Plan and Management Incentive Plan.

Note 6 – Long-Term Debt

Carrying amounts of long-term debt and related estimated fair values as of June 30, 2017 and December 31, 2016 are disclosed in the following table. Southwest’s revolving credit facility (including commercial paper) and the variable-rate Industrial Development Revenue Bonds (“IDRBs”) approximate their carrying values, as they are repaid quickly (in the case of credit facility borrowings) and have interest rates that reset frequently. These are categorized as Level 1 due to Southwest’s ability to access similar debt arrangements at measurement dates with comparable terms, including variable/market rates. The fair values of Southwest’s debentures, senior notes, and fixed-rate IDRBs were determined utilizing a market-based valuation approach, where fair values are determined based on evaluated pricing data, such as broker quotes and yields for similar securities adjusted for observable differences. Significant inputs used in the valuation generally include benchmark yield curves, credit ratings and issuer spreads. The external credit rating, coupon rate, and maturity of each security are considered in the valuation, as applicable. The fair values of debentures and fixed-rate IDRBs are categorized as Level 2 (observable market inputs based on market prices of similar securities). The Centuri secured revolving credit and term loan facility and Centuri other debt obligations (not actively traded) are categorized as Level 3, based on significant unobservable inputs to their fair values. Because Centuri’s debt is not publicly traded, fair values for the secured revolving credit and term loan facility and other debt obligations were based on a conventional discounted cash flow methodology and utilized current market pricing yield curves, across Centuri’s debt maturity spectrum, of other industrial bonds with an assumed credit rating comparable to the Company’s.

 

22


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

     June 30, 2017      December 31, 2016  
     Carrying      Fair      Carrying      Fair  
     Amount      Value      Amount      Value  

(Thousands of dollars)

           

Southwest Gas Corporation:

           

Debentures:

           

Notes, 4.45%, due 2020

   $ 125,000      $ 130,821      $ 125,000      $ 129,703  

Notes, 6.1%, due 2041

     125,000        155,466        125,000        149,734  

Notes, 3.875%, due 2022

     250,000        259,368        250,000        254,900  

Notes, 4.875%, due 2043

     250,000        268,728        250,000        266,793  

Notes, 3.8%, due 2046

     300,000        284,172        300,000        283,029  

8% Series, due 2026

     75,000        96,783        75,000        94,691  

Medium-term notes, 7.59% series, due 2017

     —          —          25,000        25,040  

Medium-term notes, 7.78% series, due 2022

     25,000        29,356        25,000        29,290  

Medium-term notes, 7.92% series, due 2027

     25,000        32,320        25,000        31,905  

Medium-term notes, 6.76% series, due 2027

     7,500        8,914        7,500        8,769  

Unamortized discount and debt issuance costs

     (9,644         (9,931   
  

 

 

       

 

 

    
     1,172,856           1,197,569     
  

 

 

       

 

 

    

Revolving credit facility and commercial paper

     92,000        92,000        5,000        5,000  
  

 

 

       

 

 

    

Industrial development revenue bonds:

           

Variable-rate bonds:

           

Tax-exempt Series A, due 2028

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

2003 Series A, due 2038

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

2008 Series A, due 2038

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

2009 Series A, due 2039

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

Unamortized discount and debt issuance costs

     (2,304         (2,489   
  

 

 

       

 

 

    
     197,696           197,511     
  

 

 

       

 

 

    

Less: current maturities

     —             (25,000   
  

 

 

       

 

 

    

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

   $ 1,462,552         $
1,375,080
 
  
  

 

 

       

 

 

    

Centuri:

           

Centuri term loan facility

   $ 105,559        105,641      $ 106,700        106,819  

Unamortized debt issuance costs

     (427         (516   
  

 

 

       

 

 

    
     105,132           106,184     

Centuri secured revolving credit facility

     99,943        100,091        41,185        41,292  

Centuri other debt obligations

     45,307        45,589        52,635        52,840  

Less: current maturities

     (27,236         (25,101   
  

 

 

       

 

 

    

Long-term debt, less current maturities - Centuri

   $ 223,146         $ 174,903     
  

 

 

       

 

 

    

Consolidated Southwest Gas Holdings, Inc.:

           

Southwest Gas Corporation long-term debt

   $ 1,462,552         $ 1,400,080     

Centuri long-term debt

     250,382           200,004     

Less: current maturities

     (27,236         (50,101   
  

 

 

       

 

 

    

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

   $ 1,685,698         $
1,549,983
 
  
  

 

 

       

 

 

    

In March 2017, Southwest amended its credit facility, increasing the borrowing capacity from $300 million to $400 million. Also, the facility was previously scheduled to expire in March 2021 and was extended to March 2022. Southwest continues to designate $150 million of capacity related to the facility as long-term debt and with the total capacity now available, has designated the remaining $250 million for working capital purposes. Interest rates for the credit facility are calculated at either the London Interbank Offered Rate (“LIBOR”) or an “alternate base rate,” plus in each case an applicable margin that is determined based on the Southwest’s senior unsecured debt rating. At June 30, 2017, the applicable margin is 1% for loans bearing interest with reference to LIBOR and 0% for loans bearing interest with reference to the alternative base rate. At June 30, 2017, $92 million was outstanding on the long-term and no borrowings were outstanding on the short-term portions of this credit facility.

 

23


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

Centuri has a $300 million secured revolving credit and term loan facility that is scheduled to expire in October 2019. At June 30, 2017, $206 million in borrowings were outstanding on the Centuri facility. Centuri assets securing the facility at June 30, 2017 totaled $501 million.

Note 7 – Short-Term Debt

In March 2017, Southwest Gas Holdings, Inc. entered into a credit facility with a borrowing capacity of $100 million that expires in March 2022. The Company intends to utilize this facility for short-term financing needs. Interest rates for this facility are calculated at either the LIBOR or the “alternate base rate,” plus in each case an applicable margin that is determined based on the Company’s senior unsecured debt rating. The applicable margin ranges from 0.75% to 1.50% for loans bearing interest with reference to LIBOR and from 0% to 0.5% for loans bearing interest with reference to the alternative base rate. The Company is also required to pay a commitment fee on the unfunded portion of the commitments based on its senior unsecured long-term debt rating. The commitment fee ranges from 0.075% to 0.200% per annum. At June 30, 2017, $2.5 million was outstanding on this facility.

Note 8 – Equity, Other Comprehensive Income, and Accumulated Other Comprehensive Income

The table below provides details of activity in equity and the redeemable noncontrolling interest for Southwest Gas Holdings, Inc. on a consolidated basis during the six months ended June 30, 2017.

 

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

(In thousands, except per share amounts)

   Shares      Amount      Capital      Income (Loss)     Earnings     Interest     Total     (Temporary
Equity)
 

DECEMBER 31, 2016

     47,482      $ 49,112      $ 903,123      $ (48,008   $ 759,263     $ (2,217   $ 1,661,273     $ 22,590  

Common stock issuances

     101        101        7,972              8,073    

Net income (loss)

                87,172       (95     87,077       49  

Redemption value adjustments

                2,315         2,315       (2,315

Foreign currency exchange translation adj.

              820           820       29  

Other comprehensive income (loss):

                   

Net actuarial gain (loss) arising during

                   

period, less amortization of unamortized

                   

benefit plan cost, net of tax

              1,190           1,190    

Amounts reclassified to net income,

                   

net of tax (FSIRS)

              1,036           1,036    

Centuri dividend to redeemable

                   

noncontrolling interest

                      (204

Dividends declared

                   

Common: $0.99 per share

                (47,528       (47,528  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

JUNE 30, 2017

     47,583      $ 49,213      $ 911,095      $ (44,962   $ 801,222     $ (2,312   $ 1,714,256     $ 20,149  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

24


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

The table below provides details of activity in equity for Southwest Gas Corporation during the six months ended June 30, 2017. Effective in January 2017, Southwest became a subsidiary of Southwest Gas Holdings, Inc., and only equity shares of the latter are publicly traded, under the ticker symbol “SWX.”

 

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

(In thousands, except per share amounts)

   Shares      Amount      Capital      Income (Loss)     Earnings     Total  

DECEMBER 31, 2016

     47,482      $ 49,112      $ 897,346      $ (45,639   $ 767,061     $ 1,667,880  

Net income

                86,460       86,460  

Other comprehensive income (loss):

               

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

              1,190         1,190  

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

              1,036         1,036  

Distribution to Southwest Gas Holdings, Inc. investment in discontinued operations

                (182,773     (182,773

Stock-based compensation (a)

           7,369          (392     6,977  

Dividends declared to Southwest Gas Holdings, Inc.

                (39,130     (39,130
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

JUNE 30, 2017

     47,482      $ 49,112      $ 904,715      $ (43,413   $ 631,226     $ 1,541,640  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

(a)

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

The table above gives effect to the holding company reorganization whereby Southwest and Centuri became subsidiaries of the Company. The historic investment in Centuri was distributed to the parent holding company. This presentation is only applicable to Southwest and not to the Company overall, as Centuri continues to be included in the continuing operations of the Company. Also in connection with the holding company creation, compensation plans of Southwest include programs that will be settled with equity shares issued by Southwest Gas Holdings, Inc. Management has determined that when no consideration is directly exchanged for these programs between Southwest and the Company, the accounting impact at Southwest for these programs is reflected both as compensation expense and as an equity contribution (of the parent) in Southwest.

The following information provides insight into amounts impacting the Company’s Other Comprehensive Income (Loss), both before and after-tax, within the Condensed Consolidated Statements of Comprehensive Income, which also impact Accumulated Other Comprehensive Income in the Condensed Consolidated Balance Sheets and the associated column in the equity table above, as well as the Redeemable Noncontrolling Interest. See Note 4 – Derivatives and Fair Value Measurements for additional information on the FSIRS.

 

25


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

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

(Thousands of dollars)

 

     Three Months Ended
June 30, 2017
    Three Months Ended
June 30, 2016
 
     Before-     Tax     Net-of-     Before-     Tax     Net-of-  
     Tax     (Expense)     Tax     Tax     (Expense)     Tax  
     Amount     or Benefit (1)     Amount     Amount     or Benefit (1)     Amount  

Defined benefit pension plans:

            

Amortization of prior service cost

   $ 334     $ (127   $ 207     $ 334     $ (127   $ 207  

Amortization of net actuarial (gain)/loss

     6,361       (2,417     3,944       6,766       (2,572     4,194  

Regulatory adjustment

     (5,735     2,179       (3,556     (6,123     2,327       (3,796
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pension plans other comprehensive income (loss)

     960       (365     595       977       (372     605  

FSIRS (designated hedging activities):

            

Amounts reclassifed into net income

     836       (318     518       837       (318     519  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FSIRS other comprehensive income

     836       (318     518       837       (318     519  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss) - Southwest Gas Corporation

     1,796       (683     1,113       1,814       (690     1,124  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustments:

            

Translation adjustments

     629       —         629       70       —         70  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency other comprehensive income (loss)

     629       —         629       70       —         70  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 2,425     $ (683   $ 1,742     $ 1,884     $ (690   $ 1,194  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Six Months Ended
June 30, 2017
    Six Months Ended
June 30, 2016
 
     Before-     Tax     Net-of-     Before-     Tax     Net-of-  
     Tax     (Expense)     Tax     Tax     (Expense)     Tax  
     Amount     or Benefit (1)     Amount     Amount     or Benefit (1)     Amount  

Defined benefit pension plans:

            

Amortization of prior service cost

   $ 668     $ (254   $ 414     $ 668     $ (254   $ 414  

Amortization of net actuarial (gain)/loss

     12,722       (4,834     7,888       13,533       (5,143     8,390  

Regulatory adjustment

     (11,470     4,358       (7,112     (12,246     4,654       (7,592
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pension plans other comprehensive income (loss)

     1,920       (730     1,190       1,955       (743     1,212  

FSIRS (designated hedging activities):

            

Amounts reclassifed into net income

     1,672       (636     1,036       1,673       (635     1,038  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FSIRS other comprehensive income

     1,672       (636     1,036       1,673       (635     1,038  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)—Southwest Gas Corporation

     3,592       (1,366     2,226       3,628       (1,378     2,250  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustments:

            

Translation adjustments

     849       —         849       852       —         852  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency other comprehensive income (loss)

     849       —         849       852       —         852  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 4,441     $ (1,366   $ 3,075     $ 4,480     $ (1,378   $ 3,102  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Twelve Months Ended
June 30, 2017
    Twelve Months Ended
June 30, 2016
 
     Before-     Tax     Net-of-     Before-     Tax     Net-of-  
     Tax     (Expense)     Tax     Tax     (Expense)     Tax  
     Amount     or Benefit (1)     Amount     Amount     or Benefit (1)     Amount  

Defined benefit pension plans:

            

Net actuarial gain/(loss)

   $ (22,770   $ 8,652     $ (14,118   $ (30,519   $ 11,597     $ (18,922

Amortization of prior service cost

     1,335       (507     828       1,336       (508     828  

Amortization of net actuarial (gain)/loss

     26,255       (9,976     16,279       30,723       (11,675     19,048  

Regulatory adjustment

     (4,808     1,826       (2,982     (2,318     882       (1,436
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pension plans other comprehensive income (loss)

     12       (5     7       (778     296       (482

FSIRS (designated hedging activities):

            

Amounts reclassifed into net income

     3,344       (1,271     2,073       3,345       (1,271     2,074  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FSIRS other comprehensive income (loss)

     3,344       (1,271     2,073       3,345       (1,271     2,074  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)—Southwest Gas Corporation

     3,356       (1,276     2,080       2,567       (975     1,592  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustments:

            

Translation adjustments

     158       —         158       (39     —         (39
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency other comprehensive income (loss)

     158       —         158       (39     —         (39
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 3,514     $ (1,276   $ 2,238     $ 2,528     $ (975   $ 1,553  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

(1)

Tax amounts are calculated using a 38% rate. The Company has elected to indefinitely reinvest the earnings of Centuri’s Canadian subsidiaries in Canada, thus preventing deferred taxes on such earnings. As a result of this assertion, the Company is not recognizing any tax effect or presenting a tax expense or benefit for the currency translation adjustment amount reported in Other Comprehensive Income, as repatriation of earnings is not anticipated.

Approximately $2.1 million of realized losses (net of tax) related to the FSIRS, reported in Accumulated other comprehensive income (“AOCI”) at June 30, 2017, will be reclassified into interest expense within the next 12 months as the related interest payments on long-term debt occur.

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

AOCI—Rollforward

(Thousands of dollars)

     Defined Benefit Plans     FSIRS     Foreign Currency Items        
     Before-Tax     Tax
(Expense)
Benefit (4)
    After-Tax     Before-Tax     Tax
(Expense)
Benefit (4)
    After-Tax     Before-Tax     Tax
(Expense)
Benefit
     After-Tax     AOCI  

Beginning Balance AOCI December 31, 2016

   $ (57,613   $ 21,893     $ (35,720   $ (15,999   $ 6,080     $ (9,919   $ (2,369   $ —        $ (2,369   $ (48,008
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Translation adjustments

     —         —         —         —         —         —         849       —          849       849  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income before reclassifications

     —         —         —         —         —         —         849       —          849       849  

FSIRS amounts reclassified from AOCI (1)

     —         —         —         1,672       (636     1,036       —         —          —         1,036  

Amortization of prior service cost (2)

     668       (254     414       —         —         —         —         —          —         414  

Amortization of net actuarial loss (2)

     12,722       (4,834     7,888       —         —         —         —         —          —         7,888  

Regulatory adjustment (3)

     (11,470     4,358       (7,112     —         —         —         —         —          —         (7,112
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net current period other comprehensive income (loss)

     1,920       (730     1,190       1,672       (636     1,036       849       —          849       3,075  

Less: Translation adjustment attributable to redeemable noncontrolling interest

     —         —         —         —         —         —         29       —          29       29  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

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

     1,920       (730     1,190       1,672       (636     1,036       820       —          820       3,046  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Ending Balance AOCI June 30, 2017

   $ (55,693   $ 21,163     $ (34,530   $ (14,327   $ 5,444     $ (8,883   $ (1,549   $ —        $ (1,549   $ (44,962
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(1)

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

(2)

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

(3)

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

(4)

Tax amounts are calculated using a 38% rate.

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

AOCI—Rollforward

(Thousands of dollars)

     Defined Benefit Plans     FSIRS        
     Before-Tax     Tax
(Expense)
Benefit (8)
    After-Tax     Before-Tax     Tax
(Expense)
Benefit (8)
    After-Tax     AOCI  

Beginning Balance AOCI December 31, 2016

   $ (57,613   $ 21,893     $ (35,720   $ (15,999   $ 6,080     $ (9,919   $ (45,639
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FSIRS amounts reclassified from AOCI (5)

     —         —         —         1,672       (636     1,036       1,036  

Amortization of prior service cost (6)

     668       (254     414       —         —         —         414  

Amortization of net actuarial loss (6)

     12,722       (4,834     7,888       —         —         —         7,888  

Regulatory adjustment (7)

     (11,470     4,358       (7,112     —         —         —         (7,112
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other comprehensive income (loss) attributable to Southwest Gas Corporation

     1,920       (730     1,190       1,672       (636     1,036       2,226  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance AOCI June 30, 2017

   $ (55,693   $ 21,163     $ (34,530   $ (14,327   $ 5,444     $ (8,883   $ (43,413
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(5)

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

(6)

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

(7)

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

(8)

Tax amounts are calculated using a 38% rate.

 

27


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

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

Amounts Recognized in AOCI (Before Tax)

 

     June 30, 2017      December 31, 2016  
(Thousands of dollars)              

Net actuarial (loss) gain

   $ (418,251    $ (430,973

Prior service cost

     (5,035      (5,703

Less: amount recognized in regulatory assets

     367,593        379,063  
  

 

 

    

 

 

 

Recognized in AOCI

   $ (55,693    $ (57,613
  

 

 

    

 

 

 

Note 9 – Construction Services Redeemable Noncontrolling Interest

In conjunction with the acquisition of the Canadian construction businesses in October 2014, the previous owners of the acquired companies hold a 3.4% equity interest in Centuri as of June 30, 2017. The terms of the agreement subject to the 3.4% interest permit the previous owners (when eligible) to exit their investment retained by requiring (if elected) the purchase of a portion of their interest based on an eligibility timeline, with incremental amounts subject to the election each year. The redemption price of the redeemable noncontrolling interest in accordance with the terms of the agreement is at fair value. The shares subject to the election cumulate (if earlier elections are not made) such that 100% of their interest retained would be subject to the election beginning in July 2022.

Due to the ability of the noncontrolling parties to redeem their interest for cash under the eligibility timeline, their interest is presented on the Company’s Condensed Consolidated Balance Sheet at June 30, 2017 as a Redeemable noncontrolling interest, a category of mezzanine equity (temporary equity). The following depicts changes to the balance of the redeemable noncontrolling interest between the indicated periods.

 

     Redeemable
Noncontrolling
Interest
 
(Thousands of dollars):       

Balance, December 31, 2016

   $ 22,590  

Net income (loss) attributable to redeemable noncontrolling interest

     49  

Foreign currency exchange translation adjustment

     29  

Centuri dividend to redeemable noncontrolling interest

     (204

Adjustment to redemption value

     (2,315
  

 

 

 

Balance, June 30, 2017

   $ 20,149  
  

 

 

 

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

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

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

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

 

28


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

The following table presents the major categories of assets and liabilities within the amounts reported as discontinued operations – construction services in the Condensed Consolidated Balance Sheet of Southwest Gas Corporation:

 

(Thousands of dollars)    December 31, 2016  

Assets:

  

Other property and investments

   $ 233,774  

Cash and cash equivalents

     9,042  

Accounts receivable, net of allowances

     173,300  

Prepaids and other current assets

     10,470  

Goodwill

     129,888  

Other noncurrent assets

     22,897  
  

 

 

 

Discontinued operations - construction services - assets

   $ 579,371  
  

 

 

 

Liabilities:

  

Current maturities of long-term debt

   $ 25,101  

Accounts payable

     46,440  

Other current liabilities

     74,518  

Long-term debt, less current maturities

     174,903  

Deferred income taxes and other deferred credits

     59,653  
  

 

 

 

Discontinued operations—construction services—liabilities

   $ 380,615  
  

 

 

 

The following table presents the components of the Discontinued operations–construction services non-owner equity amount shown in the Southwest Gas Corporation Condensed Consolidated Balance Sheet:

 

(Thousands of dollars)    December 31, 2016  

Construction services equity

   $ (4,390

Construction services noncontrolling interest

     (2,217

Construction services redeemable noncontrolling interest

     22,590  
  

 

 

 

Discontinued operations - construction services non - owner equity

   $ 15,983  
  

 

 

 

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

Results of Construction Services

 

     Three      Six      Twelve      Twelve  
     Months Ended      Months Ended      Months Ended      Months Ended  
(Thousands of dollars)    June 30, 2016      June 30, 2016      June 30, 2017      June 30, 2016  

Construction revenues

   $ 292,100      $ 498,248      $ 640,830      $ 1,074,168  

Operating expenses:

           

Construction expenses

     263,926        457,308        567,115        955,332  

Depreciation and amortization

     15,327        29,942        25,727        58,763  
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     12,847        10,998        47,988        60,073  

Other income (deductions)

     34        —          1,193        1,067  

Net interest deductions

     1,660        3,151        3,512        7,086  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     11,221        7,847        45,669        54,054  

Income tax expense (benefit)

     4,480        3,334        16,550        20,414  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

     6,741        4,513        29,119        33,640  

Net income attributable to noncontrolling interests

     156        65        949        1,168  
  

 

 

    

 

 

    

 

 

    

 

 

 

Discontinued operations - construction services - net income

   $ 6,585      $ 4,448      $ 28,170      $ 32,472  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

29


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

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 96.6% of the common stock of Centuri Construction Group Inc. (“Centuri” or the “construction services” segment) as of June 30, 2017. As part of the holding company reorganization effective January 2017, Centuri and Southwest are now subsidiaries of Southwest Gas Holdings, Inc.; whereas historically, Centuri had been a direct subsidiary of Southwest. Southwest Gas Holdings, Inc. and its subsidiaries (the “Company”) have two business segments (natural gas operations and construction services), which are discussed below.

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

As of June 30, 2017, Southwest had 1,994,000 residential, commercial, industrial, and other natural gas customers, of which 1,063,000 customers were located in Arizona, 738,000 in Nevada, and 193,000 in California. Residential and commercial customers represented over 99% of the total customer base. During the twelve months ended June 30, 2017, 54% of operating margin was earned in Arizona, 35% in Nevada, and 11% in California. During this same period, Southwest earned 85% of its operating margin (gas operating revenues less the net cost of gas sold) from residential and small commercial customers, 3% from other sales customers, and 12% from transportation customers. These general patterns are expected to remain materially consistent for the foreseeable future.

Southwest recognizes operating revenues from the distribution and transportation of natural gas (and related services) to customers. 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.

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

Centuri is a comprehensive construction services enterprise dedicated to meeting the growing demands of North American utilities, energy and industrial markets. Centuri derives revenue from installation, replacement, repair, and maintenance of energy distribution systems, and developing industrial construction solutions primarily for energy services utilities. Centuri operates in 24 major markets in the United States (primarily as NPL) and in 3 major markets in Canada (as NPL Canada (formerly Link-Line Contractors Ltd.), and W.S. Nicholls). Construction activity is cyclical and can be significantly impacted by changes in weather, general and local economic conditions (including the housing market), interest rates, employment levels, job growth, pipe replacement programs of utilities, and local and federal regulation (including tax rates and incentives). During the past few years, utilities have implemented or modified pipeline integrity management programs to enhance safety pursuant to federal and state mandates. These programs, coupled with recent bonus depreciation tax deduction incentives, have resulted in a significant increase in multi-year pipeline replacement projects throughout the U.S. Generally, revenues are lowest during the first quarter of the year due to less favorable winter weather conditions. Revenues typically improve as more favorable weather

 

30


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

conditions occur during the summer and fall months. This is expected in both the U.S. and Canadian markets. In certain circumstances, such as with large bid contracts (especially those of a longer duration), or unit-price contracts with revenue caps, results may be impacted by differences between costs incurred and those anticipated when the work was originally bid. Work awarded, or failing to be awarded, by individual large customers can impact operating results.

This Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and the notes thereto, as well as MD&A included in the 2016 Annual Report to Shareholders, which is incorporated by reference into the 2016 Form 10-K.

Executive Summary

The items discussed in this Executive Summary are intended to provide an overview of the results of the Company’s operations. As needed, certain items are covered in greater detail in later sections of management’s discussion and analysis. As reflected in the table below, the natural gas operations segment accounted for an average of 80% of twelve-month-to-date consolidated net income over the past two years. As such, management’s discussion and analysis is primarily focused on that segment. Natural gas sales are seasonal, peaking during the winter months; therefore, results of operations for interim periods are not necessarily indicative of results for a full year.

Summary Operating Results

 

     Period Ended June 30,  
     Three Months      Six Months      Twelve Months  
     2017     2016      2017     2016      2017     2016  
     (In thousands, except per share amounts)  

Contribution to net income

              

Natural gas operations

   $ 9,522     $ 2,358      $ 86,460     $ 79,941      $ 125,942     $ 113,302  

Construction services

     8,716       6,585        1,382       4,448        29,552       32,472  

Corporate and administrative

     (374     —          (670     —          (670     —    
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 17,864     $ 8,943      $ 87,172     $ 84,389      $ 154,824     $ 145,774  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Average number of common shares outstanding

     47,571       47,473        47,550       47,455        47,516       47,347  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Basic earnings per share

              

Consolidated

   $ 0.38     $ 0.19      $ 1.83     $ 1.78      $ 3.26     $ 3.08  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Natural Gas Operations

              

Gas operating revenues

   $ 260,162     $ 255,648      $ 722,764     $ 780,748      $ 1,263,428     $ 1,395,629  

Net cost of gas sold

     69,421       71,416        216,300       285,016        328,405       486,048  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Operating margin

   $ 190,741     $ 184,232      $ 506,464     $ 495,732      $ 935,023     $ 909,581  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

31


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

2nd Quarter 2017 Overview

Natural gas operations highlights:

 

   

Benefits of Arizona rate case reflected in quarterly operating results

 

   

32,000 net new customers in last 12 months (1.6% growth rate)

 

   

Depreciation and amortization expense declined $11 million compared to the prior-year quarter

 

   

Operating income increased $12.2 million compared to the prior-year quarter

 

   

Received approval to extend current rate case cycle in California

 

   

Proposed $66 million of accelerated pipe replacement in Nevada GIR application

 

   

Targeting $27 million of vintage steel pipe replacement in Arizona during 2017

 

   

Received approval for a $1.8 million surcharge associated with Arizona COYL program

Construction services highlights:

 

   

Revenues increased $8.2 million compared to the prior-year quarter

 

   

Construction expenses increased $8.1 million compared to the prior-year quarter

 

   

Depreciation and amortization expense declined $3.5 million compared to the prior-year quarter

 

   

Completed requalification of employees affected by temporary work stoppage

 

32


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

Results of Natural Gas Operations

Quarterly Analysis

 

     Three Months Ended
June 30,
 
     2017      2016  
     (Thousands of dollars)  

Gas operating revenues

   $ 260,162      $ 255,648  

Net cost of gas sold

     69,421        71,416  
  

 

 

    

 

 

 

Operating margin

     190,741        184,232  

Operations and maintenance expense

     102,501        98,744  

Depreciation and amortization

     46,254        57,232  

Taxes other than income taxes

     14,497        12,987  
  

 

 

    

 

 

 

Operating income

     27,489        15,269  

Other income (deductions)

     2,052        2,436  

Net interest deductions

     16,991        16,561  
  

 

 

    

 

 

 

Income before income taxes

     12,550        1,144  

Income tax expense (benefit)

     3,028        (1,214
  

 

 

    

 

 

 

Contribution to consolidated net income

   $ 9,522      $ 2,358  
  

 

 

    

 

 

 

The contribution to consolidated net income from natural gas operations increased $7.2 million between the second quarters of 2017 and 2016. The improvement was primarily due to higher operating margin and lower depreciation expense, both resulting from the recent Arizona general rate case decision.

Operating margin increased nearly $7 million between quarters. Rate relief in Arizona (effective April 2017) and California provided $5 million in operating margin (see Rates and Regulatory Proceedings). Approximately $2 million was attributable to customer growth, as 32,000 net new customers were added during the last twelve months.

Operations and maintenance expense increased $3.8 million, or 4%, between quarters due primarily to higher employee-related expenses and general cost increases. Employee-related expenses reflect approximately $1.3 million of incremental costs recognized associated with the amount and timing of incentive plan grants (including accelerated recognition for retirement eligible employees).

Depreciation and amortization expense decreased $11 million between quarters primarily due to reduced depreciation rates in Arizona, a result of the recent Arizona general rate case decision. Partially offsetting the decline was increased depreciation associated with a $321 million, or 5%, increase in average gas plant in service for the current quarter as compared to the corresponding quarter a year ago. The increase was attributable to pipeline capacity reinforcement work, franchise requirements, scheduled and accelerated pipe replacement activities, and new infrastructure.

Taxes other than income taxes increased $1.5 million between quarters primarily due to higher property taxes associated with net plant additions and increased property taxes in Arizona. Property taxes were also impacted by a property tax tracking mechanism enacted as part of the recently settled Arizona general rate case.

Other income, which principally includes returns on company-owned life insurance (“COLI”) policies and non-utility expenses, decreased $384,000 between quarters. The current quarter reflects $1.9 million of COLI-related income associated with COLI policy cash surrender value increases, while the prior-year quarter reflected $2.2 million of COLI-related income.

Net interest deductions increased $430,000 between quarters, primarily due to the September 2016 issuance of $300 million of senior notes, partially offset by reductions associated with the redemption of debt ($100 million of 4.85% IDRBs in July 2016, and $24.9 million of 4.75% IDRBs in September 2016) and lower interest expense associated with PGA balances as compared to the prior-year quarter.

 

33


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    June 30, 2017

 

Results of Natural Gas Operations

Six-Month Analysis

 

     Six Months Ended June 30,  
     2017      2016  
     (Thousands of dollars)  

Gas operating revenues

   $ 722,764      $ 780,748  

Net cost of gas sold

     216,300        285,016  
  

 

 

    

 

 

 

Operating margin

     506,464        495,732  

Operations and maintenance expense

     211,180        199,541  

Depreciation and amortization

     107,449        117,977  

Taxes other than income taxes

     29,279        27,000  
  

 

 

    

 

 

 

Operating income

     158,556        151,214  

Other income (deductions)

     5,663        4,191