10-Q 1 swx930201810q.htm 10-Q Document
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 September 30, 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 each 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that each registrant was required to submit 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, 49,431,933 shares as of October 31, 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).

 
1
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 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 the Condensed 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
  
September 30, 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)
 
 
September 30, 2018
 
December 31, 2017
ASSETS
 
 
 
 
Utility plant:
 
 
 
 
Gas plant
 
$
6,928,471

 
$
6,629,644

Less: accumulated depreciation
 
(2,275,376
)
 
(2,231,242
)
Construction work in progress
 
216,735

 
125,248

Net utility plant
 
4,869,830

 
4,523,650

Other property and investments
 
466,500

 
428,180

Current assets:
 
 
 
 
Cash and cash equivalents
 
69,170

 
43,622

Accounts receivable, net of allowances
 
347,571

 
347,375

Accrued utility revenue
 
34,600

 
78,200

Income taxes receivable
 
49,603

 
7,960

Deferred purchased gas costs
 

 
14,581

Prepaids and other current assets
 
220,249

 
165,294

Total current assets
 
721,193

 
657,032

Noncurrent assets:
 
 
 
 
Goodwill
 
176,059

 
179,314

Deferred income taxes
 
1,185

 
1,480

Deferred charges and other assets
 
419,829

 
447,410

Total noncurrent assets
 
597,073

 
628,204

Total assets
 
$
6,654,596

 
$
6,237,066

CAPITALIZATION AND LIABILITIES
 
 
 
 
Capitalization:
 
 
 
 
Common stock, $1 par (authorized - 60,000,000 shares; issued and outstanding - 49,422,938 and 48,090,470 shares)
 
$
51,053

 
$
49,720

         Additional paid-in capital
 
1,045,840

 
955,332

Accumulated other comprehensive income (loss), net
 
(53,390
)
 
(47,682
)
Retained earnings
 
902,730

 
857,398

Total Southwest Gas Holdings, Inc. equity
 
1,946,233

 
1,814,768

Noncontrolling interest
 
(452
)
 
(2,365
)
Total equity
 
1,945,781

 
1,812,403

Long-term debt, less current maturities
 
2,123,641

 
1,798,576

Total capitalization
 
4,069,422

 
3,610,979

Current liabilities:
 
 
 
 
         Current maturities of long-term debt
 
33,429

 
25,346

Short-term debt
 
31,500

 
214,500

Accounts payable
 
172,237

 
228,315

Customer deposits
 
68,100

 
69,781

Income taxes payable
 
2,572

 
5,946

Accrued general taxes
 
51,734

 
43,879

Accrued interest
 
30,594

 
17,870

Deferred purchased gas costs
 
93,023

 
6,841

Other current liabilities
 
229,521

 
203,403

Total current liabilities
 
712,710

 
815,881

Deferred income taxes and other credits:
 
 
 
 
Deferred income taxes and investment tax credits
 
519,146

 
476,960

Accumulated removal costs
 
322,000

 
315,000

Other deferred credits and other long-term liabilities
 
1,031,318

 
1,018,246

Total deferred income taxes and other credits
 
1,872,464

 
1,810,206

Total capitalization and liabilities
 
$
6,654,596

 
$
6,237,066

The accompanying notes are an integral part of these statements.


 
3
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2018


SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Twelve Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Operating revenues:
 
 
 
 
 
 
 
 
 
 
 
 
Gas operating revenues
 
$
217,523

 
$
213,059

 
$
987,515

 
$
935,823

 
$
1,354,000

 
$
1,276,308

Construction revenues
 
450,623

 
380,094

 
1,105,844

 
872,536

 
1,479,792

 
1,173,576

Total operating revenues
 
668,146

 
593,153

 
2,093,359

 
1,808,359

 
2,833,792

 
2,449,884

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Net cost of gas sold
 
49,903

 
45,539

 
319,101

 
261,839

 
412,307

 
334,888

Operations and maintenance
 
105,508

 
97,422

 
313,294

 
299,920

 
406,137

 
394,725

Depreciation and amortization
 
62,156

 
58,529

 
185,941

 
189,089

 
247,803

 
260,457

Taxes other than income taxes
 
15,036

 
14,046

 
44,959

 
43,325

 
59,580

 
56,221

Construction expenses
 
395,862

 
342,629

 
1,007,485

 
806,586

 
1,349,862

 
1,073,090

Total operating expenses
 
628,465

 
558,165

 
1,870,780

 
1,600,759

 
2,475,689

 
2,119,381

Operating income
 
39,681

 
34,988

 
222,579

 
207,600

 
358,103

 
330,503

Other income and (expenses):
 
 
 
 
 
 
 
 
 
 
 
 
Net interest deductions
 
(24,548
)
 
(19,494
)
 
(70,831
)
 
(56,863
)
 
(92,032
)
 
(76,423
)
Other income (deductions)
 
889

 
(1,980
)
 
(6,151
)
 
(5,780
)
 
(6,401
)
 
(8,007
)
Total other income and (expenses)
 
(23,659
)
 
(21,474
)
 
(76,982
)
 
(62,643
)
 
(98,433
)
 
(84,430
)
Income before income taxes
 
16,022

 
13,514

 
145,597

 
144,957

 
259,670

 
246,073

Income tax expense
 
3,691

 
3,094

 
33,421

 
47,411

 
51,098

 
82,833

Net income
 
12,331

 
10,420

 
112,176

 
97,546

 
208,572

 
163,240

Net income (loss) attributable to noncontrolling interest
 

 
216

 
(797
)
 
170

 
(866
)
 
684

Net income attributable to Southwest Gas Holdings, Inc.
 
$
12,331

 
$
10,204

 
$
112,973

 
$
97,376

 
$
209,438

 
$
162,556

Basic earnings per share
 
$
0.25

 
$
0.21

 
$
2.31

 
$
2.05

 
$
4.30

 
$
3.42

Diluted earnings per share
 
$
0.25

 
$
0.21

 
$
2.31

 
$
2.03

 
$
4.29

 
$
3.39

Dividends declared per share
 
$
0.520

 
$
0.495

 
$
1.560

 
$
1.485

 
$
2.055

 
$
1.935

Average number of common shares
 
49,493

 
47,628

 
48,916

 
47,577

 
48,728

 
47,553

Average shares (assuming dilution)
 
49,553

 
47,986

 
48,968

 
47,912

 
48,781

 
47,896

The accompanying notes are an integral part of these statements.


 
4
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2018


SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Thousands of dollars)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Twelve Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Net income
 
$
12,331

 
$
10,420

 
$
112,176

 
$
97,546

 
$
208,572

 
$
163,240

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

 
762

 
621

 
969

 
828

Amortization of net actuarial loss
 
6,387

 
3,944

 
19,161

 
11,832

 
23,105

 
16,027

Regulatory adjustment
 
(5,746
)
 
(3,555
)
 
(17,236
)
 
(10,667
)
 
6,021

 
(2,741
)
Net defined benefit pension plans
 
895

 
596

 
2,687

 
1,786

 
(2,606
)
 
(4
)
Forward-starting interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
Amounts reclassified into net income
 
636

 
518

 
1,907

 
1,554

 
2,426

 
2,073

Net forward-starting interest rate swaps
 
636

 
518

 
1,907

 
1,554

 
2,426

 
2,073

Foreign currency translation adjustments
 
599

 
1,012

 
(1,002
)
 
1,861

 
(1,092
)
 
1,408

Total other comprehensive income (loss), net of tax
 
2,130

 
2,126

 
3,592

 
5,201

 
(1,272
)
 
3,477

Comprehensive income
 
14,461

 
12,546

 
115,768

 
102,747

 
207,300

 
166,717

Comprehensive income (loss) attributable to noncontrolling interests
 

 
198

 
(797
)
 
181

 
(866
)
 
679

Comprehensive income attributable to Southwest Gas Holdings, Inc.
 
$
14,461

 
$
12,348

 
$
116,565

 
$
102,566

 
$
208,166

 
$
166,038

The accompanying notes are an integral part of these statements.


 
5
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2018


SOUTHWEST GAS HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
 
 
Nine Months Ended
September 30,
 
Twelve Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
CASH FLOW FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
 
Net income
 
$
112,176

 
$
97,546

 
$
208,572

 
$
163,240

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
185,941

 
189,089

 
247,803

 
260,457

Deferred income taxes
 
36,210

 
49,409

 
50,190

 
74,439

Changes in current assets and liabilities:
 
 
 
 
 
 
 
 
Accounts receivable, net of allowances
 
(1,659
)
 
(15,330
)
 
(27,276
)
 
(13,765
)
Accrued utility revenue
 
43,600

 
42,100

 
(500
)
 
(1,100
)
Deferred purchased gas costs
 
100,763

 
(79,127
)
 
84,282

 
(114,658
)
Accounts payable
 
(48,618
)
 
(26,771
)
 
(1,886
)
 
19,866

Accrued taxes
 
(9,840
)
 
4,689

 
(12,417
)
 
38,084

Other current assets and liabilities
 
1,245

 
43,044

 
(50,002
)
 
3,590

Gains on sale
 
(997
)
 
(1,452
)
 
(3,741
)
 
(4,483
)
Changes in undistributed stock compensation
 
4,686

 
9,199

 
6,375

 
10,308

AFUDC
 
(1,034
)
 
(2,077
)
 
(1,253
)
 
(2,473
)
Changes in other assets and deferred charges
 
(10,497
)
 
(14,470
)
 
(18,296
)
 
(1,436
)
Changes in other liabilities and deferred credits
 
(4,583
)
 
3,395

 
(3,747
)
 
(10,239
)
Net cash provided by operating activities
 
407,393

 
299,244

 
478,104

 
421,830

CASH FLOW FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
Construction expenditures and property additions
 
(560,165
)
 
(449,998
)
 
(733,816
)
 
(575,141
)
Acquisition of businesses, net of cash acquired
 
(4,209
)
 

 
(98,413
)
 

Changes in customer advances
 
11,051

 
(1,951
)
 
13,325

 
504

Miscellaneous inflows
 
3,827

 
9,160

 
11,312

 
14,234

Net cash used in investing activities
 
(549,496
)
 
(442,789
)
 
(807,592
)
 
(560,403
)
CASH FLOW FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
Issuance of common stock, net
 
92,234

 
11,563

 
121,826

 
11,505

Dividends paid
 
(74,535
)
 
(68,503
)
 
(98,162
)
 
(89,870
)
Centuri distribution to redeemable noncontrolling interest
 

 
(204
)
 

 
(544
)
Issuance of long-term debt, net
 
480,993

 
104,308

 
783,748

 
119,308

Retirement of long-term debt
 
(143,757
)
 
(100,240
)
 
(382,486
)
 
(159,162
)
Change in credit facility and commercial paper
 

 
145,000

 

 
150,000

Change in short-term debt
 
(183,000
)
 
110,500

 
(79,000
)
 
110,500

Principal payments on capital lease obligations
 
(422
)
 
(796
)
 
(606
)
 
(1,025
)
Redemption of Centuri shares from noncontrolling parties
 

 
(23,000
)
 

 
(23,000
)
Withholding remittance - share-based compensation
 
(2,880
)
 
(3,176
)
 
(2,880
)
 
(3,176
)
Other
 
(1,121
)
 
(1,104
)
 
(3,091
)
 
(2,068
)
Net cash provided by financing activities
 
167,512

 
174,348

 
339,349

 
112,468

Effects of currency translation on cash and cash equivalents
 
139

 
283

 
157

 
103

Change in cash and cash equivalents
 
25,548

 
31,086

 
10,018

 
(26,002
)
Cash and cash equivalents at beginning of period
 
43,622

 
28,066

 
59,152

 
85,154

Cash and cash equivalents at end of period
 
$
69,170

 
$
59,152

 
$
69,170

 
$
59,152

Supplemental information:
 
 
 
 
 
 
 
 
Interest paid, net of amounts capitalized
 
$
49,568

 
$
45,771

 
$
75,740

 
$
66,077

Income taxes paid (received)
 
$
18,261

 
$
3,687

 
$
20,247

 
$
(21,875
)
The accompanying notes are an integral part of these statements.

 
6
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2018


SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
(Unaudited)
 
 
September 30, 2018
 
December 31, 2017
ASSETS
 
 
 
 
Utility plant:
 
 
 
 
Gas plant
 
$
6,928,471

 
$
6,629,644

Less: accumulated depreciation
 
(2,275,376
)
 
(2,231,242
)
Construction work in progress
 
216,735

 
125,248

Net utility plant
 
4,869,830

 
4,523,650

Other property and investments
 
125,204

 
119,114

Current assets:
 
 
 
 
Cash and cash equivalents
 
49,065

 
37,946

Accounts receivable, net of allowances
 
70,094

 
119,748

Accrued utility revenue
 
34,600

 
78,200

Income taxes receivable
 
46,250

 

Deferred purchased gas costs
 

 
14,581

Prepaids and other current assets
 
202,705

 
153,771

Total current assets
 
402,714

 
404,246

Noncurrent assets:
 
 
 
 
Goodwill
 
10,095

 
10,095

Deferred charges and other assets
 
403,505

 
425,564

Total noncurrent assets
 
413,600

 
435,659

Total assets
 
$
5,811,348

 
$
5,482,669

CAPITALIZATION AND LIABILITIES
 
 
 
 
Capitalization:
 
 
 
 
Common stock
 
$
49,112

 
$
49,112

         Additional paid-in capital
 
1,041,310

 
948,767

Accumulated other comprehensive income (loss), net
 
(51,779
)
 
(47,073
)
Retained earnings
 
681,284

 
659,193

Total Southwest Gas Corporation equity
 
1,719,927

 
1,609,999

Long-term debt, less current maturities
 
1,818,621

 
1,521,031

Total capitalization
 
3,538,548

 
3,131,030

Current liabilities:
 
 
 
 
Short-term debt
 
9,000

 
191,000

Accounts payable
 
98,956

 
158,474

Customer deposits
 
68,100

 
69,781

Income taxes payable
 

 
4,971

Accrued general taxes
 
51,734

 
43,879

Accrued interest
 
30,481

 
17,171

Deferred purchased gas costs
 
93,023

 
6,841

Payable to parent
 
380

 
194

Other current liabilities
 
111,658

 
108,785

Total current liabilities
 
463,332

 
601,096

Deferred income taxes and other credits:
 
 
 
 
Deferred income taxes and investment tax credits, net
 
485,072

 
445,243

Accumulated removal costs
 
322,000

 
315,000

Other deferred credits and other long-term liabilities
 
1,002,396

 
990,300

Total deferred income taxes and other credits
 
1,809,468

 
1,750,543

Total capitalization and liabilities
 
$
5,811,348

 
$
5,482,669

The accompanying notes are an integral part of these statements.

 
7
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2018


SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Thousands of dollars)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Twelve Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Continuing operations:
 
 
 
 
 
 
 
 
 
 
 
 
Gas operating revenues
 
$
217,523

 
$
213,059

 
$
987,515

 
$
935,823

 
$
1,354,000

 
$
1,276,308

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
Net cost of gas sold
 
49,903

 
45,539

 
319,101

 
261,839

 
412,307

 
334,888

Operations and maintenance
 
104,657

 
97,359

 
312,055

 
298,827

 
404,549

 
393,632

Depreciation and amortization
 
47,924

 
46,194

 
145,549

 
153,643

 
193,828

 
212,693

Taxes other than income taxes
 
15,036

 
14,046

 
44,959

 
43,325

 
59,580

 
56,221

Total operating expenses
 
217,520

 
203,138

 
821,664

 
757,634

 
1,070,264

 
997,434

Operating income
 
3

 
9,921

 
165,851

 
178,189

 
283,736

 
278,874

Other income and (expenses):
 
 
 
 
 
 
 
 
 
 
 
 
Net interest deductions
 
(20,399
)
 
(17,421
)
 
(59,803
)
 
(51,622
)
 
(77,914
)
 
(69,464
)
Other income (deductions)
 
836

 
(1,775
)
 
(5,861
)
 
(5,824
)
 
(6,425
)
 
(9,200
)
Total other income and (expenses)
 
(19,563
)
 
(19,196
)
 
(65,664
)
 
(57,446
)
 
(84,339
)
 
(78,664
)
Income (loss) from continuing operations before income taxes
 
(19,560
)
 
(9,275
)
 
100,187

 
120,743

 
199,397

 
200,210

Income tax expense (benefit)
 
(5,890
)
 
(5,251
)
 
20,886

 
38,307

 
45,714

 
65,887

Income (loss) from continuing operations
 
(13,670
)
 
(4,024
)
 
79,301

 
82,436

 
153,683

 
134,323

Discontinued operations - construction services:
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 

 

 

 

 

 
21,649

Income tax expense
 

 

 

 

 

 
7,842

Income
 

 

 

 

 

 
13,807

Noncontrolling interests
 

 

 

 

 

 
514

Income - discontinued operations
 

 

 

 

 

 
13,293

Net income (loss)
 
$
(13,670
)
 
$
(4,024
)
 
$
79,301

 
$
82,436

 
$
153,683

 
$
147,616

The accompanying notes are an integral part of these statements.


 
8
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2018


SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Thousands of dollars)
(Unaudited)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
Twelve Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Continuing operations:
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) from continuing operations
 
$
(13,670
)
 
$
(4,024
)
 
$
79,301

 
$
82,436

 
$
153,683

 
$
134,323

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

 
762

 
621

 
969

 
828

Amortization of net actuarial loss
 
6,387

 
3,944

 
19,161

 
11,832

 
23,105

 
16,027

Regulatory adjustment
 
(5,746
)
 
(3,555
)
 
(17,236
)
 
(10,667
)
 
6,021

 
(2,741
)
Net defined benefit pension plans
 
895

 
596

 
2,687

 
1,786

 
(2,606
)
 
(4
)
Forward-starting interest rate swaps:
 
 
 
 
 
 
 
 
 
 
 
 
Amounts reclassified into net income
 
636

 
518

 
1,907

 
1,554

 
2,426

 
2,073

Net forward-starting interest rate swaps
 
636

 
518

 
1,907

 
1,554

 
2,426

 
2,073

Total other comprehensive income (loss), net of tax from continuing operations
 
1,531

 
1,114

 
4,594

 
3,340

 
(180
)
 
2,069

Comprehensive income (loss) from continuing operations
 
(12,139
)
 
(2,910
)
 
83,895

 
85,776

 
153,503

 
136,392

Discontinued operations - construction services:
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 

 

 
13,293

Foreign currency translation adjustments
 

 

 

 

 

 
(453
)
Comprehensive income
 

 

 

 

 

 
12,840

Comprehensive income (loss) attributable to noncontrolling interests
 

 

 

 

 

 
(16
)
Comprehensive income attributable to discontinued operations - construction services
 

 

 

 

 

 
12,856

Comprehensive income (loss)
 
$
(12,139
)
 
$
(2,910
)
 
$
83,895

 
$
85,776

 
$
153,503

 
$
149,248

The accompanying notes are an integral part of these statements.


 
9
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2018


SOUTHWEST GAS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)
 
 
Nine Months Ended
September 30,
 
Twelve Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
CASH FLOW FROM OPERATING ACTIVITIES:
 
 
 
 
 
 
 
 
Net Income
 
$
79,301

 
$
82,436

 
$
153,683

 
$
148,130

Income from discontinued operations
 

 

 

 
13,807

Income from continuing operations
 
79,301

 
82,436

 
153,683

 
134,323

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
145,549

 
153,643

 
193,828

 
212,693

Deferred income taxes
 
33,239

 
44,621

 
55,787

 
72,627

Changes in current assets and liabilities:
 
 
 
 
 
 
 
 
Accounts receivable, net of allowances
 
49,654

 
43,818

 
(2,066
)
 
(7,131
)
Accrued utility revenue
 
43,600

 
42,100

 
(500
)
 
(1,100
)
Deferred purchased gas costs
 
100,763

 
(79,127
)
 
84,282

 
(114,658
)
Accounts payable
 
(53,217
)
 
(45,972
)
 
(2,700
)
 
17,271

Accrued taxes
 
(16,026
)
 
4,092

 
(9,735
)
 
29,143

Other current assets and liabilities
 
(35,154
)
 
32,453

 
(81,333
)
 
(224
)
Changes in undistributed stock compensation
 
4,269

 
7,999

 
5,558

 
9,108

AFUDC
 
(1,034
)
 
(2,077
)
 
(1,253
)
 
(2,473
)
Changes in other assets and deferred charges
 
(11,025
)
 
(14,861
)
 
(19,082
)
 
(1,914
)
Changes in other liabilities and deferred credits
 
7,550

 
2,883

 
8,208

 
(10,751
)
Net cash provided by operating activities
 
347,469

 
272,008

 
384,677

 
336,914

CASH FLOW FROM INVESTING ACTIVITIES:
 
 
 
 
 
 
 
 
Construction expenditures and property additions
 
(486,037
)
 
(395,463
)
 
(651,022
)
 
(514,661
)
Changes in customer advances
 
11,051

 
(1,951
)
 
13,325

 
504

Miscellaneous inflows
 
1,316

 
2,407

 
1,650

 
2,925

Dividends received
 

 

 

 
9,660

Net cash used in investing activities
 
(473,670
)
 
(395,007
)
 
(636,047
)
 
(501,572
)
CASH FLOW FROM FINANCING ACTIVITIES:
 
 
 
 
 
 
 
 
Issuance of common stock, net
 

 

 

 
(58
)
Contributions from parent
 
90,644

 
11,659

 
120,344

 
11,659

Dividends paid
 
(65,000
)
 
(60,497
)
 
(86,000
)
 
(81,864
)
Issuance of long-term debt, net
 
297,495

 

 
297,495

 

Retirement of long-term debt
 

 
(25,000
)
 

 
(25,000
)
Change in credit facility and commercial paper
 

 
145,000

 

 
150,000

Change in short-term debt
 
(182,000
)
 
83,000

 
(74,000
)
 
83,000

Withholding remittance - share-based compensation
 
(2,880
)
 
(3,176
)
 
(2,880
)
 
(3,176
)
Other
 
(939
)
 
(544
)
 
(991
)
 
(1,508
)
Net cash provided by financing activities
 
137,320

 
150,442

 
253,968

 
133,053

Net cash provided by discontinued operating activities
 

 

 

 
57,680

Net cash used in discontinued investing activities
 

 

 

 
(11,049
)
Net cash used in discontinued financing activities
 

 

 

 
(44,491
)
Effects of currency translation on cash and cash equivalents
 

 

 

 
(180
)
Change in cash and cash equivalents
 
11,119

 
27,443

 
2,598

 
(29,645
)
Change in cash and cash equivalents of discontinued operations included in discontinued operations construction services assets
 

 

 

 
(1,960
)
Change in cash and cash equivalents of continuing operations
 
11,119

 
27,443

 
2,598

 
(31,605
)
Cash and cash equivalents at beginning of period
 
37,946

 
19,024

 
46,467

 
78,072

Cash and cash equivalents at end of period
 
$
49,065

 
$
46,467

 
$
49,065

 
$
46,467

Supplemental information:
 
 
 
 
 
 
 
 
Interest paid, net of amounts capitalized
 
$
42,986

 
$
40,751

 
$
67,025

 
$
59,448

Income taxes paid (received)
 
$
11,286

 
$
4

 
$
3,428

 
$
(27,952
)
The accompanying notes are an integral part of these statements.


 
10
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 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 (“Southwest” or the “natural gas operations segment”) and all of the shares of common stock of Centuri Construction Group, Inc. (“Centuri,” the “construction services” or “infrastructure services” segment). Prior to August 2017, only 96.6% of Centuri shares were owned by Southwest Gas Holdings, Inc. 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 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 infrastructure 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 infrastructure 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. In November 2017, Centuri acquired New England Utility Constructors, Inc. (“Neuco”) for $99 million, less assumed debt, thereby expanding its core services in the Northeast region of the United States. See the Southwest Gas Holdings, Inc. March 31, 2018 Form 10-Q for additional information about this acquisition, including final purchase accounting.
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 the Company.
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.

 
11
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2018


Early Adoption of Accounting Standards Update (“ASU”) No. 2018-02. In January 2018, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2018-02 “Income Statement—Reporting Comprehensive Income—Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” Early adoption of the amendments in this update was 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 addressed issues resulting from the December 22, 2017 enactment of the Tax Cuts and Jobs Act (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 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 allowed 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 effective with the early adoption date. Also in association with the adoption, the Company and Southwest elected an accounting policy for releasing income tax effects from AOCI, such that the release of any income tax effects from AOCI will occur as individual items in AOCI 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 $53 million at September 30, 2018 and $33 million at December 31, 2017 (carried at weighted average cost), as well as $73 million at September 30, 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, as indicated above, the TCJA legislation 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. A significant change that impacts the Company and Southwest includes 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 fourth quarter of 2017, reduced income tax expense. The regulated operations of Southwest experienced other impacts due to the applicable 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 the 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 nine months ended September 30, 2018, tax expense for the Company and Southwest reflects the lower U.S. federal income tax rate now in effect (as applicable to earnings in 2018). Amounts recorded by the Company and Southwest associated with the measurement and accounting for the effects of the TCJA are provisional reasonable estimates. Management is continuing to evaluate and finalize all provisional items during the measurement period permitted by the SEC and the FASB, and will complete its assessment in the fourth quarter of 2018.
In July 2018, the Arizona Corporation Commission (the “ACC”) staff issued a recommended opinion and order, and the ACC issued a decision (the “Decision”) based on the staff recommendation, requiring Southwest to return the difference in excess cost-of-service rates due to tax reform. The Decision required Southwest to provide a bill credit in August 2018 for excess taxes collected from January through July 2018. Also as required by the Decision, Southwest began tracking, in a regulatory account, the difference between amounts expected to be returned and the actual amounts returned by these means. As of September 30, 2018, this difference of $2.4 million is reflected in Other current liabilities on the balance sheets of both Southwest and the Company.
Other current liabilities. Other current liabilities for Southwest include $22 million of dividends declared by Southwest Gas Corporation, but not yet paid to Southwest Gas Holdings, Inc. at September 30, 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 include money market fund investments totaling approximately $38.8 million and $39.6 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.

 
12
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2018


Goodwill. Goodwill is assessed as of October 1st each year for impairment, or more frequently, if circumstances indicate an 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 nine months of 2018.

(Thousands of dollars)
Natural Gas
Operations
 
Infrastructure
Services
 
Consolidated
December 31, 2017
$
10,095

 
$
169,219

 
$
179,314

Additional goodwill from Neuco acquisition

 
182

 
182

Foreign currency translation adjustment

 
(3,437
)
 
(3,437
)
September 30, 2018
$
10,095

 
$
165,964

 
$
176,059

Intercompany Transactions. Centuri recognizes revenues generated from contracts with Southwest (see Note 4 – Segment Information). Centuri’s accounts receivable for these services are presented in the table below (thousands of dollars):

 
September 30, 2018
 
December 31, 2017
Centuri accounts receivable for services provided to Southwest
$
13,566

 
$
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.

 
13
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2018


Other Property and Investments. Other property and investments on the Condensed Consolidated Balance Sheets includes (thousands of dollars):
 
September 30, 2018
 
December 31, 2017
Southwest Gas Corporation:
 
 
 
Net cash surrender value of COLI policies
$
123,476

 
$
117,341

Other property
1,728

 
1,773

Total Southwest Gas Corporation
125,204

 
119,114

Centuri property, equipment, and intangibles
613,365

 
554,730

Centuri accumulated depreciation/amortization
(287,396
)
 
(258,906
)
Other property
15,327

 
13,242

Total Southwest Gas Holdings, Inc.
$
466,500

 
$
428,180

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
 
Nine Months Ended
 
Twelve Months Ended
 
September 30,
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Southwest Gas Corporation - natural gas operations segment:
 
 
 
 
 
 
 
 
 
 
 
Change in COLI policies
$
4,700

 
$
2,100

 
$
6,000

 
$
6,800

 
$
9,500

 
$
8,800

Interest income
1,506

 
670

 
4,301

 
1,848

 
5,237

 
2,417

Equity AFUDC
448

 
968

 
1,034

 
2,077

 
1,253

 
2,473

Other components of net periodic benefit cost
(5,265
)
 
(4,856
)
 
(15,794
)
 
(14,568
)
 
(20,650
)
 
(19,508
)
Miscellaneous income and (expense)
(553
)
 
(657
)
 
(1,402
)
 
(1,981
)
 
(1,765
)
 
(3,382
)
Southwest Gas Corporation - total other income (deductions)
836

 
(1,775
)
 
(5,861
)
 
(5,824
)
 
(6,425
)
 
(9,200
)
Infrastructure services segment:
 
 
 
 
 
 
 
 
 
 
 
Interest income
4

 
1

 
6

 
2

 
7

 
2

Foreign transaction gain (loss)
(91
)
 
(442
)
 
258

 
(640
)
 
144

 
(640
)
Miscellaneous income and (expense)
125

 
231

 
(595
)
 
676

 
(175
)
 
1,825

Centuri - total other income (deductions)
38

 
(210
)
 
(331
)
 
38

 
(24
)
 
1,187

Corporate and administrative
15

 
5

 
41

 
6

 
48

 
6

Consolidated Southwest Gas Holdings, Inc. - total other income (deductions)
$
889

 
$
(1,980
)
 
$
(6,151
)
 
$
(5,780
)
 
$
(6,401
)
 
$
(8,007
)
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. Refer also to Note 2 – Components of Net Periodic Benefit Cost.
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 for the obligation to make lease payments, measured on a discounted basis; and
A right-of-use asset for the 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 associated contractual obligations, leases with terms longer than a year will no longer exist off-balance sheet. Early application of the update is permitted. Management will adopt the update for interim and annual reporting periods commencing January 1, 2019 (the required adoption date). In July 2018,

 
14
 

SOUTHWEST GAS HOLDINGS, INC.
  
Form 10-Q
SOUTHWEST GAS CORPORATION
  
September 30, 2018


the FASB issued narrow-scope improvements to the standard, which include, among other things, guidance on lease classification reassessment and certain circumstances surrounding remeasurement. Also included was clarification that lessor-controlled options to terminate a lease are considered in the lease term.

Management expects to elect various practical expedients and accounting policies regarding the transition method used to implement Topic 842. The Company and Southwest plan to elect the new optional transition method included within the recent FASB update “Leases—Targeted Improvements”, also issued in July 2018, which allows for comparative periods not to be restated. In conjunction with this decision, management currently expects that no retained earnings adjustment will be necessary due to the adoption of Topic 842. At a minimum, management expects the following regarding Topic 842 practical expedients and accounting policy elections:

To elect to use the “package”, which is a set of three practical expedients that must be elected as a package and applied consistently to all of the Company’s and Southwest’s leases. These include: not reassessing whether any expired or existing contracts are or contain leases; not reassessing the lease classification for expired or existing leases (that is, existing operating and capital leases in accordance with current lease guidance will in each case be classified as operating and finance leases, respectively, under the updated guidance); and not reassessing initial direct costs for any existing leases.
To elect to adopt the practical expedient to exclude all easements in place prior to January 1, 2019 from treatment under Topic 842. However, the Company and Southwest will evaluate any new easements entered into after the effective date of the standard to determine if the arrangements should be accounted for as leases.
To make an accounting policy election by asset class to include both the lease and non-lease components (as defined in the guidance) as a single component.
To make an accounting policy election to not apply Topic 842 to short-term leases, as permitted.
Management is continuing to implement new software systems (one for Southwest and one for Centuri) to facilitate compliance with Topic 842. Management continues to evaluate the guidance in light of its customary leasing arrangements (and other arrangements in association with the new guidance) to determine the effect the new standard, and amendments, will have on its financial position, results of operations, cash flows, and business processes.
In June 2016, the FASB issued the update “Financial Instruments—Credit Losses: 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. Early adoption of the amendments in this update is permitted for interim and related annual fiscal periods after December 15, 2018. Ma