10-Q 1 d553725d10q.htm 10-Q 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

 

    Commission    

    File Number    

  

Exact name of registrant as specified in its charter and

principal office address and telephone number

 

State of

Incorporation

    

I.R.S.

Employer Identification No.

001-37976    Southwest Gas Holdings, Inc.   California      81-3881866
   5241 Spring Mountain Road       
   Post Office Box 98510       
   Las Vegas, Nevada 89193-8510       
   (702) 876-7237       
         
1-7850    Southwest Gas Corporation   California      88-0085720
   5241 Spring Mountain Road       
   Post Office Box 98510       
   Las Vegas, Nevada 89193-8510       
   (702) 876-7237       

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

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

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

Southwest Gas Holdings, Inc.:

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company    
Emerging growth company       

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

Southwest Gas Corporation:

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company    
Emerging growth company       

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

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

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

Southwest Gas Holdings, Inc. Common Stock, $1 Par Value, 48,355,558 shares as of April 30, 2018.

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

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

 

 

 


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

FILING FORMAT

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

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

 

2


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Thousands of dollars, except par value)

(Unaudited)

 

     MARCH 31,     DECEMBER 31,  
     2018     2017  
ASSETS     

Utility plant:

    

Gas plant

   $ 6,709,858     $ 6,629,644  

Less: accumulated depreciation

     (2,248,307     (2,231,242

Construction work in progress

     142,840       125,248  
  

 

 

   

 

 

 

Net utility plant

     4,604,391       4,523,650  
  

 

 

   

 

 

 

Other property and investments

     442,771       428,180  
  

 

 

   

 

 

 

Current assets:

    

Cash and cash equivalents

     65,115       43,622  

Accounts receivable, net of allowances

     335,982       347,375  

Accrued utility revenue

     47,300       78,200  

Income taxes receivable, net

     15,549       7,960  

Deferred purchased gas costs

     18,739       14,581  

Prepaids and other current assets

     181,248       165,294  
  

 

 

   

 

 

 

Total current assets

     663,933       657,032  
  

 

 

   

 

 

 

Noncurrent assets:

    

Goodwill

     176,485       179,314  

Deferred income taxes

     1,371       1,480  

Deferred charges and other assets

     438,682       447,410  
  

 

 

   

 

 

 

Total noncurrent assets

     616,538       628,204  
  

 

 

   

 

 

 

Total assets

   $ 6,327,633     $ 6,237,066  
  

 

 

   

 

 

 
CAPITALIZATION AND LIABILITIES     

Capitalization:

    

Common stock, $1 par (authorized - 60,000,000 shares; issued and outstanding - 48,336,922 and 48,090,470 shares)

   $ 49,967     $ 49,720  

Additional paid-in capital

     965,480       955,332  

Accumulated other comprehensive income (loss), net

     (56,363     (47,682

Retained earnings

     920,454       857,398  
  

 

 

   

 

 

 

Total Southwest Gas Holdings, Inc. equity

     1,879,538       1,814,768  

Noncontrolling interest

     (3,162     (2,365
  

 

 

   

 

 

 

Total equity

     1,876,376       1,812,403  

Long-term debt, less current maturities

     1,998,127       1,798,576  
  

 

 

   

 

 

 

Total capitalization

     3,874,503       3,610,979  

Current liabilities:

    

Current maturities of long-term debt

     24,867       25,346  

Short-term debt

     22,500       214,500  

Accounts payable

     175,905       228,315  

Customer deposits

     69,610       69,781  

Income taxes payable

     12,906       5,946  

Accrued general taxes

     63,307       43,879  

Accrued interest

     24,906       17,870  

Deferred purchased gas costs

     371       6,841  

Other current liabilities

     208,479       203,403  
  

 

 

   

 

 

 

Total current liabilities

     602,851       815,881  
  

 

 

   

 

 

 

Deferred income taxes and other credits:

    

Deferred income taxes and investment tax credits

     500,289       476,960  

Accumulated removal costs

     317,000       315,000  

Other deferred credits and other long-term liabilities

     1,032,990       1,018,246  
  

 

 

   

 

 

 

Total deferred income taxes and other credits

     1,850,279       1,810,206  
  

 

 

   

 

 

 

Total capitalization and liabilities

   $ 6,327,633     $ 6,237,066  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

3


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

 

    THREE MONTHS ENDED     TWELVE MONTHS ENDED  
    MARCH 31,     MARCH 31,  
    2018     2017     2018     2017  

Operating revenues:

       

Gas operating revenues

  $ 494,313     $ 462,602     $ 1,334,019     $ 1,258,914  

Construction revenues

    260,017       192,135       1,314,366       1,125,065  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

    754,330       654,737       2,648,385       2,383,979  
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

       

Net cost of gas sold

    185,732       146,879       393,898       330,400  

Operations and maintenance

    102,351       104,295       390,819       390,402  

Depreciation and amortization

    62,478       72,478       240,951       286,250  

Taxes other than income taxes

    15,257       14,782       58,421       53,145  

Construction expenses

    258,952       191,956       1,215,959       1,022,997  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    624,770       530,390       2,300,048       2,083,194  
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    129,560       124,347       348,337       300,785  
 

 

 

   

 

 

   

 

 

   

 

 

 

Other income and (expenses):

       

Net interest deductions

    (22,631     (18,714     (81,981     (74,653

Other income (deductions)

    (4,334     (990     (9,374     (8,062
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other income and (expenses)

    (26,965     (19,704     (91,355     (82,715
 

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    102,595       104,643       256,982       218,070  

Income tax expense

    24,301       35,638       53,751       71,365  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    78,294       69,005       203,231       146,705  

Net income (loss) attributable to noncontrolling interests

    (797     (303     (393     802  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Southwest Gas Holdings, Inc.

  $ 79,091     $ 69,308     $ 203,624     $ 145,903  
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

  $ 1.63     $ 1.46     $ 4.23     $ 3.07  
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share

  $ 1.63     $ 1.45     $ 4.23     $ 3.05  
 

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share

  $ 0.52     $ 0.495     $ 2.005     $ 1.845  
 

 

 

   

 

 

   

 

 

   

 

 

 

Average number of common shares

    48,416       47,530       48,105       47,492  

Average shares (assuming dilution)

    48,459       47,864       48,139       47,839  

The accompanying notes are an integral part of these statements.

 

4


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Thousands of dollars)

(Unaudited)

 

     THREE MONTHS ENDED     TWELVE MONTHS ENDED  
     MARCH 31,     MARCH 31,  
     2018     2017     2018     2017  

Net income

   $ 78,294     $ 69,005     $ 203,231     $ 146,705  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

        

Defined benefit pension plans:

        

Net actuarial gain (loss)

     —         —         (32,701     (14,118

Amortization of prior service cost

     254       207       875       828  

Amortization of net actuarial loss

     6,387       3,944       18,219       16,529  

Regulatory adjustment

     (5,746     (3,556     10,400       (3,222
  

 

 

   

 

 

   

 

 

   

 

 

 

Net defined benefit pension plans

     895       595       (3,207     17  
  

 

 

   

 

 

   

 

 

   

 

 

 

Forward-starting interest rate swaps:

        

Amounts reclassified into net income

     635       518       2,190       2,074  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net forward-starting interest rate swaps

     635       518       2,190       2,074  
  

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustments

     (911     220       640       (401
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income, net of tax

     619       1,333       (377     1,690  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     78,913       70,338       202,854       148,395  

Comprehensive income attributable to noncontrolling interests

     (797     (296     (389     788  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Southwest Gas Holdings, Inc.

   $ 79,710     $ 70,634     $ 203,243     $ 147,607  
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

5


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands of dollars)

(Unaudited)

 

     THREE MONTHS ENDED     TWELVE MONTHS ENDED  
     MARCH 31     MARCH 31  
     2018     2017     2018     2017  

CASH FLOW FROM OPERATING ACTIVITIES:

        

Net income

   $ 78,294     $ 69,005     $ 203,231     $ 146,705  

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

        

Depreciation and amortization

     62,478       72,478       240,951       286,250  

Deferred income taxes

     23,228       37,245       49,372       87,046  

Changes in current assets and liabilities:

        

Accounts receivable, net of allowances

     8,858       36,889       (68,978     21,460  

Accrued utility revenue

     30,900       30,300       (1,400     (800

Deferred purchased gas costs

     (10,628     (69,906     (36,330     (83,025

Accounts payable

     (48,497     (55,298     26,762       1,523  

Accrued taxes

     18,776       20,397       491       10,660  

Other current assets and liabilities

     (643     21,099       (29,945     (15,228

Gains on sale

     (230     (339     (4,087     (6,154

Changes in undistributed stock compensation

     1,861       6,111       6,638       10,173  

AFUDC

     (229     (475     (2,050     (2,232

Changes in other assets and deferred charges

     (1,845     (7,173     (16,941     10,078  

Changes in other liabilities and deferred credits

     18,244       1,510       20,965       (18,656
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     180,567       161,843       388,679       447,800  
  

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOW FROM INVESTING ACTIVITIES:

        

Construction expenditures and property additions

     (154,542     (115,790     (662,401     (532,760

Acquisition of businesses, net of cash acquired

     (4,209     —         (98,413     (17,000

Changes in customer advances

     3,038       1,057       2,304       5,296  

Miscellaneous inflows

     1,505       4,721       13,429       16,634  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (154,208     (110,012     (745,081     (527,830
  

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOW FROM FINANCING ACTIVITIES:

        

Issuance of common stock, net

     11,220       —         52,375       71  

Dividends paid

     (23,839     (21,397     (94,572     (85,494

Centuri distribution to redeemable noncontrolling interest

     (102     (102     (204     (442

Issuance of long-term debt, net

     335,382       26,280       716,165       400,851  

Retirement of long-term debt

     (21,102     (47,763     (312,308     (260,724

Change in credit facility and commercial paper

     (111,000     10,000       24,000       15,000  

Change in short-term debt

     (192,000     —         22,500       —    

Principal payments on capital lease obligations

     (165     (199     (946     (1,240

Redemption of Centuri shares from noncontrolling parties

     —         —         (23,000     —    

Withholding remittance - share-based compensation

     (2,852     (2,518     (3,510     (2,739

Other

     (337     (913     (2,498     (2,624
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (4,795     (36,612     378,002       62,659  
  

 

 

   

 

 

   

 

 

   

 

 

 

Effects of currency translation on cash and cash equivalents

     (71     116       114       (37
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in cash and cash equivalents

     21,493       15,335       21,714       (17,408

Cash and cash equivalents at beginning of period

     43,622       28,066       43,401       60,809  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 65,115     $ 43,401     $ 65,115     $ 43,401  
  

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental information:

        

Interest paid, net of amounts capitalized

   $ 13,294     $ 10,288     $ 74,949     $ 67,135  

Income taxes paid (received)

     4,418       1,827       8,264       (19,341

The accompanying notes are an integral part of these statements.

 

6


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

SOUTHWEST GAS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Thousands of dollars)

(Unaudited)

 

     MARCH 31,     DECEMBER 31,  
     2018     2017  
ASSETS     

Utility plant:

    

Gas plant

   $ 6,709,858     $ 6,629,644  

Less: accumulated depreciation

     (2,248,307     (2,231,242

Construction work in progress

     142,840       125,248  
  

 

 

   

 

 

 

Net utility plant

     4,604,391       4,523,650  
  

 

 

   

 

 

 

Other property and investments

     118,449       119,114  
  

 

 

   

 

 

 

Current assets:

    

Cash and cash equivalents

     45,789       37,946  

Accounts receivable, net of allowances

     147,949       119,748  

Accrued utility revenue

     47,300       78,200  

Deferred purchased gas costs

     18,739       14,581  

Receivable from parent

     216       —    

Prepaids and other current assets

     170,595       153,771  
  

 

 

   

 

 

 

Total current assets

     430,588       404,246  
  

 

 

   

 

 

 

Noncurrent assets:

    

Goodwill

     10,095       10,095  

Deferred charges and other assets

     418,833       425,564  
  

 

 

   

 

 

 

Total noncurrent assets

     428,928       435,659  
  

 

 

   

 

 

 

Total assets

   $ 5,582,356     $ 5,482,669  
  

 

 

   

 

 

 
CAPITALIZATION AND LIABILITIES             

Capitalization:

    

Common stock

   $ 49,112     $ 49,112  

Additional paid-in capital

     948,199       948,767  

Accumulated other comprehensive income (loss), net

     (54,843     (47,073

Retained earnings

     736,676       659,193  
  

 

 

   

 

 

 

Total Southwest Gas Corporation equity

     1,679,144       1,609,999  

Long-term debt, less current maturities

     1,706,994       1,521,031  
  

 

 

   

 

 

 

Total capitalization

     3,386,138       3,131,030  
  

 

 

   

 

 

 

Current liabilities:

    

Short-term debt

     —         191,000  

Accounts payable

     117,910       158,474  

Customer deposits

     69,610       69,781  

Income taxes payable, net

     13,019       4,971  

Accrued general taxes

     63,307       43,879  

Accrued interest

     24,823       17,171  

Deferred purchased gas costs

     371       6,841  

Payable to parent

     —         194  

Other current liabilities

     122,647       108,785  
  

 

 

   

 

 

 

Total current liabilities

     411,687       601,096  
  

 

 

   

 

 

 

Deferred income taxes and other credits:

    

Deferred income taxes and investment tax credits, net

     464,403       445,243  

Accumulated removal costs

     317,000       315,000  

Other deferred credits and other long-term liabilities

     1,003,128       990,300  
  

 

 

   

 

 

 

Total deferred income taxes and other credits

     1,784,531       1,750,543  
  

 

 

   

 

 

 

Total capitalization and liabilities

   $ 5,582,356     $ 5,482,669  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

7


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

SOUTHWEST GAS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands)

(Unaudited)

 

    THREE MONTHS ENDED     TWELVE MONTHS ENDED  
    MARCH 31,     MARCH 31,  
    2018     2017     2018     2017  

Continuing operations:

       

Gas operating revenues

  $ 494,313     $ 462,602     $ 1,334,019     $ 1,258,914  
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

       

Net cost of gas sold

    185,732       146,879       393,898       330,400  

Operations and maintenance

    102,190       103,824       389,687       389,931  

Depreciation and amortization

    49,961       61,195       190,688       233,913  

Taxes other than income taxes

    15,257       14,782       58,421       53,145  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    353,140       326,680       1,032,694       1,007,389  
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    141,173       135,922       301,325       251,525  
 

 

 

   

 

 

   

 

 

   

 

 

 

Other income and (expenses):

       

Net interest deductions

    (19,255     (17,210     (71,778     (67,977

Other income (deductions)

    (4,603     (1,244     (9,747     (9,543
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other income and (expenses)

    (23,858     (18,454     (81,525     (77,520
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

    117,315       117,468       219,800       174,005  

Income tax expense

    26,966       40,530       49,571       55,227  
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    90,349       76,938       170,229       118,778  
 

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations - construction services:

       

Income before income taxes

    —         —         —         56,890  

Income tax expense

    —         —         —         21,030  
 

 

 

   

 

 

   

 

 

   

 

 

 

Income

    —         —         —         35,860  

Noncontrolling interests

    —         —         —         1,105  
 

 

 

   

 

 

   

 

 

   

 

 

 

Income - discontinued operations

    —         —         —         34,755  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 90,349     $ 76,938     $ 170,229     $ 153,533  
 

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

8


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

SOUTHWEST GAS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Thousands of dollars)

(Unaudited)

 

     THREE MONTHS ENDED     TWELVE MONTHS ENDED  
     MARCH 31,     MARCH 31,  
     2018     2017     2018     2017  

Continuing operations:

        

Net income (loss) from continuing operations

   $ 90,349     $ 76,938     $ 170,229     $ 118,778  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

        

Defined benefit pension plans:

        

Net actuarial gain (loss)

     —         —         (32,701     (14,118

Amortization of prior service cost

     254       207       875       828  

Amortization of net actuarial loss

     6,387       3,944       18,219       16,529  

Regulatory adjustment

     (5,746     (3,556     10,400       (3,222
  

 

 

   

 

 

   

 

 

   

 

 

 

Net defined benefit pension plans

     895       595       (3,207     17  
  

 

 

   

 

 

   

 

 

   

 

 

 

Forward-starting interest rate swaps:

        

Amounts reclassified into net income

     635       518       2,190       2,074  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net forward-starting interest rate swaps

     635       518       2,190       2,074  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income, net of tax from continuing operations

     1,530       1,113       (1,017     2,091  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) from continuing operations

     91,879       78,051       169,212       120,869  
  

 

 

   

 

 

   

 

 

   

 

 

 

Discontinued operations - construction services:

        

Net income

     —         —         —         34,755  

Foreign currency translation adjustments

     —         —         —         (621
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     —         —         —         34,134  

Comprehensive income (loss) attributable to noncontrolling interests

     —         —         —         (21
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to discontinued operations - construction services

     —         —         —         34,155  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 91,879     $ 78,051     $ 169,212     $ 155,024  
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

9


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

SOUTHWEST GAS CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands of dollars)

(Unaudited)

 

     THREE MONTHS ENDED     TWELVE MONTHS ENDED  
     MARCH 31     MARCH 31  
     2018     2017     2018     2017  

CASH FLOW FROM OPERATING ACTIVITIES:

        

Net Income

   $ 90,349     $ 76,938     $ 170,229     $ 154,638  

Income (loss) from discontinued operations

     —         —         —         35,860  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     90,349       76,938       170,229       118,778  

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

        

Depreciation and amortization

     49,961       61,195       190,688       233,913  

Deferred income taxes

     18,676       39,223       46,622       87,729  

Changes in current assets and liabilities:

        

Accounts receivable, net of allowances

     (28,201     (7,072     (29,031     5,750  

Accrued utility revenue

     30,900       30,300       (1,400     (800

Deferred purchased gas costs

     (10,628     (69,906     (36,330     (83,025

Accounts payable

     (34,564     (44,736     14,717       3,771  

Accrued taxes

     27,476       25,176       12,683       10,637  

Other current assets and liabilities

     3,163       37,342       (47,905     (6,677

Changes in undistributed stock compensation

     2,118       5,711       5,695       9,773  

AFUDC

     (229     (475     (2,050     (2,232

Changes in other assets and deferred charges

     (1,998     (7,261     (17,655     9,728  

Changes in other liabilities and deferred credits

     17,887       1,198       20,230       (18,968
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     164,910       147,633       326,493       368,377  
  

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOW FROM INVESTING ACTIVITIES:

        

Construction expenditures and property additions

     (131,743     (101,007     (591,184     (468,413

Changes in customer advances

     3,038       1,057       2,304       5,296  

Miscellaneous inflows

     293       784       2,250       3,055  

Dividends received

     —         —         —         9,660  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (128,412     (99,166     (586,630     (450,402
  

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOW FROM FINANCING ACTIVITIES:

        

Issuance of common stock, net

     —         —         —         71  

Contributions from parent

     —         —         41,359       —    

Dividends paid

     (21,000     (18,500     (83,997     (82,597

Issuance of long-term debt, net

     297,495       —         297,495       296,469  

Retirement of long-term debt

     —         (25,000     —         (149,855

Change in credit facility and commercial paper

     (111,000     10,000       24,000       15,000  

Change in short-term debt

     (191,000     —         —         —    

Withholding remittance - share-based compensation

     (2,852     (2,518     (3,510     (2,739

Other

     (298     (523     (371     (2,234
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (28,655     (36,541     274,976       74,115  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by discontinued operating activities

     —         —         —         65,213  

Net cash used in discontinued investing activities

     —         —         —         (66,582

Net cash provided by (used in) discontinued financing activities

     —         —         —         (11,385

Effects of currency translation on cash and cash equivalents

     —         —         —         (153
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in cash and cash equivalents

     7,843       11,926       14,839       (20,817

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

     —         —         —         12,907  
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in cash and cash equivalents of continuing operations

     7,843       11,926       14,839       (7,910

Cash and cash equivalents at beginning of period

     37,946       19,024       30,950       38,860  
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 45,789     $ 30,950     $ 45,789     $ 30,950  
  

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental information:

        

Interest paid, net of amounts capitalized

   $ 10,296     $ 8,989     $ 66,097     $ 61,212  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income taxes paid (received)

   $ —       $ (38   $ (7,816   $ (36,767
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these statements.

 

10


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

Note 1 – Nature of Operations and Basis of Presentation

Nature of Operations. Southwest Gas Holdings, Inc., is a holding company, owning all of the shares of common stock of Southwest Gas Corporation and, prior to August 2017, 96.6% of the shares of common stock of Centuri Construction Group, Inc. (“Centuri” or the “construction services” segment). During August 2017, Southwest Gas Holdings, Inc. acquired the remaining 3.4% equity interest in Centuri that was held by the previous owners.

Southwest Gas Corporation (“Southwest” or the “natural gas operations segment”) is engaged in the business of purchasing, distributing, and transporting natural gas for customers in portions of Arizona, Nevada, and California. Public utility rates, practices, facilities, and service territories of Southwest are subject to regulatory oversight. The timing and amount of rate relief can materially impact results of operations. Natural gas purchases and the timing of related recoveries can materially impact liquidity. Results for the natural gas operations segment are higher during winter periods due to the seasonality incorporated in its regulatory rate structures. Centuri is a comprehensive construction services enterprise dedicated to meeting the growing demands of North American utilities, energy and industrial markets. Centuri derives revenue from installation, replacement, repair, and maintenance of energy distribution systems, and developing industrial construction solutions. Centuri operations are generally conducted under the business names of NPL Construction Co. (“NPL”), Canyon Pipeline Construction, Inc. (“Canyon”), NPL Canada Ltd. (“NPL Canada”), W.S. Nicholls Construction, Inc. (“W.S. Nicholls”), and Canyon Special Projects, Inc. (“Special Projects,” formerly Brigadier Pipelines Inc.). 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 11 – Acquisition of Construction Services Business for more information.

Basis of Presentation. The condensed consolidated financial statements for Southwest Gas Holdings, Inc. and subsidiaries (the “Company”) and Southwest included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. In connection with a holding company reorganization in January 2017, Centuri ceased to be a subsidiary of Southwest and became a subsidiary of Southwest Gas Holdings, Inc. To give effect to this change, the separate condensed consolidated financial statements related to Southwest Gas Corporation, which are included in this Form 10-Q, depict Centuri-related amounts for periods prior to January 1, 2017 as discontinued operations.

No substantive change has occurred with regard to the Company’s business segments on the whole, or in the primary businesses comprising those segments as a result of the foregoing organizational changes, or due to the acquisition of Neuco. Following the organizational changes, Centuri operations continue to be part of continuing operations and included in the consolidated financial statements of Southwest Gas Holdings, Inc.

The preparation of the condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments, consisting of normal recurring items and estimates necessary for a fair statement of results for the interim periods, have been made. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the 2017 Annual Report to Shareholders, which is incorporated by reference into the 2017 Form 10-K.

Early Adoption of Accounting Standards Update (“ASU”) No. 2018-02. In January 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-02 “Income Statement—Reporting Comprehensive Income (Topic 220)—Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” Early adoption of the amendments in this update is permitted, including adoption in any interim period. Therefore, the Company and Southwest chose to adopt the update early, as permitted, as of January 1, 2018. The adoption of this update is considered a change in accounting principle. The update addresses issues resulting from the December 22, 2017 enactment of the TCJA. Stakeholders raised a narrow-scope financial reporting issue that arose as a consequence of the TCJA related to the fact that when deferred tax balances were remeasured in December 2017, those deferred

 

11


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

tax balances were to be reduced, but related amounts historically accumulated in Accumulated Other Comprehensive Income (“AOCI”) prior to the enactment of the TCJA, were required to be recognized as income tax expense rather than being relieved from AOCI. The amendments in this update allow a reclassification from AOCI to retained earnings for those otherwise “stranded” tax effects in AOCI following enactment of the TCJA. Accordingly, approximately $9.3 million of previously stranded tax effects resulting from the TCJA were reclassified to retained earnings from AOCI on the Condensed Consolidated Balance Sheets of Southwest and the Company as of March 31, 2018. The Company and Southwest have determined an accounting policy for releasing income tax effects from AOCI. The Company and Southwest will release any income tax effects from accumulated other comprehensive income as individual items in accumulated other comprehensive income are sold or liquidated, to the extent that the related income tax effects are material. See Note 9 – Equity, Other Comprehensive Income, and Accumulated Other Comprehensive Income for more information.

Prepaids and other current assets. Prepaids and other current assets includes gas pipe materials and operating supplies of $45 million at March 31, 2018 and $33 million at December 31, 2017 (carried at weighted average cost), as well as $62 million at March 31, 2018 and $40 million at December 31, 2017 related to a regulatory asset associated with the Arizona decoupling mechanism (an alternative revenue program).

Income Taxes. 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%. The tax rate reduction created excess deferred taxes, resulting in the required remeasurement of deferred tax balances, which when remeasured during the 4th quarter of 2017, reduced income tax expense. 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 that regulation. The remeasurement, for Southwest, reduced the net deferred income tax liability and caused the creation of a regulatory liability with appropriate tax gross-up. Both deferred tax liabilities and excess deferred tax liabilities (included within regulatory liabilities) reduce utility rate base. The TCJA includes provisions that stipulate how these excess deferred taxes are to be passed back to customers, and ultimate facilitation will occur in conjunction with appropriate regulatory commissions. During the three months ended March 31, 2018, tax expense for the Company and Southwest reflects the lower U.S. federal income tax rates now in effect (and applicable to earnings in 2018). Because rate actions, to address the impacts of tax reform on future rates, have not yet concluded, current customer rates have not been reduced. However, management recorded a regulatory liability and reduced utility revenues by approximately $14 million in the 1st quarter of 2018 for potential regulatory rate reductions to customers. Collective regulatory liabilities associated with the impacts of tax reform on utility operations are included within Other deferred credits on the Company’s and Southwest’s balance sheets.

Other current liabilities. Other current liabilities of Southwest Gas Corporation include $22 million of dividends declared but not yet paid to Southwest Gas Holdings, Inc. at March 31, 2018.

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 $28 million and $12 million, 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 and financing activities included the following: Upon contract expiration, customer advances of approximately $298,000 and $477,000, during the first three months of 2018 and 2017, respectively, were applied as contributions toward utility construction activity and represent non-cash investing activity.

Goodwill. Goodwill is assessed as of October each year for impairment (required annually by U.S. GAAP), or otherwise, if circumstances indicate impairment to the carrying value of goodwill may have occurred. In consideration of the holding company reorganization, management of the Company considered its reporting units and segments and determined that historic judgments regarding its segments and reporting units continue to apply, and that no change was necessary with regard to the level at which goodwill is assessed for impairment. No impairment was deemed to have occurred in the first three months of 2018.

 

12


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

Goodwill:    

 

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

December 31, 2017

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

Additional goodwill from Neuco acquisition

     —          182        182  

Foreign currency translation adjustment

     —          (3,011      (3,011
  

 

 

    

 

 

    

 

 

 

March 31, 2018

   $ 10,095      $ 166,390      $ 176,485  
  

 

 

    

 

 

    

 

 

 

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

 

     March 31, 2018      December 31, 2017  

Centuri accounts receivable for services provided to Southwest

   $ 13,012      $ 12,987  
  

 

 

    

 

 

 

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

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

 

     March 31, 2018      December 31, 2017  

Southwest Gas Corporation:

     

Net cash surrender value of COLI policies

   $ 116,690      $ 117,341  

Other property

     1,759        1,773  
  

 

 

    

 

 

 

Total Southwest Gas Corporation

     118,449        119,114  

Centuri property, equipment, and intangibles

     579,110        554,730  

Centuri accumulated provision for depreciation and amortization

     (268,006      (258,906

Other property

     13,218        13,242  
  

 

 

    

 

 

 

Total Southwest Gas Holdings, Inc.

   $ 442,771      $ 428,180  
  

 

 

    

 

 

 

 

13


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

Other Income (Deductions). The following table provides the composition of significant items included in Other income (deductions) in the Condensed Consolidated Statements of Income (thousands of dollars):

 

     Three Months Ended     Twelve Months Ended  
     March 31     March 31  
     2018     2017     2018     2017  

Southwest Gas Corporation - natural gas operations segment:

        

Change in COLI policies

   $ (700   $ 2,800     $ 6,800     $ 9,300  

Interest income

     1,418       564       3,638       2,045  

Equity AFUDC

     229       476       2,049       2,233  

Other components of net periodic benefit cost

     (5,265     (4,855     (19,834     (19,675

Miscellaneous income and (expense)

     (285     (229     (2,400     (3,446
  

 

 

   

 

 

   

 

 

   

 

 

 

Southwest Gas Corporation - total other income (deductions)

     (4,603     (1,244     (9,747     (9,543
  

 

 

   

 

 

   

 

 

   

 

 

 

Construction services segment:

        

Interest income

     1       —         4       1  

Foreign transaction gain (loss)

     147       (1     (606     (13

Miscellaneous income and (expense)

     115       255       956       1,493  
  

 

 

   

 

 

   

 

 

   

 

 

 

Centuri - total other income (deductions)

     263       254       354       1,481  
  

 

 

   

 

 

   

 

 

   

 

 

 

Corporate and administrative

     6       —         19       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (4,334   $ (990   $ (9,374   $ (8,062
  

 

 

   

 

 

   

 

 

   

 

 

 

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

Recently Issued Accounting Standards Updates.

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 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. The FASB recently issued guidance that will allow the election of a practical expedient to not apply the new standard to existing easement contracts that were not previously assessed as leases under historic guidance. However, the Company 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.

 

14


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

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.

 

15


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

Note 2 – Components of Net Periodic Benefit Cost

As of January 1, 2018, the Company and Southwest adopted Financial Accounting Standards Board (“FASB”) “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” 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 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. This guidance is required to be applied on a retrospective basis for the presentation of the service cost component and the other components of net benefit cost and on a prospective basis for the capitalization of only the service cost component of net benefit cost. Amounts capitalized as part of assets prior to the date of adoption were not adjusted through a cumulative effect adjustment. The guidance allows a practical expedient for the retrospective application that permits use of the amounts disclosed for the various components of net benefit cost in the pension and other postretirement benefit plans footnote as the basis for the retrospective application. This is in lieu of determining how much of the various components of net benefit cost were actually reflected in the income statement each period as a result of capitalization of certain costs into assets and their subsequent amortization. The Company and Southwest have elected to utilize the practical expedient. Therefore, upon adoption, amounts presented in the Condensed Consolidated Statements of Income for operations and maintenance for the three months and twelve months ended March 31, 2017 were reclassified. The Operations and maintenance line item of the Southwest Gas Holdings, Inc. Condensed Consolidated Statement of Income was revised from $109.2 million to $104.3 million for the three months ended March 31, 2017 and from $410.1 million to $390.4 million for the twelve months ended March 31, 2017. The Operations and maintenance line item of the Southwest Gas Corporation Condensed Consolidated Statement of Income was revised from $108.7 million to $103.8 million for the three months ended March 31, 2017 and from $409.6 million to $389.9 million for the twelve months ended March 31, 2017. The Other income (deductions) line item of the Southwest Gas Holdings, Inc. Condensed Consolidated Statement of Income was revised from $3.9 million to ($990,000) for the three months ended March 31, 2017 and from $11.6 million to ($8.1) million for the twelve months ended March 31, 2017. The Other income (deductions) line item of the Southwest Gas Corporation Condensed Consolidated Statement of Income was revised from $3.6 million to ($1.2) million for the three months ended March 31, 2017 and from $10.1 million to ($9.5) million for the twelve months ended March 31, 2017. Net income overall was not impacted by this reclassification for either Southwest Gas Holdings, Inc. or Southwest Gas Corporation.

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

During the first quarter of 2018, qualifying term-vested participants were offered a lump-sum present value payout of their pensions. The offer was primarily intended to reduce insurance and ongoing maintenance costs associated with qualifying participant balances. There were approximately 385 eligible participants subject to the offer. Payment from pension assets, for those electing to take advantage of the offer, is expected to occur by July 2018. The lump sum payout will have no impact on net periodic benefit cost or pension funding requirements during 2018.

The service cost component of net periodic benefit costs included in the table below are components of an overhead loading process associated with the cost of labor (refer to discussion above related to the update to Topic 715). The overhead process ultimately results in allocation of that portion of overall net periodic benefit costs to the same accounts to which productive labor is charged. As a result, service costs become components of various accounts, primarily operations and maintenance expense, net utility plant, and deferred charges and other assets for both the Company and Southwest. Refer also to the practical expedient elected related to amounts capitalized as part of assets prior to the adoption date.

 

16


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

     Qualified Retirement Plan  
     Period Ended March 31,  
     Three Months     Twelve Months  
     2018     2017     2018     2017  
(Thousands of dollars)                         

Service cost

   $ 7,139     $ 5,848     $ 24,683     $ 22,972  

Interest cost

     11,043       11,520       45,606       46,041  

Expected return on plan assets

     (14,689     (13,799     (56,086     (56,217

Amortization of net actuarial loss

     8,029       6,001       26,032       24,950  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 11,522     $ 9,570     $ 40,235     $ 37,746  
  

 

 

   

 

 

   

 

 

   

 

 

 
     SERP  
     Period Ended March 31,  
     Three Months     Twelve Months  
     2018     2017     2018     2017  
(Thousands of dollars)                         

Service cost

   $ 61     $ 78     $ 292     $ 327  

Interest cost

     415       471       1,827       1,865  

Amortization of net actuarial loss

     375       360       1,456       1,397  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 851     $ 909     $ 3,575     $ 3,589  
  

 

 

   

 

 

   

 

 

   

 

 

 
     PBOP  
     Period Ended March 31,  
     Three Months     Twelve Months  
     2018     2017     2018     2017  
(Thousands of dollars)                         

Service cost

   $ 368     $ 367     $ 1,469     $ 1,492  

Interest cost

     687       808       3,111       3,192  

Expected return on plan assets

     (930     (840     (3,448     (3,201

Amortization of prior service costs

     334       334       1,335       1,335  

Amortization of net actuarial loss

     —         —         —         313  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 459     $ 669     $ 2,467     $ 3,131  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

17


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

Note 3 – Revenue

Effective January 2018, the Company and Southwest adopted the update, ASC Topic 606, Revenue from Contracts with Customers, using the modified retrospective transition method. Under the modified retrospective approach, the information for periods prior to the adoption date has not been restated and continues to be reported under the accounting standards in effect for those periods. As permitted under the standard, the Company and Southwest have elected to apply the guidance retrospectively only to those contracts that were not completed at January 1, 2018. Management assessed the effects the new guidance has 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.

The following information about the Company’s revenues is presented by segment. Southwest comprises one segment – natural gas operations.

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 recognizes revenue when it satisfies its performance by transferring gas to the customer. 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. Revenues from customer arrangements and from alternative revenue programs are described below.

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.

Southwest generally has two types of services to its customers: tariff sales and transportation–only service. Tariff sales encompass sales to many types of customers (primarily residential) 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. Southwest provides both the commodity and the related distribution service 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 with stated periods. 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. The provision of service is represented by the turn of the meter dial and is the primary representation of the satisfaction of performance obligations of Southwest. The amount billable via regulated rates (both volumetric and fixed monthly rates as part of rate design) corresponds to the value to the customer, and management believes that the amount billable under the “invoice practical expedient” (amount Southwest has the right to invoice) is appropriate to utilize for purposes of recognizing revenue. Estimated amounts remaining unbilled since the last meter read date are restricted from being billed due only to the passage of time and therefore are also recognized for service provided through the balance sheet date. While natural gas service is typically recurring, there is generally not a contract term for utility service. Therefore, the contract term is not generally viewed to extend beyond the service provided to date, and customers can generally terminate service at will.

Transportation-only service is also 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-supplied gas to the intended location. Southwest concluded that transportation/transmission service is suitable to an “over time” model. Rate structures under Southwest’s regulation for transportation customers include a combination of volumetric charges and monthly “fixed” charges (including charges commonly referred to as capacity charges, demand charges, or reservation charges) as part of the rate design of our regulated jurisdictions. These types of fixed charges represent a separate performance obligation associated with standing ready over the period of the month to deliver quantities of gas, regardless of whether the customer takes delivery of any quantity of gas. The performance obligations under these circumstances are satisfied over the course of the month under an output measure of progress based on time, which correlates to the period for which the charges are eligible to be invoiced.

 

18


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

Under its regulation, Southwest enters into negotiated rate contracts for those customers located in proximity to another pipeline, which pose a threat of bypassing its distribution system. Southwest may also enter into similar contracts for customers otherwise able to 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. The performance obligations for these customers are satisfied similar to those for other customers by means of transporting/delivering natural gas to the customer. Many or most of the rate components, and structures, for these types of customers are the same as those for similar customers without negotiated rate components; and the negotiated rates are within the parameters of the tariff guidelines. Management determined that these arrangements qualify for the invoice practical expedient for recognizing revenue. Furthermore, while some of these contracts include contract periods extending over time, including multiple years, as amounts billable under the contract are based on rates in effect for the customer for service provided to date, no significant financing component is deemed to exist.

As indicated above, 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 recognized monthly in revenue and in the associated regulatory asset/liability in advance of rate adjustments intended to collect or return amounts recognized. Revenues recognized for the adjustment to the benchmarks noted are required to be presented separately from revenues from contracts from customers, and as such, are provided below and identified as Alternative revenue program revenue.

Gas operating revenues on the Condensed Consolidated Statements of Income of both the Company and Southwest include revenue from contracts with customers, which is shown disaggregated by customer type, and various categories of revenue:

 

     Three Months Ended     Twelve Months Ended  
     March 31     March 31  
(Thousands of dollars)    2018            2017     2018            2017  

Residential

   $ 344,611        $ 342,737     $ 859,078        $ 850,798  

Small commercial

     87,943          81,125       250,331          236,819  

Large commercial

     15,440          13,595       54,224          49,610  

Industrial/other

     6,510          5,451       23,085          19,453  

Transportation

     24,054          22,732       89,081          86,446  
  

 

 

      

 

 

   

 

 

      

 

 

 

Revenue from contracts with customers

     478,558          465,640       1,275,799          1,243,126  

Alternative revenue program revenues (deferrals)

     27,209          (4,232     66,788          12,790  

Other revenues (a)

     (11,454        1,194       (8,568        2,998  
  

 

 

      

 

 

   

 

 

      

 

 

 

Total Gas operating revenues

   $ 494,313        $ 462,602     $ 1,334,019        $ 1,258,914  
  

 

 

      

 

 

   

 

 

      

 

 

 

 

(a) Includes various other revenues, which were offset by $14 million of tax reform savings revenue adjustments for both periods ended March 31, 2018.

Construction Services Segment:

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. Some unit-price contracts contain caps that if encroached, trigger revenue and loss recognition similar to a fixed-price contract model.

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.

 

19


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

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 identifies most of the terms describing each party’s rights and obligations that will govern future work authorizations. An MSA is often effective for multiple years. A work authorization is issued by the customer to describe the location, timing, and any additional information necessary to complete the work for the customer. The combination of the MSA and the work authorization is when a contract exists and revenue recognition may begin. Each work authorization is generally a single performance obligation as Centuri is performing a significant integration service. Centuri has elected to use the portfolio method practical expedient at the customer level as the terms and conditions of the work performed under MSA’s are similar in nature with each customer, but vary significantly between customers.

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. Each bid contract is evaluated for revenue recognition individually. Control of assets created under bid contracts generally passes to the customer over time. Bid contracts often have a single performance obligation as Centuri is providing a significant integration service.

Centuri’s MSA and bid contracts are characterized as either fixed-price contracts or unit-price contracts for revenue recognition purposes. The cost-to-cost input method is used to measure progress towards the satisfaction of a performance obligation for fixed-price contracts. Input methods result in the recognition of revenue based on the entity’s effort to satisfy the performance obligation relative to the total expected effort to satisfy the performance obligation. For unit-price contracts, an output method is used to measure progress towards satisfaction of a performance obligation. For unit-price contracts, the output measurement will be the completion of each unit that is required under the contract.

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. 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.

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. 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.

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, 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, performance incentives, safety bonuses, payment discounts, and volume rebates. Centuri will typically estimate variable consideration and adjust financial information, as necessary.

 

20


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

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 for under the current contract 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.

The following tables display Centuri’s revenue from contracts with customers disaggregated by service type and contract type:

 

(Thousands of dollars)    Three Months Ended      Twelve Months Ended  
     March 31      March 31  
     2018      2017      2018      2017  

Service Types:

           

Replacement gas construction

   $ 157,351      $ 120,438      $ 824,979      $ 727,518  

New gas construction

     36,197        33,079        168,494        208,289  

Other construction

     66,469        38,618        320,893        189,258  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Construction revenues

   $ 260,017      $ 192,135      $ 1,314,366      $ 1,125,065  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(Thousands of dollars)    Three Months Ended      Twelve Months Ended  
     March 31      March 31  
     2018      2017      2018      2017  

Contract Types:

           

Master services agreement

   $ 194,464      $ 147,192      $ 932,804      $ 841,468  

Bid contract

     65,553        44,943        381,562        283,597  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Construction revenues

   $ 260,017      $ 192,135      $ 1,314,366      $ 1,125,065  
  

 

 

    

 

 

    

 

 

    

 

 

 

Unit priced contracts

   $ 234,285      $ 177,671      $ 1,176,699      $ 964,023  

Fixed priced contracts

     25,732        14,464        137,667        161,042  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Construction revenues

   $ 260,017      $ 192,135      $ 1,314,366      $ 1,125,065  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table provides information about receivables, revenue earned on contracts in progress in excess of billings, which are included within accounts receivable, net of allowances and amounts billed in excess of revenue earned on contracts, which is included in other current liabilities as of March 31, 2018 and December 31, 2017 on the Company’s Condensed Consolidated Balance Sheets:

 

(Thousands of dollars)    March 31, 2018      December 31, 2017  

Contracts receivable, net

   $ 130,288      $ 221,859  

Revenue earned on contracts in progress in excess of billings

     57,745        5,768  

Amounts billed in excess of revenue earned on contracts

     8,102        9,602  

The revenue earned on contracts in progress in excess of billings primarily relates to Centuri’s rights to consideration for work completed but not billed and/or approved at the reporting date. The revenue earned on contracts in progress in excess of billings are transferred to contracts receivable when the rights become unconditional. The amounts billed in excess of revenue earned on contracts primarily relates to the advance consideration received from customers for which work has not yet been completed. The amount of revenue recognized in 2018 from performance obligations satisfied (or partially satisfied) in previous periods under these contracts is $54 million.

For Centuri’s contracts that have an original duration of one year or less, Centuri uses the practical expedient applicable to such contracts and does not consider the time value of money. Further, because of the short duration of these contracts, Centuri has not disclosed the transaction price for the remaining performance obligations as of the end of each reporting period or when the Company expects to recognize the revenue.

Centuri has eleven contracts that had an original duration of more than one year. The aggregate amount of the transaction price allocated to the unsatisfied performance obligations of these contracts as of March 31, 2018 is $84 million. Centuri expects to recognize the remaining performance obligations over the next four years, however, the timing of that recognition is largely within the control of the customer and when the necessary equipment and materials required to complete the work are provided by the customer.

 

21


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

Construction services contracts receivable consists of the following:

 

(Thousands of dollars)    March 31, 2018  

Billed on completed contracts and contracts in progress

   $ 129,838  

Other receivables

     467  
  

 

 

 

Contracts receivable, gross

     130,305  

Allowance for doubtful accounts

     (17
  

 

 

 

Contracts receivable, net

   $ 130,288  
  

 

 

 

Contracts receivable above is included in accounts receivable, net of allowances in the Southwest Gas Holdings, Inc. Condensed Consolidated Balance Sheet at March 31, 2018.

Management recognizes revenue on contracts in progress in excess of billings (a contract asset) within Accounts receivable, net of allowances in its balance sheets, and amounts billed in excess of revenue earned (a contract liability) in Other current liabilities. However, the following shows the significant changes in these asset and liability balances associated with Centuri since January 1, 2018:

 

(Thousands of dollars)    March 31, 2018  
     Revenue earned on
contracts in progress
in excess of billings
     Amounts billed in
excess of revenue
earned on contracts
 

Revenue recognized that was included in the amounts billed in excess of revenue earned on contracts balance at the beginning of the period

   $ —        $ (9,602

Increases due to amounts billed to customers in excess of revenue earned during the period

     —          8,102  

Transferred to contracts receivable from revenue earned on contracts in progress in excess of billings recognized at the beginning of the period

     (5,768      —    

Increase from the reclassification of contract assets due to the adoption of topic 606

     51,744     

Increases from contract assets, contingent on a future event occurring

     6,001        —    

In regards to the table above, prior to the adoption of ASC Topic 606, revenue earned on contracts in progress in excess of billings was only used to recognize contract assets related to fixed-price contracts under previous accounting guidance. This balance now includes any conditional contract assets for both fixed-price contracts and unit-price contracts. Centuri considers retention and unbilled amounts to customers to be conditional contract assets, as payment is contingent on the occurrence of a future event. Contracts receivable, net, included in Accounts receivable, net of allowances, includes only amounts that are unconditional in nature, which means only the passage of time remains and Centuri has invoiced the customer. Similarly, amounts billed in excess of revenue earned on contracts, which is included in the Other current liabilities line item on the Company’s Condensed Consolidated Balance Sheets, was only used to recognize contract liabilities related to fixed-price contracts under previous accounting guidance. This line item now includes contract liabilities related to both fixed-price contracts and unit-price contracts. In the event a contract asset or contract liability is expected to be recognized for greater than one year from the financial statement date, Centuri classifies those amounts as long-term contract assets or contract liabilities, included in Other deferred credits and other long-term liabilities on the Company’s Condensed Consolidated Balance Sheets.

The adoption of Topic 606 had no impact on any of the financial statements of Southwest Gas Holdings, Inc. or Southwest.

 

22


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

Note 4 – Segment Information

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

 

     Natural Gas
Operations
     Construction
Services
     Other      Total  

Three months ended March 31, 2018

           

Revenues from external customers

   $ 494,313      $ 232,859      $ —        $ 727,172  

Intersegment revenues

     —          27,158        —          27,158  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 494,313      $ 260,017      $ —        $ 754,330  
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment net income (loss)

   $ 90,349      $ (11,001    $ (257    $ 79,091  
  

 

 

    

 

 

    

 

 

    

 

 

 

Three months ended March 31, 2017

           

Revenues from external customers

   $ 462,602      $ 170,839      $ —        $ 633,441  

Intersegment revenues

     —          21,296        —          21,296  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 462,602      $ 192,135      $ —        $ 654,737  
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment net income (loss)

   $ 76,938      $ (7,334    $ (296    $ 69,308  
  

 

 

    

 

 

    

 

 

    

 

 

 
     Natural Gas
Operations
     Construction
Services
     Other      Total  

Twelve months ended March 31, 2018

           

Revenues from external customers

   $ 1,334,019      $ 1,211,345      $ —        $ 2,545,364  

Intersegment revenues

     —          103,021        —          103,021  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,334,019      $ 1,314,366      $ —        $ 2,648,385  
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment net income (loss)

   $ 170,229      $ 34,693      $ (1,298    $ 203,624  
  

 

 

    

 

 

    

 

 

    

 

 

 

Twelve months ended March 31, 2017

           

Revenues from external customers

   $ 1,258,914      $ 1,027,835      $ —        $ 2,286,749  

Intersegment revenues

     —          97,230        —          97,230  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,258,914      $ 1,125,065      $ —        $ 2,383,979  
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment net income (loss)

   $ 118,778      $ 27,421      $ (296    $ 145,903  
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 5 – Derivatives and Fair Value Measurements

Derivatives. In managing its natural gas supply portfolios, Southwest has historically entered into fixed- and variable-price contracts, which qualify as derivatives. Additionally, Southwest utilizes fixed-for-floating swap contracts (“Swaps”) to supplement its fixed-price contracts. The fixed-price contracts, firm commitments to purchase a fixed amount of gas in the future at a fixed price, qualify for the normal purchases and normal sales exception that is allowed for contracts that are probable of delivery in the normal course of business, and are exempt from fair value reporting. The variable-price contracts have no significant market value. The Swaps are recorded at fair value.

The fixed-price contracts and Swaps are utilized by Southwest under its volatility mitigation programs to effectively fix the price on a portion (up to 25% in the Arizona and California jurisdictions) of its natural gas supply portfolios. The maturities of the Swaps highly correlate to forecasted purchases of natural gas, during time frames ranging from April 2018 through October 2019. Under such contracts, Southwest pays the counterparty a fixed rate and receives from the counterparty a floating rate per MMBtu (“dekatherm”) of natural gas. Only the net differential is actually paid or received. The differential is calculated based on the notional amounts under the contracts, which are detailed in the table below (thousands of dekatherms):

 

     March 31, 2018      December 31, 2017  

Contract notional amounts

     11,391        10,929  
  

 

 

    

 

 

 

 

23


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

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

The following table sets forth the gains and (losses) recognized on the Swaps (derivatives) for the three- and twelve-month periods ended March 31, 2018 and 2017 and their location in the Condensed Consolidated Statements of Income for both the Company and Southwest:

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

 

(Thousands of dollars)

 

           
          Three Months Ended      Twelve Months Ended  
    

Location of Gain or (Loss)

Recognized in Income on Derivative

   March 31      March 31  

Instrument

      2018      2017      2018      2017  

Swaps

  

Net cost of gas sold

   $ (5,196    $ (5,137    $ (11,631    $ 1,081  

Swaps

  

Net cost of gas sold

     5,196      5,137      11,631      (1,081 )* 
     

 

 

    

 

 

    

 

 

    

 

 

 

Total

      $ —        $ —        $ —        $ —    
     

 

 

    

 

 

    

 

 

    

 

 

 

 

*

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

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

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

Fair values of derivatives not designated as hedging instruments:

 

March 31, 2018

Instrument       

  

Balance Sheet Location

   Asset
Derivatives
     Liability
Derivatives
     Net
Total
 

Swaps

   Other current liabilities    $ 11      $ (5,875    $ (5,864

Swaps

   Other deferred credits      —          (2,397      (2,397
     

 

 

    

 

 

    

 

 

 

Total

      $ 11      $ (8,272    $ (8,261
     

 

 

    

 

 

    

 

 

 

December 31, 2017

Instrument            

  

Balance Sheet Location

   Asset
Derivatives
     Liability
Derivatives
     Net
Total
 

Swaps

   Other current liabilities    $ 11      $ (4,468    $ (4,457

Swaps

   Other deferred credits      19        (1,342      (1,323
     

 

 

    

 

 

    

 

 

 

Total

      $ 30      $ (5,810    $ (5,780
     

 

 

    

 

 

    

 

 

 

The estimated fair values of the natural gas derivatives were determined using future natural gas index prices (as more fully described below). Master netting arrangements exist with each counterparty that provide for the net settlement (in the settlement month) of all contracts through a single payment. As applicable, management has elected to reflect the net amounts in its balance sheets. There was no outstanding collateral associated with the Swaps during either period shown in the above table.

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

 

24


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

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

 

     Three Months Ended      Twelve Months Ended  
(Thousands of dollars)    March 31, 2018      March 31, 2018  

Paid to counterparties

   $ 2,715      $ 4,514  
  

 

 

    

 

 

 

No amounts were received from counterparties during any of the periods indicated above.

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

 

March 31, 2018

Instrument        

  

Balance Sheet Location

   Net Total  

Swaps

   Prepaids and other current assets    $ 5,864  

Swaps

   Deferred charges and other assets      2,397  

December 31, 2017

Instrument            

  

Balance Sheet Location

   Net Total  

Swaps

   Prepaids and other current assets    $ 4,457  

Swaps

   Deferred charges and other assets      1,323  

Fair Value Measurements. The estimated fair values of Southwest’s Swaps were determined at March 31, 2018 and December 31, 2017 using futures settlement prices, published by the CME Group, for the delivery of natural gas at Henry Hub adjusted by the price of future settlement bases, which reflect the difference between the price of natural gas at a given delivery basin and the Henry Hub pricing points. These Level 2 inputs (inputs, other than quoted prices, for similar assets or liabilities) are observable in the marketplace throughout the full term of the Swaps, but have been credit-risk adjusted with no significant impact to the overall fair value measurement.

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

Level 2 - Significant other observable inputs

 

(Thousands of dollars)    March 31, 2018      December 31, 2017  

Liabilities at fair value:

     

Other current liabilities - Swaps

   $ (5,864    $ (4,457

Other deferred credits - Swaps

     (2,397      (1,323
  

 

 

    

 

 

 

Net Assets (Liabilities)

   $ (8,261    $ (5,780
  

 

 

    

 

 

 

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

With regard to the fair values of assets associated with pension and postretirement benefit plans, asset values were last updated as required as of December 2017. Refer to Note 11 – Pension and Other Post Retirement Benefits in the 2017 Annual Report to Shareholders on Form 10-K.

 

25


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

Note 6 – Common Stock

On March 29, 2017, the Company filed with the Securities Exchange Commission (“SEC”) an automatic shelf registration statement on Form S-3 (File No. 333-217018), which became effective upon filing, for the offer and sale of up to $150 million of common stock from time to time in at-the-market offerings under the prospectus included therein and in accordance with the Sales Agency Agreement, dated March 29, 2017, between the Company and BNY Mellon Capital Markets, LLC (the “Equity Shelf Program”). During the three months ending March 31, 2018, the Company sold, through the continuous equity offering program with BNY Mellon Capital Markets, LLC as agent, an aggregate of 137,300 shares of the Company’s common stock in the open market at a weighted average price of $67.00 per share, resulting in proceeds to the Company of $9,107,664, net of $91,997 in agent commissions. During the twelve months ended March 31, 2018, the Company sold, through this continuous equity offering program with the same party acting as agent, an aggregate of 643,007 shares of the Company’s common stock in the open market at a weighted average price of $79.28 per share, resulting in proceeds to the Company of $50,466,691, net of $509,765 in agent commissions. As of March 31, 2018, the Company had up to $99,023,545 of common stock available for sale under the program. Net proceeds from the sale of shares of common stock under the Equity Shelf Program are intended for general corporate purposes, including the acquisition of property for the construction, completion, extension or improvement of pipeline systems and facilities located in and around the communities served by Southwest.

During the three months ended March 31, 2018, the Company issued approximately 77,000 shares of common stock through the Restricted Stock/Unit Plan and Management Incentive Plan.

Also during the quarter ended March 31, 2018, the Company issued 33,000 shares of common stock through the Dividend Reinvestment and Stock Purchase Plan (“DRSPP”), raising approximately $2 million.

Note 7 – Long-Term Debt

Carrying amounts of long-term debt and related estimated fair values as of March 31, 2018 and December 31, 2017 are disclosed in the following table. Southwest’s revolving credit facility (including commercial paper) and the variable-rate Industrial Development Revenue Bonds (“IDRBs”) approximate their carrying values, as they are repaid quickly (in the case of credit facility borrowings) and have interest rates that reset frequently. These are categorized as Level 1 due to Southwest’s ability to access similar debt arrangements at measurement dates with comparable terms, including variable/market rates. The fair values of Southwest’s debentures, senior notes, and fixed-rate IDRBs were determined utilizing a market-based valuation approach, where fair values are determined based on evaluated pricing data, such as broker quotes and yields for similar securities adjusted for observable differences. Significant inputs used in the valuation generally include benchmark yield curves, credit ratings and issuer spreads. The external credit rating, coupon rate, and maturity of each security are considered in the valuation, as applicable. The fair values of debentures and fixed-rate IDRBs are categorized as Level 2 (observable market inputs based on market prices of similar securities). The Centuri secured revolving credit and term loan facility and Centuri other debt obligations (not actively traded) are categorized as Level 3, based on significant unobservable inputs to their fair values. Because Centuri’s debt is not publicly traded, fair values for the secured revolving credit and term loan facility and other debt obligations were based on a conventional discounted cash flow methodology and utilized current market pricing yield curves, across Centuri’s debt maturity spectrum, of other industrial bonds with an assumed credit rating comparable to the Company’s.

 

26


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

     March 31, 2018      December 31, 2017  
     Carrying      Fair      Carrying      Fair  
     Amount      Value      Amount      Value  

(Thousands of dollars)

           

Southwest Gas Corporation:

           

Debentures:

           

Notes, 4.45%, due 2020

   $ 125,000      $ 127,630      $ 125,000      $ 129,273  

Notes, 6.1%, due 2041

     125,000        155,349        125,000        158,304  

Notes, 3.875%, due 2022

     250,000        252,270        250,000        256,163  

Notes, 4.875%, due 2043

     250,000        284,998        250,000        283,243  

Notes, 3.8%, due 2046

     300,000        291,945        300,000        302,970  

Notes, 3.7%, due 2028

     300,000        302,520        —          —    

8% Series, due 2026

     75,000        95,542        75,000        96,063  

Medium-term notes, 7.78% series, due 2022

     25,000        28,147        25,000        28,714  

Medium-term notes, 7.92% series, due 2027

     25,000        30,810        25,000        31,542  

Medium-term notes, 6.76% series, due 2027

     7,500        8,811        7,500        8,882  

Unamortized discount and debt issuance costs

     (12,480         (9,350   
  

 

 

       

 

 

    
     1,470,020           1,173,150     
  

 

 

       

 

 

    

Revolving credit facility and commercial paper

     39,000        39,000        150,000        150,000  
  

 

 

       

 

 

    

Industrial development revenue bonds:

           

Variable-rate bonds:

           

Tax-exempt Series A, due 2028

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

2003 Series A, due 2038

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

2008 Series A, due 2038

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

2009 Series A, due 2039

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

Unamortized discount and debt issuance costs

     (2,026         (2,119   
  

 

 

       

 

 

    
     197,974           197,881     
  

 

 

       

 

 

    

Less: current maturities

     —             —       
  

 

 

       

 

 

    

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

   $ 1,706,994         $ 1,521,031     
  

 

 

       

 

 

    

Centuri:

           

Centuri term loan facility

   $ 194,357        195,757      $ 199,578        207,588  

Unamortized debt issuance costs

     (1,056         (1,111   
  

 

 

       

 

 

    
     193,301           198,467     

Centuri secured revolving credit facility

     79,227        79,261        56,472        56,525  

Centuri other debt obligations

     43,472        43,256        47,952        48,183  

Less: current maturities

     (24,867         (25,346   
  

 

 

       

 

 

    

Long-term debt, less current maturities - Centuri

   $ 291,133         $ 277,545     
  

 

 

       

 

 

    

Consolidated Southwest Gas Holdings, Inc.:

           

Southwest Gas Corporation long-term debt

   $ 1,706,994         $ 1,521,031     

Centuri long-term debt

     316,000           302,891     

Less: current maturities

     (24,867         (25,346   
  

 

 

       

 

 

    

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

   $ 1,998,127         $ 1,798,576     
  

 

 

       

 

 

    

Southwest has a $400 million credit facility that is scheduled to expire in March 2022. Southwest designates $150 million of capacity related to the facility as long-term debt and has designated the remaining $250 million for working capital purposes. Interest rates for the credit facility are calculated at either the London Interbank Offered Rate (“LIBOR”) or an “alternate base rate,” plus in each case an applicable margin that is determined based on Southwest’s senior unsecured debt rating. At March 31, 2018, the applicable margin is 1% for loans bearing interest with reference to LIBOR and 0% for loans bearing interest with reference to the alternative base rate. At March 31, 2018, $19 million was outstanding on the long-term portion (not including the commercial paper program, discussed below) and no borrowings were outstanding on the short-term portion of this credit facility.

 

27


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

Southwest has a $50 million commercial paper program. Any issuance under the commercial paper program is supported by Southwest’s current revolving credit facility and, therefore, does not represent additional borrowing capacity. Any borrowing under the commercial paper program will be designated as long-term debt. Interest rates for the program are calculated at the then current commercial paper rate. At March 31, 2018, $20 million was outstanding under the commercial paper program.

In March 2018, Southwest issued $300 million in 3.7% Senior Notes at a discount of 0.185%. The notes will mature in April 2028. A portion of the proceeds were used to repay amounts then outstanding under the revolving portion of the credit facility and the remainder to repay amounts then outstanding under the commercial paper program.

Centuri has a $450 million senior secured revolving credit and term loan facility that is scheduled to expire in November 2022. This facility includes a revolving credit facility and a term loan facility. The line of credit portion of the facility is $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. The limit on the term loan facility was reached in November 2017. No further borrowing is permitted under the term loan facility. The $450 million revolving credit and term loan facility is secured by substantially all of Centuri’s assets except those explicitly excluded under the terms of the agreement (including owned real estate and certain certificated vehicles). Centuri assets securing the facility at March 31, 2018 totaled $592 million. At March 31, 2018, $274 million in borrowings were outstanding under the Centuri facility.

Note 8 – Short-Term Debt

The Company has a $100 million credit facility that is scheduled to expire in March 2022. The Company had $22.5 million in short-term borrowings outstanding at March 31, 2018 under this facility.

Note 9 – Equity, Other Comprehensive Income, and Accumulated Other Comprehensive Income

The table below provides details of activity in equity and the noncontrolling interest for Southwest Gas Holdings, Inc. on a consolidated basis during the three months ended March 31, 2018.

 

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

(In thousands, except per share amounts)

  Shares     Amount     Capital     Income (Loss)     Earnings     Interest     Total  

DECEMBER 31, 2017

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

Common stock issuances

    247       247       10,148             10,395  

Net income (loss)

            79,091       (797     78,294  

Foreign currency exchange translation adj.

          (911         (911

Other comprehensive income (loss):

             

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

          895           895  

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

          635           635  

Reclass of stranded deferred taxes due to TCJA (a)

          (9,300     9,300         —    

Dividends declared

             

Common: $0.52 per share

            (25,335       (25,335
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

March 31, 2018

    48,337     $ 49,967     $ 965,480     $ (56,363   $ 920,454     $ (3,162   $ 1,876,376  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Release of excess deferred taxes accumulated prior to December 22, 2017 (date of enactment of the TCJA), as a result of the adoption of ASU 2018-02, which permitted such release.

 

28


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

The table below provides details of activity in equity for Southwest Gas Corporation during the three months ended March 31, 2018. Only equity shares of the Company are publicly traded, under the ticker symbol “SWX.”

 

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

(In thousands, except per share amounts)

  Shares     Amount     Capital     Income (Loss)     Earnings     Total  

DECEMBER 31, 2017

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

Net income

            90,349       90,349  

Other comprehensive income (loss):

           

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

          895         895  

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

          635         635  

Reclass of stranded deferred taxes due to TCJA (a)

          (9,300     9,300       —    

Stock-based compensation (b)

        (568       (166     (734

Dividends declared to Southwest Gas Holdings, Inc.

            (22,000     (22,000
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

March 31, 2018

    47,482     $ 49,112     $ 948,199     $ (54,843   $ 736,676     $ 1,679,144  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Release of excess deferred taxes accumulated prior to December 22, 2017 (date of enactment of the TCJA), as a result of the adoption of ASU 2018-02, which permitted such release.

(b)

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

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

 

29


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

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

(Thousands of dollars)

 

     Three Months Ended     Three Months Ended  
     March 31, 2018     March 31, 2017  
     Before-     Tax     Net-of-     Before-     Tax     Net-of-  
     Tax     (Expense)     Tax     Tax     (Expense)     Tax  
     Amount     or Benefit (1)     Amount     Amount     or Benefit (1)     Amount  

Defined benefit pension plans:

            

Amortization of prior service cost

   $ 334     $ (80   $ 254     $ 334     $ (127   $ 207  

Amortization of net actuarial (gain)/loss

     8,404       (2,017     6,387       6,361       (2,417     3,944  

Regulatory adjustment

     (7,560     1,814       (5,746     (5,735     2,179       (3,556
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pension plans other comprehensive income (loss)

     1,178       (283     895       960       (365     595  

FSIRS (designated hedging activities):

            

Amounts reclassified into net income

     837       (202     635       836       (318     518  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FSIRS other comprehensive income

     837       (202     635       836       (318     518  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss) - Southwest Gas Corporation

     2,015       (485     1,530       1,796       (683     1,113  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustments:

            

Translation adjustments

     (911     —         (911     220       —         220  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency other comprehensive income (loss)

     (911     —         (911     220       —         220  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 1,104     $ (485   $ 619     $ 2,016     $ (683   $ 1,333  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Twelve Months Ended     Twelve Months Ended  
     March 31, 2018     March 31, 2017  
     Before-     Tax     Net-of-     Before-     Tax     Net-of-  
     Tax     (Expense)     Tax     Tax     (Expense)     Tax  
     Amount     or Benefit (1)     Amount     Amount     or Benefit (1)     Amount  

Defined benefit pension plans:

            

Net actuarial gain/(loss)

   $ (43,027   $ 10,326     $ (32,701   $ (22,770   $ 8,652     $ (14,118

Amortization of prior service cost

     1,335       (460     875       1,335       (507     828  

Amortization of net actuarial (gain)/loss

     27,488       (9,269     18,219       26,660       (10,131     16,529  

Regulatory adjustment

     10,515       (115     10,400       (5,196     1,974       (3,222
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pension plans other comprehensive income (loss)

     (3,689     482       (3,207     29       (12     17  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FSIRS (designated hedging activities):

            

Amounts reclassified into net income

     3,345       (1,155     2,190       3,345       (1,271     2,074  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FSIRS other comprehensive income

     3,345       (1,155     2,190       3,345       (1,271     2,074  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss) - Southwest Gas Corporation

     (344     (673     (1,017     3,374       (1,283     2,091  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustments:

            

Translation adjustments

     640       —         640       (401     —         (401
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency other comprehensive income (loss)

     640       —         640       (401     —         (401
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 296     $ (673   $ (377   $ 2,973     $ (1,283   $ 1,690  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Tax amounts are calculated using a 24% rate following the December 22, 2017 enactment date of the TCJA. For periods prior to the enactment date (and included in specific line items of the tables for the twelve months ended March 31, 2018 and 2017), tax amounts were calculated using a 38% rate. The tax effect of before-tax amounts remaining in the balance of accumulated other comprehensive income as of March 31, 2018 is effectively computed using a 24% tax rate overall after the reclassification of previously stranded excess deferred taxes existing as a result of the TCJA (see table for Accumulated other comprehensive income, including the balance, below). With regard to foreign currency translation adjustments, the Company has elected to indefinitely reinvest the earnings of Centuri’s Canadian subsidiaries in Canada, thus preventing deferred taxes on such earnings. As a result of this assertion, the Company is not recognizing any tax effect or presenting a tax expense or benefit for the currency translation adjustment amount reported in Other Comprehensive Income, as repatriation of earnings is not anticipated.

 

30


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

Approximately $2.5 million of realized losses (net of tax) related to the FSIRS, reported in Accumulated other comprehensive income (“AOCI”) at March 31, 2018, will be reclassified into interest expense within the next 12 months as the related interest payments on long-term debt occur.

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

AOCI - Rollforward    

(Thousands of dollars)

 

    Defined Benefit Plans     FSIRS     Foreign Currency Items              
    Before-Tax     Tax
(Expense)
Benefit (5)
    After-Tax     Before-Tax     Tax
(Expense)
Benefit (5)
    After-Tax     Before-Tax     Tax
(Expense)
Benefit
    After-Tax     Other     AOCI  

Beginning Balance AOCI
December 31, 2017

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Translation adjustments

    —         —         —         —         —         —         (911     —         (911     —         (911
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income
before reclassifications

    —         —         —         —         —         —         (911     —         (911     —         (911

FSIRS amounts reclassified from AOCI (1)

    —         —         —         837       (202     635       —         —         —         —         635  

Amortization of prior service cost (2)

    334       (80     254       —         —         —         —         —         —         —         254  

Amortization of net actuarial loss (2)

    8,404       (2,017     6,387       —         —         —         —         —         —         —         6,387  

Regulatory adjustment (3)

    (7,560     1,814       (5,746     —         —         —         —         —         —         —         (5,746
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    1,178       (283     895       837       (202     635       (911     —         (911     —         619  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reclass of stranded deferred taxes due to TCJA (4)

    —         —         —         —         —         —         —         —         —         (9,300     (9,300
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance AOCI March 31, 2018

  $ (60,342   $ 22,010     $ (38,332   $ (11,818   $ 4,607     $ (7,211   $ (1,520   $ —       $ (1,520   $ (9,300   $ (56,363
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

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

(2)

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

(3)

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

(4)

Release of excess deferred taxes accumulated prior to December 22, 2017 (date of enactment of the TCJA), as a result of the adoption of ASU 2018-02, which permitted such release.

(5)

Tax amounts related to the before-tax balance at March 31, 2018 are calculated using a 24% rate after the release of previously stranded excess deferred taxes existing as a result of the TCJA; amounts prior to the December 22, 2017 enactment of the TCJA were calculated using a 38% rate.

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

AOCI - Rollforward

(Thousands of dollars)

 

     Defined Benefit Plans     FSIRS              
     Before-Tax     Tax
(Expense)
Benefit (10)
    After-Tax     Before-Tax     Tax
(Expense)
Benefit (10)
    After-Tax     Other     AOCI  

Beginning Balance AOCI December 31, 2017

   $ (61,520   $ 22,293     $ (39,227   $ (12,655   $ 4,809     $ (7,846   $ —       $ (47,073
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

FSIRS amounts reclassified from AOCI (6)

     —         —         —         837       (202     635       —         635  

Amortization of prior service cost (7)

     334       (80     254       —         —         —         —         254  

Amortization of net actuarial loss (7)

     8,404       (2,017     6,387       —         —         —         —         6,387  

Regulatory adjustment (8)

     (7,560     1,814       (5,746     —         —         —         —         (5,746
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     1,178       (283     895       837       (202     635       —         1,530  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reclass of stranded deferred taxes due to TCJA (9)

     —         —         —         —         —         —         (9,300     (9,300
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance AOCI March 31, 2018

   $ (60,342   $ 22,010     $ (38,332   $ (11,818   $ 4,607     $ (7,211   $ (9,300   $ (54,843
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(6)

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

(7)

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

(8)

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

(9)

Release of excess deferred taxes accumulated prior to December 22, 2017 (date of enactment of the TCJA), as a result of the adoption of ASU 2018-02, which permitted such release.

 

31


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

(10)

Tax amounts related to the before-tax balance at March 31, 2018 are calculated using a 24% rate after the reclass of previously stranded excess deferred taxes existing as a result of the TCJA; amounts prior to the December 22, 2017 enactment of the TCJA were calculated using a 38% rate.

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

Amounts Recognized in AOCI (Before Tax)

(Thousands of dollars)

 

     March 31, 2018      December 31, 2017  

Net actuarial (loss) gain

   $ (440,151    $ (448,555

Prior service cost

     (4,034      (4,368

Less: amount recognized in regulatory assets

     383,843        391,403  
  

 

 

    

 

 

 

Recognized in AOCI

   $ (60,342    $ (61,520
  

 

 

    

 

 

 

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

As a result of a holding company structure in January 2017, no substantive change occurred with regard to the Company’s business segments on the whole, or in the primary businesses comprising those segments (Centuri operations continue to be part of continuing operations of the controlled group of companies), and financial information related to Centuri continues to be included in condensed consolidated financial statements of Southwest Gas Holdings, Inc.

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

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

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

Results of Construction Services

 

(Thousands of dollars)    Twelve
Months Ended
March 31, 2017
 

Construction revenues

   $ 932,930  

Operating expenses:

  

Construction expenses

     831,041  

Depreciation and amortization

     41,054  
  

 

 

 

Operating income

     60,835  

Other income (deductions)

     1,227  

Net interest deductions

     5,172  
  

 

 

 

Income before income taxes

     56,890  

Income tax expense

     21,030  
  

 

 

 

Net income

     35,860  

Net income attributable to noncontrolling interests

     1,105  
  

 

 

 

Discontinued operations - construction services - net income

   $ 34,755  
  

 

 

 

 

32


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

Note 11 – Acquisition of Construction Services Business

In November 2017, the Company, through its subsidiaries, led principally by Centuri, completed the acquisition of a privately held construction business, New England Utility Constructors, Inc. (“Neuco”) for approximately $99 million, less assumed debt. See the Company’s 2017 Form 10-K for additional information about this acquisition.

Assets acquired and liabilities assumed in the transaction were recorded, generally, at their acquisition date fair values. Transaction costs associated with the acquisition were expensed as incurred. The Company’s allocation of the purchase price was based on an evaluation of the appropriate fair values and represented management’s best estimate based on available data (including market data, data regarding customers of the acquired businesses, terms of acquisition-related agreements, analysis of historical and projected results, and other types of data). The analysis included consideration of types of intangibles that were acquired, including non-competition agreements, customer relationships, trade names, and work backlog. The final purchase accounting has been completed.

The estimated fair values of assets acquired and liabilities assumed as of November 1, 2017, are as follows (in millions of dollars):

 

     Acquisition
Date
     Measurement
Period
Adjustments
     Revised
Acquisition
Date
 

Cash and cash equivalents

   $ 0.8      $ —        $ 0.8  

Contracts receivable

     18.3        —          18.3  

Other receivables

     5.4        —          5.4  

Property, plant and equipment

     15.1        —          15.1  

Prepaid expenses and deposits

     1.7        (0.1      1.6  

Intangible assets

     44.8        —          44.8  

Goodwill

     32.0        0.2        32.2  
  

 

 

    

 

 

    

 

 

 

Total assets acquired

     118.1        0.1        118.2  

Current liabilities

     (18.5      (0.1      (18.6

Other long-term liabilities

     (0.3      —          (0.3
  

 

 

    

 

 

    

 

 

 

Net assets acquired

   $ 99.3      $ —        $ 99.3  
  

 

 

    

 

 

    

 

 

 

The Company incurred and expensed acquisition costs of $2.6 million for the twelve months ended March 31, 2018. No acquisition-related costs were incurred during the three months ended March 31, 2018.

The allocation of the purchase price of Neuco was accounted for in accordance with applicable accounting guidance. Goodwill, which is generally not deductible for tax purposes, consists of the value associated with the assembled workforce and consolidation of operations. However, as the business of Neuco was acquired via asset purchase for tax purposes, the approximately $32 million of tax-basis goodwill is expected to be deductible for tax purposes. In the first quarter of 2018, values at the acquisition date were adjusted as reflected in the table above, with no significant overall impact to the Company’s consolidated balance sheets.

 

33


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Southwest Gas Holdings, Inc. is a holding company that owns all of the shares of common stock of Southwest Gas Corporation (“Southwest” or the “natural gas operations” segment) and all of the shares of common stock of Centuri Construction Group Inc. (“Centuri” or the “construction services” segment). Prior to August 2017, only 96.6% of Centuri 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 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 for this change, the separate consolidated financial statements of Southwest Gas Corporation depict Centuri-related amounts for periods prior to January 2017 as discontinued operations of Southwest. Southwest Gas Holdings, Inc. and its subsidiaries (the “Company”) have two business segments (natural gas operations and construction services), which are discussed below.

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

As of March 31, 2018, Southwest had 2,026,000 residential, commercial, industrial, and other natural gas customers, of which 1,080,000 customers were located in Arizona, 751,000 in Nevada, and 195,000 in California. Residential and commercial customers represented over 99% of the total customer base. During the twelve months ended March 31, 2018, 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. Gas cost is a tracked cost, which is passed through to customers without markup under purchased gas adjustment (“PGA”) mechanisms, impacting revenues and net cost of gas sold on a dollar-for-dollar basis, thereby having no impact on Southwest’s profitability. Therefore, management routinely uses operating margin, defined as operating revenues less the net cost of gas sold, in its analysis of Southwest’s financial performance. Operating margin also forms a basis for Southwest’s various regulatory decoupling mechanisms. Operating margin is not, however, specifically defined in accounting principles generally accepted in the United States (“U.S. GAAP”) and is considered a non-GAAP measure. 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. (Refer to the Summary Operating Results table for a reconciliation of revenues to operating margin.)

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 and W.S. Nicholls).

 

34


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

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 have resulted in a significant increase in multi-year pipeline replacement projects throughout the U.S. Centuri has focused its efforts on obtaining pipe replacement work under both blanket contracts and incremental bid projects. For both the twelve months ended March 31, 2018 and 2017, revenues from replacement work provided over 60% of total revenues. 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.

This Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and the notes thereto, as well as MD&A included in the 2017 Annual Report to Shareholders, which is incorporated by reference into the 2017 Form 10-K.

Executive Summary

The items discussed in this Executive Summary are intended to provide an overview of the results of the Company’s operations. As needed, certain items are covered in greater detail in later sections of management’s discussion and analysis. As reflected in the table below, the natural gas operations segment accounted for an average of 83% of twelve-month-to-date consolidated net income over the past two years. As such, management’s discussion and analysis is primarily focused on that segment. Natural gas sales are seasonal, peaking during the winter months; therefore, results of operations for interim periods are not necessarily indicative of results for a full year.

Summary Operating Results

 

     Period Ended March 31,  
     Three Months     Twelve Months  
     2018     2017     2018     2017  
     (In thousands, except per share amounts)  

Contribution to net income

        

Natural gas operations

   $ 90,349     $ 76,938     $ 170,229     $ 118,778  

Construction services

     (11,001     (7,334     34,693       27,421  

Corporate and administrative

     (257     (296     (1,298     (296
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 79,091     $ 69,308     $ 203,624     $ 145,903  
  

 

 

   

 

 

   

 

 

   

 

 

 

Average number of common shares

     48,416       47,530       48,105       47,492  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share

        

Consolidated

   $ 1.63     $ 1.46     $ 4.23     $ 3.07  
  

 

 

   

 

 

   

 

 

   

 

 

 

Natural Gas Operations

        

Reconciliation of Revenue to Operating Margin (Non-GAAP measure)

        

Gas operating revenues

   $ 494,313     $ 462,602     $ 1,334,019     $ 1,258,914  

Less: Net cost of gas sold

     185,732       146,879       393,898       330,400  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating margin

   $ 308,581     $ 315,723     $ 940,121     $ 928,514  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

35


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

1st Quarter 2018 Overview

Natural gas operations highlights:

 

   

32,000 net new customers (1.6% growth rate)

   

Issued $300 million in Senior Notes due in 2028

   

Arizona rate case settlement (April 2017) provided rate relief and lower depreciation

   

Operating income increased $5.3 million compared to the prior-year quarter

   

Income tax expense decreased approximately $14 million due to tax reform

   

Operating margin reflects estimated regulatory impacts of tax reform

Construction services highlights:

 

   

Revenues increased $67.9 million compared to the prior-year quarter

   

Construction expenses increased $67 million compared to the prior-year quarter

   

Depreciation and amortization expense increased $1.2 million compared to the prior-year quarter

   

Net interest deductions increased $1.7 million compared to the prior-year quarter

 

36


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

Results of Natural Gas Operations

 

     Three Months Ended  
     March 31, 2018  
     2018      2017  
     (Thousands of dollars)  

Gas operating revenues

   $ 494,313      $ 462,602  

Net cost of gas sold

     185,732        146,879  
  

 

 

    

 

 

 

Operating margin

     308,581        315,723  

Operations and maintenance expense

     102,190        103,824  

Depreciation and amortization

     49,961        61,195  

Taxes other than income taxes

     15,257        14,782  
  

 

 

    

 

 

 

Operating income

     141,173        135,922  

Other income (deductions)

     (4,603      (1,244

Net interest deductions

     19,255        17,210  
  

 

 

    

 

 

 

Income before income taxes

     117,315        117,468  

Income tax expense

     26,966        40,530  
  

 

 

    

 

 

 

Contribution to consolidated net income

   $ 90,349      $ 76,938  
  

 

 

    

 

 

 

Contribution to consolidated net income from natural gas operations increased $13.4 million between quarters. The improvement was primarily due to rate relief and customer growth, lower depreciation expense, offset by a decrease in other income and an increase in net interest deductions. U.S. tax reform impacted both revenue and tax expense. The amounts above reflect a reclassification of $4.9 million for 2017 from Operations and maintenance expense to Other income (deductions) related to the non-service cost components of net periodic benefit costs, as a result of the adoption of the update to FASB Topic 715 (refer to Note 2 to the condensed consolidated financial statements in this Form 10-Q), with no impact to net income overall. The reclassification in the 2017 period is intended to make that information comparable to the current period presentation.

Operating margin decreased $7 million between quarters, due to a $14 million reserve adjustment recognized due to the enactment of U.S. tax reform in December 2017. The adjustment contemplates that future rates will be reduced by this estimated amount associated with the 1st quarter of 2018 as rates billed to customers do not yet reflect the reduced cost of service resulting from tax reform. However, as the significant decline in applicable U.S. income tax rates also significantly reduced income tax expense (see discussion below), net income was not impacted unfavorably. Operating margin was favorably impacted by rate relief in Arizona (effective April 2017) and California, which collectively provided $5 million in operating margin (see Rates and Regulatory Proceedings). Approximately $4 million in increased operating margin was attributable to customer growth, as 32,000 net new customers were added during the last twelve months. Operating margin associated with recoveries of regulatory assets, infrastructure replacement mechanisms, customers outside the decoupling mechanisms, and other miscellaneous revenues declined $2 million.

Operations and maintenance expense decreased $1.6 million between quarters. Costs associated with the amount and timing of employee incentive plan grants declined $3.3 million due to incremental grants in 2017. Both periods include accelerated recognition for retirement eligible employees. These impacts were offset by increases in general costs and higher pension expense.

Depreciation and amortization expense decreased $11 million between quarters primarily due to reduced depreciation rates in Arizona, a result of the prior-year Arizona general rate case decision. Partially offsetting the decline was increased depreciation associated with a $437 million, or 7%, increase in average gas plant in service for the current quarter as compared to the corresponding quarter a year ago. 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 $475,000 between quarters primarily due to higher property taxes associated with net plant additions.

 

37


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

Other income decreased $3 million between quarters primarily due to a decline in income from company-owned life insurance (“COLI”) policies. The current quarter reflects a $700,000 decrease in COLI policy cash surrender values, while the prior-year quarter reflected $2.8 million of COLI-related income. Amounts in both periods reflect the non-service cost components of employee pension and post-retirement benefits.

Net interest deductions increased $2 million in the first quarter of 2018 as compared to the prior-year quarter, primarily due to higher interest associated with credit facility borrowings during the current-year quarter and the issuance of $300 million of senior notes in March 2018. The increase was partially offset by reductions in interest expense associated with deferred purchased gas adjustment (“PGA”) balances as compared to the prior-year quarter.

Income taxes were favorably impacted in 2018 due to the December 2017 enactment of tax reform. Among other things, tax reform reduced the corporate federal income tax rate from 35% to 21%, effective January 2018.

 

38


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

Results of Natural Gas Operations

 

     Twelve Months Ended  
     March 31, 2018  
     2018      2017  
     (Thousands of dollars)  

Gas operating revenues

   $ 1,334,019      $ 1,258,914  

Net cost of gas sold

     393,898        330,400  
  

 

 

    

 

 

 

Operating margin

     940,121        928,514  

Operations and maintenance expense

     389,687        389,931  

Depreciation and amortization

     190,688        233,913  

Taxes other than income taxes

     58,421        53,145  
  

 

 

    

 

 

 

Operating income

     301,325        251,525  

Other income (deductions)

     (9,747      (9,543

Net interest deductions

     71,778        67,977  
  

 

 

    

 

 

 

Income before income taxes

     219,800        174,005  

Income tax expense

     49,571        55,227  
  

 

 

    

 

 

 

Contribution to consolidated net income

   $ 170,229      $ 118,778  
  

 

 

    

 

 

 

Contribution to consolidated net income from natural gas operations increased by $51.5 million between the twelve-month periods of 2018 and 2017. The improvement was primarily due to higher operating margin, lower depreciation expense, and lower income tax expense, partially offset by an increase in taxes other than income taxes and lower other income (deductions). The amounts above for Operations and maintenance expense and Other income (deductions) for the 2017 period reflect a $19.7 million reclassification related to the non-service cost components of employee pensions and other post-retirement benefits, as a result of the adoption of the update to FASB Topic 715. The reclassification is intended to make the prior period comparable to the current period, but did not impact net income overall.

Operating margin increased $11.6 million between periods including a combined $19 million of rate relief in the Arizona and California jurisdictions. Customer growth provided $10 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 $3 million. A $14 million reserve recorded in the first quarter of 2018 associated with tax reform, decreased operating margin in the current period. However, net income overall was not unfavorably impacted, as favorable impacts from tax reform are reflected in income tax expense.

Operations and maintenance expense was relatively flat between periods primarily as general cost increases, higher pension costs, and additional expenditures for pipeline integrity management and damage prevention programs were offset by a $2.7 million decrease in self-insured employee medical costs and lower bad debt expense.

Depreciation and amortization expense decreased $43 million between periods primarily due to reduced depreciation rates in Arizona, a result of the April 2017 Arizona general rate case decision. Partially offsetting the decline was depreciation associated with a $359 million, or 6%, increase in average gas plant in service for the current period as compared to the prior period. 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 million between periods primarily due to higher property taxes associated with net plant additions and increased property taxes in Arizona, including the impact of the property tax regulatory tracking mechanism.

Other income (deductions) decreased $204,000 between the twelve-month periods of 2018 and 2017. The current period reflects a $6.8 million increase in COLI policy cash surrender values, while the prior-year period included $9.3 million of COLI-related income. Interest income increased $1.6 million including interest related to the Gas Infrastructure Replacement (“GIR”) mechanism in Nevada. See the Rates and Regulatory Proceedings section for more information about the GIR. Amounts in both periods reflect the non-service cost components of employee pension and post-retirement benefits.

 

39


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

Net interest deductions increased $3.8 million between the current and prior-year periods, primarily due to the issuance of $300 million of senior notes in September 2016, higher interest associated with credit facility borrowings during late 2017 and early 2018, and the issuance of the $300 million senior notes in March 2018. The increase was substantially offset by reductions in interest expense associated with deferred PGA balances as compared to the prior-year period and various debt redemptions in the second half of 2016.

Income taxes were favorably impacted in 2018 due to the December 2017 enactment of tax reform, which reduced the corporate federal income tax rate from 35% to 21%, effective January 2018. Approximately $8 million of one-time tax benefits, related to the remeasurement of deferred tax liabilities, were recorded in the fourth quarter of 2017 in addition to the lower rate utilized in the first quarter of 2018.

 

40


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

Results of Construction Services

 

     Three Months Ended  
     March 31,  
     2018      2017  
     (Thousands of dollars)  

Construction revenues

   $ 260,017      $ 192,135  

Operating expenses:

     

Construction expenses

     258,952        191,956  

Depreciation and amortization

     12,517        11,283  
  

 

 

    

 

 

 

Operating income (loss)

     (11,452      (11,104

Other income (deductions)

     263        254  

Net interest deductions

     3,196        1,504  
  

 

 

    

 

 

 

Income (loss) before income taxes

     (14,385      (12,354

Income tax expense (benefit)

     (2,587      (4,717
  

 

 

    

 

 

 

Net income (loss)

     (11,798      (7,637

Net income (loss) attributable to noncontrolling interests

     (797      (303
  

 

 

    

 

 

 

Contribution to consolidated net income (loss) attributable to Centuri

   $ (11,001    $ (7,334
  

 

 

    

 

 

 

In November 2017, Centuri acquired New England Utility Constructors, Inc. (“Neuco”). Line items in the table above reflect the results of Neuco only for the 2018 period.

Revenues increased $68 million, or 35%, in the first quarter of 2018 when compared to the prior-year quarter primarily due to additional pipe replacement work for many natural gas distribution customers and $14 million of Neuco revenues. The prior period was impacted by a temporary work stoppage.

Construction expenses increased $67 million, or 35%, between quarters. The increase in construction expenses is due to additional pipe replacement work and higher labor costs incurred to complete work during inclement weather conditions in the current-year quarter. Approximately $14.1 million of Neuco construction expenses are included in the three months ended March 31, 2018. Gains on sale of equipment (reflected as an offset to construction expenses) were approximately $230,000 and $339,000 for the first quarters of 2018 and 2017, respectively.

Depreciation and amortization expense increased $1.2 million between quarters, primarily due to 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, partially offset by a $2 million reduction in depreciation associated with the extension of the estimated useful lives of certain depreciable equipment.

Net interest deductions increased by $1.7 million between quarters. The increase was due primarily to higher average debt outstanding (including amounts used to finance the Neuco acquisition) under the $450 million secured revolving credit and term loan facility.

The reduction in corporate federal income taxes resulting from the December 2017 enactment of tax reform unfavorably impacted results during the first quarter of 2018, as lower corporate federal tax rates provide a reduced benefit during periods when losses are encountered.

 

41


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

Results of Construction Services

 

     Twelve Months Ended  
     March 31,  
     2018      2017  
     (Thousands of dollars)  

Construction revenues

   $ 1,314,366      $ 1,125,065  

Operating expenses:

     

Construction expenses

     1,215,959        1,022,997  

Depreciation and amortization

     50,263        52,337  
  

 

 

    

 

 

 

Operating income

     48,144        49,731  

Other income (deductions)

     354        1,481  

Net interest deductions

     9,678        6,676  
  

 

 

    

 

 

 

Income before income taxes

     38,820        44,536  

Income tax expense

     4,520        16,313  
  

 

 

    

 

 

 

Net income

     34,300        28,223  

Net income (loss) attributable to noncontrolling interests

     (393      802  
  

 

 

    

 

 

 

Contribution to consolidated net income attributable to Centuri

   $ 34,693      $ 27,421  
  

 

 

    

 

 

 

Line items in the table above reflect the results of Neuco only since the November 2017 acquisition date.

Revenues increased $189 million, or 17%, in the current twelve-month period compared to the same period of 2017 primarily due to additional pipe replacement work for many natural gas distribution customers and the inclusion of approximately $31 million from Neuco since the November 2017 acquisition date. In addition, Centuri performed work on a multi-year water pipe replacement program, which began in late 2016, that contributed incremental revenues of $39.3 million and $17.7 million during the twelve-month periods ended March 31, 2018 and 2017, respectively.

Construction expenses increased $193 million, or 19% between periods, primarily due to higher labor costs experienced due to changes in the mix of work with existing customers, lower productivity resulting from inclement weather, and greater operating expenses to support increased growth in operations. In addition, results were negatively impacted by higher construction costs and an unfavorable mix of work performed during the period related to the water pipe replacement program noted above. Centuri is pursuing relief from the customer in the form of modified terms or additional cost recovery. Approximately $27 million of construction expenses from Neuco are included in the twelve months ended March 31, 2018. Gains on sale of equipment (reflected as an offset to construction expenses) were $4.1 million and $6.2 million for the twelve-month periods of 2018 and 2017, respectively.

Depreciation and amortization expense decreased $2.1 million between the current and prior-year periods primarily due to a $5.5 million reduction in depreciation associated with the extension of the estimated useful lives of certain depreciable equipment over the last twelve months, 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.

Net interest deductions increased $3 million between periods. The increase was due primarily to higher average debt outstanding under the $450 million secured revolving credit and term loan facility.

Income tax expense decreased $11.8 million between periods primarily due to approximately $12 million of one-time tax benefits, related to the remeasurement of Centuri’s deferred tax liabilities, that were recorded in the fourth quarter of 2017.

 

42


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

Rates and Regulatory Proceedings

Arizona Jurisdiction

Arizona General Rate Case. In May 2016, Southwest filed a general rate application with the Arizona Corporation Commission (“ACC”). Following undertakings associated with the filing, a settlement hearing was held in February 2017, and the ACC approved the settlement in April 2017 (with new rates effective the same month), providing for, among other things, rate changes that would result in a combined net annual operating income increase of $60.7 million (including $16 million in additional operating revenue and a $44.7 million decrease in depreciation expense). The decision included a 7.82% rate of return on original cost rate base of $1.336 billion, a 9.5% return on common equity, and a capital structure utilizing 52% common equity. Other key elements included the approval of the continuation of the Customer-Owned Yard Line (“COYL”) program, the implementation of a vintage steel pipe replacement program, and a continuation of the current decoupled rate design, excluding the previous 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, which will defer changes in related expense for recovery in the next general rate case. It also included a three-year moratorium on filing another general rate application prior to May 2019. Surcharge rates associated with the decoupling mechanism were updated in April 2018.

Tax Reform. In January 2018, the ACC held a workshop specifically to address U.S. tax reform with all jurisdictional public service corporations and directed ACC staff (“the Staff”) to prepare a recommended order for consideration at an open meeting. The Staff-recommended order provided that all utilities apply regulatory accounting treatment to address 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. In April 2018, Southwest filed an application with the ACC, requesting approval for a tax refund process intended to ensure that customers receive the benefits from tax reform through an ACC-approved earnings test whereby a tax refund application will be made annually to refund to customers any margin contributing to earnings above the ACC-authorized rate of return.

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, which was later approved (December 2016) to be modified not to exceed $80 million, following land purchase and bid solicitation for the engineering, procurement and construction of the facility. Construction commenced during the third quarter of 2017 and is expected to be completed by the end of 2019. Through March 2018, Southwest has incurred approximately $39 million in capital expenditures toward the project (including land acquisition costs).

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. In the annual COYL filing made in February 2018, Southwest requested an increase from $1.8 million to $2.4 million in surcharge revenue related to 2017 expenditures of $18 million.

 

43


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

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. In the annual VSP filing made in February 2018, Southwest requested an increase in surcharge revenue to collect $3.1 million related to the 2017 expenditures.

California Jurisdiction

Tax Reform. In its 2017 decision approving Southwest’s request to extend the filing date of its next general rate case, the California Public Utilities Commission (“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 tax reform.

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.

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.

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 California GHG emissions reporting and the California Cap and Trade Program. The CPUC issued a decision in March 2018 adopting an allocation methodology to distribute the net revenues or costs beginning in the second quarter of 2018. Southwest has a net cost balance, which will be amortized over a 12-month period in rates for all applicable rate schedules, effective July 2018. In addition, for years 2019-2020, the decision adopted an allocation methodology to distribute the revenue proceeds through a California Climate Credit to active residential customers in April of each year. GHG compliance costs will be recovered through rates (including transportation rates) as prescribed by Decision D.15-10-032. There is no impact on earnings.

Nevada Jurisdiction

Nevada General Rate Case. The most recent general rate case decision was received from the Public Utilities Commission (“PUCN”) in November 2012 as amended in a Rehearing Decision in April 2013. Southwest currently plans to file a general rate case prior to June 2018. See also Infrastructure Replacement Mechanisms below.

Tax Reform. The PUCN has opened an “Investigation into Tax Cut and Jobs Act”, designated as Docket No. 18-02018, requiring comments to be filed, and which Southwest did file in April 2018, whereby Southwest described its plan to address the tax changes in its upcoming general rate case to be filed prior to June 2018. It was also noted that for those mechanisms that include monthly deferral calculations (the Deferred Energy Account Adjustment and the Accumulated Deferred Interest), Southwest has already updated the applicable carrying charges that are impacted by federal tax rates.

 

44


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

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 GIR Advance Application requesting authorization to replace qualifying infrastructure. Approximately $57.3 million of replacement work was approved for 2017 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.

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. 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. 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 took place in April 2018, and a decision on this proposal is expected in the second quarter of 2018.

Federal Energy Regulatory Commission (“FERC”) Jurisdiction

General Rate Case. Paiute Pipeline Company (“Paiute”), a wholly owned subsidiary of Southwest, filed its most recent general rate case with the FERC in February 2014, and following settlement proceedings, tariff changes were filed in March 2015. The settlement implied an 11.5% pre-tax rate of return, and as part of the agreement, Paiute agreed to file a rate case no later than May 2019. See Tax Reform below.

 

45


SOUTHWEST GAS HOLDINGS, INC.    Form 10-Q
SOUTHWEST GAS CORPORATION    March 31, 2018

 

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 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 could be received in the second quarter of 2018 and the additional facilities could be in place by the end of 2018.

Tax Reform. The FERC has issued a Notice of Proposed Rulemaking (“NOPR”) on whether the 2018 federal income tax changes cause pipeline rates to no longer be just and reasonable. A decision is expected in the second quarter of 2018 for the proposed rule. If the NOPR is approved as proposed, pipelines will be required to file a FERC Form No. 501-G to evaluate the impact of tax reform on their revenue requirement. In addition to filing the form, pipelines would select one of the following four options: 1) make a limited section 4 filing to reduce its rates by the percentage reduction in its cost of service shown in its FERC Form No. 501-G, 2) commit to file either a prepackaged uncontested rate settlement or a general section 4 rate case, 3) file a statement explaining why no change in rates is necessary, or 4) file the new FERC form without taking any other action. The FERC will ultimately consider whether to initiate a section 5 investigation of any pipeline that has not submitted a limited section 4 rate reduction filing or committed to file a general section 4 rate case.

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 March 31, 2018, under-collections in Arizona, northern Nevada, and southern Nevada resulted in an asset of approximately $18.7 million and over-collections in California resulted in a liability of $371,000 on the Company’s and Southwest’s Condensed Consolidated Balance Sheets. Filings to change rates in accordance with PGA clauses are subject to audit by state regulatory commission staffs. PGA changes impact cash flows but have no direct impact on profit margin. However, gas cost deferrals and recoveries can impact comparisons between periods of individual consolidated income statement components. These include Gas operating revenues, Net cost of gas sold, Net interest deductions, and Other income (deductions).

The following table presents Southwest’s outstanding PGA balances receivable/(payable) (thousands of dollars):