SOUTHWEST GAS HOLDINGS, INC. Southwest Gas Holdings, Inc. is a holding company that owns all of the shares of common stock ofSouthwest Gas Corporation ("Southwest" or the "natural gas distribution" segment), all of the shares of common stock ofCenturi Group, Inc. ("Centuri," or the "utility infrastructure services" segment), as well as all of the membership interests in the newly formedMountainWest Pipelines Holding Company ("MountainWest," or the "pipeline and storage" segment).Southwest Gas Holdings, Inc. and its subsidiaries are collectively referred to as the "Company." The Company completed the acquisition ofDominion Energy Questar Pipeline, LLC ("Questar Pipelines") and related entities inDecember 2021 . Following the acquisition, the Company formed MountainWest which owns all of the membership interests of Questar Pipelines. InApril 2022 , the Company completed a general rebranding of the Questar Pipelines entities under the MountainWest name. The acquired operations further diversify the Company's business including an essentialRocky Mountain energy hub with over 2,000 miles of highly contracted,FERC -regulated interstate natural gas pipelines providing transportation and underground storage services inUtah ,Wyoming , andColorado . InOctober 2021 , our Board of Directors (the "Board") authorized and declared a dividend of one preferred stock purchase right for each share of common stock outstanding to stockholders of record at the close of business onOctober 21, 2021 . InMarch 2022 , the Company announced that the Board had determined to separate Centuri from the Company and authorized management to complete the separation within nine to twelve months from the date of such announcement. Management evaluated various alternatives to determine the optimal structure to maximize stockholder value and subsequently announced the separation structure is expected to be a tax-free spin-off in which stockholders of the Company would receive a prorated dividend of Centuri shares in association with the completion. Then, inApril 2022 , as a result of interest in the Company well in excess of a tender offer by an activist stockholder (Carl Icahn ) to other stockholders, the Board authorized the review of a full range of strategic alternatives intended to maximize stockholder value. As part of this process, a strategic review committee of the Board, consisting entirely of independent directors, will evaluate a sale of the Company, as well as a range of alternatives, including, but not limited to, a separate sale of its business units and/or pursuing the spin-off of Centuri. There can be no assurances that the Company will be able to successfully separate Centuri on the anticipated timeline or at all, nor assurances that other strategic alternatives considered will be executed or maximize value as intended. See "Item 1A - Risk Factors" included elsewhere in this Quarterly Report on Form 10-Q. As described in Note 9 - Subsequent Events, onMay 6, 2022 , the Company entered into a Cooperation Agreement withCarl C. Icahn and the persons and entities named therein (the "Icahn Group "). In accordance with the Cooperation Agreement, among other things, (i)Karen S. Haller has replacedJohn C. Hester as the Company's President and Chief Executive Officer, (ii) theIcahn Group has certain board designation rights, (iii) theIcahn Group has agreed to terminate its previously announced tender offer, and (iv) theIcahn Group caused its affiliates to file a stipulation of dismissal with prejudice dismissing the action filed by them onNovember 29, 2021 , which was entered by theDelaware Court of Chancery onMay 9, 2022 . See Note 9 - Subsequent Events for more information. Southwest is engaged in the business of purchasing, distributing, and transporting natural gas for customers in portions ofArizona ,Nevada , andCalifornia . Southwest is the largest distributor of natural gas inArizona , selling and transporting natural gas in most of central and southernArizona , including thePhoenix andTucson metropolitan areas. InJanuary 2022 , Southwest completed the purchase of theGraham County Utilities, Inc. ("GCU") gas distribution system, located inGraham County, Arizona . Southwest is also the largest distributor of natural gas inNevada , serving the majority of southernNevada , including theLas Vegas metropolitan area, and portions of northernNevada . In addition, Southwest distributes and transports natural gas for customers in portions ofCalifornia , including theLake Tahoe area and the high desert and mountain areas inSan Bernardino County . Through its subsidiaries, Southwest operates two federally regulated interstate pipelines serving portions of the foregoing northern territories ofNevada andCalifornia . As ofMarch 31, 2022 , Southwest had 2,171,000 residential, commercial, industrial, and other natural gas customers, of which 1,161,000 customers were located inArizona , 806,000 inNevada , and 204,000 inCalifornia . InJanuary 2022 , approximately 5,300 customers became part of Southwest's gas distribution operations that were formerly served by GCU. Over the past twelve months, first-time meter sets were approximately 38,000, compared to 37,000 for the twelve months endedMarch 2021 . Residential and small commercial customers represented over 99% of the total customer base. During the twelve months endedMarch 31, 2022 , 54% of operating margin (Regulated operations revenues less the net cost of gas sold) was earned inArizona , 34% inNevada , and 12% inCalifornia . During this same period, Southwest earned 85% of its operating margin from residential and small commercial customers, 4% from other sales customers, and 11% from transportation customers. These patterns are expected to remain materially consistent for the foreseeable future. 33 --------------------------------------------------------------------------------
SOUTHWEST GAS HOLDINGS, INC. Form 10-QSOUTHWEST GAS CORPORATION March 31, 2022 Southwest recognizes operating revenues from the distribution and transportation of natural gas (and related services) to customers. Operating margin is a financial measure defined by management as Regulated operations revenues less the net cost of gas sold. However, operating margin is not specifically defined in accounting principles generally accepted inthe United States ("U.S. GAAP"). Thus, operating margin is considered a non-GAAP measure. Management uses this financial measure because Regulated operations revenues include the net cost of gas sold, which is a tracked cost that is passed through to customers without markup under purchased gas adjustment ("PGA") mechanisms. Fluctuations in the net cost of gas sold impact revenues on a dollar-for-dollar basis, but do not impact operating margin or operating income. Therefore, management believes operating margin provides investors and other interested parties with useful and relevant information to analyze Southwest's financial performance in a rate-regulated environment. The principal factors affecting changes in operating margin are general rate relief (including impacts of infrastructure trackers) and customer growth. Commission decisions on the amount and timing of such relief may impact our earnings. Refer to the Summary Operating Results table below for a reconciliation of gross margin to operating margin, and refer to Rates and Regulatory Proceedings in this Management's Discussion and Analysis, for details of various rate proceedings. 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 unusual weather variability and conservation on operating margin, allowing Southwest to pursue energy efficiency initiatives. Centuri is a strategic infrastructure services company that partners with regulated utilities to build and maintain the energy network that powers millions of homes and businesses acrossthe United States ("U.S.") andCanada . With an unwavering commitment to serve as long-term partners to customers and communities, Centuri's employees enable regulated utilities to safely and reliably deliver natural gas and electricity, as well as achieve their goals for environmental sustainability. Centuri operates in 70 primary locations across 44 states and provinces in theU.S. andCanada . Centuri operates in theU.S. , primarily as NPL, Neuco,Linetec , andRiggs Distler , and inCanada , primarily asNPL Canada . Utility infrastructure services activity can be impacted by changes in infrastructure replacement programs of utilities, weather, and local and federal regulation (including tax rates and incentives). Utilities continue to implement or modify system integrity management programs to enhance safety pursuant to federal and state mandates. These programs have resulted in multi-year utility system replacement projects throughout theU.S. Generally, Centuri revenues are lowest during the first quarter of the year due to less favorable winter weather conditions. Revenues typically improve as more favorable weather conditions occur during the summer and fall months. In cases of severe weather, such as following a regional storm, Centuri may be engaged to perform restoration activities related to above-ground utility infrastructure, and related results impacts are not solely within the control of management. In addition, 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. MountainWest is an interstate natural gas transmission pipeline company that provides transportation and underground storage services to customers inUtah ,Wyoming , andColorado . A substantial portion of its revenue results from reservation charges, but variable rates are also included as part of its primarily rate-regulated rate structures. While the novel coronavirus ("COVID-19") pandemic has been ongoing since the first quarter of 2020, the Company continues to facilitate administration, communication, and all critical functions. To date, there has not been a significant disruption in the Company's supply chains, transportation network, or ability to serve customers. The extent to which COVID-19 may adversely impact the Company's business depends on future developments; however, management does not currently expect impacts to be material to the Company's liquidity or financial position overall. This Management's Discussion and Analysis ("MD&A") of Financial Condition and Results of Operations should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto, as well as MD&A, included in the 2021 Annual Report to Stockholders, which is incorporated by reference into the 2021 Form 10-K. 34 --------------------------------------------------------------------------------
SOUTHWEST GAS HOLDINGS, INC. Form 10-QSOUTHWEST GAS CORPORATION March 31, 2022 Executive Summary
The items discussed in this Executive Summary are intended to provide an overview of the results of the Company's and Southwest's operations and are covered in greater detail in later sections of MD&A.
Summary Operating Results
Period Ended March 31,
Three Months Twelve Months
(In thousands, except per share amounts) 2022 2021 2022 2021
Contribution to net income
Natural gas distribution $ 111,795 $ 118,715 $ 180,215 $ 194,234
Utility infrastructure services (23,486) (859) 17,793 84,207
Pipeline and storage 16,930 - 16,930 -
Corporate and administrative (9,061) (563) (35,274) (1,366)
Net income $ 96,178 $ 117,293 $ 179,664 $ 277,075
Weighted average common shares 60,737 57,600 59,919 56,564
Basic earnings per share
Consolidated $ 1.58 $ 2.04 $ 3.00 $ 4.90
Natural Gas Distribution
Reconciliation of Gross Margin to Operating Margin
(Non-GAAP measure)
Utility Gross Margin $ 233,882 $ 233,156 $ 571,051 $ 546,171 Plus:
Operations and maintenance (excluding Admin. & General) expense 73,422 64,057 276,525 246,214 Depreciation and amortization expense 72,114 68,698 256,814 239,268 Operating margin$ 379,418 $ 365,911 $ 1,104,390 $ 1,031,653 1st Quarter 2022 OverviewSouthwest Gas Holdings highlights include the following: •Announced the Board's evaluation of strategic alternatives, including a potential sale of the Company, sale of business segments, and/or spin-off of Centuri •Issued 6,325,000 shares of common stock, raising$452 million in net proceeds •Corporate and administrative expenses include impact of interest on$1.6 billion term loan and activism costs Natural gas distribution highlights include the following: •38,000 first-time meters sets occurred over the past 12 months •Operating margin increased$14 million •Issued$600 million in 4.05% 10-year Notes •Nevada general rate case finalized with rate relief effectiveApril 2022
Utility infrastructure services highlights include the following:
•Record revenues of
Pipeline and storage highlights include the following:
•Recognized revenue of
35
--------------------------------------------------------------------------------SOUTHWEST GAS HOLDINGS, INC. Form 10-QSOUTHWEST GAS CORPORATION March 31, 2022
Results of Natural Gas Distribution
Quarterly Analysis
Three Months Ended
March 31,
(Thousands of dollars) 2022 2021
Regulated operations revenues $ 676,539 $ 521,932
Net cost of gas sold 297,121 156,021
Operating margin 379,418 365,911
Operations and maintenance expense 119,636 106,135
Depreciation and amortization 72,114 68,698
Taxes other than income taxes 21,652 20,687
Operating income 166,016 170,391
Other income (deductions) 1,315 550
Net interest deductions 26,610 22,166
Income before income taxes 140,721 148,775
Income tax expense 28,926 30,060
Contribution to consolidated net income
Contribution from natural gas distribution operations decreased
Operating margin increased$14 million quarter over quarter. Approximately$7 million of incremental margin was attributable to customer growth including 38,000 first-time meter sets during the last twelve months. Rate relief inCalifornia added$1 million of margin. Also contributing to the increase were customer late fees that were$2.8 million greater in the current quarter due to the lifting of the moratorium in 2021 on such fees inArizona ,Nevada , andCalifornia . The moratorium was previously in place beginning inMarch 2020 to provide temporary relief to customers during the COVID-19 pandemic. Amounts collected from and returned to customers associated with regulatory account balances and programs, including$6.2 million in incremental (previously unrecovered) revenue associated with Vintage Steel Pipe ("VSP") and Customer-Owned Yard Line ("COYL") programs inArizona , also contributed to the improvement. Refer to Rates and Regulatory Proceedings below. Other differences in miscellaneous revenue and margin from customers outside the decoupling mechanisms contributed to the remaining net variance between quarters. Operations and maintenance expense increased$13.5 million between quarters. In addition to general inflationary impacts, other increases occurred in the service-related component of employee pension costs (see$775,000 increase reflected in service cost for the three plans in Note 2 - Components of Net Periodic Benefit Cost) and$3.5 million specifically related to customer service, system support, and billing. Other increases included employee and benefit-related costs ($1.2 million ) and increased general business insurance ($800,000 ). The prior year period expense levels included more modest expense levels overall due to COVID-environment reduced training, travel and related amounts. Depreciation and amortization expense increased$3.4 million , or 5%, between quarters, primarily due to a$564 million , or 7%, increase in average gas plant in service compared to the corresponding quarter a year ago. Offsetting the increase, amortization related to regulatory account recoveries decreased approximately$700,000 between quarters, which is also reflected in Operating margin above. The increase in plant was attributable to pipeline capacity reinforcement work, franchise requirements, scheduled pipe replacement activities, and new infrastructure. Other income increased$765,000 . The current quarter reflects a$2 million decline in COLI policy cash surrender values, while the prior-year quarter reflected a$2.7 million increase. These fluctuations primarily result from changes in the portion of the cash surrender values that are associated with equity securities, and are directionally consistent with the broader securities markets. This decrease was offset by non-service-related components of employee pension and other postretirement benefit costs, which decreased$3.3 million between quarters. Interest income increased$2.1 million between quarters due to the increased receivable position of the Purchased Gas Adjustment. A gain of$1.5 million was recognized on the sale of non-regulated property in the first quarter of 2022. Net interest deductions increased$4.4 million in the first quarter of 2022, as compared to the prior-year quarter, primarily related to lower interest in the prior-year quarter, as a carrying amount related to an annual excess accumulated deferred tax 36
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SOUTHWEST GAS HOLDINGS, INC. Form 10-QSOUTHWEST GAS CORPORATION March 31, 2022 ("EADIT") balance inArizona was required to be returned to customers, thereby reducing interest when the carrying charge regulatory liability balance was amortized for the return ($1.5 million ), and due to higher interest in the current period due to$300 million of Senior Notes issued inAugust 2021 , and to a lesser extent,$600 million of Senior Notes issued inMarch 2022 .
Results of Natural Gas Distribution
Twelve-Month Analysis
Twelve Months Ended March 31,
(Thousands of dollars) 2022 2021
Regulated operations revenues $ 1,676,397 $ 1,369,690
Net cost of gas sold 572,007 338,037
Operating margin 1,104,390 1,031,653
Operations and maintenance expense 452,051 409,429
Depreciation and amortization 256,814 239,268
Taxes other than income taxes 81,308 67,769
Operating income 314,217 315,187
Other income (deductions) (3,794) 14,496
Net interest deductions 102,004 98,256
Income before income taxes 208,419 231,427
Income tax expense 28,204 37,193
Contribution to consolidated net income $ 180,215 Contribution to consolidated net income from natural gas distribution operations decreased$14 million between the twelve-month periods endedMarch 2022 and 2021. The decline was due primarily to increases in Operations and maintenance expense, Depreciation and amortization, and Taxes other than income taxes, and a decrease in Other income (deductions), offset by an increase in Operating margin. Operating margin increased$73 million between periods. Customer growth provided$14 million , and combined rate relief provided$44 million of incremental operating margin. Also contributing to the increase were customer late fees that were$8 million greater in the current period due to lifting the moratorium on such fees in all jurisdictions, which was initially instituted inMarch 2020 to provide temporary relief to customers during the pandemic. Additionally, regulatory account balance returns and recoveries increased approximately$2.1 million between periods. Incremental (previously unrecovered) VSP and COYL revenue inArizona ($5.2 million combined, between twelve-month periods) also contributed to the variance between periods. Operations and maintenance expense increased$43 million , or 10%, between periods. In addition to general inflationary impacts, Southwest also experienced$7 million of higher legal-claim related costs (including a$5 million legal reserve as described in Note 1 - Background, Organization, and Summary of Significant Accounting Policies), higher levels of service-related pension costs ($6.1 million ), customer service, system support, and billing costs ($7.9 million ), increased expenditures for pipeline damage prevention programs ($4 million ) and general business insurance ($2.7 million ), as well as increased medical and other employee benefit costs. Prior year expense levels were uncharacteristically low due to COVID-period reduced training/travel and other cost savings. Depreciation and amortization expense increased$17.5 million , or 7%, between periods primarily due to a$562 million , or 7%, increase in average gas plant in service since the corresponding period in the prior year. The increase in gas plant was attributable to pipeline capacity reinforcement work, franchise requirements, scheduled pipe replacement activities, and new infrastructure, as well as the implementation of a new customer information system placed into production in the second quarter of 2021. Amortization of regulatory account balances impacted expense in both periods, which is offset in Operating margin above.
Taxes other than income taxes increased
Other income decreased$18.3 million between the twelve-month periods of 2022 and 2021, primarily due to current-period income of$4.1 million related to COLI policy cash surrender values and net death benefits recognized, compared to the twelve months endedMarch 31, 2021 which reflected an exceptionally large increase in values of$27.4 million (including$3.7 million of net death benefits). Additionally, equity AFUDC was lower by$5.6 million , due to the impact short-term borrowings have 37 --------------------------------------------------------------------------------
SOUTHWEST GAS HOLDINGS, INC. Form 10-QSOUTHWEST GAS CORPORATION March 31, 2022 on AFUDC rates. Offsetting these impacts were non-service cost components of employee pension and other postretirement benefit costs which were$7.8 million lower between periods, and interest income which increased$3.9 million between periods. A gain on sale of non-regulated property in the most recent twelve-month period also impacted the variance between periods. Net interest deductions increased$3.7 million between periods primarily due to increased interest associated with$300 million of Senior Notes issued inAugust 2021 , and to a lesser extent,$600 million of Senior Notes issued inMarch 2022 . Income tax expense decreased$9 million between the twelve-month period endedMarch 31, 2022 and 2021, primarily due to a reduction in pre-tax book income, additional amortization of EADIT ($5 million ), and to a lesser extent, changes inArizona andCalifornia state apportionment percentages of$2.8 million . Income tax expense in both periods reflects that COLI results are recognized without tax consequences.
Results of Utility Infrastructure Services
Quarterly Analysis
Three Months Ended
March 31,
(Thousands of dollars) 2022 2021
Utility infrastructure services revenues $ 523,877 $ 363,975
Operating expenses:
Utility infrastructure services expenses 503,232 335,614
Depreciation and amortization 37,612 24,744
Operating income (loss) (16,967) 3,617
Other income (deductions) (486) (102)
Net interest deductions 11,131 1,622
Income (loss) before income taxes (28,584) 1,893
Income tax expense (benefit) (6,170) 1,200
Net income (loss) (22,414) 693
Net income attributable to noncontrolling interests 1,072 1,552
Contribution to consolidated results attributable to Centuri
Utility infrastructure services revenues increased$159.9 million , or 44%, in the first quarter of 2022 when compared to the prior-year quarter, including$113.8 million fromRiggs Distler . Revenues from electric infrastructure services increased$88 million in the first quarter of 2022 when compared to the prior-year quarter, of which$67.5 million was recorded byRiggs Distler . Included in electric infrastructure services revenues overall was$14 million from emergency restoration services performed byLinetec andRiggs Distler following tornado and other storm damage to customers' above-ground utility infrastructure in and around theGulf Coast and eastern regions of theU.S. , compared to$9 million in the prior-year quarter. Centuri's revenues derived from storm-related services vary from period to period due to the unpredictable nature of weather-related events, and when this type of work is performed, it typically generates a higher profit margin than core infrastructure services, due to improved operating efficiencies related to equipment utilization and absorption of fixed costs. The current quarter increase also included approximately$38.8 million in gas infrastructure services revenues, including$13.6 million recorded byRiggs Distler , primarily from increased volumes under master service agreements. Utility infrastructure services expenses increased$167.6 million in the first quarter of 2022 when compared to the prior-year quarter. The overall increase includes$104.1 million incurred byRiggs Distler , and incremental costs related to the higher volume of infrastructure services provided. Changes in mix of work and inflationary pressures led to higher input costs including fuel and subcontractor expenses, while higher rental and tooling costs were incurred in support of growth in our electric infrastructure business. The incremental impact of fuel costs in the current environment is estimated at$5 million . These impacts are in contrast to the first quarter of 2021, when favorable weather and mix of work provided improved efficiencies and relative favorable results were uncustomary compared to first quarters that typically bring higher losses, given the seasonal nature of the business and winter-weather hampering effects on construction efforts. Also included in total Utility infrastructure services expenses were general and administrative costs, which increased approximately$7.1 million between quarters, including$4 million of general and administrative costs incurred byRiggs Distler . Other administrative costs increased due to the continued growth in the business. Gains on sale of equipment in the first quarter of 2022 and 2021 (reflected as an offset to Utility infrastructure services expenses) were approximately$413,000 and$1.5 million , respectively. 38 --------------------------------------------------------------------------------
SOUTHWEST GAS HOLDINGS, INC. Form 10-QSOUTHWEST GAS CORPORATION March 31, 2022 Depreciation and amortization expense increased$12.9 million between quarters, of which$12.3 million was recorded byRiggs Distler . The remaining increase was attributable to equipment and computer systems purchased to support the growing volume of infrastructure work. The increase in Net interest deductions of$9.5 million was primarily due to incremental interest related to outstanding borrowings under Centuri's$1.545 billion amended and restated secured revolving credit and term loan facility in conjunction with the acquisition ofRiggs Distler .
Results of Utility Infrastructure Services
Twelve-Month Analysis
Twelve Months Ended March 31,
(Thousands of dollars) 2022 2021
Utility infrastructure services revenues $ 2,318,563 $ 1,978,770
Operating expenses:
Utility infrastructure services expenses 2,123,085 1,745,729
Depreciation and amortization 130,511 98,548
Operating income 64,967 134,493
Other income (deductions) 683 (67)
Net interest deductions 30,508 7,992
Income before income taxes 35,142 126,434
Income tax expense 11,406 34,477
Net income 23,736 91,957
Net income attributable to noncontrolling interests 5,943 7,750
Contribution to consolidated net income attributable to Centuri
$
17,793
Utility infrastructure services revenues increased$339.8 million , or 17%, in the current twelve-month period compared to the corresponding period of 2021, including$277.7 million recorded byRiggs Distler subsequent to its acquisition onAugust 27, 2021 . Revenues from electric infrastructure services increased$179.7 million in 2022 when compared to the prior year, of which$175.5 million was recorded byRiggs Distler . Included in the incremental electric infrastructure revenues during the twelve-month period of 2022 was$70.5 million from emergency restoration services performed byLinetec andRiggs Distler , following hurricane, tornado, and other storm damage to customers' above-ground utility infrastructure in and around theGulf Coast and eastern regions of theU.S. , as compared to$90.5 million in similar services during the twelve-month period in 2021. The remaining increase in revenue was attributable to continued growth with existing gas infrastructure customers under master service and bid agreements, partially offset by reduced work with two significant customers during the 2022 twelve-month period (totaling$60.6 million ), due to the mix of projects under each customer's multi-year capital spending programs. Utility infrastructure services expenses increased$377.4 million , or 22%, between periods (including$14 million of professional fees related to the acquisition ofRiggs Distler ). The increase overall includes$249 million incurred byRiggs Distler subsequent to the acquisition, as well as incremental costs related to electric infrastructure services work and costs necessary for the completion of additional gas infrastructure work. Higher fuel costs, equipment rental expense, and subcontractor expenses were also incurred in support of growth in our electric infrastructure business. Expenses in relation to revenues, and therefore, profit margins, can be impacted by the mix of work and inefficiencies from equipment and facility utilization and under-absorption of other fixed costs, which occurred due to the reduced work from the two large customers and lower revenues from emergency restoration services as noted above. Also included in total Utility infrastructure services expenses were general and administrative costs, which increased approximately$26.5 million between comparative periods, including the noted$14 million of acquisition-related professional fees and an additional$13.3 million of general and administrative costs incurred byRiggs Distler subsequent to the acquisition. Other administrative costs increased due to the growth in the business. Gains on sale of equipment (reflected as an offset to Utility infrastructure services expenses) were approximately$5.8 million and$3.3 million for the twelve-month periods of 2022 and 2021, respectively. Depreciation and amortization expense increased$32 million between the current and prior-year twelve-month periods, of which$29.1 million was recorded byRiggs Distler subsequent to the acquisition. The remaining increase was attributable to equipment and computer systems purchased to support the growing volume of infrastructure work. 39 --------------------------------------------------------------------------------
SOUTHWEST GAS HOLDINGS, INC. Form 10-QSOUTHWEST GAS CORPORATION March 31, 2022 Net interest deductions increased$22.5 million between periods due to incremental interest related to outstanding borrowings under Centuri's$1.545 billion amended and restated secured revolving credit and term loan facility in conjunction with the acquisition ofRiggs Distler .
Results of Pipeline and Storage
Quarterly Analysis
The first quarter of 2022 was the first reporting period of post-acquisition operating results for the pipeline and storage segment.
Three Months Ended
March 31,
(Thousands of dollars) 2022
Regulated operations revenues $ 66,993
Operating expenses:
Net cost of gas sold 1,797
Operations and maintenance expense 24,312
Depreciation and amortization 12,920
Taxes other than income taxes 3,164
Operating income 24,800
Other income (deductions) 543
Net interest deductions 4,382
Income before income taxes 20,961
Income tax expense 4,031Contribution to consolidated results attributable to MountainWest
$ 16,930 Current period operating results include rate-regulated transmission and subscription storage revenues of$61.1 million . Operating expenses include$8.7 million of costs associated with integrating MountainWest, including employee retention payments. Additional integration costs will be incurred in future periods until integration efforts are completed.
Rates and Regulatory Proceedings
Southwest is subject to the regulation of theArizona Corporation Commission (the "ACC"), thePublic Utilities Commission of Nevada (the "PUCN"), theCalifornia Public Utilities Commission (the "CPUC"), and theFederal Energy Regulatory Commission (the "FERC"). Due to the size of Southwest's regulated operations and the frequency of rate cases and other procedural activities with its commissions, the following discussion focuses primarily on the proceedings within its natural gas distribution operations.
General Rate Relief and Rate Design
Rates charged to customers vary according to customer class and rate jurisdiction and are set by the individual state and federal regulatory commissions that govern Southwest's service territories. Southwest makes periodic filings for rate adjustments as the cost of providing service changes (including the cost of natural gas purchased), and as additional investments in new or replacement pipeline and related facilities are made. Rates are intended to provide for recovery of all commission-approved costs and a reasonable return on investment. The mix of fixed and variable components in rates assigned to various customer classes (rate design) can significantly impact the operating margin actually realized by Southwest. Management has worked with its regulatory commissions in designing rate structures that strive to provide affordable and reliable service to its customers while mitigating volatility in prices to customers and stabilizing returns to investors. Such rate structures were in place in all of Southwest's operating areas during all periods for which results of natural gas distribution operations are disclosed above.
Arizona Jurisdiction
ArizonaGeneral Rate Case . InDecember 2021 , Southwest filed a general rate case application proposing a revenue increase of approximately$90.7 million . Although updated rates related to the previous rate case became effective inJanuary 2021 , the most significant driver for the new request is the necessity to reflect in rates the substantial capital investments that have been made since the end of the test year in the previous case, including the customer information system implemented inMay 2021 . The current filing is based on a test year endedAugust 31, 2021 and proposes a return on common equity of 9.90% relative to a target equity ratio of 51%. Recovery (over three years) of the approximately$12 million related to the outstanding deferral 40 --------------------------------------------------------------------------------
SOUTHWEST GAS HOLDINGS, INC. Form 10-QSOUTHWEST GAS CORPORATION March 31, 2022 balance associated with the LNG facility (see below) is included in the request, along with the approximately$2.5 million (also over three years) in late payment charges that were suppressed from customer accounts during the COVID-19 pandemic. A request to continue the Delivery Charge Adjustment ("DCA"), Southwest's full-revenue decoupling mechanism, is also included, while no changes to Southwest's existing rate design are proposed. A decision is anticipated by the end of 2022, with new rates expected to be effective in the first quarter of 2023. Delivery Charge Adjustment. The DCA is filed each April, which along with other reporting requirements, contemplates a rate to recover the over- or under-collected margin tracker (decoupling mechanism) amounts based on the balance at the end of the reporting period. AnApril 2022 filing proposes a rate to return$10.5 million , the over-collected balance existing at the end of the first quarter 2022. Tax Reform. In the most recently concludedArizona general rate proceeding, a Tax Expense Adjustor Mechanism ("TEAM") was approved to timely recognize any future tax rate changes resulting from federal or state tax legislation. In addition, the TEAM tracks and returns/recovers the revenue requirement impact of changes in EADIT amortization compared to the amount authorized in the most recently concluded rate case. InDecember 2021 , Southwest filed its inaugural TEAM rate application for the recovery of approximately$4.3 million associated with the mechanism. The commission staff is expected to issue its report on the filing in the second quarter of 2022 for ACC consideration at a subsequent open meeting.Liquefied Natural Gas ("LNG") Facility. In 2014, Southwest sought ACC preapproval to construct, operate, and maintain a 233,000 dekatherm LNG facility in southernArizona . This facility is intended to enhance service reliability and flexibility related to natural gas deliveries in the southernArizona area by providing a local storage option, connecting directly to Southwest's distribution system. Southwest was ultimately granted approval for construction and deferral of costs. The facility was placed in service inDecember 2019 . The capital costs and the operating expenses associated with plant operation were approved and considered as part of Southwest's previous general rate case. Approximately$12 million in costs, incurred following the in-service date of the facility and after the period considered as part of the previous general rate case, were deferred in the previously authorized regulatory asset account and are included for consideration in the current general rate case application. Customer-Owned Yard Line ("COYL") Program. Southwest originally received approval, in connection with its 2010Arizona general rate case, to implement a program to conduct leak surveys, and if leaks were present, to replace and relocate service lines and meters forArizona customers whose meters were set off from the customer's home, representing a non-traditional configuration. A filing inMay 2021 proposed the recovery of previously unrecovered surcharge revenue from 2019 and 2020 (collectively,$13.7 million ) over a one-year period. InNovember 2021 , the ACC approved full recovery within the proposed timeline, the rate for which was implemented the same month. In aFebruary 2022 filing, Southwest requested to increase its surcharge revenue by$3.4 million to recover the revenue requirement associated with previous investments made sinceAugust 2020 and through calendar year 2021, with a proposed rate implementation ofJune 2022 . Vintage Steel Pipe ("VSP") Program. Southwest received approval, in connection with its 2016 Arizona general rate case, to implement a VSP replacement program, due to having a substantial amount of pre-1970s vintage steel pipe inArizona . However, as part of Southwest's most recent rate case decision in 2020, the ACC ultimately decided to discontinue the accelerated VSP program. A filing inMay 2021 proposed the recovery of previously unrecovered surcharge revenue relating to investments during 2019 and 2020, with approximately$60 million to be recovered over a three-year period. InNovember 2021 , the ACC approved full recovery over the proposed three-year timeline, updated rates for which were implemented inMarch 2022 .Graham County Utilities . InApril 2021 ,Southwest and Graham County Utilities, Inc. ("GCU") filed a joint application with the ACC for approval to transfer assets of GCU to Southwest and extend Southwest's Certificate of Public Convenience and Necessity to serve the more than 5,000 associated customers, for a purchase price of$3.5 million . Approval of the application by the ACC was received inDecember 2021 with final transfer inmid-January 2022 . Former GCU customers continue to be served under existing GCU rates until such time as they are rolled into Southwest's rates, which is proposed to take place in conjunction with the effective date of rates resulting from the currently pendingArizona general rate case.
California Jurisdiction
CaliforniaGeneral Rate Case . InAugust 2019 , Southwest filed a general rate case based on a 2021 test year, seeking authority to increase rates in itsCalifornia rate jurisdictions, after being granted earlier permission to extend the rate case cycle by two years and continue its 2.75% previously approved Post-Test Year ("PTY") attrition adjustments for 2019 and 2020. Southwest reached an agreement in principle with thePublic Advocate's Office, which was unanimously approved by the CPUC onMarch 25, 2021 , including a$6.4 million total combined revenue increase with a 10% return on common equity, relative to a 52% equity ratio. Approximately$4 million of the original proposed increase was associated with aNorth Lake 41 --------------------------------------------------------------------------------
SOUTHWEST GAS HOLDINGS, INC. Form 10-QSOUTHWEST GAS CORPORATION March 31, 2022 Tahoe project that would not ultimately be completed by the beginning of 2021; consequently, the parties agreed to provide for recovery of the cost of service impacts of the project through a future surcharge. The rate case decision maintains Southwest's existing 2.75% annual attrition adjustments and the continuation of the pension balancing account. It also includes cumulative expenditures totaling$119 million over the five-year rate cycle to implement risk-informed proposals, consisting of a school COYL replacement, meter protection, and pipe replacement programs. Although new rates were originally anticipated to be in place byJanuary 1, 2021 , in light of an administrative delay, Southwest was granted authority to establish a general rate case memorandum account to track the impacts related to the delay in the implementation of new rates for purposes of later recovery. New rates were ultimately implementedApril 1, 2021 .
Attrition Filing. Following the 2021 implementation of rates approved as part of
the general rate case, Southwest is also authorized to implement annual PTY
attrition increases of 2.75%, the first annual adjustment of which began in
Customer Data Modernization Initiative ("CDMI"). In April 2019 , Southwest filed
an application with the CPUC seeking authority to establish a two-way,
interest-bearing balancing account to record costs associated with the CDMI to
mitigate adverse financial implications associated with this multi-year project
(including a new customer information system, ultimately implemented in May
2021 ). Effective October 2019 , the CPUC granted a memorandum account, which
allowed Southwest to track costs, including operations and maintenance costs and
capital-related costs, such as depreciation, taxes, and return associated with
California's portion of the CDMI (initially estimated at $19 million ). The
balance tracked in the memorandum account was transferred to the two-way
balancing account in July 2020 . A rate to begin recovering the balance
accumulated through June 30, 2020 was established and made effective September
1, 2020 , and updated in January 2021 , August 2021 , and January 2022 . This rate
is expected to be updated at least annually.
Carbon Offset Program. In March 2022 , Southwest filed an application to seek
approval to offer a voluntary program to California customers to purchase carbon
offsets in an effort to provide customers additional options to reduce their
respective GHG emissions. A request to establish a two-way balancing account to
track program-related costs and revenues was included as part of the
application. Southwest anticipates a decision in 2023.
Nevada Jurisdiction
Nevada General Rate Case. OnAugust 31, 2021 , Southwest filed its most recent general rate case, which was further updated by a certification filing onDecember 17, 2021 . The request proposed a combined revenue increase of approximately$28.7 million (as of certification); the most significant driver for the new request is the necessity to reflect in rates the substantial capital investments that have been made since the end of the test year in the previous case, including the customer information system that was implemented inMay 2021 . The filing included a proposed return on common equity of 9.90% with a target equity ratio of 51%; recovery over two years of approximately$6.6 million in previously deferred late payment charges related to a regulatory asset associated with COVID-19; and continuation of full revenue decoupling under the General Revenues Adjustment ("GRA") mechanism. The filing utilized a test year endedMay 31, 2021 with certification-period adjustments throughNovember 30, 2021 . OnFebruary 7, 2022 , the parties filed a stipulation with the PUCN, providing for a statewide revenue increase of$14.05 million , a return on common equity of 9.40% relative to a 50% target equity ratio, and continuation of Southwest's full revenue decoupling mechanism. The stipulation was approved by the commission, and new rates became effectiveApril 1, 2022 . The commission's order did not include recovery of the approximate$6.6 million in previously deferred late payment charges related to a regulatory asset associated with COVID 19 (as noted below). General Revenues Adjustment. As noted above, the continuation of the GRA was affirmed as part of Southwest's most recent general rate case with an expansion to include a large customer class (with average monthly throughput requirements greater than 15,000 therms), effectiveApril 2022 . Southwest makes Annual Rate Adjustment ("ARA") filings to update rates to recover or return amounts associated with various regulatory mechanisms, including the GRA. Southwest made its most recent ARA filing inNovember 2021 related to balances as ofSeptember 30, 2021 . New rates related to that filing will be effectiveJuly 1, 2022 . While there is no impact to net income overall from adjustments to recovery rates associated with the related regulatory balances, operating cash flows are impacted by such changes. COYL Program. InAugust 2021 , Southwest filed a joint petition with the Regulatory Operations Staff of the PUCN proposing a Nevada COYL replacement program to include residential COYLs, public school COYLs, and any other COYLs that are identified to be a safety concern. The petition was approved inJanuary 2022 and provides for capital investments up to$5 million per year for five years and the establishment of a regulatory asset to track the capital-related costs. After five years, the program will be reassessed to determine if it should be continued. Infrastructure Replacement Mechanism. In 2014, the PUCN approved final rules for the Gas Infrastructure Replacement ("GIR") mechanism, which provided for the deferral and recovery of certain costs associated with accelerated replacement of qualifying infrastructure that would not otherwise provide incremental revenues between general rate cases. Associated with the replacement of various types of pipe infrastructure under the mechanism (Early VintagePlastic Pipe , COYL, and VSP), the 42
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SOUTHWEST GAS HOLDINGS, INC. Form 10-QSOUTHWEST GAS CORPORATION March 31, 2022
related regulations provide Southwest with the opportunity to file a GIR "Advance Application" annually to seek preapproval of qualifying replacement projects.
In cases where preapproval of projects is requested and granted, a GIR rate application is separately filed to reset the GIR recovery surcharge rate related to previously approved and completed projects. OnSeptember 30, 2021 , Southwest filed its latest rate application to reset the recovery surcharge to include cumulative deferrals throughAugust 31, 2021 . The updated surcharge rate is expected to result in an annual revenue decrease of approximately$1.4 million in southernNevada and an annual revenue increase of$66,000 in northernNevada . The parties reached a stipulation that was approved by the commission and new rates became effectiveJanuary 1, 2022 . Conservation and Energy Efficiency. The PUCN allows deferral (and later recovery) of approved conservation and energy efficiency costs, recovery rates for which are adjusted in association with ARA filings. In itsNovember 2021 ARA filing, Southwest proposed annualized margin decreases of$574,000 and$434,700 for southern and northernNevada , respectively, requested to become effective inJuly 2022 . InMay 2021 , Southwest filed its Conservation and Energy Efficiency plan for the years 2022 - 2024, with a proposed annual budget amount of approximately$3 million . A PUCN decision received in the fourth quarter 2021 authorized the continuation of Southwest's currently authorized programs and an annual budget of approximately$1.3 million . Expansion and Economic Development Legislation. InJanuary 2016 , final regulations were approved by the PUCN associated with legislation ("SB 151") previously introduced and signed into law inNevada . The legislation authorized natural gas utilities to expand their infrastructure to provide service to unserved and underserved areas inNevada . InNovember 2017 , Southwest filed for preapproval of a project to extend service toMesquite, Nevada , in accordance with the SB 151 regulations. Ultimately, the PUCN issued an order approving Southwest's proposal for the expansion, and Southwest provides periodic updates and adjusts the rates to recover the revenue requirement associated with the investments to serve customers as part of the ARA filings and rate case proceedings. As ofMarch 2022 , approximately 40 miles of natural gas infrastructure has been installed throughout theMesquite expansion area. InJune 2019 , Southwest filed for preapproval to construct the infrastructure necessary to expand natural gas service toSpring Creek , nearElko, Nevada , and to implement a cost recovery methodology to recover the associated revenue requirement consistent with the SB 151 regulations. The expansion facilities consist of a high-pressure approach main and associated regulator stations, an interior backbone, and an extension of the distribution system from the interior backbone. The total capital investment was estimated to be$61.9 million . A stipulation was reached with the parties and approved by the PUCN inDecember 2019 , including in regard to the rate recovery allocation amongst northernNevada ,Elko , andSpring Creek expansion customers. Construction began in the third quarter of 2020, and service commenced to the firstSpring Creek customers inDecember 2020 . As ofMarch 31, 2022 , approximately 28 miles of natural gas infrastructure has been installed throughout theSpring Creek expansion area, and is anticipated to be completed in 2026. Regulatory Asset Related to COVID-19. The PUCN issued an order directing utilities within the state to establish regulatory asset accounts, effectiveMarch 12, 2020 , the date the Governor declared a state of emergency related to COVID-19, to track the financial impacts associated with maintaining service for customers affected by COVID-19, including those whose service would have been otherwise terminated/disconnected. These amounts, totaling approximately$6.6 million , were included in Southwest's recently concluded general rate case request. The commission ultimately decided that the deferred late payment charges that made up the$6.6 million did not qualify as costs of maintaining service and denied recovery. However, this amount was previously fully reserved by management pending the outcome of the ultimate proceeding. Carbon Offset Program. InJune 2021 , Southwest filed an application to seek approval to offer a voluntary program to northern and southernNevada customers to purchase carbon offsets in an effort to provide customers additional options to reduce their respective GHG emissions. A request to establish a regulatory asset to track program-related costs and revenues was included as part of the application. The parties reached a stipulation that was approved by the commission inDecember 2021 approving Southwest's proposal. Implementation of the program is expected in the second quarter of 2022.
FERC Jurisdiction
General Rate Case . In 2020,Great Basin Gas Transmission Company ("Great Basin"), a wholly owned subsidiary of Southwest, reached an agreement in principle with theFERC Staff providing that its three largest transportation customers and all storage customers would be required to have primary service agreement terms of at least five years, that term-differentiated rates would continue generally, and included a 9.90% pre-tax rate of return. Interim rates were made effectiveFebruary 2020 . As part of the settlement, Great Basin will not file a rate case later thanMay 31, 2025 . 43 --------------------------------------------------------------------------------
SOUTHWEST GAS HOLDINGS, INC. Form 10-Q
SOUTHWEST GAS CORPORATION March 31, 2022
PGA Filings
The rate schedules in all of Southwest's service territories contain provisions
that permit adjustment 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. Balances are recovered from or refunded to customers on an
ongoing basis with interest. As of March 31, 2022 , under-collections in each of
Southwest's service territories resulted in an asset of $368 million on the
Company's and Southwest's Condensed Consolidated Balance Sheets. The increase in
the PGA balance during the first quarter of 2022 includes nearly $400 million in
commodity and transmission costs incurred during this period. See also Deferred
Purchased Gas Costs in Note 1 - Background, Organization, and Summary of
Significant Accounting Policies in this quarterly report on Form 10-Q.
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 operating margin. However, gas cost deferrals and recoveries
can impact comparisons between periods of individual consolidated income
statement components. These include Regulated operations 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) March 31, 2022 December 31, 2021 March 31, 2021
Arizona $ 255,472 $ 214,387 $ 194,446
Northern Nevada 13,700 12,632 3,036
Southern Nevada 93,153 55,967 31,849
California 5,629 8,159 9,555
$ 367,954 $ 291,145 $ 238,886
Not included in the PGA balances table above are $297,000 at March 31, 2022 and
$5.7 million at December 31, 2021 in deferred purchased gas cost liabilities for
MountainWest.
Capital Resources and Liquidity
Historically, cash on hand and cash flows from operations have provided a substantial portion of cash used in investing activities (primarily for construction expenditures and property additions). In recent years, Southwest has undertaken significant pipe replacement activities to fortify system integrity and reliability, including on an accelerated basis in association with certain gas infrastructure replacement programs. This activity has necessitated the issuance of both debt and equity securities to supplement cash flows from operations. The Company, in executing on its plans to fund the MountainWest acquisition, initially funded the transaction through short-term borrowings, which would be refinanced through a multi-pronged permanent financing plan by the second quarter of 2022, some of which was executed during the first quarter of 2022 as the Company used$452 million in net proceeds from its underwritten offering of common stock to repay a portion of such short-term borrowings. In the interim, its working capital resources are necessarily low compared to its short-term obligations, which will be alleviated once management completes its execution on the remainder of its plan. The Company's capitalization strategy is to maintain an appropriate balance of equity and debt to preserve investment-grade credit ratings, which help minimize interest costs. Investment-grade credit ratings have been maintained following the acquisition. The Company's Cash and cash equivalents as ofMarch 31, 2022 andDecember 31, 2021 were$625 million and$223 million , respectively. The increase in Cash and cash equivalents between periods is largely attributable to Southwest's net proceeds received from the$600 million 4.05% Senior Notes issuance inMarch 2022 , which were partially used inMarch 2022 to pay down amounts then outstanding on the credit facility, and inApril 2022 , to redeem the$250 million 3.875% Senior Notes then maturing, in addition to funding interest payments on various debt ($23 million ), with the remaining cash available for general corporate purposes. Additionally, the Company received a$34 million dividend from MountainWest inMarch 2022 , which was partially used inApril 2022 to pay a post-closing payment adjustment to the sellers in connection with the MountainWest acquisition (see Note 8 - Business Acquisitions).
Cash Flows
Operating Cash Flows. Cash flows from consolidated operating activities increased$239 million in the first three months of 2022 as compared to the same period of 2021. The improvement in cash flows primarily resulted from the change in purchased gas costs, including amounts incurred and deferred, as well as when amounts are incorporated in customer bills to recover or return deferred balances. The prior period included a$50 million incremental contribution to the noncontributory qualified 44
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SOUTHWEST GAS HOLDINGS, INC. Form 10-QSOUTHWEST GAS CORPORATION March 31, 2022
retirement plan (reflected as a change in other liabilities and deferred credits). Other impacts include benefits from depreciation and changes in components of working capital overall, including collections of accounts receivable balances in the utility infrastructure services segment.
The corporate and administrative expenses/outflows forSouthwest Gas Holdings, Inc. in the three- and twelve-month periods endedMarch 31, 2022 include expenses incurred related to shareholder activism, in addition to expenses and financing costs for the MountainWest acquisition, as well as expenses for services performed followingDecember 31, 2021 , but related to the acquisition. Investing Cash Flows. Cash used in consolidated investing activities increased$9 million in the first three months of 2022 as compared to the same period of 2021. The change was primarily due to an increase in capital expenditures in the natural gas distribution segment. Financing Cash Flows. Net cash provided by consolidated financing activities increased$163 million in the first three months of 2022 as compared to the same period of 2021. The change was primarily due to Southwest's issuance of$600 million in notes, in addition to the Company's$452 million in net proceeds from the issuance of common stock in an underwritten public offering in the current period. Part of the proceeds of Southwest's notes issuance was used to pay down the amounts then outstanding under the long-term portion of its credit facility. The Company used the net proceeds from the common stock issuance to repay a portion of its 364-day Term Loan Facility that was funded inDecember 2021 . InFebruary 2022 , Southwest also redeemed$25 million 7.78% series Medium-term notes then maturing. By comparison, the prior period included$203 million net proceeds from the short-term portion of Southwest's credit facility and the Company's credit facility, all of which is considered short-term. The capital requirements and resources of the Company generally are determined independently for the individual business segments. Each business segment is generally responsible for securing its own financing sources. However, the holding company may raise funds through stock issuances or other external financing sources in support of each business segment.
Operating Cash Flows. Cash flows provided by operating activities increased$260 million in the first three months of 2022 as compared to the same period of 2021. The improvement in operating cash flows was primarily attributable to the impacts related to deferred purchased gas costs, as well as to other working capital changes. Investing Cash Flows. Cash used in investing activities increased$10 million in the first three months of 2022 as compared to the same period of 2021. The change was primarily due to increases in capital expenditures in 2022 as compared to the same period in the prior year. See alsoGas Segment Construction Expenditures and Financing below. Financing Cash Flows. Net cash provided by financing activities increased$179 million in the first three months of 2022 as compared to the same period of 2021. The increase was primarily due to Southwest's issuance of$600 million in notes in the first quarter of 2022 that was not used untilApril 2022 to redeem$250 million in maturing notes, but was used to repay the then outstanding amounts on its credit facility. Offsetting this increase was the redemption of$25 million 7.78% series Medium-term notes that matured inFebruary 2022 , parent contributions received in the first quarter of 2021 that did not recur in 2022, and proceeds in the prior year from a$250 million Term Loan issued to fund increased gas purchased costs during the 2021 freeze. See Note 5 - Debt.
Gas Segment Construction Expenditures, Debt Maturities, and Financing
During the twelve-month period endedMarch 31, 2022 , construction expenditures for the natural gas distribution segment were$615 million (not including amounts incurred for capital expenditures but not yet paid). The majority of these expenditures represented costs associated with the replacement of existing transmission, distribution, and general plant to fortify system integrity and reliability. Management estimates natural gas segment construction expenditures during the five-year period endingDecember 31, 2026 will be approximately$2.5 to$3.5 billion . Of this amount, approximately$650 million to$700 million is scheduled to be incurred in 2022. Southwest plans to continue to request regulatory support to undertake projects, or to accelerate projects as necessary, for the improvement of system flexibility and reliability, or to expand, where relevant, to unserved or underserved areas. Southwest may expand existing, or initiate new, programs. Significant replacement activities are expected to continue well beyond the next few years. See also Rates and Regulatory Proceedings. During the three-year period, cash flows from operating activities of Southwest are expected to provide approximately 69% of the funding for gas operations of Southwest and total construction expenditures and dividend requirements. As ofMarch 31, 2022 , Southwest had$250 million , 3.875% notes maturing (repaid inApril 2022 ), and a$250 million Term Loan due inMarch 2023 . Any additional cash requirements, including construction-related, and pay down or refinancing of debt, are expected to be provided by existing credit facilities, 45 --------------------------------------------------------------------------------
SOUTHWEST GAS HOLDINGS, INC. Form 10-QSOUTHWEST GAS CORPORATION March 31, 2022 equity contributions from the Company, and/or other external financing sources. The timing, types, and amounts of additional external financings will be dependent on a number of factors, including the cost of gas purchases, conditions in the capital markets, timing and amounts of rate relief, timing and amounts of surcharge collections from, or amounts returned to, customers related to other regulatory mechanisms and programs, as well as growth levels in Southwest's service areas and earnings. External financings may include the issuance of debt securities, bank and other short-term borrowings, and other forms of financing. Bonus Depreciation In 2017, with the enactment ofU.S. tax reform, the bonus depreciation deduction percentage changed from 50% to 100% for "qualified property" placed in service afterSeptember 27, 2017 and before 2023. The bonus depreciation tax deduction phases out starting in 2023, by 20% for each of the five following years. Qualified property excludes public regulated operations property. The Company estimates bonus depreciation will defer the payment of approximately$27 million (which relates to utility infrastructure services operations) of federal income taxes for 2022.
Dividend Policy
Dividends are payable on the Company's common stock at the discretion of the Board. In setting the dividend rate, the Board currently targets a payout ratio of 55% to 65% of consolidated earnings per share and considers, among other factors, current and expected future earnings levels, our ongoing capital expenditure plans, expected external funding needs, and our ability to maintain strong investment-grade credit ratings and liquidity. The Company has paid dividends on its common stock since 1956 and has increased that dividend each year since 2007. InFebruary 2022 , the Board elected to increase the quarterly dividend from$0.595 to$0.62 per share, representing a 4.2% increase, effective with theJune 2022 payment. Liquidity Liquidity refers to the ability of an enterprise to generate sufficient amounts of cash through its operating activities and external financing to meet its cash requirements. Several factors (some of which are out of the control of the Company) that could significantly affect liquidity in the future include: variability of natural gas prices, changes in ratemaking policies of regulatory commissions, regulatory lag, customer growth in the natural gas distribution segment, the ability to access and obtain capital from external sources, interest rates, changes in income tax laws, pension funding requirements, inflation, and the level of earnings. Natural gas prices and related gas cost recovery rates, as well as plant investment, have historically had the most significant impact on liquidity. On an interim basis, Southwest defers over- or under-collections of gas costs to PGA balancing accounts. In addition, Southwest uses this mechanism to either refund amounts over-collected or recoup amounts under-collected as compared to the price paid for natural gas during the period since the last PGA rate change went into effect. AtMarch 31, 2022 , the combined balance in the PGA accounts totaled an under-collection of$368 million . SeePGA Filings for more information. InMarch 2022 , Southwest amended its$250 million Term Loan, extending the maturity date toMarch 21, 2023 . The proceeds were originally used to fund the increased cost of natural gas supply during the month ofFebruary 2021 caused by extreme weather conditions in the centralU.S. The Term Loan was extended as a result of the current gas cost environment and management's funding plans for purchases. InMarch 2022 , Southwest issued$600 million aggregate principal amount of 4.05% Senior Notes at a discount of 0.65%. The notes will mature inMarch 2032 . Southwest used the net proceeds to redeem$250 million 3.875% notes due inApril 2022 and to repay outstanding amounts under its credit facility, with the remaining net proceeds used for general corporate purposes. Southwest has a credit facility, with a borrowing capacity of$400 million , which expires inApril 2025 . Southwest designates$150 million of the facility for long-term borrowing needs and the remaining$250 million for working capital purposes. The maximum amount outstanding on the long-term portion of the credit facility (including a commercial paper program) during the first three months of 2022 was$150 million . The maximum amount outstanding on the short-term portion of the credit facility during the first three months of 2022 was$85 million . As ofMarch 31, 2022 , no borrowings were outstanding on the short-term or long-term portions of this credit facility. The credit facility can be used as necessary to meet liquidity requirements, including temporarily financing under-collected PGA balances, or meeting the refund needs of over-collected balances. The credit facility has been adequate for Southwest's working capital needs outside of funds raised through operations and other types of external financing. As indicated, any additional cash requirements would include the existing credit facility, equity contributions from the Company, and/or other external financing sources. 46
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SOUTHWEST GAS HOLDINGS, INC. Form 10-QSOUTHWEST GAS CORPORATION March 31, 2022 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 during 2022 will be designated as long-term debt. Interest rates for the commercial paper program are calculated at the current commercial paper rate during the borrowing term. AtMarch 31, 2022 , there were no borrowings outstanding under this program. Centuri has a senior secured revolving credit and term loan facility. The line of credit portion comprises$400 million ; associated amounts borrowed and repaid are available to be re-borrowed. The term loan facility portion provided approximately$1.145 billion . The term loan facility expires onAugust 27, 2028 and the revolving credit facility expires onAugust 27, 2026 . This multi-currency facility allows the borrower to request loan advances in either Canadian dollars orU.S. dollars. The obligations under the credit agreement are secured by present and future ownership interests in substantially all direct and indirect subsidiaries of Centuri, substantially all of the tangible and intangible personal property of each borrower, certain of their direct and indirect subsidiaries, and all products, profits, and proceeds of the foregoing. Centuri assets securing the facility atMarch 31, 2022 totaled$2.4 billion . The maximum amount outstanding on the combined facility during the first three months of 2022 was$1.2 billion . As ofMarch 31, 2022 ,$108 million was outstanding on the revolving credit facility, in addition to$1.01 billion that was outstanding on the term loan portion of the facility. Also atMarch 31, 2022 , there was approximately$239 million , net of letters of credit, available for borrowing under the line of credit.Southwest Gas Holdings, Inc. has a credit facility with a borrowing capacity of$200 million that expires inDecember 2026 . This facility is intended for short-term financing needs. AtMarch 31, 2022 ,$69 million was outstanding under this facility. InNovember 2021 , the Company entered into a$1.6 billion delayed-draw Term Loan Facility that was funded onDecember 31, 2021 in connection with the acquisition of MountainWest. This term loan matures onDecember 30, 2022 . There was$1.16 billion outstanding under this Term Loan Facility as ofMarch 31, 2022 , included in the total of$1.474 billion of total short-term debt and current maturities of$291 million . This contributed to a negative working capital position of$584 million as ofMarch 31, 2022 , and the Company does currently not have sufficient liquidity or capital resources to repay this debt at maturity without issuing new debt or equity. InApril 2022 , the Company used a portion of proceeds from the issuance of$600 million Senior Notes issued inMarch 2022 to redeem$250 million in Senior Notes then maturing and included in current maturities as ofMarch 31, 2022 . InMarch 2022 , the Company used net proceeds from the issuance of a common stock offering (see below) to repay a portion of borrowings under the Term Loan Facility. Management intends to satisfy the remainder of this obligation through the issuance of long-term debt. However, management maintains the discretion to seek alternative sources, and can provide no assurances as to its ability to refinance this obligation with the intended method or on attractive terms. InMarch 2022 , the Company sold, through a prospectus supplement under its Universal Shelf program, an aggregate of 6,325,000 shares of common stock, with an underwritten public offering price of$74.00 per share, resulting in proceeds to the Company of$452.2 million , net of the underwriters' discount of$15.8 million . The Company used the net proceeds to repay a portion of the outstanding borrowings under the 364-day term loan credit agreement that was used to initially fund the MountainWest acquisition. InApril 2021 , the Company entered into a Sales Agency Agreement between the Company andBNY Mellon Capital Markets, LLC andJ.P. Morgan Securities LLC (the "Equity Shelf Program") for the offer and sale of up to$500 million of common stock from time to time in at-the-market offerings under the related prospectus supplement filed with theSecurities and Exchange Commission (the "SEC") the same month. There was no activity under this multi-year program during the first quarter of 2022. Net proceeds from the sales 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, as well as for repayment or repurchase of indebtedness (including amounts outstanding from time to time under the credit facilities, senior notes, Term Loan or future credit facilities), and to provide for working capital. The Company had approximately$341.8 million available under the program as ofMarch 31, 2022 . During the twelve months endedMarch 31, 2022 , 2,302,407 shares were issued in at-the-market offerings under the foregoing program at an average price of$68.70 per share with gross proceeds of$158.2 million , agent commissions of$1.6 million , and net proceeds of$156.6 million under the equity shelf program noted above. See Note 4 - Common Stock for more information. 47 --------------------------------------------------------------------------------
SOUTHWEST GAS HOLDINGS, INC. Form 10-QSOUTHWEST GAS CORPORATION March 31, 2022 Interest rates for the Company's Term Loan Facility and Centuri's credit facility contain LIBOR-based rates. Certain LIBOR-based rates are scheduled to be discontinued as a benchmark or reference rate after 2021, while other LIBOR-based rates are scheduled to be discontinued afterJune 2023 . As ofMarch 31, 2022 , the Company had$2.17 billion billion in aggregate outstanding borrowings under Centuri's credit facility and the Company's Term Loan Facility. In order to mitigate the impact of a LIBOR discontinuance on the Company's financial condition and results of operations, management will monitor developments and work with lenders, where relevant, to determine the appropriate replacement/alternative reference rate for variable rate debt. At this time the Company can provide no assurances as to the impact a LIBOR discontinuance will have on its financial condition or results of operations. Any alternative rate may be less predictable or less attractive than LIBOR.
Forward-Looking Statements
This quarterly report contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 ("Reform Act"). All statements other than statements of historical fact
included or incorporated by reference in this quarterly report are
forward-looking statements, including, without limitation, statements regarding
the Company's plans, objectives, goals, intentions, projections, strategies,
future events or performance, negotiations, and underlying assumptions. The
words "may," "if," "will," "should," "could," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "project," "continue," "forecast," "intend,"
"endeavor," "promote," "seek," and similar words and expressions are generally
used and intended to identify forward-looking statements. For example,
statements regarding plans to review a full range of strategic alternatives to
maximize stockholder value, refinance near-term maturities, to separate Centuri
from the Company, those regarding operating margin patterns, customer growth,
the composition of our customer base, price volatility, seasonal patterns,
payment of debt, the Company's COLI strategy, replacement market and new
construction market, our intent and ability to complete planned acquisitions and
at amounts originally set out, impacts from the COVID-19 pandemic, including on
our employees, customers, or otherwise, our financial position, revenue,
earnings, cash flows, debt covenants, operations, regulatory recovery, work
deployment or resumption and related uncertainties stemming from this pandemic
or otherwise, expected impacts of valuation adjustments associated with any
redeemable noncontrolling interest, the profitability of storm work, mix of
work, or absorption of fixed costs by larger infrastructure services customers
including Southwest, the impacts of U.S. tax reform including disposition in any
regulatory proceeding and bonus depreciation tax deductions, the impact of
recent Pipeline and Hazardous Materials Safety Administration rulemaking, the
amounts and timing for completion of estimated future construction expenditures,
plans to pursue infrastructure programs or programs under SB 151 legislation,
forecasted operating cash flows and results of operations, net earnings impacts
or recovery of costs from gas infrastructure replacement and COYL programs and
surcharges, funding sources of cash requirements, amounts generally expected to
be reflected in future period revenues from regulatory rate proceedings
including amounts requested or settled from recent and ongoing general rate
cases or other regulatory proceedings, rates and surcharges, PGA administration
and recovery, and other rate adjustments, sufficiency of working capital and
current credit facilities, bank lending practices, the Company's views regarding
its liquidity position, ability to raise funds and receive external financing
capacity and the intent and ability to issue various financing instruments and
stock under the existing at-the-market equity program or otherwise, future
dividend increases and the Board's current target dividend payout ratio, pension
and postretirement benefits, certain impacts of tax acts, the effect of any
other rate changes or regulatory proceedings, contract or construction change
order negotiations, impacts of accounting standard updates, statements regarding
future gas prices, gas purchase contracts and pipeline imbalance charges or
claims related thereto, recoverability of regulatory assets, the impact of
certain legal proceedings or claims, and the timing and results of future rate
hearings, including any ongoing or future general rate cases and other
proceedings, and the final resolution for recovery of the CDMI-related amounts
and balances in any jurisdiction, and statements regarding pending approvals are
forward-looking statements. All forward-looking statements are intended to be
subject to the safe harbor protection provided by the Reform Act.
A number of important factors affecting the business and financial results of
the Company could cause actual results to differ materially from those stated in
the forward-looking statements. These factors include, but are not limited to,
customer growth rates, conditions in the housing market, the impacts of COVID-19
including that which may result from a continued or sustained restriction by
government officials or otherwise, including impacts on employment in our
territories, the health impacts to our customers and employees due to the
persistence of the virus or virus variants or efficacy of vaccines, the ability
to collect on customer accounts due to the suspension or lifted moratorium on
late fees or service disconnection in any or all jurisdictions, the ability to
obtain regulatory recovery of all costs and financial impacts resulting from
this pandemic, the ability of the infrastructure services business to resume or
continue work with all customers and the impact of a delay or termination of
work as a result thereof, the impacts of future restrictions placed on our
business by government regulation or otherwise (such as self-imposed
restrictions for the safety of employees and customers), including related to
personal distancing, investment in personal protective equipment and other
protocols, the impact of a resurgence of the virus or its variants, and
decisions of Centuri customers (including Southwest) as to whether to pursue
capital projects due to economic impacts resulting from the pandemic or
otherwise, the ability to recover and timing thereof related to costs associated
with the PGA mechanisms or other
48
--------------------------------------------------------------------------------SOUTHWEST GAS HOLDINGS, INC. Form 10-QSOUTHWEST GAS CORPORATION March 31, 2022 regulatory assets or programs, the effects of regulation/deregulation, governmental or regulatory policy regarding pipeline safety, greenhouse gas emissions, natural gas or alternative energy, the regulatory support for ongoing infrastructure programs or expansions, the timing and amount of rate relief, the timing and methods determined by regulators to refund amounts to customers resulting fromU.S. tax reform, changes in rate design, variability in volume of gas or transportation service sold to customers, changes in gas procurement practices, changes in capital requirements and funding, the impact of credit rating actions and conditions in the capital markets on financing costs, the impact of variable rate indebtedness with or without a discontinuance of LIBOR including in relation to amounts of indebtedness then outstanding, changes in construction expenditures and financing, levels of or changes in operations and maintenance expenses, or other costs, including fuel costs and other costs impacted by inflation or otherwise, geopolitical influences on the business or its costs, effects of pension or other postretirement benefit expense forecasts or plan modifications, accounting changes and regulatory treatment related thereto, currently unresolved and future liability claims and disputes, changes in pipeline capacity for the transportation of gas and related costs, results of Centuri bid work, the impact of weather on Centuri's operations, projections about acquired business' earnings or those planned (including accretion within the first twelve months or other periods) and future acquisition-related costs, the timing and magnitude of costs necessary to integrate and stand up newly acquired operations, administration, and systems, and the ability to complete stand-up for MountainWest prior to the expiration of the transition services agreement, the ability to attract, hire, and maintain necessary staff and management for our collective operations, impacts of changes in value of any redeemable noncontrolling interest if at other than fair value, Centuri utility infrastructure expenses, differences between actual and originally expected outcomes of Centuri bid or other fixed-price construction agreements, outcomes from contract and change order negotiations, ability to successfully procure new work and impacts from work awarded or failing to be awarded from significant customers (collectively, including from Southwest), the mix of work awarded, the amount of work awarded to Centuri following the lifting of work stoppages or reduction, the result of productivity inefficiencies from regulatory requirements or otherwise, delays in commissioning individual projects, acquisitions and management's plans related thereto, the ability of management to successfully finance, close, and assimilate acquired businesses, the impact on our stock price or our credit ratings due to undertaking or failing to undertake acquisition activity or other strategic endeavors, the impact on our stock price, costs, or businesses from the stock rights program, actions or disruptions of significant shareholders and costs related thereto, competition, our ability to raise capital in external financings, our ability to continue to remain within the ratios and other limits subject to our debt covenants, and ongoing evaluations in regard to goodwill and other intangible assets. In addition, the Company can provide no assurance that its discussions regarding certain trends or plans relating to its financing and operating expenses will continue, proceed as planned, or cease to continue in future periods. For additional information on the risks associated with the Company's business, see Item 1A. Risk Factors and Item 7A. Quantitative and Qualitative Disclosures About Market Risk in the Annual Report on Form 10-K for the year endedDecember 31, 2021 . All forward-looking statements in this quarterly report are made as of the date hereof, based on information available to the Company and Southwest as of the date hereof, and the Company and Southwest assume no obligation to update or revise any of its forward-looking statements, even if experience or future changes show that the indicated results or events will not be realized. We caution you not to unduly rely on any forward-looking statement(s).
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