EX-13.01 6 d513923dex1301.htm EX-13.01 EX-13.01

 

Exhibit 13.01

Consolidated Selected Financial Statistics

 

Year Ended December 31,    2017     2016     2015     2014     2013  
(Thousands of dollars, except per share amounts)                               

Operating revenues

   $ 2,548,792     $ 2,460,490     $ 2,463,625     $ 2,121,707     $ 1,950,782  

Operating expenses

     2,225,092       2,164,776       2,175,293       1,837,224       1,676,567  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

   $ 323,700     $ 295,714     $ 288,332     $ 284,483     $ 274,215  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Southwest

          

Gas Holdings, Inc.

   $ 193,841     $ 152,041     $ 138,317     $ 141,126     $ 145,320  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets at year end

   $ 6,237,066     $ 5,581,126     $ 5,358,685     $ 5,208,297     $ 4,565,174  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Capitalization at year end

          

Total equity

   $ 1,812,403     $ 1,661,273     $ 1,592,325     $ 1,486,266     $ 1,412,395  

Redeemable noncontrolling interest

           22,590       16,108       20,042        

Long-term debt, excluding current maturities

     1,798,576       1,549,983       1,551,204       1,631,374       1,381,327  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 3,610,979     $ 3,233,846     $ 3,159,637     $ 3,137,682     $ 2,793,722  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Current maturities of long-term debt

   $ 25,346     $ 50,101     $ 19,475     $ 19,192     $ 11,105  

Common stock data

          

Common equity percentage of capitalization

     50.2     51.4     50.4     47.4     50.6

Return on average common equity

     11.2     9.3     8.9     9.7     10.6

Basic earnings per share

   $ 4.04     $ 3.20     $ 2.94     $ 3.04     $ 3.14  

Diluted earnings per share

   $ 4.04     $ 3.18     $ 2.92     $ 3.01     $ 3.11  

Dividends declared per share

   $ 1.98     $ 1.80     $ 1.62     $ 1.46     $ 1.32  

Payout ratio

     49     56     55     48     42

Book value per share at year end

   $ 37.74     $ 35.03     $ 33.65     $ 32.03     $ 30.51  

Market value per share at year end

   $ 80.48     $ 76.62     $ 55.16     $ 61.81     $ 55.91  

Market value to book value per share

     213     219     164     193     183

Common shares outstanding at year end (000)

     48,090       47,482       47,378       46,523       46,356  

Number of common shareholders at year end

     13,077       13,619       14,153       14,749       15,359  

Ratio of earnings to fixed charges

     3.54       3.46       3.43       3.58       3.90  

 

Southwest Gas Holdings, Inc.

   27


 

Natural Gas Operations

 

Year Ended December 31,    2017     2016     2015     2014     2013  
(Thousands of dollars)                               

Operating revenue

   $ 1,302,308     $ 1,321,412     $ 1,454,639     $ 1,382,087     $ 1,300,154  

Net cost of gas sold

     355,045       397,121       563,809       505,356       436,001  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

     947,263       924,291       890,830       876,731       864,153  

Expenses

          

Operations and maintenance

     410,745       401,724       393,199       383,732       384,914  

Depreciation and amortization

     201,922       233,463       213,455       204,144       193,848  

Taxes other than income taxes

     57,946       52,376       49,393       47,252       45,551  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

   $ 276,650     $ 236,728     $ 234,783     $ 241,603     $ 239,840  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Contribution to consolidated net income

   $ 156,818     $ 119,423     $ 111,625     $ 116,872     $ 124,169  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets at year end

   $ 5,482,669     $ 5,001,756     $ 4,822,845     $ 4,652,307     $ 4,272,029  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net gas plant at year end

   $ 4,523,650     $ 4,131,971     $ 3,891,085     $ 3,658,383     $ 3,486,108  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Construction expenditures and property additions

   $ 560,448     $ 457,120     $ 438,289     $ 350,025     $ 314,578  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flow, net

          

From operating activities

   $ 309,216     $ 507,224     $ 497,500     $ 288,534     $ 265,290  

From (used in) investing activities

     (557,384     (446,238     (416,727     (328,645     (304,189

From (used in) financing activities

     267,090       (63,339     (74,159     23,413       44,947  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash

   $ 18,922     $ (2,353   $ 6,614     $ (16,698   $ 6,048  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total throughput (thousands of therms)

          

Residential

     674,271       684,626       655,421       617,377       741,327  

Small commercial

     297,677       294,525       285,118       276,582       298,045  

Large commercial

     92,561       90,949       92,284       94,391       102,761  

Industrial/Other

     33,816       30,275       30,973       32,374       50,210  

Transportation

     974,407       970,561       1,035,707       906,691       1,037,916  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total throughput

     2,072,732       2,070,936       2,099,503       1,927,415       2,230,259  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average cost of gas purchased ($/therm)

   $ 0.44     $ 0.37     $ 0.44     $ 0.55     $ 0.42  

Customers at year end

     2,015,000       1,984,000       1,956,000       1,930,000       1,904,000  

Employees at year end

     2,285       2,247       2,219       2,196       2,220  

Customer to employee ratio

     882       883       881       879       858  

Degree days – actual

     1,478       1,613       1,512       1,416       1,918  

Degree days – ten-year average

     1,733       1,771       1,792       1,816       1,876  

 

Southwest Gas Holdings, Inc.

   28


 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

About Southwest Gas Holdings, Inc.

Southwest Gas Holdings, Inc. is a holding company that owns all of the shares of common stock of Southwest Gas Corporation (“Southwest” or the “natural gas operations” segment), and all of the shares of common stock of Centuri Construction Group, Inc. (“Centuri” or the “construction services” segment). Prior to August 2017, only 96.6% of Centuri’s shares were owned. During August 2017, Southwest Gas Holdings, Inc. acquired the remaining 3.4% equity interest in Centuri that was held by the previous owners (and previously reflected as a redeemable noncontrolling interest).

As part of a holding company reorganization, effective January 2017, designed to provide further separation between regulated and unregulated businesses, Centuri and Southwest are now subsidiaries of Southwest Gas Holdings, Inc.; whereas historically, Centuri had been a direct subsidiary of Southwest. To give effect to this change, the separate consolidated financial statements of Southwest Gas Corporation depict Centuri-related amounts for periods prior to 2017 as discontinued operations of Southwest. Refer to Note 1Summary of Significant Accounting Policies and Note 18 – Reorganization Impacts – Discontinued Operations Solely Related to Southwest Gas Corporation of this 2017 Annual Report for additional details regarding the reorganization and the presentation of financial information. 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 December 31, 2017, Southwest had 2,015,000 residential, commercial, industrial, and other natural gas customers, of which 1,073,000 customers were located in Arizona, 747,000 in Nevada, and 195,000 in California. Residential and commercial customers represented over 99% of the total customer base. During 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

 

Southwest Gas Holdings, Inc.

   29


 

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. Centuri operates in 23 major markets in the United States (primarily as NPL) and in 2 major markets in Canada (as NPL Canada (formerly Link-Line Contractors Ltd.) and W.S. Nicholls). In November 2017, Centuri expanded its operations in the Northeast region of the United States (“U.S.”) through the acquisition of a private construction services business. The acquired company is expected to be accretive to earnings per share during the first full year of operations. Information surrounding the acquisition can be found in Note 19 – Acquisition of Construction Services Business in this annual report.

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 bonus depreciation tax deduction incentives, have resulted in a significant increase in multi-year pipeline replacement projects throughout the U.S. Generally, Centuri revenues are lowest during the first quarter of the year due to less favorable winter weather conditions. Revenues typically improve as more favorable weather conditions occur during the summer and fall months. 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.

Executive Summary

The items discussed in this Executive Summary are intended to provide an overview of the results of the Company’s operations and 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 consolidated net income over the past three years.

 

Southwest Gas Holdings, Inc.

   30


 

Summary Operating Results

 

Year ended December 31,    2017     2016      2015  
(In thousands, except per share amounts)                    

Contribution to net income

       

Natural gas operations

   $ 156,818     $ 119,423      $ 111,625  

Construction services

     38,360       32,618        26,692  

Corporate and administrative

     (1,337             
  

 

 

   

 

 

    

 

 

 

Consolidated

   $ 193,841     $ 152,041      $ 138,317  
  

 

 

   

 

 

    

 

 

 

Average number of common shares

     47,965       47,469        46,992  
  

 

 

   

 

 

    

 

 

 

Basic earnings per share

       

Consolidated

   $ 4.04     $ 3.20      $ 2.94  
  

 

 

   

 

 

    

 

 

 

Natural Gas Operations

       

Gas operating revenues

   $ 1,302,308     $ 1,321,412      $ 1,454,639  

Net cost of gas sold

     355,045       397,121        563,809  
  

 

 

   

 

 

    

 

 

 

Operating margin

   $ 947,263     $ 924,291      $ 890,830  
  

 

 

   

 

 

    

 

 

 

2017 Overview

Consolidated results for 2017 increased compared to 2016 as improvements were experienced in both operating segments. Basic earnings per share were $4.04 in 2017 compared to basic earnings per share of $3.20 in 2016.

Natural gas operations highlights include the following:

 

Arizona rate case settlement provided increased operating margin and lower depreciation

 

Operating margin increased $23 million, or 2.5%, between 2017 and 2016

 

31,000 net new customers (1.6% growth rate); achieved 2 million total customers in November 2017

 

Returns on Company-Owned Life Insurance (“COLI”) policies were $10.3 million in 2017 compared to $7.4 million in 2016

 

New tax law provided $8 million in tax benefits

 

Credit facility amended (and extended to March 2022), increasing the borrowing capacity from $300 million to $400 million

Construction services highlights include the following:

 

Revenues in 2017 increased $107 million, or 9%, compared to 2016

 

Construction expenses increased $125 million, or 12%, compared to 2016

 

New tax law provided $12 million in net tax benefits

 

Completed the acquisition of a construction services business in November 2017

 

Amended and restated the senior secured revolving credit and term loan facility, increasing the borrowing capacity from $300 million to $450 million in November 2017

Southwest Gas Holdings highlights include the following:

 

In March 2017, entered into a credit facility with a borrowing capacity of $100 million that expires in March 2022

 

Acquired the residual 3.4% interest in Centuri in August 2017

 

Amended and restated bylaws to eliminate cumulative voting and enact majority voting policy

 

Southwest Gas Holdings, Inc.

   31


 

Results of Natural Gas Operations

 

Year Ended December 31,    2017      2016      2015  
(Thousands of dollars)                     

Gas operating revenues

   $ 1,302,308      $ 1,321,412      $ 1,454,639  

Net cost of gas sold

     355,045        397,121        563,809  
  

 

 

    

 

 

    

 

 

 

Operating margin

     947,263        924,291        890,830  

Operations and maintenance expense

     410,745        401,724        393,199  

Depreciation and amortization

     201,922        233,463        213,455  

Taxes other than income taxes

     57,946        52,376        49,393  
  

 

 

    

 

 

    

 

 

 

Operating income

     276,650        236,728        234,783  

Other income (deductions)

     13,036        8,276        2,292  

Net interest deductions

     69,733        66,997        64,095  
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     219,953        178,007        172,980  

Income tax expense

     63,135        58,584        61,355  
  

 

 

    

 

 

    

 

 

 

Contribution to consolidated net income

   $ 156,818      $ 119,423      $ 111,625  
  

 

 

    

 

 

    

 

 

 

2017 vs. 2016

The contribution to consolidated net income from natural gas operations increased $37.4 million between 2017 and 2016. The improvement was primarily due to an increase in operating margin, lower depreciation expense, and higher other income, partially offset by an increase in general taxes and operations and maintenance expenses.

Operating margin increased $23 million between years. Combined rate relief in the Arizona and California jurisdictions provided $15 million in operating margin (see Rates and Regulatory Proceedings). Customer growth contributed $9 million in operating margin, while operating margin associated with recoveries of regulatory assets, infrastructure replacement mechanisms, customers outside the decoupling mechanisms, and other miscellaneous revenues decreased $1 million.

Operations and maintenance expense increased $9 million, or 2%, between 2017 and 2016 as general cost increases were partially offset by a decline in self-insured employee medical costs. Higher expenses for pipeline integrity management and damage prevention programs accounted for $2.5 million of the increase.

Depreciation and amortization expense decreased $31.5 million, or 14%, primarily due to reduced depreciation rates in Arizona, a result of the Arizona general rate case decision. Partially offsetting the decline was increased depreciation expense associated with a $338 million, or 6%, increase in average gas plant in service for the current year as compared to the prior year. The increase in gas plant was attributable to pipeline capacity reinforcement work, franchise requirements, scheduled and accelerated pipe replacement activities, and new infrastructure.

Taxes other than income taxes increased $5.6 million, or 11%, between 2017 and 2016 primarily due to higher property taxes associated with net plant additions and increased property taxes in Arizona, including the impact of a property tax regulatory tracking mechanism resulting from the recent Arizona general rate case.

Other income, which principally includes returns on COLI policies (including cash surrender values and recognized net death benefits) and non-utility expenses, increased $4.8 million between 2017 and 2016. The current year

 

Southwest Gas Holdings, Inc.

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reflects a $10.3 million increase in COLI policy cash surrender values, while the prior year reflected $7.4 million of combined COLI-related income and recognized death benefits. COLI amounts were greater than expected in both years. In addition, interest earned related to the Gas Infrastructure Replacement (“GIR”) mechanism in Nevada grew in the current year due to a substantial increase in the amount of accelerated pipe replacement work under the program during 2017. See the Nevada Jurisdiction section of Rates and Regulatory Proceedings.

Net interest deductions increased $2.7 million between 2017 and 2016, primarily due to the issuance of $300 million of senior notes in September 2016 and higher interest associated with credit facility borrowings during 2017. The increase was substantially offset by reductions in interest expense associated with deferred purchased gas adjustment (“PGA”) balances as compared to the prior year and various debt redemptions in the second half of 2016 and early 2017.

Income taxes were favorably impacted by approximately $8 million in 2017 due to the December 2017 enactment of legislation commonly referred to as the Tax Cuts and Jobs Act (“TCJA”). This reduction primarily relates to the remeasurement of deferred tax liabilities not associated with utility plant depreciation timing differences. Refer to Note 13 – Income Taxes in the notes to the consolidated financial statements.

2016 vs. 2015

The contribution to consolidated net income from natural gas operations increased $7.8 million between 2016 and 2015. The improvement was primarily due to an increase in operating margin and other income, partially offset by an increase in operating expenses and net interest deductions.

Operating margin increased $33 million between 2016 and 2015. Combined rate relief in the California jurisdiction and Paiute Pipeline Company provided $10 million, and new customers contributed $8 million, in operating margin during 2016. The Nevada Conservation and Energy Efficiency (“CEE”) surcharge, which was implemented in January 2016, provided $11 million of the increase between the comparative years of 2016 and 2015. Amounts collected through the surcharge did not impact net income as they also resulted in an increase in associated amortization expense. Infrastructure replacement mechanisms and customers outside the decoupling mechanisms, as well as other miscellaneous revenues, collectively provided $4 million of operating margin during 2016.

Operations and maintenance expense increased $8.5 million, or 2%, between 2016 and 2015 due primarily to general cost increases and higher employee medical costs, partially offset by a decline in pension expense. Higher expenses for pipeline integrity management and damage prevention programs accounted for $2.6 million of the increase between years.

Depreciation and amortization expense increased $20 million, or 9%, between 2016 and 2015. Average gas plant in service increased $341 million, or 6%, between this time period. This was attributable to pipeline capacity reinforcement work, franchise requirements, scheduled and accelerated pipe replacement activities, and new infrastructure, which collectively resulted in increased depreciation expense. Amortization associated with the recovery of regulatory assets increased approximately $7.1 million overall between these periods, notably due to amortization accompanying the recovery of Nevada CEE costs indicated above.

Taxes other than income taxes increased $3 million, or 6%, between 2016 and 2015 primarily due to higher property taxes associated with net plant additions.

 

Southwest Gas Holdings, Inc.

   33


 

Other income increased $6 million between 2016 and 2015 due to $7.4 million of COLI-related income, including recognized net death benefits, during 2016, but a COLI-related loss of $500,000 during 2015.

Net interest deductions increased $2.9 million between 2016 and 2015, primarily due to higher interest expense associated with deferred purchased gas adjustment (“PGA”) balances and the issuance of $300 million of senior notes. The increase was substantially offset by reductions associated with the redemption of debt ($20 million of 5.25% 2003 Series D IDRBs in September 2015, $100 million of 4.85% 2005 Series A IDRBs in July 2016, and $24.9 million of 4.75% 2006 Series A in September 2016).

The effective income tax rates in both 2016 and 2015 were impacted by COLI results, which are not subject to tax. Additionally, the Company claimed a federal income tax credit, which resulted in a recognized benefit of approximately $1.7 million during 2016.

Results of Construction Services

 

Year Ended December 31,    2017      2016      2015  
(Thousands of dollars)                     

Construction revenues

   $ 1,246,484      $ 1,139,078      $ 1,008,986  

Operating expenses:

        

Construction expenses

     1,148,963        1,024,423        898,781  

Depreciation and amortization

     49,029        55,669        56,656  
  

 

 

    

 

 

    

 

 

 

Operating income

     48,492        58,986        53,549  

Other income (deductions)

     345        1,193        587  

Net interest deductions

     7,986        6,663        7,784  
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     40,851        53,516        46,352  

Income tax expense

     2,390        19,884        18,547  
  

 

 

    

 

 

    

 

 

 

Net income

     38,461        33,632        27,805  

Net income attributable to noncontrolling interests

     101        1,014        1,113  
  

 

 

    

 

 

    

 

 

 

Contribution to consolidated net income attributable to Centuri

   $ 38,360      $ 32,618      $ 26,692  
  

 

 

    

 

 

    

 

 

 

In May 2016, Centuri acquired ETTI. Line items in the tables above reflect the results of ETTI only since the acquisition date, including approximately $6 million in revenues during 2016 and $8 million in revenues during 2017. In November 2017, Centuri acquired New England Utility Constructors, Inc. (“Neuco”). Line items in the table above reflect the results of Neuco only since the acquisition date, including approximately $17 million in revenues during 2017.

2017 vs. 2016

Contribution to consolidated net income from construction services increased $5.7 million in 2017 compared to 2016. Results were positively impacted by the remeasurement of Centuri’s deferred tax liabilities due to the recently enacted TCJA. Higher construction costs outpaced increased revenues, but were partially offset by lower depreciation.

Revenues increased $107.4 million, or 9%, in 2017 when compared to 2016, primarily due to additional pipe replacement work for natural gas distribution customers partially offset by a temporary work stoppage with a

 

Southwest Gas Holdings, Inc.

   34


 

customer. The temporary work stoppage began in the first quarter of 2017 and was due to regulatory issues attributable to requalifying employees of all contractors working on the customer’s natural gas system. Operations resumed following the requalification of Centuri employees during the second quarter of 2017. In addition, Centuri performed work on a multi-year water pipe replacement program, which began in late 2016, for a customer that contributed incremental revenues of $29.7 million during 2017. Construction revenues include contracts with Southwest totaling $97 million in 2017 and $98 million in 2016. Centuri accounts for services provided to Southwest at contractual prices. Refer to Consolidation under Summary of Significant Accounting Policies in Note 1 to the consolidated financial statements.

Construction expenses increased by $124.5 million, or 12%, in 2017 when compared to 2016. The increase in construction expenses is disproportionate to the increase in revenues due in part to logistics surrounding the timing and length of the temporary work stoppage with the customer noted above and higher labor costs incurred to complete work during inclement weather conditions in the first quarter of 2017. Results were also negatively impacted by certain construction costs driven primarily by customer-paced acceleration as well as an unfavorable mix of work related to the water pipe replacement program. Centuri is pursuing relief from the customer in the form of modified terms or additional cost recovery pursuant to terms of the contract. Gains on sale of equipment (reflected as an offset to construction expenses) were approximately $4.2 million and $7.1 million for 2017 and 2016, respectively.

Depreciation and amortization expense decreased $6.6 million between 2017 and 2016 primarily due to a $10 million reduction in depreciation associated with a change in the estimated useful lives of certain depreciable equipment, partially offset by incremental amortization of finite-lived intangible assets recognized from the Neuco acquisition and an increase in depreciation on additional equipment purchased to support the growing volume of work being performed.

The increase in net interest deductions was due primarily to interest expense and amortization of debt issuance costs associated with incremental borrowings under the $450 million secured revolving credit and term loan facility.

Income tax expense decreased $17.5 million between 2017 and 2016 primarily due to a net benefit ($12 million) related to enactment of the TCJA and the remeasurement of Centuri’s deferred tax liabilities. Pre-tax income declined $12.6 million between 2017 and 2016.

During the past several years, construction services segment efforts have been focused on obtaining pipe replacement work under both blanket contracts and incremental bid projects. For 2017 and 2016, revenues from replacement work were approximately 60% of total revenues. Governmental pipeline safety-related programs and U.S. bonus depreciation tax incentives have resulted in many utilities undertaking ongoing multi-year distribution pipe replacement projects.

2016 vs. 2015

Contribution to consolidated net income from construction services for 2016 increased $5.9 million compared to 2015. Additional bid work, lower depreciation and amortization, and decreased interest expense positively impacted net income. Pretax losses of $3.4 million were incurred in 2015 on an industrial construction project in Canada.

 

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Revenues increased $130.1 million, or 13%, in 2016 when compared to 2015, primarily due to work performed on certain large bid projects and additional pipe replacement work. In addition, higher revenues were recognized due to favorable weather conditions during the year, generally in the mid-western and north-eastern parts of the United States and in Canada, which extended the construction season. Governmental-mandated pipeline safety-related programs resulted in many utilities undertaking multi-year distribution pipe replacement projects. Construction revenues included contracts with Southwest totaling $98 million in 2016 and $104 million in 2015.

Construction expenses increased $125.6 million, or 14%, during 2016 as compared to 2015 due to additional pipe replacement work, higher labor costs experienced due to changes in the mix of work with existing customers, and greater operating expenses to support increased growth in operations. General and administrative expense (included in construction expenses) increased approximately $1.6 million overall to support the growth in operations and the increasing size, geographic footprint and complexity of Centuri’s business. Gains on sale of equipment (reflected as an offset to construction expenses) were approximately $7.1 million and $3.4 million for 2016 and 2015, respectively.

Depreciation and amortization expense decreased $1 million between 2016 and 2015 primarily due to a $4 million reduction in depreciation associated with an extension of the estimated useful lives of certain depreciable equipment and to a decline in amortization of certain finite-lived intangible assets, partially offset by an increase in depreciation on additional equipment purchased to support the growing volume of work being performed.

Operating income increased $5.4 million, or 10%, in 2016 when compared to 2015, primarily due to increased bid work at favorable profit margins overall.

Net interest deductions declined $1.1 million between 2016 and 2015, primarily due to lower interest rates on outstanding borrowings during 2016 as compared to 2015 and to a decrease in the average line-of-credit balance outstanding during 2016.

Rates and Regulatory Proceedings

General Rate Relief and Rate Design

Rates charged to customers vary according to customer class and rate jurisdiction and are set by the individual state and federal regulatory commissions that govern Southwest’s service territories. Southwest makes periodic filings for rate adjustments as the costs of providing service (including the cost of natural gas purchased) changes, and as additional investments in new or replacement pipeline and related facilities are made. Rates are intended to provide for recovery of all commission-approved prudently incurred costs and provide a reasonable return on investment. The mix of fixed and variable components in rates assigned to various customer classes (rate design) can significantly impact the operating margin actually realized by Southwest. Management has worked with its regulatory commissions in designing rate structures that strive to provide affordable and reliable service to its customers while mitigating the volatility in prices to customers and stabilizing returns to investors. Such rate structures were in place in all of Southwest’s operating areas during all periods (2015—2017) for which results of Natural Gas Operations are disclosed above.

Nevada Jurisdiction

Nevada General Rate Case.    The most recent general rate case decision was received from the Public Utilities Commission of Nevada (“PUCN”) in November 2012, and was amended in a Rehearing Decision in April 2013. Southwest was authorized an overall rate of return of 6.56% and a 10% return on 42.7% common equity in southern Nevada; and an overall rate of return of 7.88%, and 9.30% return on 59.1% common equity in northern Nevada. As

 

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required, Southwest currently plans to file a general rate case prior to June 2018. See also Infrastructure Replacement Mechanisms below. To date, the PUCN has not initiated any action specific to recent changes in federal tax law. Due to the timing of the next Nevada general rate case filing, it is anticipated that any adjustment will be addressed in the upcoming proceeding. Refer to Note 1 – Summary of Significant Accounting Policies, Note 5 – Regulatory Assets and Liabilities, and Note 13 – Income Taxes.

General Revenues Adjustment.    As part of the Annual Rate Adjustment (“ARA”) filing in 2016, the PUCN authorized rate adjustments associated with its revenue decoupling mechanism (General Revenues Adjustment, or “GRA”). The rate adjustment collected $13.6 million from customers during 2017, a decrease in collections of $11.8 million, as compared to 2016. In June 2017, Southwest filed to adjust the GRA surcharge, effective January 2018, which was approved by the PUCN during the third quarter of 2017. This rate adjustment is expected to result in a decrease in collections from customers of $15.4 million. While there is no impact to net income overall from this rate adjustment, operating cash flows will be reduced as the associated regulatory liability balance is refunded.

Infrastructure Replacement Mechanisms.    In January 2014, the PUCN approved final rules for a mechanism to defer and recover certain costs associated with accelerated replacement of infrastructure that would not otherwise currently provide incremental revenues. Associated with such mechanism, each year, Southwest files a Gas Infrastructure Replacement (“GIR”) Advance Application requesting authorization to replace qualifying infrastructure. For projects approved in 2015 and completed in 2016, the annualized revenue was approximately $4.5 million. In June 2016, Southwest filed an Advance Application for projects expected to be completed during 2017, proposing approximately $60 million of accelerated pipe replacement to include early vintage plastic, early vintage steel, and a Customer-Owned Yardline (“COYL”) program. The PUCN issued an Order on the Advance Application in October 2016, approving approximately $57.3 million of replacement work with an annualized revenue requirement estimated at approximately $5.3 million. In May 2017, Southwest filed a GIR Advance Application with the PUCN for projects totaling approximately $66 million that are expected to be completed during 2018. The PUCN issued an Order on this latest Advance Application in September 2017, approving approximately $66 million of replacement work with an annualized revenue requirement estimated at approximately $6 million.

Filed separately, as part of each annual GIR filing, Southwest requests authorization to reset the GIR recovery surcharge, related to previously approved and completed projects, with the new rates becoming effective each January. In November 2017, for projects approved in 2016 and completed by July of 2017, the deferred annualized revenue requirement of $8.7 million was approved to be recovered from customers through updated rates effective January 2018. The updated surcharge is expected to result in incremental annual margin of $4.2 million.

Subsequent to three GIR rate applications, the GIR regulations require Southwest to either file a general rate case or a request for waiver before it can file another GIR Advance Application. The October 2016 approved rate application was the third such filing by Southwest subject to these regulations, necessitating a request for waiver to permit Southwest to proceed with the GIR program without filing a general rate case in 2017. This waiver was approved by the PUCN in January 2017; however, in order to file a GIR Advance Application in 2018 (for projects recommended for completion under the program in 2019), a general rate case will be filed before June 2018.

COYL Program    The COYL program, while not large in magnitude, represents the first of its kind in Nevada, modeled after the program in place for several years in Southwest’s Arizona jurisdiction. As part of the GIR Advance Application approved in October 2016, the COYL program approval was granted for the northern Nevada rate jurisdiction, but consideration for the southern Nevada rate jurisdiction was initially deferred until 2020, when

 

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certain early vintage plastic pipe programs are expected to be completed. In May 2017, Southwest filed a GIR Advance Application with the PUCN, similar to previous years, including a request to continue the COYL program in northern Nevada. Southwest entered into a settlement agreement with the intervening parties and filed a proposed stipulation requesting the PUCN approve the settlement agreement, which would authorize Southwest to start replacing COYLs in southern Nevada in certain situations, and to recover associated amounts through the GIR mechanism. The PUCN issued an Order on the GIR Advance Application in September 2017, approving the COYL provisions in southern Nevada.

Conservation and Energy Efficiency(“CEE”).    In June 2015, Southwest requested recovery of energy efficiency and conservation development and implementation costs, including promotions and incentives for various programs, as originally approved for deferral by the PUCN effective November 2009. While recovery of initial program costs was approved as part of the most recent general rate case, amounts incurred subsequent to May 2012 (the certification period) continued to be deferred. Approved rates for the post-May 2012 costs deferred (including previously expected program expenditures for 2016) became effective January 2016 and resulted in annualized margin increases of $2 million in northern Nevada and $8.5 million in southern Nevada. Then, as part of the ARA filing, approved in December 2016 Southwest modified rates, effective January 2017, authorizing annualized margin decreases of $1.4 million in northern Nevada and $1.3 million in southern Nevada to return over-collected balances. The 2017 ARA filing approved in November 2017, with modified rates effective January 2018, is expected to result in annualized margin decreases of $8.2 million in southern Nevada and $1.4 million in northern Nevada to return over-collected balances. There is, however, no anticipated impact to net income overall from these decreases as amortization expense will also be reduced.

Expansion and Economic Development Legislation.    In February 2015, legislation (“SB 151”) was introduced in Nevada directing the PUCN to adopt regulations authorizing natural gas utilities to expand their infrastructure consistent with a program of economic development. This includes providing gas service to unserved and underserved areas in Nevada, as well as attracting and retaining utility customers and accommodating the expansion of existing business customers. SB 151 was signed into law in May 2015. The draft regulations were reviewed by the Legislative Council Bureau and final regulations were approved by the PUCN in January 2016.

In November 2017, Southwest filed for preapproval of a project to extend service to include the service territory of Mesquite, Nevada, in accordance with the SB 151 regulations. This project proposes the extension of existing facilities to Mesquite at an estimated cost of approximately $30 million. The cost is proposed to be recovered through a volumetric surcharge on all southern Nevada customers. Southwest also proposed a second phase designed to assist potential customers in existing homes who are interested in accessing natural gas service, which would then be reflected as a separate surcharge to Mesquite customers only. Hearings are expected to take place in April 2018, and a decision on this proposal is expected within the required 210-day time period for filings of this type.

California Jurisdiction

California General Rate Case.    In December 2012, Southwest filed a general rate case application, based on a 2014 future test year, with the California Public Utilities Commission (“CPUC”) requesting an annual revenue increase of approximately $11.6 million for its California rate jurisdictions. Southwest sought to continue a Post-Test Year (“PTY”) Ratemaking Mechanism, which allows for annual attrition increases. The application included a request to establish a COYL program and an Infrastructure Reliability and Replacement Adjustment Mechanism (“IRRAM”)

 

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to facilitate and complement projects involving the enhancement and replacement of gas infrastructure, promoting timely cost recovery for qualifying non-revenue producing capital expenditures. In June 2014, the CPUC issued a final decision in this proceeding (“CPUC decision”), authorizing a $7.1 million overall revenue increase and PTY attrition increase of 2.75% annually for 2015 to 2018. A depreciation reduction of $3.1 million, as requested by Southwest, was also approved. The CPUC decision also provided for a two-way pension balancing account to track differences between authorized and actual pension funding amounts, a limited COYL inspection program for schools, and an IRRAM to recover the costs associated with the new limited COYL program. New rates associated with the CPUC decision were effective June 2014, and annual attrition increases were implemented in January of 2015-2017 in accordance with the June 2014 decision.

In December 2016, Southwest filed to modify the most recent general rate case decision to extend the current rate case cycle by two years, including extension of the annual PTY attrition adjustments through 2020 from 2018. That latest rate case decision would have otherwise required Southwest to file its next general rate application by September 2017. Expedited consideration was requested and in June 2017, the CPUC approved the request, thereby extending the rate case filing deadline. Southwest believes this extension is in the public interest as it provides rate stability to customers for two additional years consistent with the current reasonable rates approved as part of the last general rate case, and the continuation of the currently approved 2.75% PTY attrition adjustment for the two additional years.

Tax Reform.    In its 2017 decision approving Southwest’s request to extend the filing date of its next general rate case, the CPUC also directed Southwest to track income tax expenses resulting from mandatory or elective changes in tax law, procedure or policy. The purpose is to identify differences between Southwest’s authorized income tax expenses and its actual incurred income tax expenses, the result of which would be reviewed in Southwest’s next general rate case. Excluding advance requested or required procedural changes, Southwest does not currently anticipate making an ad hoc filing in advance of the next general rate case filing to implement any changes resulting from the TCJA. Refer to Note 1 – Summary of Significant Accounting Policies, Note 5 – Regulatory Assets and Liabilities, and Note 13 – Income Taxes.

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

Greenhouse Gas (“GHG”) Compliance.    California Assembly Bill Number 32 and the regulations promulgated by the California Air Resources Board (“CARB”), require Southwest, as a covered entity, to comply with all applicable requirements associated with the California GHG emissions reporting and the California Cap and Trade Program. The objective of these programs is to reduce California statewide GHG emissions to 1990 levels by 2020. Southwest must report annual GHG emissions by April of each year and third-party verification of those reported amounts is required by September of each year. Starting with 2015, CARB will annually allocate to Southwest a certain number of allowances based on Southwest’s reported 2011 GHG emissions. Southwest received (in the third quarters of each year 2014 through 2016) its allocations for each year from 2015 through 2017. Of those allocated allowances, Southwest must consign a certain percentage to CARB for auction. Southwest can use any allocated allowances that remain after consignment, along with allowances it can purchase through CARB auctions or reserve sales, or through over the counter (“OTC”) purchases with other market participants, to meet its compliance

 

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obligations. The CPUC has issued a proposed decision, expected to be finalized in the first quarter of 2018, which will provide guidance on the allocation of accrued 2015-2017 compliance costs and proceeds to be refunded to certain customers. Should the decision become final as expected, the refunds will appear as a line item on bills during the second quarter. There is no expected impact on earnings.

Arizona Jurisdiction

Arizona General Rate Case.    Southwest filed a general rate application with the Arizona Corporation Commission (“ACC”) in May 2016 requesting an increase in authorized annual operating revenues of approximately $32 million for its Arizona rate jurisdiction. A settlement was reached among several parties in December 2016 and a formal draft settlement was filed in January 2017. Hearings were held in February 2017, and the ACC approved the settlement agreement in April 2017. The settlement provided for an overall annual operating revenue increase of $16 million, the capital structure and cost of capital originally proposed by Southwest, and a return on common equity set at 9.50%. Annual depreciation expense is expected to be reduced by $44.7 million, as supported by a depreciation study included in the filing, for a combined net annual operating income increase of $60.7 million. Other key elements of the settlement included approval of the continuation and expansion of the current Customer-Owned Yard Line (“COYL”) program (adding the ability to seek out COYLs through a targeted approach and mobilization of work crews for replacement), implementation of a vintage steel pipe replacement program, and a continuation of the current decoupled rate design (excluding a winter-period adjustment to rates), making the mechanism fundamentally similar to that which exists in Nevada. The settlement also included a property tax tracking mechanism to defer changes in property tax expense for recovery or return in the next general rate case. New rates were effective April 2017. The settlement also includes a three-year rate case moratorium prohibiting a new application to adjust base rates from being filed prior to May 2019.

Tax Reform.    In January 2018, the ACC held a workshop specifically to address U.S. tax reform with all jurisdictional public service corporations. The ACC directed ACC staff (“the Staff”) to prepare a recommended order for consideration at an open meeting. The Staff-recommended order requires all utilities to apply regulatory accounting treatment to address all impacts from the enactment of tax reform beginning January 1, 2018. Additionally, the Staff recommended that all jurisdictional utilities file an application to address savings associated with tax reform within 60 days of the open meeting through a tax expense adjustor mechanism, a notice of intent to file a rate case within 90 days, or to file an application to address the impacts of tax reform. At the referenced open meeting in February, the ACC issued an order, adopting the Staff’s recommendations. Management is evaluating the options and will continue to work with ACC Staff, the ACC Commissioners, and the Residential Utility Consumer Office (“RUCO”) to provide any recognized net savings to customers in an efficient manner. Refer to Note 1 – Summary of Significant Accounting Policies, Note 5 – Regulatory Assets and Liabilities, and Note 13 – Income Taxes.

LNG (“Liquefied Natural Gas”) Facility.    In January 2014, Southwest filed an application with the ACC seeking preapproval to construct, operate and maintain a 233,000 dekatherm LNG facility in southern Arizona. This facility is intended to enhance service reliability and flexibility in natural gas deliveries in the southern Arizona area by providing a local storage option, to be operated by Southwest and connected directly to its distribution system. In December 2014, Southwest received an order from the ACC granting pre-approval of Southwest’s application to construct the LNG facility and the deferral of costs, up to $50 million. Following the December 2014 preapproval, Southwest purchased the site for the facility and completed detailed engineering design specifications for the purpose of soliciting bids for the engineering, procurement and construction (“EPC”) of the facility. Southwest solicited requests for proposals for the EPC phase of the project, and in October 2016 made a filing with the ACC to modify the previously issued Order to update the pre-approved costs to reflect a not-to-exceed amount of

 

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$80 million, which was approved by the ACC in December 2016. Through December 2017, Southwest has incurred approximately $34.8 million in capital expenditures toward the project (including land acquisition costs). Construction commenced during the third quarter of 2017 and is expected to be completed by the end of 2019.

Customer-Owned Yardline (“COYL”) Program.    Southwest received approval in connection with an earlier Arizona general rate case, to implement a program to conduct leak surveys, and if leaks were present, to replace and relocate service lines and meters for Arizona customers whose meters were set off from the customer’s home, which is not a traditional configuration. Customers with this configuration were previously responsible for the cost of maintaining these lines and were subject to the immediate cessation of natural gas service if low-pressure leaks occurred. Effective June 2013, the ACC authorized a surcharge to recover the costs of depreciation and pre-tax return on the costs incurred to replace and relocate service lines and meters. The surcharge is revised annually as the program progresses. In 2014, Southwest received approval to add a “Phase II” component to the COYL program to include the replacement of non-leaking COYLs. In the annual COYL filing made in February 2017, Southwest requested to establish an annual surcharge to collect $1.8 million related to the revenue requirement associated with $12.1 million in capital projects completed under both Phase I and Phase II during 2016. In June 2017, the ACC issued a decision approving the surcharge application. All capital work completed in earlier years was incorporated in Southwest’s Arizona rate base in connection with the recently completed general rate case proceeding, as discussed above.

Vintage Steel Pipe Program.    Southwest received approval, in connection with its most recent Arizona general rate case, to implement a vintage steel pipe (“VSP”) replacement program. Southwest currently has approximately 6,000 miles of pre-1970s vintage steel pipe in Arizona. Southwest proposed to start replacing the pipe on an accelerated basis and to recover the costs through an annual surcharge filing that will be made in February of each year. The surcharge is designed to be revised annually as the program progresses. Southwest replaced approximately 40 miles of VSP during 2017 totaling approximately $27 million and is targeting replacement projects during 2018 of approximately $100 million. The annual VSP filing is expected to be made in the first quarter of 2018.

Federal Energy Regulatory Commission (“FERC”) Jurisdiction

General Rate Case.    Paiute Pipeline Company (“Paiute”), a wholly owned subsidiary of Southwest, filed a general rate case with the FERC in February 2014. In September 2014, Paiute reached an agreement in principle with the FERC Staff and intervenors to settle the case, and in February 2015, the FERC approved the settlement. Tariff changes in compliance with the settlement were filed in March 2015. In addition to agreeing to rate design changes to encourage longer-term contracts with its shippers, the settlement resulted in an annual revenue increase of $2.4 million, plus a $1.3 million depreciation reduction. The settlement implied an 11.5% pre-tax rate of return. Also, as part of this agreement, Paiute agreed to file a rate case no later than May 2019. No filing in advance of the date required is currently contemplated. Excluding advance requested or required procedural changes, management does not currently anticipate making an ad hoc filing in advance of the next general rate case filing to implement any income tax changes resulting from the TCJA. Refer to Note 1 – Summary of Significant Accounting Policies, Note 5 – Regulatory Assets and Liabilities, and Note 13 – Income Taxes.

2018 Expansion.    In response to growing demand in the Carson City and South Lake Tahoe areas of northern California and northern Nevada, Paiute evaluated shipper interest in acquiring additional transportation capacity and executed precedent agreements for incremental transportation capacity with Southwest during the third quarter of 2016. In October 2016, Paiute initiated a pre-filing review process with the FERC for an expansion project, which was approved during the same month. In July 2017, a certificate application was filed, which included

 

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an applicant environmental assessment. The project is anticipated to consist of 8.5 miles of additional transmission pipeline infrastructure at an approximate cost of $18 million. If the process progresses as planned, a decision should be received by April 2018 and the additional facilities could be in place by the end of 2018.

PGA Filings

The rate schedules in all of Southwest’s service territories contain provisions that permit adjustments to rates as the cost of purchased gas changes. These deferred energy provisions and purchased gas adjustment clauses are collectively referred to as “PGA” clauses. Differences between gas costs recovered from customers and amounts paid for gas by Southwest result in over- or under-collections. At December 31, 2017, under-collections in Arizona, northern Nevada, and California resulted in an asset of approximately $14.6 million and over-collections in southern Nevada resulted in a liability of $6.8 million on the Company’s and Southwest’s balance sheets. Gas cost rates paid to suppliers have been higher than net amounts recovered from customers during 2017, resulting in fluctuations since December 31, 2016. Filings to change rates in accordance with PGA clauses are subject to audit by state regulatory commission staffs. PGA changes impact cash flows but have no direct impact on profit margin. However, gas cost deferrals and recoveries can impact comparisons between periods of individual Consolidated Statements of Income components. These include Gas operating revenues, Net cost of gas sold, Net interest deductions, and Other income (deductions).

The following table presents Southwest’s outstanding PGA balances receivable/(payable) at the end of its two most recent fiscal years (thousands of dollars):

 

      2017     2016  

Arizona

   $ 5,069     $ (20,349

Northern Nevada

     8,189       (3,339

Southern Nevada

     (6,841     (66,788

California

     1,323       2,608  
  

 

 

   

 

 

 
   $ 7,740     $ (87,868
  

 

 

   

 

 

 

Arizona PGA Filings.    In Arizona, Southwest calculates the change in the gas cost component of customer rates, which are updated monthly, utilizing a rolling twelve-month average. In May 2014, Southwest filed an application to provide for monthly adjustments to the surcharge component of the Gas Cost Balancing Account to allow for more timely refunds to/recoveries from ratepayers, which was approved in July 2014. A surcredit was implemented in April 2016 to refund the then over-collected balance, which was adjusted monthly through February 2017, and was eliminated in March 2017.

California Gas Cost Filings.    In California, a monthly gas cost adjustment based on forecasted monthly prices is utilized. Monthly adjustments modeled in this fashion provide the timeliest recovery of gas costs in any Southwest jurisdiction and are designed to send appropriate pricing signals to customers.

Nevada ARA Application.    In November 2017, Southwest filed to adjust its quarterly Deferred Energy Account Adjustment rate, which is based upon a twelve-month rolling average, in addition to requesting adjusted Base Tariff Energy rates, both of which were also approved effective January 2018. These new rates are intended to collect or refund the outstanding balances over a twelve-month period.

 

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Gas Price Volatility Mitigation

Regulators in Southwest’s service territories have encouraged Southwest to take proactive steps to mitigate price volatility to its customers. To accomplish this, Southwest periodically enters into fixed-price term contracts and Swaps under its collective volatility mitigation programs for a portion (up to 25% in the Arizona and California jurisdictions) of its annual normal weather supply needs. For the 2017/2018 heating season, contracts contained in the fixed-price portion of the supply portfolio ranged from approximately $2.30 to approximately $3.40 per dekatherm. Southwest makes natural gas purchases, not covered by fixed-price contracts, under variable-price contracts with firm quantities, and on the spot market. The contract price for these contracts is determined at the beginning of each month to reflect that month’s published first-of-month index price. The contract price of commitments to purchase gas at daily market prices is based on a published daily price index. In either case, the index price is not published or known until the purchase period begins. In late 2013, Southwest suspended fixed-for-floating-index-price swaps and fixed-price purchases pursuant to the Volatility Mitigation Program (“VMP”) for its Nevada service territories. Southwest evaluates, on a quarterly basis, the suspension of Nevada VMP purchases in light of prevailing market fundamentals and regulatory conditions.

Pipeline Safety Regulation

Congress passed the Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011 (“the Bill”), effective January 2012, which increased/strengthened previously existing safety requirements, including damage prevention programs, penalty provisions, and requirements related to automatic and remote-controlled shut-off valves, public awareness programs, incident notification, and maximum allowable operating pressure for certain facilities. The Bill required the Department of Transportation to conduct further study of existing programs and future requirements; these studies are nearing their completion and proposed regulation changes are anticipated in 2018. The Pipeline and Hazardous Materials Safety Administration (“PHMSA”) is in the process of proposing a series of significant rulemakings that are expected to further transform the regulatory requirements for pipelines. In October 2016, PHMSA issued a final rule regarding expanding the use of excess flow valves in natural gas distribution systems. The new rule became effective in April 2017, and Southwest updated its processes to accommodate the new rule. The financial impact to operations resulting from the safety measures of the new rule is not anticipated to be substantial. In March 2017, PHMSA issued a final rule on “Pipeline Safety: Operator Qualification, Cost Recovery, Accident and Incident Notification, and Other Pipeline Safety Changes.” The Operator Qualification portion of that rule is the most significant change and contains requirements for Control Room Management and Team Training. The training was in place by the required date of January 23, 2018. While the impact to personnel training processes is significant, the financial impact to operations is not anticipated to be substantial.

Southwest continues to monitor changing pipeline safety legislation and participates, to the extent possible, in developing associated mandates and reporting requirements. Additionally, it works with its state and federal commissions, where possible, to develop customer rates that are responsive to incremental costs of compliance. However, due to the timing of when rates are implemented in response to new requirements, and as additional rules are developed, compliance requirements could impact expenses and the timing and amount of capital expenditures.

Capital Resources and Liquidity

Over the past three years, cash on hand and cash flows from operations have generally provided the majority of cash used in investing activities (primarily construction expenditures and property additions). Certain pipe replacement work of Southwest was accelerated during these years to take advantage of bonus depreciation tax incentives and to fortify system integrity and reliability, notably in association with new gas infrastructure

 

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replacement programs as discussed above. During the same three-year period, the Company was able to establish long-term cost savings from debt refinancing and strategic debt redemptions. The Company’s capitalization strategy is to maintain an appropriate balance of equity and debt to maintain strong investment-grade credit ratings which should minimize interest costs. In December 2015, the Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”) was enacted extending the 50% bonus depreciation tax deduction provided for by earlier legislation for qualified property acquired or constructed and placed in-service during 2015 (and additional years as noted below) as well as other tax deductions, credits, and incentives through 2016. However, the Tax Cuts and Jobs Act (“TCJA”) of 2017, enacted in December 2017, eliminates the bonus depreciation tax deduction for utility (and authorizes 100% bonus depreciation tax deduction for non-utility) property placed in service after September 27, 2017. See Bonus Depreciation for more information.

Cash Flows

The enactment of the Tax Cuts and Jobs Act in December 2017 will likely have an impact on future cash flows. The magnitude of the impact depends on the results of future regulatory proceedings surrounding the method and timing (which management cannot currently predict) of reflecting net tax benefits in customer rates. Due to the reduction in the applicable U.S. federal income tax rate from 35% to 21%, deferred tax assets and liabilities have been remeasured. The reduction in plant-related deferred tax differences was reclassified to a regulatory liability. The period and timing of return are subject to Internal Revenue Code (“IRC”) provisions and regulatory actions in each jurisdiction. See the Rates and Regulatory Proceedings section above, Note 5 – Regulatory Assets and Liabilities, and Note 13 – Income Taxes in notes to consolidated financial statements for more information about potential developments regarding this topic.

Southwest Gas Holdings, Inc.:

Operating Cash Flows.    Cash flows provided by consolidated operating activities decreased $231 million between 2017 and 2016. The decline in operating cash flows was primarily attributable to the change in deferred purchased gas costs and other changes in working capital. While deferred tax liabilities were substantially reduced due to tax reform, they were not impactful to operating cash flows in 2017. Refer to Results of Natural Gas Operations and Rates and Regulatory Proceedings.

Investing Cash Flows.    Cash used in consolidated investing activities increased $175 million in 2017 as compared to 2016. The change was primarily due to the Centuri acquisition of Neuco (see Note 19 – Acquisition of Construction Services Business). In addition, increased construction expenditures in the natural gas operations segment, including scheduled and accelerated replacement activity contributed to the increase.

Financing Cash Flows.    Net cash provided by consolidated financing activities increased $429 million in 2017 as compared to 2016. The increase was primarily due to borrowings associated with the Neuco acquisition and activity under the credit facilities and commercial paper program (including an increase in borrowings in the current year and the repayment of borrowings in the prior year). The prior period included proceeds in utility operations from the issuance of $300 million in senior notes and the repayment of $125 million in fixed-rate Industrial Development Revenue Bonds (“IDRBs”). Refer to Note 8 – Long-term Debt and Note 9 – Short-Term Debt. The Company also issued approximately $41 million during 2017 in stock under its Equity Shelf Program. See also Note 7 – Common Stock, and the discussion below. Cash outflows during 2017 included the $23 million purchase of the previous owners’ interest in Centuri. See also Note 17 – Construction Services Noncontrolling Interests for additional information. Dividends paid increased in 2017 as compared to 2016 as a result of an increase in the quarterly dividend rate and an increase in the number of shares outstanding.

 

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The Company issued approximately 103,000 additional shares of common stock collectively through the Restricted Stock/Unit Plan and the Management Incentive Plan.

Southwest Gas Corporation:

Operating Cash Flows.    Cash flows provided by operating activities decreased $200 million between 2017 and 2016. The decline in operating cash flows was primarily attributable to the change in deferred purchased gas costs as discussed above. Refer to Results of Natural Gas Operations and Rates and Regulatory Proceedings.

Investing Cash Flows.    Cash used in investing activities increased $124 million in 2017 as compared to 2016. The change was primarily due to additional construction expenditures, as indicated above.

Financing Cash Flows.    Net cash provided by financing activities increased $345 million in 2017 as compared to 2016. The increase was primarily due to activity under the credit facility and commercial paper program (an increase in borrowings in the current year and the repayment of borrowings in the prior year). The prior period included proceeds from the issuance of $300 million in senior notes as discussed above and the repayment of $125 million in IDRBs. The current period included the repayment of $25 million in medium-term notes, as well as inflows due to capital contributions from Southwest Gas Holdings, Inc.

The capital requirements and resources of the Company generally are determined independently for the natural gas operations and construction services segments. Each business activity is generally responsible for securing its own financing sources.

2017 Construction Expenditures

During the three-year period ended December 31, 2017, total gas plant in service increased from $5.6 billion to $6.6 billion, or at an average annual rate of 6%. Replacement, reinforcement, and franchise work was a substantial portion of the plant increase. To a lesser extent, customer growth impacted expenditures as Southwest set approximately 80,000 meters during the three-year period.

During 2017, construction expenditures for the natural gas operations segment were $560 million. The majority of these expenditures represented costs associated with scheduled and accelerated replacement of existing transmission, distribution, and general plant to fortify system integrity and reliability. Cash flows from operating activities of Southwest were $309 million and provided approximately 48% of construction expenditures and dividend requirements of the natural gas operations segment. Other necessary funding was provided by cash on hand, external financing activities, capital contributed by the Company, and, as needed, existing credit facilities.

2017 Financing Activity

In March 2017, the Company filed with the Securities Exchange Commission (“SEC”) an automatic shelf registration statement 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”). Sales of the shares will continue to be made at market prices prevailing at the time of sale. Net proceeds from the sale of shares of common stock under the Equity Shelf Program are intended for general corporate purposes, including the acquisition of property for the construction, completion, extension or improvement of pipeline systems and facilities located in and around the communities Southwest serves. During the twelve months ended December 31, 2017, the Company sold, through the continuous equity offering program with BNY Mellon Capital Markets, LLC as agent, an

 

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aggregate of 505,707 shares of the Company’s common stock in the open market at a weighted average price of $82.61 per share, resulting in proceeds to the Company of $41,359,027, net of $417,768 in agent commissions. These net proceeds were contributed to Southwest by the Company. As of December 31, 2017, the Company had up to $108,223,205 of common stock available for sale under the program. See Note 7 – Common Stock for more information.

Three-Year Construction Expenditures, Debt Maturities, and Financing

Management estimates natural gas segment construction expenditures during the three-year period ending December 31, 2020 will be approximately $2 billion. Of this amount, approximately $670 million is expected to be incurred in 2018. Southwest plans to continue to request regulatory support to accelerate projects that improve system flexibility and reliability (including replacement of early vintage plastic and steel pipe). This includes the recent approval to complete accelerated replacement projects in Nevada of $57.3 million and $65.7 million in 2017 and 2018, respectively. It also incorporates programs included in the recently approved Arizona general rate case settlement (the continuation of the COYL program and implementation of a vintage steel pipe replacement program). Southwest may expand existing, or initiate new, programs. If efforts continue to be successful, significant replacement activities are expected to continue well beyond the next few years. See also Rates and Regulatory Proceedings for discussion of Nevada infrastructure, Arizona COYL, and an LNG facility. During the three-year period, cash flows from operating activities of Southwest are expected to provide approximately 50% to 60% of the funding for gas operations total construction expenditures and dividend requirements. Any additional cash requirements are expected to be provided by existing credit facilities, equity contributions from Southwest Gas Holdings, and/or other external financing sources. The timing, types, and amounts of any additional external financings will be dependent on a number of factors, including the cost of gas purchases, conditions in the capital markets, timing and amounts of rate relief, timing differences between U.S. federal taxes currently embedded in customer rates and amounts implemented under tax reform of the TCJA of 2017, as well as, growth levels in Southwest’s service areas, and earnings. External financings could include the issuance of debt securities, bank and other short-term borrowings, and other forms of financing. See additional discussion in the Notes to financial statements (specifically, Note 7 – Common Stock).

In December 2017, the Company and Southwest filed with the SEC a shelf registration statement which included a prospectus detailing the Company’s plans to offer and sell, from time to time in amounts at prices and on terms that will be determined at the time of such offering, any combination of common stock, preferred stock, debt securities (which may or may not be guaranteed by one or more of its directly or indirectly wholly owned subsidiaries if indicated in the relevant prospectus supplement), guarantees of debt securities issued by Southwest Gas Corporation, depository shares, warrants to purchase common stock, preferred stock or depository shares issued by Southwest Gas Holdings, Inc. or debt securities issued by Southwest Gas Holdings, Inc. or Southwest Gas Corporation, units and rights. Additionally, Southwest Gas Corporation may offer and sell, from time to time in amounts at prices and on terms that will be determined at the time of such offering, any combination of debt securities (which may or may not be guaranteed by one or more of its directly or indirectly wholly owned subsidiaries if indicated in the relevant prospectus supplement) and guarantees of debt securities issued by Southwest Gas Holdings, Inc. or by one or more of its directly or indirectly wholly owned subsidiaries if indicated in the relevant prospectus supplement. The Company has not entered into a Sales Agency Agreement for the sale of any of these securities at this time.

 

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Liquidity

Liquidity refers to the ability of an enterprise to generate sufficient amounts of cash through its operating activities and external financing to meet its cash requirements. Several general factors (some of which are out of the control of the Company) that could significantly affect liquidity in future years include: variability of natural gas prices, changes in the ratemaking policies of regulatory commissions, regulatory lag, customer growth in the natural gas segment’s service territories, the ability to access and obtain capital from external sources, interest rates, changes in income tax laws, pension funding requirements, inflation, and the level of earnings. Natural gas prices and related gas cost recovery rates, as well as plant investment, have historically had the most significant impact on liquidity.

On an interim basis, Southwest defers over- or under-collections of gas costs to PGA balancing accounts. In addition, Southwest uses this mechanism to either refund amounts over-collected or recoup amounts under-collected as compared to the price paid for natural gas during the period since the last PGA rate change went into effect. During 2017, the combined balance in the PGA accounts totaled an under-collection of $7.7 million. See PGA Filings for more information.

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. The maximum amount outstanding during 2017 occurred during the third quarter and was $28.5 million. At December 31, 2017, $23.5 million was outstanding on this facility. The maximum amount outstanding on the credit facility during each of the second and fourth quarters were $2.5 million and $27.5 million, respectively. There were no borrowings on the credit facility during the first quarter.

In March 2017, Southwest Gas Corporation amended its $300 million credit and commercial paper facility. The credit facility borrowing capacity increased from $300 million to $400 million and extended the term of the facility from March 2021 to March 2022. Southwest continues to designate $150 million of the $400 million facility for long-term borrowing needs and the remaining $250 million for working capital purposes. The maximum amount outstanding during 2017 occurred during the fourth quarter and was $348 million ($150 million outstanding on the long-term portion of the credit facility, including $50 million on the commercial paper program, in addition to $198 million outstanding on the short-term portion). At December 31, 2017, $150 million was outstanding on the long-term portion of the credit facility ($50 million of which was in commercial paper) and $191 million was outstanding on the short-term portion. The maximum amount outstanding on the long-term portion of the credit facility (including the commercial paper program) during each of the first, second, and third quarters was $70 million, $92 million, and $150 million, respectively. The credit facility can be used as necessary to meet liquidity requirements, including temporarily financing under-collected PGA balances, meeting the refund needs of over-collected balances, or temporarily funding capital expenditures. At December 31, 2017, the credit facility was deemed adequate for working capital needs outside of funds raised through operations and other types of external financing.

Southwest has a $50 million commercial paper program as noted above. Any issuance under the commercial paper program is supported by the revolving credit facility and, therefore, does not represent additional borrowing capacity. Any borrowing under the commercial paper program will be designated as long-term debt. Interest rates for the commercial paper program are calculated at the then current commercial paper rate. At December 31, 2017, $50 million was outstanding on the commercial paper program. There are no long-term debt maturities in 2018.

 

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In November 2017, in association with the acquisition of a construction services-related business (refer to Note 19), Centuri amended its secured revolving credit and term loan facility, increasing the borrowing capacity from $300 million to $450 million. The line of credit portion of the facility increased to $250 million; amounts borrowed and repaid under the revolving credit facility are available to be re-borrowed. The term loan facility portion has a limit of approximately $200 million, which was reached in November 2017 after refinancing of the original term loan noted above and additional borrowing that occurred under the amended facility. No further borrowing is permitted under the term loan facility. The $450 million secured revolving credit and term loan facility expires in November 2022. At December 31, 2017 $199.6 million was outstanding (after repayments) on the term facility. The maximum amount outstanding on the credit facility during 2017 was $287 million, which occurred in the fourth quarter, at which point $199.6 million was outstanding on the term loan facility. At December 31, 2017, $56.5 million was outstanding on the Centuri secured revolving credit facility. At December 31, 2017, there was approximately $177 million, net of letters of credit, available under the line of credit.

Credit Ratings

Credit ratings apply to debt securities such as bonds, notes, and other debt instruments and do not apply to equity securities such as common stock. Borrowing costs and the ability to raise funds are directly impacted by the credit ratings of the Company. Credit ratings issued by nationally recognized ratings agencies (Moody’s Investors Service, Inc. (“Moody’s”), Standard & Poor’s Ratings Services (“Standard & Poor’s”), and Fitch Ratings (“Fitch”)) provide a method for determining the credit worthiness of an issuer. Credit ratings are important because long-term debt constitutes a significant portion of total capitalization. These credit ratings are a factor considered by lenders when determining the cost of future debt for both Southwest and Southwest Gas Holdings, Inc. (i.e., generally the better the rating, the lower the cost to borrow funds). The current unsecured long-term debt ratings of both companies are all considered investment grade.

 

      Moody’s (1)    Standard & Poor’s (2)    Fitch (3)

Southwest Gas Holdings, Inc.:

        

Issuer rating

   Baa1    BBB+    BBB+

Outlook

   Stable    Stable    Stable

Last reaffirmed

   January 2018    February 2018    December 2016

Southwest Gas Corporation:

        

Senior unsecured long-term debt

   A3    BBB+    A

Outlook

   Stable    Stable    Stable

Last reaffirmed

   January 2018    February 2018    April 2017

 

(1)

Moody’s debt ratings range from Aaa (highest rating possible) to C (lowest quality, usually in default). Moody’s applies an A rating to obligations which are considered upper-medium grade obligations with low credit risk. A numerical modifier of 1 (high end of the category) through 3 (low end of the category) is included with the A to indicate the approximate rank of a company within the range.

 

(2)

Standard & Poor’s debt ratings range from AAA (highest rating possible) to D (obligation is in default). The Standard & Poor’s rating of BBB+ indicates the issuer of the debt is regarded as having an adequate capacity to pay interest and repay principal. The ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus “+” or minus “-” sign to show relative standing within the major rating categories.

 

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(3)

Fitch debt ratings range from AAA (highest credit quality) to D (defaulted debt obligation). The Fitch rating of A indicates low default risk and a strong ability to pay financial commitments. The modifiers “+” or “-” may be appended to a rating to denote relative status within major rating categories.

A credit rating is not a recommendation to buy, sell, or hold a debt security, but is intended to provide an estimation of the relative level of credit risk of debt securities, and is subject to change or withdrawal at any time by the rating agency. The foregoing credit ratings are subject to change at any time in the discretion of the applicable ratings agency. Numerous factors, including many that are not within management’s control, are considered by the ratings agencies in connection with assigning credit ratings.

No debt instruments have credit triggers or other clauses that result in default if these bond ratings are lowered by rating agencies. Certain debt instruments contain securities ratings covenants that, if set in motion, would increase financing costs if debt ratings deteriorated. Certain debt instruments also have leverage ratio caps and minimum net worth requirements. At December 31, 2017, the Company is in compliance with all covenants. Under the most restrictive of the covenants, approximately $2.1 billion in additional debt could be issued and the leverage ratio requirement would still be met. At least $1 billion of cushion in equity relating to the minimum net worth requirement exists at December 31, 2017. No specific limitations as to dividends exist under the collective covenants.

At December 31, 2017, Southwest is also in compliance with all covenants. Under the most restrictive of the covenants, approximately $2 billion in additional debt could be issued and the leverage ratio requirement would still be met. At least $1 billion of cushion in equity relating to the minimum net worth requirement exists at December 31, 2017. No specific limitations as to dividends exist under the collective covenants.

Certain Centuri debt instruments have leverage ratio caps and fixed charge ratio coverage requirements. At December 31, 2017, Centuri is in compliance with all of its covenants. Under the most restrictive of the covenants, Centuri could issue over $69 million in additional debt and meet the leverage ratio requirement. Centuri has at least $28 million of cushion relating to the minimum fixed charge ratio coverage requirement. Centuri’s revolving credit and term loan facility is secured by underlying assets of the construction services segment. Centuri also has restrictions on how much it could give to Southwest Gas Holdings, Inc. in cash dividends which is limited to 50% of Centuri’s consolidated net income.

Bonus Depreciation

In December 2015, the Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”) was enacted, extending the 50% bonus depreciation tax deduction for qualified property acquired or constructed and placed in-service during 2015 (and additional years as noted below) as well as other tax deductions, credits, and incentives. The bonus depreciation tax deduction was to be phased out over five years. The PATH Act provided for a 50% bonus depreciation tax deduction in 2015 through 2017, 40% in 2018, 30% in 2019, and no bonus deduction after 2019. In 2017, with the enactment of the Tax Cuts and Jobs Act, the bonus depreciation deduction percentage changed from 50% to 100% for “qualified property” placed in service after September 27, 2017 and before 2023. The bonus depreciation tax deduction phases out starting in 2023, by 20% for each of the five following years. Qualified property excludes public utility property. The Company estimates bonus depreciation will defer the payment of approximately $42 million (including $26 million associated with utility operations) of federal income taxes for 2017, resulting in a minimal amount of federal income tax being paid, and that bonus depreciation will defer the payment of approximately $15 million (none of which relates to utility operations) of federal income taxes for 2018.

 

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Inflation

Inflation can impact results of operations for Southwest and Centuri. Labor, employee benefits, natural gas, consulting, and construction costs are the categories most significantly impacted by inflation. Changes to the cost of gas are generally recovered through PGA mechanisms and do not significantly impact net earnings. Labor and employee benefits are components of the cost of service, and gas infrastructure costs are the primary component of utility rate base. In order to recover increased costs, and earn a fair return on rate base, general rate cases are filed by Southwest, when deemed necessary, for review and approval by regulatory authorities. Regulatory lag, that is, the time between the date increased costs are incurred and the time such increases are recovered through the ratemaking process, can impact earnings. See Rates and Regulatory Proceedings for a discussion of recent rate case proceedings.

Off-Balance Sheet Arrangements

All debt is recorded in the balance sheet. Long-term operating and capital leases are described in Note 2 – Utility Plant and Leases of the Notes to Consolidated Financial Statements, and included in the Contractual Obligations table below.

Contractual Obligations

The table below summarizes the Company’s contractual obligations at December 31, 2017 (millions of dollars):

 

     Payments due by period  
Contractual Obligations    Total      2018      2019-2020      2021-2022      Thereafter  

Operating leases (Note 2)

   $ 41      $ 9      $ 14      $ 8      $ 10  

Gas purchase obligations

     132        81        47        1        3  

Pipeline capacity/storage

     828        132        180        136        380  

Derivatives (Note 14)

     6        5        1                

Other commitments

     19        12        7                

Long-term debt, including current maturities (Note 8)

     1,824        25        180        645        974  

Interest on long-term debt

     1,096        72        145        118        761  

Capital leases (Note 2)

     1        1                       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,947      $ 337      $ 574      $ 908      $ 2,128  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In the table above, operating leases represent multi-year obligations for office rent and certain equipment. Gas purchase obligations include fixed-price and variable-rate gas purchase contracts covering approximately 272 million dekatherms. The fixed-price contracts range in price from approximately $2.30 to approximately $3.40 per dekatherm. Variable-price contracts reflect minimum contractual obligations, with estimation in pricing.

Southwest has pipeline capacity/storage contracts for firm transportation service, both on a short- and long-term basis, with several companies for all of its service territories, some with terms extending to 2044. Southwest also has interruptible contracts in place that allow additional capacity to be acquired should an unforeseen need arise. Costs associated with these pipeline capacity contracts are a component of the cost of gas sold and are recovered from customers primarily through the PGA mechanisms. Included in the pipeline capacity payments shown in the above table, are payments associated with storage that Southwest has contracted for in southern California and Arizona. The terms of these contracts extend through 2024 and 2019, respectively.

 

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Debt obligations in the table above consist of scheduled principal and interest payments over the life of the debt. Capital leases represent multi-year obligations for equipment. Interest rates in effect at December 31, 2017 on variable rate long-term debt were assumed to remain in effect in the future periods disclosed in the table. In the table above, interest on long-term debt includes future interest payments of $1.05 billion for Southwest and $46 million for Centuri.

Pension:    Estimated funding for pension and other postretirement benefits during calendar year 2018 is $47 million and is not included in the table above.

Recently Issued Accounting Standards Updates

The Financial Accounting Standards Board (“FASB”) recently issued Accounting Standards Updates related to revenue recognition, recognition and measurement of financial instruments, leases, net periodic benefit cost, measurement of credit losses, classification of certain cash receipts and cash payments in the cash flow statement, accounting for income taxes relating to intra-entity asset transfers other than inventory, and simplifying the test for goodwill impairment. See Note 1 – Summary of Significant Accounting Policies for more information regarding these accounting standards updates and their potential impact on financial position, results of operations, and disclosures.

Application of Critical Accounting Policies

A critical accounting policy is one which is very important to the portrayal of the financial condition and results of a company, and requires the most difficult, subjective, or complex judgments of management. The need to make estimates about the effect of items that are uncertain is what makes these judgments difficult, subjective, and/or complex. Management makes subjective judgments about the accounting and regulatory treatment of many items and bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments. These estimates may change as new events occur, as more experience is acquired, as additional information is obtained, and as the operating environment changes. While management may make many estimates and judgments, many would not be materially altered, or provide a material impact to the financial statements taken as a whole, if different estimates, or means of estimation were employed. The following are accounting policies that are deemed critical to the financial statements. For more information regarding significant accounting policies, see Note 1 – Summary of Significant Accounting Policies.

Regulatory Accounting

Natural gas operations are subject to the regulation of the Arizona Corporation Commission, the Public Utilities Commission of Nevada, the California Public Utilities Commission, and the Federal Energy Regulatory Commission. The accounting policies of the Company and Southwest conform to generally accepted accounting principles applicable to rate-regulated entities and reflect the effects of the ratemaking process. As such, the Company and Southwest are allowed to defer as regulatory assets, costs that otherwise would be expensed, if it is probable that future recovery from customers will occur. Companies are also permitted to recognize, as regulatory assets, amounts associated with various revenue decoupling mechanisms, as long as the requirements of alternative revenue programs permitted under U.S. Generally Accepted Accounting Principles continue to be met. Management reviews the regulatory assets to assess their ultimate recoverability within the approved regulatory guidelines. If rate recovery is no longer probable, due to competition or the actions of regulators, write-off of the related regulatory asset (which would be recognized as current-period expense) is required. Regulatory liabilities are recorded if it is probable that revenues will be reduced for amounts that will be credited to customers through the ratemaking process. The timing and inclusion of costs in rates is often delayed (regulatory lag) and results in a reduction of current-period earnings. Refer to Note 5 – Regulatory Assets and Liabilities for a list of regulatory assets and liabilities.

 

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Accrued Utility Revenues

Revenues related to the sale and/or delivery of natural gas are generally recorded when natural gas is delivered to customers. However, the determination of natural gas sales to individual customers is based on the reading of their meters, which is performed on a systematic basis throughout the month. At the end of each month, operating margin associated with natural gas service that has been provided but not yet billed is accrued. This accrued utility revenue is estimated each month based primarily on applicable rates, number of customers, rate structure, analyses reflecting significant historical trends, seasonality, and experience. The interplay of these assumptions can impact the variability of the accrued utility revenue estimates. All Southwest rate jurisdictions have decoupled rate structures, limiting variability due to extreme weather conditions.

Accounting for Income Taxes

The Company is subject to income taxes in the United States and Canada. Income tax calculations require estimates due to known future tax rate changes, book to tax differences, and uncertainty with respect to regulatory treatment of certain property items. The asset and liability method of accounting is utilized for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Regulatory tax assets and liabilities are recorded to the extent management believes they will be recoverable from or refunded to customers in future rates. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. With the enactment of the Tax Cuts and Jobs Act of 2017, management undertook processes to remeasure these balances. Management regularly assesses financial statement tax provisions to identify any change in the regulatory treatment or tax-related estimates, assumptions, or enacted tax rates that could have a material impact on cash flows, financial position, and/or results of operations. Refer to Note 1 – Summary of Significant Accounting Policies, Note 5 – Regulatory Assets and Liabilities, and Note 13 – Income Taxes.

Accounting for Pensions and Other Postretirement Benefits

Southwest has a noncontributory qualified retirement plan with defined benefits covering substantially all employees. In addition, there is a separate unfunded supplemental retirement plan which is limited to officers. Pension obligations and costs for these plans are affected by the amount and timing of cash contributions to the plans, the return on plan assets, discount rates, and by employee demographics, including age, compensation, and length of service. Changes made to the provisions of the plans may also impact current and future pension costs. Actuarial formulas are used in the determination of pension obligations and costs and are affected by actual plan experience and assumptions about future experience. Key actuarial assumptions include the expected return on plan assets, the discount rate used in determining the projected benefit obligation and pension costs, and the assumed rate of increase in employee compensation. Relatively small changes in these assumptions (particularly the discount rate) may significantly affect pension obligations and costs for these plans. For example, a change of 0.25% in the discount rate assumption would change the pension plan projected benefit obligation by approximately $41.6 million and future pension expense by $3.9 million. A change of 0.25% in the employee compensation assumption would change the pension obligation by approximately $7.5 million and expense by $1.6 million. A 0.25% change in the expected asset return assumption would change pension expense by approximately $2.0 million (but has no impact on the pension obligation).

 

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At December 31, 2017, the discount rate is 3.75%, lowered from the 4.50% rate used at December 31, 2016. The methodology utilized to determine the discount rate was consistent with prior years. The weighted-average rate of compensation escalation remains at 3.25%. The asset return assumption of 7.00% to be used for 2018 expense is consistent with the rate used for 2017. Pension expense for 2018 is estimated to increase approximately $7.8 million as compared to that experienced in 2017. Future years’ expense level movements (up or down) will continue to be greatly influenced by long-term interest rates, asset returns, and funding levels.

Goodwill

As indicated in Note 1Summary of Significant Accounting Policies, we assess our goodwill for impairment at least annually during the 4th calendar quarter, unless events or changes in circumstances indicate an impairment may have occurred before that time. As permitted under accounting guidance on testing goodwill for impairment, we perform either a qualitative assessment or a quantitative assessment of each of our reporting units based on management’s judgment. Adjustment of values would only occur if conditions of impairment were deemed to be permanent. With respect to our qualitative assessments, we consider events and circumstances specific to us, such as macroeconomic conditions, industry and market considerations, cost factors and overall financial performance, when evaluating whether it is more likely than not that the fair values of our reporting units are less than their respective carrying amounts. The assumptions we use in our analysis are subject to uncertainty, and declines in the future performance of our reporting units and changing business conditions could result in the recognition of impairment charges, which could be significant. The Company’s reporting units are the same as its segments (natural gas operations and construction services) for purposes of impairment evaluation. Almost all of the goodwill on the Company’s consolidated balance sheet pertains to our construction services segment.

Business Combinations

In accordance with U.S. GAAP, the assets acquired and liabilities assumed in an acquired business are recorded at their estimated fair values on the date of acquisition. The amount of goodwill initially recognized in a business combination is based on the excess of the purchase price of the acquired company over the fair value of the other assets acquired and liabilities assumed. The determination of these fair values requires management to make significant estimates and assumptions. For example, assumptions with respect to the timing and amount of future revenues and expenses associated with an asset are used to determine its fair value but the actual timing and amount may differ materially resulting in impairment of the asset’s recorded value. In some cases, the Company engages independent third-party valuation firms to assist in determining the fair values of acquired assets and liabilities assumed. Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows of the acquired business, trademarks, customer relationships, technology obsolescence, and discount rates. In addition, uncertain tax positions and tax-related valuation allowances assumed in connection with a business combination are initially estimated at the acquisition date. These items are reevaluated quarterly, based upon facts and circumstances that existed at the acquisition date with any adjustments to the preliminary estimates being recorded to goodwill, provided that the Company is within the twelve-month measurement period allowed by authoritative guidance. Subsequent to the measurement period or the final determination of the estimated value of the tax allowance or contingency, whichever comes first, changes to these uncertain tax positions and tax-related valuation allowances will affect the provision for income taxes in the Consolidated Statements of Income, and could have a material impact on the Company’s results of operations and financial position. Goodwill is evaluated for impairment no less frequently than annually. The fair value assigned to the intangible assets acquired and liabilities assumed, and the determination of goodwill associated with the current acquisition, are described in Note 19 – Acquisition of Construction Services Business.

 

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Certifications

The Securities and Exchange Commission (“SEC”) requires the filing of certifications of the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of registrants regarding reporting accuracy, disclosure controls and procedures, and internal control over financial reporting as exhibits to periodic filings. The CEO and CFO certifications for the period ended December 31, 2017 are included as exhibits to the 2017 Annual Report on Form 10-K filed with the SEC.

Forward-Looking Statements

This annual report contains statements which constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (“Reform Act”). All statements other than statements of historical fact included or incorporated by reference in this annual report are forward-looking statements, including, without limitation, statements regarding management’s plans, objectives, goals, intentions, projections, strategies, future events or performance, and underlying assumptions. The words “may,” “if,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “continue,” “forecast,” “intend,” “promote,” “seek,” and similar words and expressions are generally used and intended to identify forward-looking statements. For example, statements regarding operating margin patterns, customer growth, the composition of our customer base, price volatility, seasonal patterns, payment of debt, interest savings, the Company’s COLI strategy, replacement market and new construction market, the impacts of the Tax Cuts and Jobs Act legislation including disposition in regulatory proceedings, bonus depreciation tax deductions, the impact of recent PHMSA rulemaking, amount and timing for completion of estimated future construction expenditures, including the LNG facility in southern Arizona and the cost of the Paiute 2018 expansion project in northern Nevada and northern California, forecasted operating cash flows and results of operations, net earnings impacts from gas infrastructure replacement surcharges, funding sources of cash requirements, amounts generally expected to be reflected in 2018 or future period revenues from regulatory rate proceedings including amounts resulting from the settled Arizona general rate case, rates and surcharges, PGA, and other rate adjustments, sufficiency of working capital and current credit facilities, bank lending practices, the Company’s views regarding its liquidity position, ability to raise funds and receive external financing capacity and the intent and ability to issue common stock under the Equity Shelf Program, the intent and ability to issue various financing instruments and stock under the December 2017 shelf registration statement, future dividend increases and the Board’s current target dividend payout ratio, pension and post-retirement benefits, certain impacts of tax acts, the effect of any rate changes or regulatory proceedings, contract or construction change order negotiations, impacts of accounting standard updates, infrastructure replacement mechanisms and COYL programs, statements regarding future gas prices, gas purchase contracts and derivative financial instruments, recoverability of regulatory assets, the impact of certain legal proceedings, and the timing and results of future rate hearings and approvals are forward-looking statements. All forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act.

A number of important factors affecting the business and financial results of the Company could cause actual results to differ materially from those stated in the forward-looking statements. These factors include, but are not limited to, customer growth rates, conditions in the housing market, the ability to recover costs through the PGA mechanisms or other regulatory assets, the effects of regulation/deregulation, the timing and amount of rate relief, the timing and methods determined by regulators to refund amounts to customers resulting from the TCJA, changes in rate design, variability in volume of gas or transportation service sold to customers, changes in gas procurement practices, changes in capital requirements and funding, the impact of conditions in the capital markets on financing costs, changes in construction expenditures and financing, changes in operations and maintenance expenses, effects of pension expense forecasts, accounting changes and regulatory treatment related thereto,

 

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future liability claims, changes in pipeline capacity for the transportation of gas and related costs, results of Centuri bid work, Centuri’s projections about the acquired business’ earnings (including accretion within the first twelve months) and future acquisition-related costs, Centuri construction expenses, differences between actual and originally expected outcomes of Centuri bid or other fixed-price construction agreements, outcomes from contract and change order negotiations, ability to successfully procure new work, impacts from work awarded or failing to be awarded from significant customers, the mix of work awarded, the amount of work awarded to Centuri following the lifting of the work stoppage, acquisitions and management’s plans related thereto, competition, our ability to raise capital in external financings, our ability to continue to remain within the ratios and other limits subject to our debt covenants, and ongoing evaluations in regard to goodwill and other intangible assets. In addition, the Company can provide no assurance that its discussions regarding certain trends relating to its financing and operating expenses will continue in future periods. For additional information on the risks associated with the Company’s business, see Item 1A. Risk Factors and Item 7A. Quantitative and Qualitative Disclosures About Market Risk in the Annual Report on Form 10-K for the year ended December 31, 2017.

All forward-looking statements in this annual report are made as of the date hereof, based on information available to the Company as of the date hereof, and the Company assumes no obligation to update or revise any of its forward-looking statements even if experience or future changes show that the indicated results or events will not be realized. We caution you to not rely unduly on any forward-looking statement(s).

Common Stock Price and Dividend Information

 

     2017      2016      Dividends Declared  
      High      Low      High      Low      2017      2016  

First quarter

   $ 86.65      $ 75.63      $ 67.29      $ 53.51      $ 0.495      $ 0.450  

Second quarter

     85.56        72.32        79.43        62.75        0.495        0.450  

Third quarter

     82.77        72.55        79.58        67.97        0.495        0.450  

Fourth quarter

     86.87        76.60        76.64        64.35        0.495        0.450  
              

 

 

    

 

 

 
               $ 1.980      $ 1.800  
              

 

 

    

 

 

 

The principal market on which the common stock of the Company is traded is the New York Stock Exchange. At February 15, 2018, there were 13,002 holders of record of common stock, and the market price of the common stock was $68.38.

Dividends are payable on the Company’s common stock at the discretion of the Board of Directors (“Board”). In setting the dividend rate, the Board considers, among other factors, current and expected future earnings levels, our ongoing capital expenditure plans and expected external funding needs, our payout ratio, and our ability to maintain strong credit ratings and liquidity. The quarterly common stock dividend declared was 40.5 cents per share throughout 2015, 45 cents per share throughout 2016, and 49.5 cents per share throughout 2017. The Company has paid dividends on its common stock since 1956 and has increased that dividend each year since 2007. In February 2018, the Board elected to increase the quarterly dividend from $0.495 to $0.52 per share, representing a 5% increase, effective with the June 2018 payment. The Board currently targets a payout ratio of 55% to 65% of consolidated earnings per share.

 

Southwest Gas Holdings, Inc.

   55


 

SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Thousands of dollars, except par value)

 

December 31,    2017     2016  

ASSETS

    

Utility plant:

    

Gas plant

   $ 6,629,644     $ 6,193,760  

Less: accumulated depreciation

     (2,231,242     (2,172,966

Construction work in progress

     125,248       111,177  
  

 

 

   

 

 

 

Net utility plant (Note 2)

     4,523,650       4,131,971  
  

 

 

   

 

 

 

Other property and investments (Note 1)

     428,180       342,343  
  

 

 

   

 

 

 

Current assets:

    

Cash and cash equivalents

     43,622       28,066  

Accounts receivable, net of allowances (Note 4)

     347,375       285,145  

Accrued utility revenue (Note 3)

     78,200       76,200  

Income taxes receivable, net

     7,960       4,455  

Deferred purchased gas costs (Note 5)

     14,581       2,608  

Prepaids and other current assets (Notes 1, 5, and 14)

     165,294       136,833  
  

 

 

   

 

 

 

Total current assets

     657,032       533,307  
  

 

 

   

 

 

 

Noncurrent assets:

    

Goodwill (Notes 1 and 19)

     179,314       139,983  

Deferred income taxes (Note 13)

     1,480       1,288  

Deferred charges and other assets (Notes 2, 5, and 14)

     447,410       432,234  
  

 

 

   

 

 

 

Total noncurrent assets

     628,204       573,505  
  

 

 

   

 

 

 

Total assets

   $ 6,237,066     $ 5,581,126  
  

 

 

   

 

 

 

 

Southwest Gas Holdings, Inc.

   56


 

December 31,    2017     2016  

CAPITALIZATION AND LIABILITIES

    

Capitalization:

    

Common stock, $1 par (authorized – 60,000,000 shares; issued and outstanding – 48,090,470 and 47,482,068 shares) (Note 12)

   $ 49,720     $ 49,112  

Additional paid-in capital

     955,332       903,123  

Accumulated other comprehensive income (loss), net (Note 6)

     (47,682     (48,008

Retained earnings

     857,398       759,263  
  

 

 

   

 

 

 

Total Southwest Gas Holdings, Inc. equity

     1,814,768       1,663,490  

Noncontrolling interest

     (2,365     (2,217
  

 

 

   

 

 

 

Total equity

     1,812,403       1,661,273  

Redeemable noncontrolling interest (Note 17)

     —         22,590  

Long-term debt, less current maturities (Note 8)

     1,798,576       1,549,983  
  

 

 

   

 

 

 

Total capitalization

     3,610,979       3,233,846  
  

 

 

   

 

 

 

Commitments and contingencies (Note 10)

    

Current liabilities:

    

Current maturities of long-term debt (Note 8)

     25,346       50,101  

Short-term debt (Note 9)

     214,500        

Accounts payable

     228,315       184,669  

Customer deposits

     69,781       72,296  

Income taxes payable, net

     5,946       1,909  

Accrued general taxes

     43,879       42,921  

Accrued interest

     17,870       17,939  

Deferred purchased gas costs (Note 5)

     6,841       90,476  

Other current liabilities (Notes 2, 5, and 14)

     203,403       168,064  
  

 

 

   

 

 

 

Total current liabilities

     815,881       628,375  
  

 

 

   

 

 

 

Deferred income taxes and other credits:

    

Deferred income taxes and investment tax credits, net (Note 13)

     476,960       840,653  

Accumulated removal costs (Note 5)

     315,000       308,000  

Other deferred credits and other long-term liabilities (Notes 2, 5, 11, and 14)

     1,018,246       570,252  
  

 

 

   

 

 

 

Total deferred income taxes and other credits

     1,810,206       1,718,905  
  

 

 

   

 

 

 

Total capitalization and liabilities

   $ 6,237,066     $ 5,581,126  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

Southwest Gas Holdings, Inc.

   57


 

SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

 

Year Ended December 31,    2017     2016     2015  

Operating revenues:

      

Gas operating revenues (Note 3)

   $ 1,302,308     $ 1,321,412     $ 1,454,639  

Construction revenues (Note 3)

     1,246,484       1,139,078       1,008,986  
  

 

 

   

 

 

   

 

 

 

Total operating revenues

     2,548,792       2,460,490       2,463,625  
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Net cost of gas sold

     355,045       397,121       563,809  

Operations and maintenance

     412,187       401,724       393,199  

Depreciation and amortization

     250,951       289,132       270,111  

Taxes other than income taxes

     57,946       52,376       49,393  

Construction expenses

     1,148,963       1,024,423       898,781  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     2,225,092       2,164,776       2,175,293  
  

 

 

   

 

 

   

 

 

 

Operating income

     323,700       295,714       288,332  
  

 

 

   

 

 

   

 

 

 

Other income and (expenses):

      

Net interest deductions (Notes 8 and 9)

     (78,064     (73,660     (71,879

Other income (deductions)

     13,394       9,469       2,879  
  

 

 

   

 

 

   

 

 

 

Total other income and (expenses)

     (64,670     (64,191     (69,000
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     259,030       231,523       219,332  

Income tax expense (Note 13)

     65,088       78,468       79,902  
  

 

 

   

 

 

   

 

 

 

Net income

     193,942       153,055       139,430  

Net income attributable to noncontrolling interests

     101       1,014       1,113  
  

 

 

   

 

 

   

 

 

 

Net income attributable to Southwest Gas Holdings, Inc.

   $ 193,841     $ 152,041     $ 138,317  
  

 

 

   

 

 

   

 

 

 

Basic earnings per share (Notes 1 and 16)

   $ 4.04     $ 3.20     $ 2.94  
  

 

 

   

 

 

   

 

 

 

Diluted earnings per share (Notes 1 and 16)

   $ 4.04     $ 3.18     $ 2.92  
  

 

 

   

 

 

   

 

 

 

Average number of common shares

     47,965       47,469       46,992  

Average shares (assuming dilution)

     47,991       47,814       47,383  

The accompanying notes are an integral part of these statements.

 

Southwest Gas Holdings, Inc.

   58


 

SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Thousands of dollars)

 

Year Ended December 31,    2017     2016     2015  

Net Income

   $ 193,942     $ 153,055     $ 139,430  
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

      

Defined benefit pension plans (Notes 6 and 11):

      

Net actuarial gain (loss)

     (32,701     (14,118     (18,922

Amortization of prior service cost

     828       828       828  

Amortization of net actuarial loss

     15,776       16,781       21,316  

Regulatory adjustment

     12,590       (3,462     (3,500
  

 

 

   

 

 

   

 

 

 

Net defined benefit pension plans

     (3,507     29       (278
  

 

 

   

 

 

   

 

 

 

Forward-starting interest rate swaps:

      

Amounts reclassified into net income (Notes 6 and 14)

     2,073       2,075       2,073  
  

 

 

   

 

 

   

 

 

 

Net forward-starting interest rate swaps

     2,073       2,075       2,073  
  

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustments

     1,771       161       (1,954
  

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     337       2,265       (159
  

 

 

   

 

 

   

 

 

 

Comprehensive income

     194,279       155,320       139,271  

Comprehensive income attributable to noncontrolling interests

     112       1,019       1,047  
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Southwest Gas Holdings, Inc.

   $ 194,167     $ 154,301     $ 138,224  
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

Southwest Gas Holdings, Inc.

   59


 

SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands of dollars)

 

Year Ended December 31,    2017     2016     2015  

CASH FLOW FROM OPERATING ACTIVITIES:

      

Net Income

   $ 193,942     $ 153,055     $ 139,430  

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

      

Depreciation and amortization

     250,951       289,132       270,111  

Deferred income taxes

     63,389       68,732       48,785  

Changes in current assets and liabilities:

      

Accounts receivable, net of allowances

     (40,947     30,096       (39,850

Accrued utility revenue

     (2,000     (1,500     (800

Deferred purchased gas costs

     (95,608     45,858       129,566  

Accounts payable

     19,961       21,695       (3,491

Accrued taxes

     2,112       26,340       (8,405

Other current assets and liabilities

     (8,203     (27,432     23,213  

Gains on sale

     (4,196     (7,148     (3,102

Changes in undistributed stock compensation

     10,888       5,456       2,914  

AFUDC

     (2,296     (2,289     (3,008

Changes in other assets and deferred charges

     (22,269     16,960       (14,166

Changes in other liabilities and deferred credits

     4,231       (18,447     10,863  
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     369,955       600,508       552,060  
  

 

 

   

 

 

   

 

 

 

 

Southwest Gas Holdings, Inc.

   60


 

 

Year Ended December 31,    2017     2016     2015  

CASH FLOW FROM INVESTING ACTIVITIES:

      

Construction expenditures and property additions

     (623,649     (529,531     (488,000

Acquisition of businesses, net of cash acquired

     (94,204     (17,000     (9,261

Restricted cash

                 785  

Changes in customer advances

     323       7,900       18,300  

Miscellaneous inflows

     16,645       13,039       8,354  
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (700,885     (525,592     (469,822
  

 

 

   

 

 

   

 

 

 

CASH FLOW FROM FINANCING ACTIVITIES:

      

Issuance of common stock, net

     41,155       472       35,396  

Dividends paid

     (92,130     (83,317     (74,248

Centuri distribution to redeemable noncontrolling interest

     (204     (439     (99

Issuance of long-term debt, net

     407,063       423,946       135,816  

Retirement of long-term debt

     (338,969     (255,273     (187,973

Change in credit facility and commercial paper

     145,000       (145,000      

Change in short-term debt

     214,500       (18,000     13,000  

Principal payments on capital lease obligations

     (980     (1,354     (1,420

Redemption of Centuri shares from noncontrolling parties

     (23,000            

Withholding remittance – share-based compensation

     (3,176     (2,119     (4,913

Other

     (3,074     (1,569     41  
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     346,185       (82,653     (84,400
  

 

 

   

 

 

   

 

 

 

Effects of currency translation on cash and cash equivalents

     301       (194     (1,407
  

 

 

   

 

 

   

 

 

 

Change in cash and cash equivalents

     15,556       (7,931     (3,569

Cash and cash equivalents at beginning of period

     28,066       35,997       39,566  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 43,622     $ 28,066     $ 35,997  
  

 

 

   

 

 

   

 

 

 

Supplemental information:

      

Interest paid, net of amounts capitalized

   $ 71,943     $ 67,440     $ 66,623  
  

 

 

   

 

 

   

 

 

 

Income taxes paid (received)

   $ 5,673     $ (19,032   $ 43,225  
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

Southwest Gas Holdings, Inc.

   61


 

SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

AND REDEEMABLE NONCONTROLLING INTEREST

(In thousands, except per share amounts)

 

    Southwest Gas Holdings, Inc. Equity                    
    Common Stock    

Additional

Paid-in
Capital

   

Accumulated
Other

Comprehensive
Income (Loss)

   

Retained
Earnings

   

Non-

controlling
Interest

   

Total

   

Redeemable
Noncontrolling

Interest
(Temporary
Equity)

 
     Shares     Amount              

DECEMBER 31, 2014

    46,523     $ 48,153     $ 851,381     $ (50,175   $ 639,164     $ (2,257   $ 1,486,266     $ 20,042  

Common stock issuances

    854       854       39,290             40,144    

Net income (loss)

            138,317       174       138,491       939  

Redemption value adjustments (Note 17)

        5,777         (1,069       4,708       (4,708

Foreign currency exchange translation adj.

          (1,888         (1,888     (66

Net actuarial gain (loss) arising during the period, less amortization of unamortized benefit plan cost, net of tax (Notes 6 and 11)

          (278         (278  

Amounts reclassified to net income, net of tax (Notes 6 and 14)

          2,073           2,073    

Centuri distribution to redeemable noncontrolling interest

                  (99

Dividends declared

               

Common: $1.62 per share

            (77,191       (77,191  
   

DECEMBER 31, 2015

    47,377       49,007       896,448       (50,268     699,221       (2,083     1,592,325       16,108  

Common stock issuances

    105       105       6,675             6,780    

Net income (loss)

            152,041       (134     151,907       1,148  

Redemption value
adjustments (Note 17)

            (5,768       (5,768     5,768  

Foreign currency exchange translation adj.

          156           156       5  

Net actuarial gain (loss) arising during the period, less amortization of unamortized benefit plan cost, net of tax (Notes 6 and 11)

          29           29    

Amounts reclassified to net income, net of tax (Notes 6 and 14)

          2,075           2,075    

 

Southwest Gas Holdings, Inc.

   62


 

 

    Southwest Gas Holdings, Inc. Equity                    
    Common Stock    

Additional

Paid-in
Capital

   

Accumulated
Other

Comprehensive
Income (Loss)

   

Retained
Earnings

   

Non-

controlling
Interest

   

Total

   

Redeemable
Noncontrolling

Interest
(Temporary
Equity)

 
     Shares     Amount              

Centuri distribution to redeemable noncontrolling interest

                  (439

Dividends declared

               

Common: $1.80 per share

            (86,231       (86,231  
   

DECEMBER 31, 2016

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

Common stock issuances

    608       608       52,209             52,817    

Net income (loss)

            193,841       (148     193,693       248  

Redemption value adjustments (Note 17)

            (355       (355     355  

Foreign currency exchange translation adj.

          1,760           1,760       11  

Redemption of Centuri shares from noncontrolling parties

                  (23,000

Net actuarial gain (loss) arising during the period, less amortization of unamortized benefit plan cost, net of tax (Notes 6 and 11)

          (3,507         (3,507  

Amounts reclassified to net income, net of tax (Notes 6 and  14)

          2,073           2,073    

Centuri distribution to redeemable noncontrolling interest

                  (204

Dividends declared

               

Common: $1.98 per share

            (95,351       (95,351  
   

DECEMBER 31, 2017

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

 

 
*

There are 4.7 million common shares registered and available for issuance under provisions of the various stock issuance plans. In March 2017, the Company registered for issuance common shares with an aggregate sales price of up to $150 million. These shares are not included in the 4.7 million common shares registered and available for issuance.

The accompanying notes are an integral part of these statements.

 

Southwest Gas Holdings, Inc.

   63


 

SOUTHWEST GAS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Thousands of dollars)

 

December 31,    2017     2016  

ASSETS

    

Utility plant:

    

Gas plant

   $ 6,629,644     $ 6,193,760  

Less: accumulated depreciation

     (2,231,242     (2,172,966

Construction work in progress

     125,248       111,177  
  

 

 

   

 

 

 

Net utility plant (Note 2)

     4,523,650       4,131,971  
  

 

 

   

 

 

 

Other property and investments (Note 1)

     119,114       108,569  
  

 

 

   

 

 

 

Current assets:

    

Cash and cash equivalents

     37,946       19,024  

Accounts receivable, net of allowances (Note 4)

     119,748       111,845  

Accrued utility revenue (Note 3)

     78,200       76,200  

Income taxes receivable, net

           4,455  

Deferred purchased gas costs (Note 5)

     14,581       2,608  

Prepaids and other current assets (Notes 1, 5, and 14)

     153,771       126,363  
  

 

 

   

 

 

 

Total current assets

     404,246       340,495  
  

 

 

   

 

 

 

Noncurrent assets:

    

Goodwill (Note 1)

     10,095       10,095  

Deferred charges and other assets (Notes 2, 5, and 14)

     425,564       410,625  

Discontinued operations – construction services – assets (Note 18)

           579,371  
  

 

 

   

 

 

 

Total noncurrent assets

     435,659       1,000,091  
  

 

 

   

 

 

 

Total assets

   $ 5,482,669     $ 5,581,126  
  

 

 

   

 

 

 

 

Southwest Gas Holdings, Inc.

   64


 

CONSOLIDATED BALANCE SHEETS – Continued

 

December 31,    2017     2016  

CAPITALIZATION AND LIABILITIES

    

Capitalization:

    

Common stock (Note 12)

   $ 49,112     $ 49,112  

Additional paid-in capital

     948,767       897,346  

Accumulated other comprehensive income (loss), net (Note 6)

     (47,073     (45,639

Retained earnings

     659,193       767,061  
  

 

 

   

 

 

 

Total Southwest Gas Corporation equity

     1,609,999       1,667,880  

Discontinued operations – construction services non-owner equity

           15,983  

Long-term debt, less current maturities (Note 8)

     1,521,031       1,375,080  
  

 

 

   

 

 

 

Total capitalization

     3,131,030       3,058,943  
  

 

 

   

 

 

 

Commitments and contingencies (Note 10)

    

Current liabilities:

    

Current maturities of long-term debt (Note 8)

           25,000  

Short-term debt (Note 9)

     191,000        

Accounts payable

     158,474       138,229  

Customer deposits

     69,781       72,296  

Income taxes payable, net

     4,971        

Accrued general taxes

     43,879       42,921  

Accrued interest

     17,171       17,395  

Deferred purchased gas costs (Note 5)

     6,841       90,476  

Payable to parent

     194        

Other current liabilities (Notes 2, 5, and 14)

     108,785       95,999  
  

 

 

   

 

 

 

Total current liabilities

     601,096       482,316  
  

 

 

   

 

 

 

Deferred income taxes and other credits:

    

Deferred income taxes and investment tax credits, net (Note 13)

     445,243       806,109  

Accumulated removal costs (Note 5)

     315,000       308,000  

Other deferred credits and other long-term liabilities (Notes 2, 5, 11, and 14)

     990,300       545,143  

Discontinued operations – construction services – liabilities (Note 18)

           380,615  
  

 

 

   

 

 

 

Total deferred income taxes and other credits

     1,750,543       2,039,867  
  

 

 

   

 

 

 

Total capitalization and liabilities

   $ 5,482,669     $ 5,581,126  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

Southwest Gas Holdings, Inc.

   65


 

SOUTHWEST GAS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands)

 

Year Ended December 31,    2017     2016     2015  

Continuing operations:

      

Gas operating revenues (Note 3)

   $ 1,302,308     $ 1,321,412     $ 1,454,639  
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Net cost of gas sold

     355,045       397,121       563,809  

Operations and maintenance

     410,745       401,724       393,199  

Depreciation and amortization

     201,922       233,463       213,455  

Taxes other than income taxes

     57,946       52,376       49,393  
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     1,025,658       1,084,684       1,219,856  
  

 

 

   

 

 

   

 

 

 

Operating income

     276,650       236,728       234,783  
  

 

 

   

 

 

   

 

 

 

Other income and (expenses):

      

Net interest deductions (Notes 8 and 9)

     (69,733     (66,997     (64,095

Other income (deductions)

     13,036       8,276       2,292  
  

 

 

   

 

 

   

 

 

 

Total other income and (expenses)

     (56,697     (58,721     (61,803
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     219,953       178,007       172,980  

Income tax expense (Note 13)

     63,135       58,584       61,355  
  

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     156,818       119,423       111,625  
  

 

 

   

 

 

   

 

 

 

Discontinued operations – construction services: (Note 18)

      

Income before income taxes

           53,516       46,352  

Income tax expense

           19,884       18,547  
  

 

 

   

 

 

   

 

 

 

Income

           33,632       27,805  

Noncontrolling interests

           1,014       1,113  
  

 

 

   

 

 

   

 

 

 

Income – discontinued operations

           32,618       26,692  
  

 

 

   

 

 

   

 

 

 

Net income

   $ 156,818     $ 152,041     $ 138,317  
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

Southwest Gas Holdings, Inc.

   66


 

SOUTHWEST GAS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Thousands of dollars)

 

Year Ended December 31,    2017     2016     2015  

Continuing operations:

      

Net Income from continuing operations

   $ 156,818     $ 119,423     $ 111,625  
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

      

Defined benefit pension plans (Notes 6 and 11):

      

Net actuarial gain (loss)

     (32,701     (14,118     (18,922

Amortization of prior service cost

     828       828       828  

Amortization of net actuarial loss

     15,776       16,781       21,316  

Regulatory adjustment

     12,590       (3,462     (3,500
  

 

 

   

 

 

   

 

 

 

Net defined benefit pension plans

     (3,507     29       (278
  

 

 

   

 

 

   

 

 

 

Forward-starting interest rate swaps:

      

Amounts reclassified into net income (Notes 6 and 14)

     2,073       2,075       2,073  
  

 

 

   

 

 

   

 

 

 

Net forward-starting interest rate swaps

     2,073       2,075       2,073  
  

 

 

   

 

 

   

 

 

 

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

     (1,434     2,104       1,795  
  

 

 

   

 

 

   

 

 

 

Comprehensive income from continuing operations

     155,384       121,527       113,420  
  

 

 

   

 

 

   

 

 

 

Discontinued operations – construction services:

      

Net income

           32,618       26,692  

Foreign currency translation adjustments

           161       (1,954
  

 

 

   

 

 

   

 

 

 

Comprehensive income

           32,779       24,738  

Comprehensive income (loss) attributable to noncontrolling interests

           5       (66
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to discontinued operations –
construction services

           32,774       24,804  
  

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 155,384     $ 154,301     $ 138,224  
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

Southwest Gas Holdings, Inc.

   67


 

SOUTHWEST GAS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands of dollars)

 

      2017     2016     2015  

CASH FLOW FROM OPERATING ACTIVITIES:

      

Net Income

   $ 156,818     $ 153,055     $ 139,430  

Income (loss) from discontinued operations

           33,632       27,805  
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     156,818       119,423       111,625  

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

      

Depreciation and amortization

     201,922       233,463       213,455  

Deferred income taxes

     67,169       67,959       53,396  

Changes in current assets and liabilities:

      

Accounts receivable, net of allowances

     (7,902     40,731       (12,444

Accrued utility revenue

     (2,000     (1,500     (800

Deferred purchased gas costs

     (95,608     45,858       129,566  

Accounts payable

     4,545       16,183       (8,751

Accrued taxes

     10,383       19,391       (1,626

Other current assets and liabilities

     (13,726     (33,496     21,736  

Changes in undistributed stock compensation

     9,288       5,456       2,914  

AFUDC

     (2,296     (2,289     (3,008

Changes in other assets and deferred charges

     (22,918     16,611       (14,513

Changes in other liabilities and deferred credits

     3,541       (18,447     10,863  
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     309,216       509,343       502,413  
  

 

 

   

 

 

   

 

 

 

CASH FLOW FROM INVESTING ACTIVITIES:

      

Construction expenditures and property additions

     (560,448     (457,119     (438,289

Changes in customer advances

     323       7,900       18,300  

Miscellaneous inflows

     2,741       2,982       3,262  

Dividends received

           12,461       2,801  
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (557,384     (433,776     (413,926
  

 

 

   

 

 

   

 

 

 

 

Southwest Gas Holdings, Inc.

   68


 

CONSOLIDATED STATEMENTS OF CASH FLOWS – Continued

 

      2017     2016     2015  

CASH FLOW FROM FINANCING ACTIVITIES:

      

Issuance of common stock, net

           472       35,396  

Contributions from parent

     41,359              

Dividends paid

     (81,497     (83,317     (74,248

Issuance of long-term debt, net

           296,469        

Retirement of long-term debt

     (25,000     (124,855     (51,200

Change in credit facility and commercial paper

     145,000       (145,000      

Change in short-term debt

     191,000       (18,000     13,000  

Withholding remittance – share-based compensation

     (3,176     (2,119     (4,913

Other

     (596     (1,569     92  
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     267,090       (77,919     (81,873
  

 

 

   

 

 

   

 

 

 

Net cash provided by discontinued operating activities

           91,165       49,647  

Net cash used in discontinued investing activities

           (91,816     (55,896

Net cash provided by (used in) discontinued financing activities

           (4,734     (2,527

Effects of currency translation on cash and cash equivalents

           (194     (1,407
  

 

 

   

 

 

   

 

 

 

Change in cash and cash equivalents

     18,922       (7,931     (3,569

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

           5,579       10,183  
  

 

 

   

 

 

   

 

 

 

Change in cash and cash equivalents of continuing operations

     18,922       (2,352     6,614  

Cash and cash equivalents at beginning of period

     19,024       21,376       14,762  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 37,946     $ 19,024     $ 21,376  
  

 

 

   

 

 

   

 

 

 

Supplemental information:

      

Interest paid, net of amounts capitalized

   $ 64,790     $ 61,501     $ 59,161  
  

 

 

   

 

 

   

 

 

 

Income taxes paid (received)

   $ (7,854   $ (31,011   $ 13,544  
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

Southwest Gas Holdings, Inc.

   69


 

SOUTHWEST GAS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(In thousands, except per share amounts)

 

    Southwest Gas Corporation Equity        
    Common Stock    

Additional

Paid-in

Capital

   

Accumulated
Other

Comprehensive

Income (Loss)

   

Retained

Earnings

   

Total

 
     Shares     Amount          

DECEMBER 31, 2014

    46,523     $ 48,153     $ 851,381     $ (49,538   $ 640,125     $ 1,490,121  

Common stock issuances

    854       854       39,290           40,144  

Net income

            138,317       138,317  

Net actuarial gain (loss) arising during the period, less amortization of unamortized benefit plan cost, net of tax (Notes 6 and 11)

          (278       (278

Amounts reclassified to net income, net of tax
(Notes 6 and 14)

          2,073         2,073  

Dividends declared

           

Common: $1.62 per share

            (77,191     (77,191
   

DECEMBER 31, 2015

    47,377       49,007       890,671       (47,743     701,251       1,593,186  

Common stock issuances

    105       105       6,675           6,780  

Net income

            152,041       152,041  

Net actuarial gain (loss) arising during the period, less amortization of unamortized benefit plan cost, net of tax (Notes 6 and 11)

          29         29  

Amounts reclassified to net income, net of tax
(Notes 6 and 14)

          2,075         2,075  

Dividends declared

           

Common: $1.80 per share

            (86,231     (86,231
   

DECEMBER 31, 2016

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

Net income

            156,818       156,818  

Net actuarial gain (loss) arising during the period, less amortization of unamortized benefit plan cost, net of tax (Notes 6 and 11)

          (3,507       (3,507

Amounts reclassified to net income, net of tax
(Notes 6 and 14)

          2,073         2,073  

Distribution to Southwest Gas Holdings, Inc. investment in discontinued operations (Note 18)

            (182,773     (182,773

Stock-based compensation (a)

        10,062         (784     9,278  

Dividends declared to Southwest Gas Holdings, Inc.

            (81,129     (81,129

Contributions from Southwest Gas Holdings, Inc.

        41,359           41,359  
   

DECEMBER 31, 2017

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

 

 
(a)

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

The accompanying notes are an integral part of these statements.

 

Southwest Gas Holdings, Inc.

   70


 

Notes to Consolidated Financial Statements

Note 1Summary of Significant Accounting Policies

Nature of Operations.    This is a combined annual report of Southwest Gas Holdings, Inc. and Southwest Gas Corporation. The Notes to the Consolidated Financial Statements apply to both entities. Southwest Gas Holdings, Inc. (the “Company”), is a holding company, owning all of the shares of common stock of Southwest Gas Corporation (“Southwest” or the “natural gas operations” segment) and all of the shares of common stock of Centuri Construction Group, Inc. (“Centuri” or the “construction services” segment). Prior to August 2017, only 96.6% of Centuri’s shares were owned. In August 2017, Southwest Gas Holdings, Inc. acquired the remaining 3.4% equity interest in Centuri Construction Group, Inc. that was held by the previous owners (and previously reflected as a redeemable noncontrolling interest). Refer to Note 17 – Construction Services Noncontrolling Interests for additional information.

In January 2017, a previously contemplated and approved reorganization under a holding company structure was made effective. The reorganization was 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. each became subsidiaries of the publicly traded holding company; whereas, historically, Centuri had been a direct subsidiary of Southwest.

Southwest is engaged in the business of purchasing, distributing, and transporting natural gas for customers in portions of Arizona, Nevada, and California. Public utility rates, practices, facilities, and service territories of Southwest are subject to regulatory oversight. The timing and amount of rate relief can materially impact results of operations. Natural gas purchases and the timing of related recoveries can materially impact liquidity. Results for the natural gas operations segment are higher during winter periods due to the seasonality incorporated in its regulatory rate structures. Centuri is a comprehensive construction services enterprise dedicated to meeting the growing demands of North American utilities, energy and industrial markets. Centuri derives revenue from installation, replacement, repair, and maintenance of energy distribution systems, and developing industrial construction solutions. Centuri operations are generally conducted under the business names of NPL Construction Co. (“NPL”), Canyon Pipeline Construction, Inc. (“Canyon”), NPL Canada Ltd. (“NPL Canada”, formerly Link-Line Contractors Ltd.), W.S. Nicholls Construction, Inc. (“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. Centuri acquired New England Utility Constructors, Inc. (“Neuco”) in November 2017, thereby expanding its core services in the Northeast region of the United States. See Note 19 – Acquisition of Construction Services Business for more information.

Basis of Presentation.    The Company follows U.S. GAAP in accounting for all of its businesses. Unless specified otherwise, all amounts are in U.S. dollars. Accounting for natural gas utility operations conforms with U.S. GAAP as applied to rate-regulated companies and as prescribed by federal agencies and commissions of the various states in which the utility operates. The preparation of financial statements in conformity with U.S. GAAP 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

 

Southwest Gas Holdings, Inc.

   71


 

revenues and expenses during the reporting period. Actual results could differ from those estimates. 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 consolidated financial statements related to Southwest Gas Corporation, which are included in this annual report, depict Centuri-related amounts for periods prior to January 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 Consolidated Balance Sheet. Those assets and liabilities are detailed in Note 18 – Reorganization Impacts – Discontinued Operations Solely Related to Southwest Gas Corporation, and include both current and non-current amounts.

Prior to the August 2017 purchase of the residual 3.4% interest in Centuri, earnings associated with the 3.4% interest were attributable to the previous noncontrolling parties and therefore, not included in the earnings of the Company. Following the purchase date, 100% of Centuri earnings are attributable to the Company.

No substantive change has occurred with regard to the Company’s business segments on the whole as a result of the foregoing organizational changes. Centuri operations continue to be part of continuing operations and included in the consolidated financial statements of Southwest Gas Holdings, Inc. While Centuri has expanded its footprint with the Neuco acquisition, its core business has remained consistent. Southwest Gas Corporation consists of a single segment – natural gas operations.

Consolidation.    The accompanying financial statements are presented on a consolidated basis for Southwest Gas Holdings, Inc. and all subsidiaries and Southwest Gas Corporation and all subsidiaries as of December 31, 2017 (except those accounted for using the equity method as discussed further below). All significant intercompany balances and transactions have been eliminated with the exception of transactions between Southwest and Centuri in accordance with accounting treatment for rate-regulated entities.

Centuri, through its subsidiaries, holds a 65% interest in a venture to market natural gas engine-driven heating, ventilating, and air conditioning (“HVAC”) technology and products. Centuri consolidates the entity (IntelliChoice Energy, LLC).

Centuri, through its subsidiaries, holds a 50% interest in W.S. Nicholls Western Construction LTD. (“Western”), a Canadian construction services company that is a variable interest entity. Centuri determined that it is not the primary beneficiary of the entity due to a shared-power structure; therefore, Centuri does not consolidate the entity and has recorded its investment, and results related thereto, using the equity method. The investment in Western totaled $12.7 million and $10.8 million at December 31, 2017 and 2016, respectively. Both periods include the impacts of foreign currency exchange translation adjustments. No dividends were received from Western during 2017. Dividends of $500,000 were received from Western in 2016. In 2017, a management fee was paid by Western to its partners, including W.S. Nicholls, in accordance with underlying agreements. The equity method investment in Western is included in Other Property and Investments in the Consolidated Balance Sheets of the Company. Centuri’s maximum exposure to loss as a result of its involvement with Western is estimated at $49.3 million. The estimated maximum exposure to loss represents the maximum loss that would be absorbed by Centuri in the event that all of the assets of Western were deemed to be worthless. Centuri recorded earnings of $1.1 million from this investment in 2017, which is included in Other Income (deductions) in the Consolidated Statements of Income.

 

Southwest Gas Holdings, Inc.

   72


 

Net Utility Plant.    Net utility plant includes gas plant at original cost, less the accumulated provision for depreciation and amortization, plus the unamortized balance of acquisition adjustments. Original cost includes contracted services, material, payroll and related costs such as taxes and benefits, general and administrative expenses, and an allowance for funds used during construction, less contributions in aid of construction.

Management determined that utility-related acquisition adjustments were immaterial to both the Company and Southwest as of December 31, 2017 and December 31, 2016, and therefore, combined related amounts with gas plant. Management has, therefore, reclassified the previous year comparative balance sheet presentation to be on the same basis as the most recently completed year-end period, resulting in $196,000 of acquisition adjustments being included in Gas plant for the period ended December 31, 2016.

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

 

Southwest Gas Corporation:    2017     2016  

Net cash surrender value of COLI policies

   $ 117,341     $ 106,744  

Other property

     1,773       1,825  
  

 

 

   

 

 

 

Total Southwest Gas Corporation

     119,114       108,569  

Centuri property, equipment, and intangibles

     554,730       451,114  

Centuri accumulated provision for depreciation and amortization

     (258,906     (228,374

Other property

     13,242       11,034  
  

 

 

   

 

 

 

Total Southwest Gas Holdings, Inc.

   $ 428,180     $ 342,343  
  

 

 

   

 

 

 

Deferred Purchased Gas Costs.    The various regulatory commissions have established procedures to enable Southwest to adjust its billing rates for changes in the cost of natural gas purchased. The difference between the current cost of gas purchased and the cost of gas recovered in billed rates is deferred. Generally, these deferred amounts are recovered or refunded within one year.

Prepaids and other current assets.    Prepaids and other current assets for Southwest and the Company include gas pipe materials and operating supplies of $33 million in 2017 and $30 million in 2016 (carried at weighted average cost), and also includes $40 million in 2017 and $953,000 in 2016 related to a regulatory asset associated with the Arizona decoupling mechanism (an alternative revenue program). In the recent Arizona general rate case decision, the decoupled rate design was approved to continue, excluding a winter-period adjustment to rates, making the mechanism fundamentally similar to that which exists in Nevada. This change from a combination of monthly winter-period adjustments to bills (coupled with an annual rate adjustment) to an annual rate adjustment resulted in an increase in the associated regulatory asset noted above.

Income Taxes.    The asset and liability method of accounting is utilized for the recognition of income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Refer to discussion below and to Note 13 – Income Taxes regarding recent tax changes enacted,

 

Southwest Gas Holdings, Inc.

   73


 

including the remeasurement of deferred tax balances. For regulatory and financial reporting purposes, investment tax credits (“ITC”) related to gas utility operations are deferred and amortized over the life of related fixed assets. As of December 31, 2017, the Company had cumulative earnings of approximately $13 million of book earnings in its foreign jurisdiction. Management previously asserted and continues to assert that all the earnings of Centuri’s Canadian subsidiaries will be permanently reinvested in Canada. As a result, no U.S. deferred income taxes have been recorded related to cumulative foreign earnings.

On December 22, 2017, the legislation referred to as the Tax Cuts and Jobs Act (“TCJA”) was enacted. Substantially all of the provisions of the TCJA are effective for taxable years beginning after December 31, 2017. The TCJA includes extensive changes which significantly impact the taxation of business entities, including specific provisions related to regulated public utilities. The more significant changes that impact the Company include the reduction in the corporate federal income tax rate from 35% to 21%, and several technical provisions including, among others, limiting the utilization of net operating losses (“NOLs”) arising after December 31, 2017 to 80% of taxable income, with the ability to indefinitely carryforward unutilized NOLs to reduce future taxable income. For 2017, the Company benefited by the reduction in tax rates related to its construction services segment as a result of the required remeasurement of deferred tax balances based on the reduction in enacted rates, reducing income tax expense in the current year. The regulated operations of Southwest experienced other impacts due to its rate-regulation and the accounting treatment prescribed by U.S. GAAP to reflect the economics of the rate-regulation. Approximately $8 million favorably impacted tax expense for Southwest, while remaining reductions in accumulated deferred income tax balances to reflect the remeasurement were reclassified to regulatory liabilities in Other deferred credits on the balance sheets of Southwest and the Company. See Note 5 – Regulatory Assets and Liabilities and Note 13 – Income Taxes for further information.

Cash and Cash Equivalents.    For purposes of reporting consolidated cash flows, cash and cash equivalents include cash on hand and financial instruments with a purchase-date maturity of three months or less. In general, cash and cash equivalents fall within Level 1 (quoted prices for identical financial instruments) of the three-level fair value hierarchy that ranks the inputs used to measure fair value by their reliability. However, cash and cash equivalents for Southwest and the Company also includes money market fund investments totaling approximately $22.2 million and $5.3 million at December 31, 2017 and 2016, respectively, which fall within Level 2 (significant other observable inputs) of the fair value hierarchy, due to the asset valuation methods used by money market funds.

Significant non-cash investing activities for Southwest and the Company included the following: Upon contract expiration, customer advances of approximately $3.7 million, $6.5 million, and $3.1 million during 2017, 2016, and 2015, respectively, were applied as contributions toward utility construction activity and represent non-cash investing activity. In addition, approximately $15 million of capital expenditures were not paid for 2017 (a liability for these expenditures was included in accounts payable), which represents non-cash investing activity.

Adoption of Accounting Standards Update (“ASU”) No. 2016-09.    As of January 1, 2017, the Company adopted 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 Consolidated Statements of Cash Flows for both Southwest Gas Holdings, Inc. and Southwest Gas Corporation. The withheld taxes were

 

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included in the Other current assets and liabilities line item of the Consolidated Statements 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 Statements of Cash Flows were revised from $18.3 million to $23.2 million for the year ended December 31, 2015 and revised from cash outflows of $30 million to $27.4 million for the year ended December 31, 2016. The Southwest Gas Corporation Consolidated Statements of Cash Flows reflects application of the ASU for 2015, 2016, and 2017.

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. This presentation requirement of the update was applied 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. No previously unrecognized tax benefits existed as a result of these changes; therefore, no cumulative effect adjustment to the opening retained earnings was required.

Goodwill.    Goodwill is assessed for impairment annually, as required by U.S. GAAP, or otherwise, if circumstances indicate impairment to the carrying value of goodwill may have occurred. The goodwill impairment analysis is conducted as of October each year and may start with an assessment of qualitative factors (Step 0) to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the qualitative factors, management determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if management does not perform a qualitative assessment, a Step 1 impairment test will be performed. Management considered the qualitative factors and the evidence obtained and determined that it is not more likely than not that the fair value of our reporting units are less than their carrying amounts in either 2016 or 2017. Thus, no impairment was recorded in either year. The Neuco acquisition in 2017 (further discussion in Note 19 – Acquisition of Construction Services Business) was considered an asset purchase for tax purposes. As a result, goodwill associated with Neuco is expected to be deductible for those same purposes.

 

      Southwest     

Construction

Services

     Total
Company
 
(In thousands of dollars)                     

December 31, 2016

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

Additional goodwill from New England Utility Constructors, Inc. acquisition

            32,028        32,028  

Foreign currency translation adjustment

            7,303        7,303  
  

 

 

    

 

 

    

 

 

 

December 31, 2017

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

 

 

    

 

 

    

 

 

 

 

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Intangible Assets.    Intangible assets (other than goodwill) are amortized using the straight-line method to reflect the pattern of economic benefits consumed over the estimated periods benefited. The recoverability of intangible assets is evaluated when events or circumstances indicate that a revision of estimated useful lives is warranted or that an intangible asset may be impaired. Non-utility intangible assets are associated with construction services businesses acquired in 2014 and the Neuco acquisition in 2017. All have finite lives. Centuri has $80.7 million and $37.7 million of intangible assets at December 31, 2017 and 2016, respectively, as detailed in the following table (thousands of dollars):

 

December 31, 2017    Gross Carrying
Amount
     Accumulated
Amortization
    Net Carrying
Amount
 

Customer relationships

   $ 76,254      $ (6,743   $ 69,511  

Trade names and trademarks

     13,754        (4,080     9,674  

Noncompete agreement

     2,060        (543     1,517  
  

 

 

    

 

 

   

 

 

 

Total

   $ 92,068      $ (11,366   $ 80,702  
  

 

 

    

 

 

   

 

 

 

December 31, 2016

                         

Customer relationships

   $ 34,033      $ (3,906   $ 30,127  

Trade names and trademarks

     9,349        (2,565     6,784  

Customer contracts backlog

     1,656        (1,656      

Noncompete agreement

     1,029        (271     758  
  

 

 

    

 

 

   

 

 

 

Total

   $ 46,067      $ (8,398   $ 37,669  
  

 

 

    

 

 

   

 

 

 

The above intangible assets are included in Other property and investments in the Southwest Gas Holdings, Inc. Consolidated Balance Sheets. The estimated future amortization of the intangible assets for the next five years is as follows (in thousands):

 

2018   $ 6,835  
2019     6,240  
2020     6,114  
2021     5,711  

2022

    5,626  

See Note 2 – Utility Plant and Leases for additional information regarding natural gas operations intangible assets. Note 19 – Acquisition of Construction Services Business includes detailed information about intangible assets purchased in the Neuco acquisition.

Accumulated Removal Costs.    Approved regulatory practices allow Southwest to include in depreciation expense a component to recover removal costs associated with utility plant retirements. In accordance with the Securities and Exchange Commission (“SEC”) position on presentation of these amounts, management reclassifies estimated removal costs from accumulated depreciation to accumulated removal costs within the liabilities section of the Consolidated Balance Sheets. Amounts fluctuate between periods depending on the level of replacement work performed, the estimated cost of removal in rates and the actual cost of removal experienced.

Gas Operating Revenues.    Southwest recognizes revenue when it satisfies its performance by transferring gas to the customer. Natural gas is delivered and “consumed” by the customer simultaneously. Revenues are recorded

 

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when customers are billed. Customer billings are substantially based on monthly meter reads and include certain other charges assessed monthly, and are calculated in accordance with applicable tariffs and state and local laws, regulations, and related agreements. An estimate of the margin associated with natural gas service provided, but not yet billed, to residential and commercial customers from the latest meter read date to the end of the reporting period is also recognized as accrued utility revenue. Revenues also include the net impacts of margin tracker/decoupling accruals based on criteria in U.S. GAAP for rate-regulated entities associated with alternative revenue programs. All of Southwest’s service territories have decoupled rate structures, which are designed to eliminate the direct link between volumetric sales and revenue, thereby mitigating the impacts of unusual weather variability and conservation on margin. See Note 3 – Revenue for additional information regarding natural gas operating revenues.

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

Construction Revenues.    The majority of Centuri contracts are performed under unit-price contracts. Generally, these contracts state prices per unit of installation. Typical installations are accomplished in a few weeks or less. Revenues are recorded as installations are completed. Revenues are recorded for long-term fixed-price contracts in a pattern that reflects the transfer of control of promised goods and services to the customer over time. The amount of revenue recognized on fixed-price contracts is based on costs expended to date relative to anticipated final contract costs. Changes in job performance, job conditions, and final contract settlements are factors that influence management’s assessment of total contract value and the total estimated costs to complete those contracts. Revisions in estimates of costs and earnings during the course of work are reflected in the accounting period in which the facts requiring revision become known. If a loss on a contract becomes known or is anticipated, the entire amount of the estimated ultimate loss is recognized at that time in the financial statements. Some unit-price contracts contain caps that if encroached, trigger revenue and loss recognition similar to a fixed-price contract model. See Note 3 – Revenue for additional information regarding construction revenues.

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

Construction Expenses.    The construction expenses classification in the income statement includes payroll expenses, office and equipment rental costs, subcontractor expenses, training, job-related materials, gains and losses on equipment sales, and professional fees of Centuri.

Net Cost of Gas Sold.    Components of net cost of gas sold include natural gas commodity costs (fixed-price and variable-rate), pipeline capacity/transportation costs, and actual settled costs of natural gas derivative instruments. Also included are the net impacts of purchased gas adjustment (“PGA”) deferrals and recoveries, which by their inclusion, result in net cost of gas sold overall that is comparable to amounts included in billed gas operating revenues. Differences between amounts incurred with suppliers, transmission pipelines, etc. and those already included in customer rates, are temporarily deferred in PGA accounts pending inclusion in customer rates.

 

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Operations and Maintenance Expense.    Operations and maintenance expense includes Southwest’s operating and maintenance costs associated with serving utility customers, uncollectible expense, administrative and general salaries and expense, employee benefits expense, and legal expense (including injuries and damages).

Depreciation and Amortization.    Utility plant depreciation is computed on the straight-line remaining life method at composite rates considered sufficient to amortize costs over estimated service lives, including components which compensate for removal costs (net of salvage value), and retirements, as approved by the appropriate regulatory agency. When plant is retired from service, the original cost of plant, including cost of removal, less salvage, is charged to the accumulated provision for depreciation. Other regulatory assets, including acquisition adjustments, are amortized when appropriate, over time periods authorized by regulators. Nonutility and construction services-related property and equipment are depreciated on a straight-line method based on the estimated useful lives of the related assets. During the third quarter of 2016, Centuri evaluated the estimated useful lives of its depreciable assets, and in so doing determined that certain equipment lives should be extended. This change in estimate reduced Centuri depreciation by approximately $10 million and $4 million, during 2017 and 2016, respectively. Costs and gains related to refunding utility debt and debt issuance expenses are deferred and amortized over the weighted-average lives of the new issues and become a component of interest expense. See also discussion regarding Accumulated Removal Costs above.

Allowance for Funds Used During Construction (“AFUDC”).    AFUDC represents the cost of both debt and equity funds used to finance utility construction. AFUDC is capitalized as part of the cost of utility plant. The debt portion of AFUDC is reported in the Company’s and Southwest’s Consolidated Statements of Income as an offset to net interest deductions and the equity portion is reported as other income. Utility plant construction costs, including AFUDC, are recovered in authorized rates through depreciation when completed projects are placed into operation, and general rate relief is requested and granted.

 

      2017     2016     2015  

(In thousands)

      

AFUDC:

      

Debt portion

   $ 1,666     $ 1,175     $ 1,666  

Equity portion

     2,296       2,289       3,008  
  

 

 

   

 

 

   

 

 

 

AFUDC capitalized as part of utility plant

   $ 3,962     $ 3,464     $ 4,674  
  

 

 

   

 

 

   

 

 

 

AFUDC rate

     5.95     7.35     7.32

 

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

 

      2017     2016     2015  

Southwest Gas Corporation – natural gas operations segment:

      

Change in COLI policies

   $ 10,300     $ 7,400     $ (500

Interest income

     2,784       1,848       1,754  

Equity AFUDC

     2,296       2,289       3,008  

Miscellaneous income and (expense)

     (2,344     (3,261     (1,970
  

 

 

   

 

 

   

 

 

 

Southwest Gas Corporation – total other income (deductions)

     13,036       8,276       2,292  
  

 

 

   

 

 

   

 

 

 

Construction services segment:

      

Interest income

     3       1       419  

Foreign transaction gain (loss)

     (754     (22     (824

Equity in earnings of unconsolidated investment – Western

     1,052       69       310  

Miscellaneous income and (expense)

     44       1,145       682  
  

 

 

   

 

 

   

 

 

 

Centuri – total other income (deductions)

     345       1,193       587  
  

 

 

   

 

 

   

 

 

 

Corporate and administrative

     13              
  

 

 

   

 

 

   

 

 

 

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

   $ 13,394     $ 9,469     $ 2,879  
  

 

 

   

 

 

   

 

 

 

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 the Company and Southwest to indemnify 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 value components of COLI policies, as they progress towards the ultimate death benefits, are also recorded without tax consequences.

Foreign Currency Translation.    Foreign currency-denominated assets and liabilities of consolidated subsidiaries are translated into U.S. dollars at exchange rates existing at the respective balance sheet dates. Translation adjustments resulting from fluctuations in exchange rates are recorded as a separate component of accumulated other comprehensive income within stockholders’ equity. Results of operations of foreign subsidiaries are translated using the monthly weighted-average exchange rates during the respective periods. Gains and losses resulting from foreign currency transactions are included in other income (expense) of the Company. Gains and losses resulting from intercompany foreign currency transactions that are of a long-term investment nature are reported in other comprehensive income, if applicable.

 

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Earnings Per Share.    Basic earnings per share (“EPS”) in each period of this report were calculated by dividing net income attributable to Southwest Gas Holdings, Inc. by the weighted-average number of shares during those periods. Diluted EPS includes additional weighted-average common stock equivalents (stock options, performance shares, and restricted stock units). Unless otherwise noted, the term “Earnings Per Share” refers to Basic EPS. A reconciliation of the denominator used in the Basic and Diluted EPS calculations is shown in the following table.

 

      2017      2016      2015  

(In thousands)

        

Average basic shares

     47,965        47,469        46,992  

Effect of dilutive securities:

        

Stock options

            1        8  

Management Incentive Plan shares

     8        124        171  

Restricted stock units (1)

     18        220        212  
  

 

 

    

 

 

    

 

 

 

Average diluted shares

     47,991        47,814        47,383  
  

 

 

    

 

 

    

 

 

 

 

(1)

The number of securities granted for 2017 includes 7,000 performance shares, the total of which was derived by assuming that target performance will be achieved during the relevant performance period.

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. Southwest and the Company adopted the new guidance on January 1, 2018 under the modified retrospective transition method, as permissible. See also Note 3 – Revenue.

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. Management believes this update will not have a material impact on its consolidated financial statements and disclosures.

 

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

 

   

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

 

   

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

Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. Though companies have historically been required to make disclosures regarding leases and of associated contractual obligations, leases (with terms longer than a year) will no longer exist off-balance sheet. Lessees (for capital 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 of Southwest and the Company currently plans to adopt the update at the required adoption date, which is for interim and annual reporting periods commencing January 1, 2019. Existing leases have been historically documented under traditional leasing arrangements by both segments. Management is in the process of evaluating other types of arrangements that have the potential to meet the definition of a lease under the new standard, and is also in the process of selecting software to efficiently implement the standard for its natural gas operations segment. In January 2018, the FASB issued guidance that allows the election of a practical expedient to not apply the new standard to existing easement contracts that were not previously accounted for as leases under historic guidance. However, companies would still be required to evaluate any new easements entered into after the effective date of the standard to determine if the arrangements should be accounted for as leases. Management is currently evaluating the new and proposed guidance in light of its customary leasing arrangements (and other arrangements in association with the new guidance) to determine the effect the new standard will have on its financial position, results of operations, cash flows, and business processes.

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

 

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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. Management believes this update will not have a material impact 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. 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 believes this update will not have a material impact on its consolidated financial statements and disclosures.

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.

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 employee benefits under 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 employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, and be appropriately described. The update also allows only the service cost

 

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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. It is anticipated that Southwest would continue to request recovery of the total costs of defined benefit plans in rate applications filed with its various regulatory bodies. 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 has historically been a component of depreciation and related rate development through efforts of companies and their regulatory commissions. The Federal Energy Regulatory Commission (“FERC”) regulates interstate transmission pipelines and also establishes, via its Uniform System of Accounts, accounting practices of rate-regulated entities. Accounting guidelines by the FERC are typically also upheld by state commissions. Historically, those guidelines have been generally consistent with guidance in U.S. GAAP (including U.S. GAAP for rate-regulated entities). The FERC has issued guidance that states it will permit an election to either continue to capitalize non-service benefit costs for regulatory reporting purposes or to cease capitalizing such costs and implement the Topic 715 update capitalization provisions “as is,” for regulatory purposes. Southwest and the Company will adopt the provisions of Topic 715 for both SEC reporting and regulatory purposes effective January 2018. The estimated non-service costs capitalized as a component of gas plant were estimated to be approximately $3 million during both years ending December 31, 2017 and December 31, 2016. Total non-service costs were approximately $19 million and $20 million during those same periods then ending.

Subsequent Events.    Management monitors events occurring after the balance sheet date and prior to the issuance of the financial statements to determine the impacts, if any, of events on the financial statements to be issued or disclosures to be made, and has reflected them where appropriate.

Note 2 – Utility Plant and Leases

Net utility plant as of December 31, 2017 and 2016 was as follows (thousands of dollars):

 

December 31,    2017     2016  

Gas plant:

    

Storage

   $ 25,019     $ 24,614  

Transmission

     363,396       349,981  

Distribution

     5,600,769       5,198,531  

General

     396,252       382,084  

Software and software-related intangibles

     230,030       224,260  

Other

     14,178       14,290  
  

 

 

   

 

 

 
     6,629,644       6,193,760  

Less: accumulated depreciation

     (2,231,242     (2,172,966

Construction work in progress

     125,248       111,177  
  

 

 

   

 

 

 

Net utility plant

   $ 4,523,650     $ 4,131,971  
  

 

 

   

 

 

 

Utility plant depreciation is computed on the straight-line remaining life method at composite rates considered sufficient to amortize costs over estimated service lives, including components which compensate for removal costs (net of salvage value), and retirements, based on the processes of regulatory proceedings and related regulatory commission approvals and/or mandates. In 2017, annual utility depreciation and amortization expense

 

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averaged 2.9% of the original cost of depreciable and amortizable property. Average rates in 2016 and 2015 approximated 3.6%. Transmission and Distribution plant (combined), associated with core natural gas delivery infrastructure, constitute the majority of gas plant. Annual utility depreciation expense averaged approximately 3.2% of original cost of depreciable transmission and distribution plant during the period 2015 through 2017.

Depreciation and amortization expense on gas plant, including intangibles, was as follows (thousands of dollars):

 

      2017      2016      2015  

Depreciation and amortization expense

   $ 187,075      $ 214,037      $ 201,233  

Included in the figures above is amortization of utility intangibles of $14.3 million in 2017, $14.8 million in 2016, and $12.7 million in 2015.

Operating Leases and Rentals.    Certain office and construction equipment is leased. The majority of these leases are short-term and accounted for as operating leases. For the gas segment, these leases are also treated as operating leases for regulatory purposes. Centuri has various short-term operating leases of equipment and temporary office sites. The table below presents Southwest’s and Centuri’s rental and lease payments that are included in operating expenses (in thousands):

 

      2017      2016      2015  

Southwest Gas Corporation

   $ 4,926      $ 4,357      $ 4,186  

Centuri

     62,310        53,956        45,849  
  

 

 

    

 

 

    

 

 

 

Consolidated rental payments/lease expense

   $ 67,236      $ 58,313      $ 50,035  
  

 

 

    

 

 

    

 

 

 

The following is a schedule of future minimum lease payments for operating leases (with initial or remaining terms in excess of one year) as of December 31, 2017 (thousands of dollars):

 

           Consolidated  
      Southwest      Centuri      Total  

2018

   $ 1,538      $ 7,297      $ 8,835  

2019

     886        7,188        8,074  

2020

     714        5,157        5,871  

2021

     627        3,828        4,455  

2022

     299        3,364        3,663  

Thereafter

     116        9,530        9,646  
  

 

 

    

 

 

    

 

 

 

Total minimum lease payments

   $ 4,180      $ 36,364      $ 40,544  
  

 

 

    

 

 

    

 

 

 

Capital Leases.    Centuri leases certain construction equipment under capital leases arrangements. The amounts associated with capital leases of equipment as of December 31, 2017 and 2016 are as follows (thousands of dollars):

 

December 31,    2017     2016  

Capital leased assets, gross

   $ 2,159     $ 3,189  

Less: accumulated amortization

     (1,000     (1,172
  

 

 

   

 

 

 

Capital leased assets, net

   $ 1,159     $ 2,017  
  

 

 

   

 

 

 

 

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The following is a schedule of future minimum lease payments for non-cancelable capital leases (with initial or remaining terms in excess of one year) as of December 31, 2017 (thousands of dollars):

 

Year Ending December 31,        

2018

   $ 709  

2019

     233  

2020

     191  

2021

      

2022

      

Thereafter

      
  

 

 

 
     1,133  

Less: amount representing interest

     (84
  

 

 

 

Total minimum lease payments

   $ 1,049  
  

 

 

 

Note 3 – Revenue

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. The Company adopted the update on January 1, 2018 using the modified retrospective transition method. Management of both segments of the Company completed assessments of sources of revenue and the effects that adoption of the new guidance will have on the Company’s (and Southwest’s in the case of utility operations) financial position, results of operations, and cash flows. Based on these assessments, such impacts were not material overall. Presentation and disclosure requirements of the new guidance will have the most impact on the financial statements and note disclosures during the first quarter of 2018.

The following information about the Company’s revenues is presented by segment. Southwest consists of only one segment – natural gas operations. For more information regarding reportable segments, see Note 15 – Segment Information.

Natural Gas Operations Segment:

Southwest is engaged in the business of purchasing, distributing, and transporting natural gas for customers in portions of Arizona, Nevada, and California. Public utility rates, practices, facilities, and service territories of Southwest are subject to regulatory oversight. Southwest generally has two types of sales to its customers: tariff sales and transportation–only service. Tariff sales encompass sales to many types of customers (residential customers primarily) under various rate schedules, subject to cost-of-service ratemaking, which is based on the rate-regulation of state commissions and the Federal Energy Regulatory Commission. Those commissions determine generally all important terms of service, which are memorialized in our tariffs, and in some cases, in state statutes. Those tariffs and statutes have been determined to effectively comprise customer contract terms from an accounting perspective. Southwest provides both the commodity and the related distribution thereof to nearly all of its approximate 2 million customers, and only several hundred customers (who are eligible to secure their own gas) subscribe to transportation-only service. Also, only a few hundred customers have contracts covered by stated periods. Therefore, most all can terminate at their election. Southwest recognizes revenue when it satisfies its performance requirement by transferring volumes of gas to the customer. Natural gas is delivered and consumed by the customer simultaneously. Recognition is appropriate in any given month for natural gas service both through the meter-read date and, to the extent a customer consumes gas or takes service after the meter-read date, through the end of the month (not yet billed).

 

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Similar to tariff sales (which include the provision of the commodity and transportation service), transportation-only service is governed by tariff rate provisions. Transportation-only service is generally only available to very large customers under requirements of Southwest’s various tariffs. With this service, customers secure their own gas supply and Southwest provides transportation services to move the customer commodity to the intended location.    

Southwest occasionally enters into negotiated rate contracts for customers located in proximity to another pipeline, which, thereby pose a bypass threat. Southwest can also enter into such contracts for potential customers that may be able to otherwise satisfy their energy needs by means of alternative fuel to natural gas. Less than two dozen customers are party to contracts with rate components subject to negotiation. Many rate provisions and terms of service for these less common types of contracts are also subject to regulatory oversight and tariff provisions.

Revenues also include the net impacts of margin tracker/decoupling accruals. All of Southwest’s service territories have decoupled rate structures (also referred to as alternative revenue programs) that are designed to eliminate the direct link between volumetric sales and revenue, thereby mitigating the impacts of unusual weather variability and conservation on margin. The primary alternative revenue programs involve permissible adjustments for differences between stated tariff benchmarks and amounts billable through revenue from contracts with customers via existing rates. Such adjustments are currently recognized by entries to revenue and the associated regulatory asset/liability. See Note 5 – Regulatory Assets and Liabilities.

Construction Services Segment:

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

An MSA is an agreement that identifies most of the terms describing each party’s rights and obligations that will govern future work authorizations. An MSA is often effective for a period of two to seven years at a time. A work authorization is required to be issued by the customer in order for each party to fully know its rights and obligations. The work authorization will describe the location, timing and any additional information necessary to complete the work for the customer. Each work authorization references the terms and conditions included in the MSA. As such, the combination of the MSA and the work authorization is when a contract exists and revenue recognition may begin.

A bid contract is typically a one-time agreement for a specific project that has all necessary terms defining each party’s rights and obligations. Bid contracts have terms and conditions that vary from contract to contract. As such, each bid contract is evaluated for revenue recognition individually. Control of assets created under bid contracts generally passes to the customer over time and the customer either simultaneously receives and consumes the benefits provided by performance (i.e. when services are provided), or performance creates or enhances an asset the customer controls (i.e. when goods are provided).

 

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Centuri’s MSA and bid contracts are characterized as either fixed-price contracts or unit-price contracts for revenue recognition purposes.

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

Actual revenues and project costs can vary, sometimes substantially, from previous estimates due to changes in a variety of factors including unforeseen circumstances not originally contemplated (including at times events not covered by its contracts) preventing it from obtaining adequate compensation. These circumstances can include concealed or unknown environmental conditions; changes in the cost of equipment, commodities, materials or labor; unanticipated costs or claims due to customer-caused delays, customer failure to provide required materials or equipment, errors in engineering, specifications or designs, project modifications, or contract termination and Centuri’s inability to obtain reimbursement for such costs or recover claims; weather conditions; and quality issues requiring rework or replacement. These factors, along with other risks inherent in performing fixed-price contracts may cause actual revenues and gross profit for a project to differ from previous estimates and could result in reduced profitability or losses on projects. Changes in these factors may result in revisions to costs and earnings, the impacts for which are recognized in the period in which the changes are identified; once identified, these types of conditions continue to be evaluated for each project throughout the project term, and ongoing revisions in management’s estimates of contract value, contract cost, and contract profit are recognized as necessary in the period determined.

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

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

Note 4 – Receivables and Related Allowances

Business activity with respect to gas utility operations is conducted with customers located within the three-state region of Arizona, Nevada, and California. The table below contains information about the gas utility customer accounts receivable balance (net of allowance) at December 31, 2017 and 2016, and the percentage of customers in each of the three states.

 

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   87


 

 

      December 31, 2017      December 31, 2016  

Gas utility customer accounts receivable balance (in thousands)

   $ 119,444      $ 111,320  

 

      December 31, 2017  

Percent of customers by state

  

Arizona

     53

Nevada

     37

California

     10

Although Southwest seeks to minimize its credit risk related to utility operations by requiring security deposits from new customers, imposing late fees, and actively pursuing collection on overdue accounts, some accounts are ultimately not collected. Customer accounts are subject to collection procedures that vary by jurisdiction (late fee assessment, noticing requirements for disconnection of service, and procedures for actual disconnection and/or reestablishment of service). After disconnection of service, accounts are generally written off approximately one month after inactivation. Dependent upon the jurisdiction, reestablishment of service requires both payment of previously unpaid balances and additional deposit requirements. Provisions for uncollectible accounts are recorded monthly based on experience, customer and rate composition, and write-off processes. They are included in the ratemaking process as a cost of service. The Nevada jurisdictions have a regulatory mechanism associated with the gas cost-related portion of uncollectible accounts. Such amounts are deferred and collected through a surcharge in the ratemaking process. Activity in the allowance account for uncollectibles is summarized as follows (thousands of dollars):

 

      Allowance for
Uncollectibles
 

Balance, December 31, 2014

   $ 2,255  

Additions charged to expense

     4,113  

Accounts written off, less recoveries

     (4,098
  

 

 

 

Balance, December 31, 2015

     2,270  

Additions charged to expense

     3,264  

Accounts written off, less recoveries

     (3,010
  

 

 

 

Balance, December 31, 2016

     2,524  

Additions charged to expense

     2,310  

Accounts written off, less recoveries

     (2,723
  

 

 

 

Balance, December 31, 2017

   $ 2,111  
  

 

 

 

At December 31, 2017, the construction services segment (Centuri) had $227.6 million in customer accounts receivable. Both the allowance for uncollectibles and write-offs related to Centuri customers have been insignificant and are not reflected in the table above.

Note 5 – Regulatory Assets and Liabilities

Southwest is subject to the regulation of the Arizona Corporation Commission (“ACC”), the Public Utilities Commission of Nevada (“PUCN”), the California Public Utilities Commission (“CPUC”), and the Federal Energy Regulatory Commission (“FERC”). Accounting policies of Southwest conform to U.S. GAAP applicable to rate-regulated entities and reflect the effects of the ratemaking process. Accounting treatment for rate-regulated

 

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entities allows for deferral as regulatory assets, costs that otherwise would be expensed, if it is probable that future recovery from customers will occur. If rate recovery is no longer probable, due to competition or the actions of regulators, Southwest is required to write-off the related regulatory asset. Regulatory liabilities are recorded if it is probable that revenues will be reduced for amounts that will be credited to customers through the ratemaking process.

The following table represents existing regulatory assets and liabilities (thousands of dollars):

 

December 31,    2017     2016  

Regulatory assets:

    

Accrued pension and other postretirement benefit costs (1)

   $ 391,403     $ 379,063  

Unrealized net loss on non-trading derivatives (Swaps) (2)

     5,780        

Deferred purchased gas costs (3)

     14,581       2,608  

Accrued purchased gas costs (4)

     17,000       37,100  

Unamortized premium on reacquired debt (5)

     20,913       21,975  

Accrued absence time (10)

     13,870       13,440  

Other (6)

     68,351       23,557  
  

 

 

   

 

 

 
     531,898       477,743  

Regulatory liabilities:

    

Deferred purchased gas costs (3)

     (6,841     (90,476

Accumulated removal costs

     (315,000     (308,000

Unrealized net gain on non-trading derivatives (Swaps) (2)

           (4,377

Unamortized gain on reacquired debt (7)

     (9,253     (9,789

Regulatory excess deferred taxes and gross -up (8)

     (433,908     (6,593

Other (9)

     (33,184     (18,066
  

 

 

   

 

 

 

Net regulatory assets (liabilities)

   $ (266,288   $ 40,442  
  

 

 

   

 

 

 

 

(1)

Included in Deferred charges and other assets on the Consolidated Balance Sheets. Recovery period is greater than five years. (See Note 11 – Pension and Other Postretirement Benefits).

(2)

The following table details the regulatory assets/(liabilities) offsetting the derivatives (Swaps) at fair value in the Consolidated Balance Sheets (thousands of dollars). The actual amounts, when realized at settlement, become a component of purchased gas costs under Southwest’s purchased gas adjustment (“PGA”) mechanisms. (See Note 14 – Derivatives and Fair Value Measurements).

 

Instrument    Balance Sheet Location    2017      2016  

Swaps

   Deferred charges and other assets    $ 1,323      $  

Swaps

   Prepaids and other current assets      4,457         

Swaps

   Other current liabilities             (3,532

Swaps

   Other deferred credits             (845

 

(3)

Balance recovered or refunded on an ongoing basis with interest.

(4)

Included in Prepaids and other current assets on the Consolidated Balance Sheets. Balance recovered or refunded on an ongoing basis.

(5)

Included in Deferred charges and other assets on the Consolidated Balance Sheets. Recovered over life of debt instruments.

 

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(6)

The following table details the components of Other regulatory assets which are included in either Prepaids and other current assets or Deferred charges and other assets on the Consolidated Balance Sheets (as indicated). Recovery periods vary. Margin tracking/decoupling mechanisms are alternative revenue programs and revenue associated with under-collections (for the difference between authorized margin levels and amounts billed to customers through rates currently) are recognized as revenue so long as recovery is expected to take place within 24 months.

 

Other Regulatory Assets    2017      2016  

State mandated public purpose programs (including low income and conservation programs) (a) (e)

   $ 4,832      $ 7,096  

Margin and interest-tracking accounts (a) (e)

     42,354        3,517  

Infrastructure replacement programs and similar (b) (e)

     9,627        6,976  

Environmental compliance programs (c) (e)

     9,702        4,329  

Other (d)

     1,836        1,639  
  

 

 

    

 

 

 
   $ 68,351      $ 23,557  
  

 

 

    

 

 

 

 

a)

Included in Prepaids and other current assets on the Consolidated Balance Sheets. See Prepaids and other current assets in Note 1 – Summary of Significant Accounting Policies.

b)

Included in Deferred charges and other assets on the Consolidated Balance Sheets.

 

c)

2017 included in Prepaids and other current assets on the Consolidated Balance Sheets ($9.2 million) and Deferred charges and other assets on the Consolidated Balance Sheets ($527,000); 2016 included in Prepaids and other current assets on the Consolidated Balance Sheets ($3.8 million) and Deferred charges and other assets on the Consolidated Balance Sheets ($500,000).

d)

2017 included in Prepaids and other current assets on the Consolidated Balance Sheets ($531,000) and Deferred charges and other assets on the Consolidated Balance Sheets ($1.3 million); 2016 included in Prepaids and other current assets on the Consolidated Balance Sheets ($622,000) and Deferred charges and other assets on the Consolidated Balance Sheets ($1 million).

e)

Balance recovered or refunded on an ongoing basis, generally with interest.

(7)

Included in Other deferred credits and other long-term liabilities on the Consolidated Balance Sheets. Amortized over life of debt instruments.

(8)

The Tax Cuts and Jobs Act required a remeasurement and reduction of the net deferred income tax liability. The reduction (excess deferred taxes) became a regulatory liability with appropriate tax gross-up. The excess deferred taxes reduce rate base. The tax benefit will be returned to utility customers in accordance with regulatory requirements. Included in Other deferred credits and other long-term liabilities on the Consolidated Balance Sheets.

(9)

The following table details the components of Other regulatory liabilities which are included in either Other current liabilities or Other deferred credits and other long-term liabilities on the Consolidated Balance Sheets (as indicated).

 

Other Regulatory Liabilities    2017     2016  

State mandated public purpose programs (including low income and conservation
programs) (a) (e)

   $ (10,213   $ (7,101

Margin, interest- and property tax-tracking accounts (b) (e)

     (9,505     (3,668

Environmental compliance programs (a) (e)

     (8,574     (4,469

Regulatory accounts for differences related to pension funding (c)

     (3,178     (2,284

Other (d) (e)

     (1,714     (544
  

 

 

   

 

 

 
   $ (33,184   $ (18,066
  

 

 

   

 

 

 

 

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a)

Included in Other current liabilities on the Consolidated Balance Sheets.

b)

2017 included in Other current liabilities ($6.6 million) and Other deferred credits and other long-term liabilities ($2.9 million) on the Consolidated Balance Sheets; 2016 included in Other current liabilities on the Consolidated Balance Sheets.

c)

Included in Other deferred credits and other long-term liabilities on the Consolidated Balance Sheets.

d)

2017 included in Other current liabilities on the Consolidated Balance Sheets ($1.7 million) and in Other deferred credits and other long-term liabilities on the Consolidated Balance Sheets ($9,000); 2016 included in Other current liabilities on the Consolidated Balance Sheets ($536,000) and in Other deferred credits and other long-term liabilities on the Consolidated Balance Sheets ($8,000).

e)

Balance recovered or refunded on an ongoing basis, generally with interest.

 

(10)    

Regulatory recovery occurs on a one-year lag basis through the labor loading process.

Note 6 – Other Comprehensive Income and Accumulated Other Comprehensive Income (“AOCI”)

The following information provides insight into amounts impacting Other Comprehensive Income (Loss), both before and after-tax, within the Consolidated Statements of Comprehensive Income, which also impact Accumulated Other Comprehensive Income in the Consolidated Balance Sheets and Consolidated Statements of Equity of the Company and Southwest.

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

 

(Thousands of dollars)          2017                   2016                   2015         
     Before-
Tax
Amount
    Tax
(Expense)
or
Benefit (1)
    Net-of-
Tax
Amount
    Before-
Tax
Amount
    Tax
(Expense)
or
Benefit (1)
    Net-of-
Tax
Amount
    Before-
Tax
Amount
    Tax
(Expense)
or
Benefit (1)
    Net-of-
Tax
Amount
 

Defined benefit pension plans:

                 

Net actuarial gain/(loss)

  $ (43,027   $ 10,326     $ (32,701   $ (22,770   $ 8,652     $ (14,118   $ (30,519   $ 11,597     $ (18,922

Amortization of prior service cost

    1,335       (507     828       1,335       (507     828       1,335       (507     828  

Amortization of net actuarial (gain)/loss

    25,445       (9,669     15,776       27,066       (10,285     16,781       34,381       (13,065     21,316  

Regulatory adjustment

    12,340       250       12,590       (5,584     2,122       (3,462     (5,646     2,146       (3,500
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pension plans other comprehensive income (loss)

    (3,907     400       (3,507     47       (18     29       (449     171       (278

Forward-starting interest rate swaps (“FSIRS”) (designated hedging activities):

                 

Amounts reclassified into net income

    3,344       (1,271     2,073       3,345       (1,270     2,075       3,344       (1,271     2,073  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FSIRS other comprehensive income (loss)

    3,344       (1,271     2,073       3,345       (1,270     2,075       3,344       (1,271     2,073  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss) – Southwest Gas Corporation

    (563     (871     (1,434     3,392       (1,288     2,104       2,895       (1,100     1,795  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustments:

                 

Translation adjustments

    1,771             1,771       161             161       (1,954           (1,954
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency other comprehensive income (loss)

    1,771             1,771       161             161       (1,954           (1,954
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 1,208     $ (871   $ 337     $ 3,553     $ (1,288   $ 2,265     $ 941     $ (1,100   $ (159
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1)

Tax amounts related to existing before-tax balances accumulating prior to the enactment of the U.S. tax reform changes of the TCJA were estimated using a 38% effective rate. Tax amounts related to before-tax balances accumulating after the enactment date were estimated using a 24% effective rate. Management previously asserted and continues to assert that all of the earnings of Centuri’s Canadian subsidiaries will be permanently reinvested in Canada. As a result, no U.S. deferred income taxes have been recorded for foreign earnings. Therefore, foreign currency translation adjustments are reflected in other comprehensive income with no associated U.S. deferred income tax adjustment.

With regard to the table above, and the roll-forward tables below, management recognizes tax impacts (associated with underlying before-tax amounts in AOCI) in both AOCI and in Deferred income taxes and investment tax credits, net on its balance sheets. U.S. tax reform of the TCJA was enacted on December 22, 2017. U.S. GAAP requires that deferred tax assets and liabilities be adjusted to reflect the effects of a change in tax laws and rates, and also requires that the effect be included in income from continuing operations for the period of enactment. As a result, when deferred tax balances on the balance sheet for the period ending December 31, 2017 were remeasured as a result of the TCJA to reflect the change in enacted rates, those adjustments were also reflected in income tax expense on the Consolidated Statements of Income, as required.

The estimated amounts that will be amortized from accumulated other comprehensive income or regulatory assets into net periodic benefit cost over the next year are summarized below (in thousands):

 

Retirement plan net actuarial loss

   $ 32,000  

SERP net actuarial loss

     1,500  

PBOP prior service cost

     1,300  

Approximately $2.1 million of realized losses (net of tax) related to the FSIRS, included in AOCI at December 31, 2017, will be reclassified into interest expense within the next twelve months as the related interest payments on long-term debt occur.

 

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The following table represents a rollforward of AOCI, presented on the Company’s Consolidated Balance Sheets and its Consolidated Statements of Equity:

AOCI—Rollforward

(Thousands of dollars)

 

     Defined Benefit Plans (Note 11)     FSIRS (Note 14)     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
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net actuarial gain/(loss)

    (43,027     10,326       (32,701                                         (32,701

Translation adjustments

                                        1,771             1,771       1,771  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income before reclassifications

    (43,027     10,326       (32,701                       1,771             1,771       (30,930

FSIRS amounts reclassified from AOCI (1)

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

Amortization of prior service
cost (2)

    1,335       (507     828                                           828  

Amortization of net actuarial loss (2)

    25,445       (9,669     15,776                                           15,776  

Regulatory adjustment (3)

    12,340       250       12,590                                           12,590  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current period other
comprehensive income (loss)

    (3,907     400       (3,507     3,344       (1,271     2,073       1,771             1,771       337  

Less: Translation adjustment
attributable to redeemable noncontrolling interest

                                        11             11       11  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    (3,907     400       (3,507     3,344       (1,271     2,073       1,760             1,760       326  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance AOCI December 31, 2017

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

The FSIRS reclassification amounts are included in the Net interest deductions line item on the Consolidated Statements of Income. Tax amounts related to FSIRS balances were estimated using a 38% effective rate. See also discussion above regarding the enactment of the TCJA.

(2)

These AOCI components are included in the computation of net periodic benefit cost (see Note 11 – Pension and Other Postretirement Benefits 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 Consolidated Balance Sheets).

(4)

Tax amounts related to existing before-tax balances accumulating prior to the enactment of the U.S. tax reform changes of the TCJA for both Defined Benefit Plans and FSIRS were estimated using a 38% effective rate. Tax amounts related to before-tax balances accumulated after the enactment date were estimated using a 24% effective rate.

 

Southwest Gas Holdings, Inc.

   93


 

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

AOCI—Rollforward

(Thousands of dollars)