Southwest Gas (SWX) - 2021 Q3 - Quarterly Report

Part I Item 1. Financial Statements This section presents Southwest Gas Holdings, Inc.'s unaudited condensed consolidated financial statements and notes for the period ended September 30, 2021 Condensed Consolidated Financial Statements Southwest Gas Holdings, Inc. reported a Q3 2021 net loss of $11.6 million, with total assets growing to $10.37 billion primarily due to the Riggs Distler acquisition Southwest Gas Holdings, Inc. - Condensed Consolidated Statements of Income (Q3) | Indicator | Q3 2021 (Millions USD) | Q3 2020 (Millions USD) | | :--- | :--- | :--- | | Total operating revenues | $888.7 | $791.2 | | Operating income | $23.3 | $54.3 | | Net income (loss) attributable to SWX | $(11.6) | $18.3 | | Diluted EPS | $(0.19) | $0.32 | Southwest Gas Holdings, Inc. - Condensed Consolidated Balance Sheets | Indicator | Sep 30, 2021 (Billions USD) | Dec 31, 2020 (Billions USD) | | :--- | :--- | :--- | | Total current assets | $1.39 | $0.87 | | Net utility plant | $6.40 | $6.18 | | Goodwill | $0.79 | $0.35 | | Total assets | $10.37 | $8.74 | | Total current liabilities | $1.36 | $0.91 | | Long-term debt | $3.57 | $2.73 | | Total equity | $2.91 | $2.67 | Southwest Gas Holdings, Inc. - Condensed Consolidated Statements of Cash Flows (Nine Months) | Indicator | Nine Months Ended Sep 30, 2021 (Millions USD) | Nine Months Ended Sep 30, 2020 (Millions USD) | | :--- | :--- | :--- | | Net cash provided by operating activities | $51.5 | $487.8 | | Net cash used in investing activities | $(1,314.4) | $(618.5) | | Net cash provided by financing activities | $1,366.1 | $105.3 | Note 1 – Background, Organization, and Summary of Significant Accounting Policies This note details the company's structure, strategic acquisitions of Riggs Distler and Questar Pipelines, and financial impacts from the February 2021 winter storm - In October 2021, the company agreed to acquire Questar Pipelines for $1.545 billion in cash and the assumption of approximately $430 million in debt, to be funded initially by a new 364-day term loan[34] - The utility infrastructure services segment, Centuri, completed the acquisition of Riggs Distler in August 2021, expanding its electric services footprint in the Northeast and Mid-Atlantic regions[36] - Extreme cold weather in February 2021 resulted in approximately $250 million in incremental natural gas supply costs, funded by a $250 million term loan and expected to be recovered from customers[51] - A $5 million liability was recorded related to a natural gas pipe explosion incident in August 2021, representing the company's maximum self-insured retention[60] Note 3 – Revenue This note disaggregates revenue for the Natural Gas Operations segment by customer type and for Utility Infrastructure Services by service and contract type Natural Gas Operations - Revenue from Contracts with Customers (Nine Months Ended Sep 30) | Customer Type | 2021 (Millions USD) | 2020 (Millions USD) | | :--- | :--- | :--- | | Residential | $743.8 | $690.9 | | Small commercial | $185.8 | $159.1 | | Large commercial | $40.0 | $32.6 | | Total | $1,068.2 | $966.9 | Utility Infrastructure Services - Revenues by Service Type (Nine Months Ended Sep 30) | Service Type | 2021 (Millions USD) | 2020 (Millions USD) | | :--- | :--- | :--- | | Gas infrastructure services | $961.8 | $935.4 | | Electric power infrastructure services | $347.1 | $283.0 | | Other | $216.6 | $190.3 | | Total | $1,525.4 | $1,408.7 | Note 4 – Common Stock This note details the company's ongoing at-the-market equity offering program and the adoption of a one-year shareholder rights plan in October 2021 - The company has an active $500 million at-the-market (ATM) Equity Shelf Program, with $341.8 million remaining available for sale as of September 30, 2021[77] - On October 10, 2021, the Board adopted a one-year shareholder rights plan (a 'poison pill') exercisable if a person or group acquires 10% or more of the company's common stock without Board approval[80] Note 5 – Debt This note outlines the company's debt structure, including new long-term notes, Centuri's refinancing for the Riggs Distler acquisition, and financing for the Questar Pipelines acquisition - In August 2021, Southwest Gas Corporation issued $300 million of 3.18% Senior Notes due 2051[87] - In August 2021, Centuri entered into an amended credit agreement for a $1.145 billion secured term loan and a $400 million secured revolving credit facility to fund the Riggs Distler acquisition and refinance previous debt[88] - On November 1, 2021, the company entered into a $1.6 billion delayed-draw term loan credit agreement to fund the acquisition of Questar Pipelines[92] Note 8 - Business Acquisitions This note details Centuri's acquisition of Riggs Distler for $830.4 million in cash, including the preliminary purchase price allocation and related transaction costs - On August 27, 2021, the company, through Centuri, acquired Riggs Distler for $830.4 million in cash consideration[108] Preliminary Purchase Price Allocation | Category | Estimated Fair Value (Millions USD) | | :--- | :--- | | Property and equipment | $118.1 | | Intangible assets | $335.0 | | Goodwill | $446.8 | | Total liabilities assumed | $188.0 | | Net assets acquired | $830.4 | - The company incurred and expensed $14 million in acquisition-related costs for the Riggs Distler transaction during the nine months ended September 30, 2021[113] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, highlighting the impacts of the Riggs Distler acquisition, planned Questar Pipelines acquisition, regulatory activities, and capital resources Executive Summary This summary provides a high-level overview of Q3 2021 results and key strategic developments, including major acquisitions and the adoption of a shareholder rights plan - Key strategic highlights for Q3 2021 include: - Completed the acquisition of Riggs Distler for $830 million - Announced the planned acquisition of Questar Pipelines for $1.545 billion in cash plus assumption of debt - Authorized a preferred stock purchase right (poison pill) for each outstanding common share[132] Contribution to Net Income (Loss) by Segment (Q3) | Segment | Q3 2021 (Millions USD) | Q3 2020 (Millions USD) | | :--- | :--- | :--- | | Natural gas operations | $(27.5) | $(16.0) | | Utility infrastructure services | $18.5 | $34.9 | | Corporate and administrative | $(2.6) | $(0.6) | | Net income (loss) | $(11.6) | $18.3 | Results of Natural Gas Operations The natural gas segment's Q3 2021 contribution to consolidated results declined due to increased operating expenses and depreciation, despite an increase in operating margin - Q3 contribution from natural gas operations decreased by $11.6 million year-over-year, primarily due to an $18.5 million increase in Operations and maintenance expense (including a $5 million legal reserve) and a $5.4 million increase in Depreciation and amortization, which offset an $18 million increase in Operating margin[133][134][135][136] - For the first nine months of 2021, contribution from natural gas operations increased by $23 million year-over-year, driven by a $62.9 million increase in operating margin from customer growth and rate relief[140][141] Results of Utility Infrastructure Services The utility infrastructure segment's Q3 2021 revenues increased due to the Riggs Distler acquisition, but net income contribution fell sharply due to acquisition costs and margin pressures - Q3 revenues increased by $52.5 million, including $49.5 million from the newly acquired Riggs Distler[153] - Q3 contribution to net income decreased to $18.5 million from $34.9 million year-over-year, primarily due to $13 million in acquisition costs and an unfavorable impact on profit margins from reduced work with two large customers[153][154] - For the first nine months of 2021, contribution to net income fell to $32.8 million from $50.9 million year-over-year, impacted by $14 million in acquisition costs and reduced operating efficiencies[159][160] Rates and Regulatory Proceedings This section details extensive regulatory activities, including rate case decisions in Arizona and California, a new filing in Nevada, and a significant shift in the Purchased Gas Adjustment balance - Arizona: A general rate case decision effective January 2021 resulted in an annual revenue increase of $36.8 million[171] - California: A general rate case was approved in March 2021, resulting in a $6.4 million revenue increase, effective April 1, 2021[181] - Nevada: A new general rate case was filed in August 2021 requesting a revenue increase of approximately $30.5 million[188] Purchased Gas Adjustment (PGA) Balances | Jurisdiction | Sep 30, 2021 (Millions USD) (Receivable) | Dec 31, 2020 (Millions USD) (Payable) | | :--- | :--- | :--- | | Arizona | $191.9 | $(3.9) | | Southern Nevada | $39.0 | $(42.1) | | Total | $240.8 | $(52.6) | Capital Resources and Liquidity The company's liquidity was impacted by decreased operating cash flow due to winter storm costs, but strong financing activities supported major acquisitions and capital expenditures - Cash flow from operations decreased by $436 million in the first nine months of 2021 compared to 2020, primarily due to under-collected purchased gas costs following the February 2021 winter storm[209] - Net cash provided by financing activities increased by $1.3 billion, driven by Centuri's new $1.145 billion term loan and revolving credit facility used to fund the Riggs Distler acquisition[211] - Management estimates natural gas segment construction expenditures will be approximately $2.1 billion for the three-year period ending December 31, 2023[218] - The company has secured financing for its major strategic initiatives, including a new term loan for the Riggs Distler acquisition and a committed $1.6 billion term loan for the pending Questar Pipelines acquisition[231][234] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company states that no material changes have occurred related to market risk disclosures since its 2020 Annual Report on Form 10-K - No material changes have occurred related to the disclosures about market risk since the 2020 Annual Report on Form 10-K[240] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2021, excluding the recently acquired Riggs Distler business - Management elected to exclude the newly acquired Riggs Distler business from its evaluation of disclosure controls and procedures for the quarter ended September 30, 2021, as permitted by SEC guidance for new acquisitions[242] - Management believes the company's disclosure controls and procedures are effective at a reasonable assurance level as of September 30, 2021[243] Part II Item 1. Legal Proceedings The company is involved in various legal proceedings but does not expect any to have a material adverse impact on its financial position or results of operations - Management does not expect current litigation, individually or in aggregate, to have a material adverse impact on the company's financial position or results of operations[246] Item 1A. Risk Factors This section introduces new risk factors primarily related to the planned Questar Pipelines acquisition and the actions of activist shareholders - The company identifies risks related to the Questar Pipelines acquisition, including potential delays or failure to complete the transaction, and challenges with successful integration post-closing[248][251] - Failure to complete the Questar acquisition could negatively affect the company's stock price, and its completion could negatively impact credit ratings[249] - The company's business could be negatively affected by the actions of activist shareholders, citing the October 2021 tender offer and threatened proxy contest by funds affiliated with Carl Icahn[250] Item 6. Exhibits This section lists key exhibits filed with the Form 10-Q, including agreements for Questar Pipelines, the Shareholder Rights Agreement, and Centuri's new Credit Agreement - Key exhibits filed include: - Purchase and Sale Agreement for Questar Pipelines - Certificate of Designations for the Series A Junior Participating Preferred Stock (related to the rights plan) - Amended and Restated Bylaws - Rights Agreement (poison pill) - New Credit Agreement for Centuri's financing[254]