SOUTHWEST GAS : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

Southwest Gas Holdings, Inc. is a holding company that owns all of the shares of
common stock of Southwest Gas Corporation ("Southwest" or the "natural gas
operations" segment) and all of the shares of common stock of Centuri Group,
Inc. ("Centuri," or the "utility infrastructure services" segment). Southwest
Gas Holdings, Inc. and its subsidiaries are collectively referred to as the
"Company."
Southwest is engaged in the business of purchasing, distributing, and
transporting natural gas for customers in portions of Arizona, Nevada, and
California. Southwest is the largest distributor of natural gas in Arizona,
selling and transporting natural gas in most of central and southern Arizona,
including the Phoenix and Tucson metropolitan areas. Southwest is also the
largest distributor of natural gas in Nevada, serving the majority of southern
Nevada, including the Las Vegas metropolitan area, and portions of northern
Nevada. In addition, Southwest distributes and transports natural gas for
customers in portions of California, including the Lake Tahoe area and the high
desert and mountain areas in San Bernardino County.
As of March 31, 2021, Southwest had 2,133,000 residential, commercial,
industrial, and other natural gas customers, of which 1,138,000 customers were
located in Arizona, 793,000 in Nevada, and 202,000 in California. Over the past
twelve months, first-time meter sets were approximately 37,000, compared to
36,000 for the twelve months ended March 2020. The remaining increase in active
customer accounts compared to the March 31, 2020 total of 2,091,000 was
primarily due to a management-initiated moratorium on disconnections as a result
of the COVID-19 pandemic. As utility service is an essential service to the
residents in the states in which Southwest operates, it implemented the
moratorium in March 2020 and also ceased charging late fees. Southwest
recommenced assessing late fees in Nevada and Arizona in April 2021, with late
fees in California expected to recommence in the latter half of 2021. The
duration of our moratorium on disconnections for non-payment is currently
uncertain. Residential and small commercial customers represented over 99% of
the total customer base. During the twelve months ended March 31, 2021, 53% of
operating margin (gas operating revenues less the net cost of gas sold) was
earned in Arizona, 36% in Nevada, and 11% in California. During this same
period, Southwest earned 85% of its operating margin from residential and small
commercial customers, 3% from other sales customers, and 12% from transportation
customers. While these general patterns are expected to remain materially
consistent for the foreseeable future, the continuing COVID-19 pandemic, as
discussed further below, could impact these statistics and associated patterns
in the short term.
Southwest recognizes operating revenues from the distribution and transportation
of natural gas (and related services) to customers. Operating margin is a
financial measure defined by management as gas operating revenues less the net
cost of gas sold. However, operating margin is not specifically defined in
accounting principles generally accepted in the United States ("U.S. GAAP").
Thus, operating margin is considered a non-GAAP measure. Management uses this
financial measure because natural gas operating revenues include the net cost of
gas sold, which is a tracked cost that is passed through to customers without
markup under purchased gas adjustment ("PGA") mechanisms. Fluctuations in the
net cost of gas sold impact revenues on a dollar-for-dollar 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 for
a reconciliation of revenues 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 comprehensive utility infrastructure services enterprise dedicated
to delivering a diverse array of solutions to North America's gas and electric
providers. Centuri derives revenue primarily from installation, replacement,
repair, and maintenance of energy distribution systems. Centuri operates in 55
primary locations across 40 states and provinces in the United States ("U.S.")
and Canada. Centuri operates in the U.S., primarily as NPL, Neuco, and Linetec,
and in Canada, primarily as NPL Canada.
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SOUTHWEST GAS HOLDINGS, INC.                 Form 10-Q
                 SOUTHWEST GAS CORPORATION               March 31, 2021



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 the U.S. Generally, Centuri revenues are
lowest during the first quarter of the year due to less favorable winter weather
conditions. Revenues typically improve as more favorable weather conditions
occur during the summer and fall months. 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. 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 significantly impact operating results.
COVID-19 Pandemic
While the novel coronavirus ("COVID-19") pandemic has been ongoing since the
first quarter of 2020, management has remained focused on the impacts to local
and U.S. economies, including the breadth of vaccine deployment and level of
commerce re-opening. Our utility operations, as essential services, have been
ongoing during this time and Southwest has continued to provide services to meet
the demand of its customers. Consistent with federal and state guidelines and
protocols, Southwest has continued to operate across its territories. Similarly,
Centuri has continued nearly all operations from the outset of the pandemic in
the U.S., and demand has not significantly diminished. For the duration of the
pandemic, the ability to work may nonetheless be impacted by individuals
contracting or being exposed to COVID-19, governmental requirements to postpone
the full resumption of certain non-essential services in some of the Company's
jurisdictions, or by management imposed restrictions for safety precautions; to
date, these factors have not had a significant impact on the Company's ability
to maintain operations. Employees at many offices (including corporate
headquarters) continue to work from home on a temporary basis and travel
restrictions largely continue. Both segments continue to facilitate
administration, communication, and all critical functions, supported by deployed
technology. To date, there has not been a significant disruption in the
Company's supply chains, transportation network, or ability to serve customers.
As noted earlier, management continues to have in place a moratorium on natural
gas disconnections for non-payment and continues to work with customers
experiencing financial hardship through flexible payment arrangements.
Management also continues to coordinate with certain governmental and nonprofit
entities for customer payment assistance. Management has increased the allowance
for uncollectibles; however, neither this nor other measures associated with the
moratorium have had a material impact on our financial position overall. See
Accounts receivable, net of allowances in Note 1 - Background, Organization, and
Summary of Significant Accounting Policies. In the utility infrastructure
services segment, a limited number of Centuri customers at the outset of the
pandemic delayed some projects, and crews were temporarily reduced; however,
most work continued, while following appropriate government protocols. Some crew
reductions are ongoing in specific areas; however, the associated revenue
impacts have not been significant. Management continues to monitor these
circumstances, the future impacts of which are not currently known, such as the
impact from business curtailments, weak market conditions, or any restrictions
that may limit the fulfillment by Centuri of its contractual obligations.
The extent to which COVID-19 may adversely impact the Company's business depends
on future developments, including the timing of full resumption of commerce
across our service territories, the deployment of vaccines and population
immunity, the state of local and North American economies, and impacts of these
collective conditions on our customers, in addition to other unmitigated effects
related to the virus. Management does not currently expect the impact of these
conditions to be material to the Company's liquidity or financial position;
however, continued uncertainty of economic and operational impacts means
management cannot predict whether the related financial impact in future periods
will be different from impacts reflected for the three and twelve months ended
March 31, 2021. In anticipation of a redeployment of employees to their normal
work locations, management created a multi-phase reintegration plan to safeguard
the well-being of our teams. Management will continue to monitor developments by
government officials, and those affecting employees, customers, and operations,
and will take additional steps as necessary to address impacts from the
pandemic. Events and circumstances arising after March 31, 2021, including those
resulting from COVID-19, will be reflected in management's estimates for future
periods.
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 2020 Annual Report to Stockholders, which is
incorporated by reference into the 2020 Form 10-K.

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                 SOUTHWEST GAS HOLDINGS, INC.                 Form 10-Q
                 SOUTHWEST GAS CORPORATION               March 31, 2021



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. As needed,
certain items are covered in greater detail in later sections of MD&A. As
reflected in the table below, the natural gas operations segment accounted for
an average of 72% of twelve-month-to-date consolidated net income over the past
two years. Natural gas sales are seasonal, peaking during the winter months;
therefore, results of operations for interim periods are not necessarily
indicative of results for a full year.
Summary Operating Results
                                                                             Period Ended March 31,
                                                                         Three Months                              Twelve Months
(In thousands, except per share amounts)                            2021                  2020                              2021                 2020
Contribution to net income
Natural gas operations                                       $    118,715             $  83,599                        $   194,234          $   143,381
Utility infrastructure services                                      (859)              (10,204)                            84,207               50,231
Corporate and administrative                                         (563)                 (853)                            (1,366)              (1,943)
Net income                                                   $    117,293             $  72,542                        $   277,075          $   191,669

Weighted average common shares                                     57,600                55,310                             56,564               54,726
Basic earnings per share
Consolidated                                                 $       2.04             $    1.31                        $      4.90          $      3.50
Natural Gas Operations
Reconciliation of Revenue to Operating Margin
(Non-GAAP measure)
Gas operating revenues                                       $    521,932             $ 502,827                        $ 1,369,690          $ 1,351,089
Less: Net cost of gas sold                                        156,021               160,821                            338,037              353,381
Operating margin                                             $    365,911             $ 342,006                        $ 1,031,653          $   997,708



1st Quarter 2021 Overview
Natural gas operations highlights include the following:

•37,000 first-time meters sets (1.8% growth rate) occurred over the past 12
months
•Operating margin increased $24 million
•Company-Owned Life Insurance ("COLI") income was $2.7 million in the current
quarter versus a loss of $15.5 million in the prior-year quarter
•Issued $250 million term loan due March 2022 to fund incremental gas costs
•California rate case finalized

Utility infrastructure services highlights include the following:

•Utility infrastructure services revenues increased $30 million, or 9.1%
•Supported customers with restoration services following winter freeze event ($9
million of incremental revenue)
•Utility infrastructure services expenses increased $16 million, or 5.1%
•Realized $1.5 million in gains on sale of equipment

Southwest Gas Holdings highlights include the following:
•Increased the quarterly dividend from $0.570 to $0.595 per share effective with
the June 2021 payment
•Received net proceeds of $46 million through equity shelf program issuances


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                 SOUTHWEST GAS HOLDINGS, INC.                 Form 10-Q
                 SOUTHWEST GAS CORPORATION               March 31, 2021



Results of Natural Gas Operations
Quarterly Analysis
                                                 Three Months Ended
                                                     March 31,
(Thousands of dollars)                          2021           2020
Gas operating revenues                       $ 521,932      $ 502,827
Net cost of gas sold                           156,021        160,821
Operating margin                               365,911        342,006
Operations and maintenance expense             106,135        103,088
Depreciation and amortization                   68,698         64,725
Taxes other than income taxes                   20,687         16,378
Operating income                               170,391        157,815
Other income (deductions)                          550        (20,536)
Net interest deductions                         22,166         25,058
Income before income taxes                     148,775        112,221
Income tax expense                              30,060         28,622

Contribution to consolidated net income $ 118,715 $ 83,599

Improvements from natural gas operations to consolidated net income of
$35 million occurred between the first quarters of 2021 and 2020. The
improvement was primarily due to increases in Operating Margin and Other income.
Operating margin increased $24 million. Approximately $6 million of incremental
margin was attributable to customer growth from 37,000 first-time meter sets
during the last twelve months, while rate relief added $18 million of margin.
Offsetting these increases were impacts from the temporary moratorium on late
fees initiated by Southwest in March 2020 ($2.6 million), in addition to lower
connection/re-connection charges, as a result of the COVID-19 pandemic. Amounts
returned to and collected from customers associated with regulatory account
balances, as well as differences in miscellaneous revenue and margin from
customers outside the decoupling mechanisms, also impacted the variance between
periods.
Operations and maintenance expense increased $3 million, or 3%, between quarters
primarily due to an increase in the service-related component of employee
pension cost and other benefits, increased expenditures for pipeline damage
prevention programs, and increased legal claim-related costs, offset by lower
training and travel costs as a result of the current COVID-19 environment.
Depreciation and amortization expense increased $4 million, or 6%, between
quarters, primarily due to a $546 million, or 7%, increase in average gas plant
in service compared to the corresponding quarter a year ago. Amortization of
regulatory program balances impacted expense in both periods. The increase in
gas plant was attributable to pipeline capacity reinforcement work, franchise
requirements, scheduled pipe replacement activities, and new infrastructure.
Taxes other than income taxes increased $4.3 million between quarters primarily
due to an increase in Arizona property taxes.
Other income improved $21.1 million between quarters primarily due to an
increase in income from COLI policies. The current quarter reflects a
$2.7 million increase in COLI policy cash surrender values, while the prior-year
quarter reflected a $15.5 million decline in COLI policy cash surrender values.
These fluctuations primarily result from changes in the values of equity
securities associated with the cash surrender values; changes in both quarters
were directionally consistent with the broader securities markets. Additionally,
the non-service-related components of employee pension and other postretirement
benefit costs decreased $1.5 million between periods.
Net interest deductions decreased $2.9 million in the first quarter of 2021, as
compared to the prior-year quarter, primarily due to lower carrying costs on PGA
balances and amortization of an interest-related regulatory balance in Arizona,
as well as lower interest rates associated with variable-rate debt.
Income tax expense in both periods reflects that COLI results are recognized
without tax consequences, and also reflects the amortization of excess
accumulated deferred income tax ("EADIT") balances.
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                 SOUTHWEST GAS HOLDINGS, INC.                 Form 10-Q
                 SOUTHWEST GAS CORPORATION               March 31, 2021



Results of Natural Gas Operations
Twelve-Month Analysis
                                                   Twelve Months Ended March 31,
(Thousands of dollars)                                 2021                   2020
Gas operating revenues                       $      1,369,690             $ 1,351,089
Net cost of gas sold                                  338,037                 353,381
Operating margin                                    1,031,653                 997,708
Operations and maintenance expense                    409,429                 419,720
Depreciation and amortization                         239,268                 222,733
Taxes other than income taxes                          67,769                  62,500
Operating income                                      315,187                 292,755
Other income (deductions)                              14,496                 (16,965)
Net interest deductions                                98,256                  96,985
Income before income taxes                            231,427                 178,805
Income tax expense                                     37,193                  35,424
Contribution to consolidated net income      $        194,234             $ 

143,381

Contribution to consolidated net income from natural gas operations increased
$51 million between the twelve-month periods ended March 2021 and 2020. The
increase was primarily due to an increase in Operating margin and Other income.
Operating margin increased $34 million between periods. Customer growth provided
$15 million, and combined rate relief provided $24 million of incremental
operating margin. The pandemic-period moratorium on late fees ($7.3 million) and
lower connection/re-connection charges offset the improvements. Regulatory
account balance return and recoveries impacted both periods, in addition to
margin from customers outside the decoupling mechanisms.
Operations and maintenance expense decreased $10.3 million, or 2%, between
periods primarily due to lower travel and in-person training costs in the
current COVID-19 environment and due to other cost saving initiatives by
management. These were partially offset by incremental expenditures for pipeline
damage prevention programs associated with a growing infrastructure and customer
base, and by increases in information technology costs.
Depreciation and amortization expense increased $16.5 million, or 7%, between
periods primarily due to a $634 million, or 8%, increase in average gas plant in
service since the corresponding period in the prior year, offset by a modest
decrease in regulatory amortization.
Taxes other than income taxes increased $5.3 million between periods primarily
due to an increase in property taxes in Arizona, and to a lesser extent, in
Southwest's California and Nevada jurisdictions.
Other income increased $31.5 million between the twelve-month periods of 2021
and 2020, primarily due to a current-period $27.4 million increase in COLI
policy cash surrender values and recognized death benefits, while the twelve
months ended March 31, 2020 reflected a $5.7 million decline. Offsetting these
amounts were lower interest earned on regulatory balances and an increase in
non-service related components of post-retirement benefit cost.
Net interest deductions increased $1.3 million between periods primarily due to
interest associated with the issuance of $450 million of Senior Notes in June
2020, offset by amortization of an interest-related regulatory balance in
Arizona and a reduction in interest rates on variable-rate debt.
Income tax expense in both periods reflects that COLI results are recognized
without tax consequences, and also reflects the amortization of EADIT balances.
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                 SOUTHWEST GAS HOLDINGS, INC.                 Form 10-Q
                 SOUTHWEST GAS CORPORATION               March 31, 2021



Results of Utility Infrastructure Services
Quarterly Analysis
                                                                          Three Months Ended
                                                                               March 31,
(Thousands of dollars)                                                2021                  2020
Utility infrastructure services revenues                         $    363,975          $    333,493
Operating expenses:
Utility infrastructure services expenses                              335,614               319,314
Depreciation and amortization                                          24,744                22,928
Operating income (loss)                                                 3,617                (8,749)
Other income (deductions)                                                (102)                 (242)
Net interest deductions                                                 1,622                 2,899
Income (loss) before income taxes                                       1,893               (11,890)
Income tax expense (benefit)                                            1,200                (2,149)
Net income (loss)                                                         693                (9,741)
Net income attributable to noncontrolling interest                      1,552                   463

Contribution to consolidated net income attributable to Centuri

                                                          $       

(859) $ (10,204)

Utility infrastructure services revenues increased $30.5 million in the first
quarter of 2021 when compared to the prior-year quarter, primarily due to
incremental electric infrastructure revenues of $21.6 million from expansion of
work with existing customers and securing work with new customers. Included in
the incremental electric infrastructure revenues during the first quarter of
2021 was $9 million from emergency restoration services performed by Linetec
following tornados and ice storms primarily in Texas. The remaining increase in
revenue was attributable to favorable weather in several areas and customer
scheduling, which allowed bid projects to be completed during an otherwise
seasonally slow period.
Utility infrastructure services expenses increased $16.3 million in the first
quarter of 2021 when compared to the prior-year quarter, primarily due to costs
to complete additional electric and gas infrastructure work. Operating
efficiencies improved due to favorable weather conditions and reduced COVID-19
restrictions from the prior year. Additionally, changes in mix of work resulted
in lower subcontractor expenses as a percentage of revenues, which contributed
to increased operating income. Storm restoration work typically generates a
higher profit margin than core infrastructure services, due to improved
operating efficiencies related to equipment utilization and absorption of fixed
costs. Included in total Utility infrastructure services expenses were general
and administrative costs, which increased $3.3 million in 2021 compared to 2020,
associated primarily with growth of the business. Gains on sale of equipment in
the first quarter of 2021 (reflected as an offset to Utility infrastructure
services expenses) were $1.5 million.
Depreciation and amortization expense increased $1.8 million between quarters,
attributable to equipment purchased to support the growing business, primarily
at Linetec. Depreciation expense, relative to the revenues recorded, was
generally consistent between periods.
Net interest deductions decreased $1.3 million between quarters primarily due to
lower incremental borrowing rates associated with decreased outstanding
borrowings under Centuri's $590 million secured revolving credit and term loan
facility.








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                 SOUTHWEST GAS HOLDINGS, INC.                 Form 10-Q
                 SOUTHWEST GAS CORPORATION               March 31, 2021



Results of Utility Infrastructure Services
Twelve-Month Analysis
                                                                       Twelve Months Ended March 31,
(Thousands of dollars)                                                  2021                    2020
Utility infrastructure services revenues                         $      1,978,770          $  1,771,609
Operating expenses:
Utility infrastructure services expenses                                1,745,729             1,592,076
Depreciation and amortization                                              98,548                90,618
Operating income                                                          134,493                88,915
Other income (deductions)                                                     (67)                 (651)
Net interest deductions                                                        7,992             13,716
Income before income taxes                                                126,434                74,548
Income tax expense                                                            34,477             21,718
Net income                                                                 91,957                52,830
Net income attributable to noncontrolling interest                             7,750              2,599

Contribution to consolidated net income attributable to Centuri

                                                          $         

84,207 $ 50,231

Utility infrastructure services revenues increased $207.2 million, or 12%, in
the current twelve-month period compared to the corresponding period of 2020,
primarily due to incremental electric infrastructure revenues of $165.7 million
from expansion of work with existing customers and securing work with new
customers. Included in the incremental electric infrastructure revenues during
the twelve-month period of 2021 was $90.5 million from emergency restoration
services performed by Linetec, following hurricane, tornado, and other storm
damage to customers' above-ground utility infrastructure in and around the Gulf
Coast and eastern regions of the U.S., as compared to $13.2 million in similar
services during the twelve-month period in 2020. Centuri's revenues derived from
storm-related services vary from period to period due to the unpredictable
nature of weather-related events. The remaining increase in revenue was
attributable to continued growth with existing gas infrastructure customers
under master service and bid agreements.
Utility infrastructure services expenses increased $153.7 million between
periods, largely due to incremental expenses related to electric infrastructure
work of $91.4 million, including costs associated with storm restoration work,
as well as costs to complete additional gas and electric infrastructure work.
These costs were mitigated by increased productivity and efficiencies in
completing electrical infrastructure projects and by lower fuel costs as a
percentage of revenues. Included in Utility infrastructure services expenses
were general and administrative costs, which increased $26.1 million in the
twelve-month period ended March 2021 when compared to the corresponding period
ended March 2020, due to higher payroll and operating costs associated with
continued growth of the business and higher profit-based incentive compensation
costs. Offsetting these increases were lower insurance costs from favorable
claims experience under Centuri's self-insurance programs. Gains on sale of
equipment (reflected as an offset to Utility infrastructure services expenses)
were $3.3 million and $5.3 million for the twelve-month periods of 2021 and
2020, respectively.
Depreciation and amortization expense increased $7.9 million between the current
and prior-year period. The increase was primarily attributable to incremental
costs of $6.3 million to support the electric infrastructure work being
performed, and to additional property and equipment purchased to support the
growing business overall.
Net interest deductions decreased $5.7 million between periods primarily due to
lower incremental borrowing rates associated with decreased outstanding
borrowings under Centuri's $590 million secured revolving credit and term loan
facility.
The income tax expense increase between periods reflects the increased level of
pre-tax earnings.

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SOUTHWEST GAS HOLDINGS, INC.                 Form 10-Q
                 SOUTHWEST GAS CORPORATION               March 31, 2021



Rates and Regulatory Proceedings
Southwest is subject to the regulation of the Arizona Corporation Commission
(the "ACC"), the Public Utilities Commission of Nevada (the "PUCN"), the
California Public Utilities Commission (the "CPUC"), and the Federal Energy
Regulatory Commission (the "FERC").
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
(including the cost of natural gas purchased) changes, and as additional
investments in new or replacement pipeline and related facilities are made.
Rates are intended to provide for recovery of all commission-approved 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 operations are disclosed above.
Arizona Jurisdiction
Arizona General Rate Case. In May 2019, Southwest filed a general rate case
application requesting to increase revenue by approximately $57 million to
update the cost of service to reflect recent U.S. tax reform changes,
incorporating the return of excess deferred income taxes to customers, and to
reflect capital investments, including certain post-test year additions and the
southern Arizona liquefied natural gas ("LNG") facility. The application
included a proposed 10.3% return on equity ("ROE") relative to a capital
structure of 51.1% equity. Southwest updated its request to reflect the actual
amortization of excess accumulated deferred income taxes ("EADIT") resulting
from U.S. tax reform, and to include additional post-test year plant associated
with its customer-owned yard line ("COYL") and vintage steel pipe ("VSP")
programs, discussed further below. The amendment increased the deficiency by $36
million, to $93 million, which was further updated to $90.6 million based on
certain aspects of cost of service, including a revised proposed ROE of 10.15%.
The request and amendments included the retention of a fully decoupled rate
design, other previously approved regulatory mechanisms, and a new
infrastructure tracking mechanism for specific plastic pipe, in addition to a
proposal for a renewable natural gas ("RNG") program as part of its PGA
mechanism. Southwest entered into a stipulation for certain aspects of the case,
agreeing to continue the COYL program; to establish a Tax Expense Adjustor
Mechanism to track annual changes in the amortization of EADIT, as well as any
future changes in the federal tax rate; to include a 10-year amortization of
EADIT associated with deemed "unprotected" plant; and to incorporate various
tariff proposals. EADIT associated with "protected" plant relates to timing
differences from using accelerated depreciation for tax purposes and another
method for book purposes, and unprotected amounts relate to all other timing
differences. Following the hearing and legal briefing process, this requested
amount was further updated to $80.7 million to reflect agreements by the parties
on the treatment of EADIT and certain other ratemaking adjustments.
A final decision was issued in December 2020, with new rates becoming effective
in January 2021, resulting in an overall annual revenue increase of $36.8
million, and the continuation of both full revenue decoupling and the COYL
program. An ROE of 9.1% was approved with a capital structure comprised of 48.9%
long-term debt and 51.1% common equity. The overall increase reflects the final
ROE and the inclusion of a six-month period covering certain post-test year
plant additions, as well as the post-test year plant addition of the LNG
facility. See additional discussion related to these programs below. The
continuation of the property tax tracker was supported in the final decision, as
was the Tax Expense Adjustor Mechanism (noted above). While the RNG proposal was
not approved as part of the decision, the ACC agreed to conduct a workshop to
further explore the role of RNG in Arizona.
Delivery Charge Adjustment. The Delivery Charge Adjustment ("DCA") is filed each
April, which along with other reporting requirements, contemplates a rate to
recover the over- or under-collected margin tracker amounts based on the balance
at the end of the preceding calendar year. In April 2020, Southwest filed to
adjust the existing rate to consider the 14-month period of January 1, 2019
through February 29, 2020, proposing a rate of $0.00655 per therm based on an
ending balance of approximately $3.5 million. Although Commission Staff
concurred with Southwest's proposed rate, the ACC ultimately elected to reduce
the rate to zero in an effort to provide some measure of customer relief in
light of current issues related to the COVID-19 pandemic, and at the time of
both the April filing and the ACC decision, the balance was a liability (in an
over-recovered status). Activity through the remainder of 2020 resulted in a
modest under-collected balance at December 31, 2020, and an over-collected
balance of $9.5 million exists as of March 31, 2021.
LNG Facility. In 2014, Southwest sought ACC preapproval to construct, operate,
and maintain a 233,000 dekatherm LNG facility in southern Arizona. This facility
is intended to enhance service reliability and flexibility related to natural
gas deliveries in the southern Arizona area by providing a local storage option,
and to be connected directly to Southwest's
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SOUTHWEST GAS HOLDINGS, INC.                 Form 10-Q
                 SOUTHWEST GAS CORPORATION               March 31, 2021



distribution system. Southwest was ultimately granted approval for construction
and deferral of costs. The facility was placed in service in December 2019. The
capital costs and the operating expenses associated with plant operation were
considered and approved as part of Southwest's recently approved general rate
case. Due to the timing of the approximate $12 million in operating costs
incurred following the in-service date, a proposal to recover the associated
regulatory asset balance will be included in the next Arizona general rate case
application.
COYL Program. Southwest received approval, in connection with its 2010 Arizona
general rate case, to implement a program to conduct leak surveys, and if leaks
were present, to replace and relocate service lines and meters for Arizona
customers whose meters were set off from the customer's home, representing a
non-traditional configuration. In 2014, the ACC approved a "Phase II" of the
COYL program, which included the replacement of non-leaking COYLs. Annual
surcharges were designed to collect the revenue requirement associated with the
program. In a February 2019 filing, Southwest requested to increase its
surcharge to recover a revenue requirement of $6.7 million (an increase of
$3.2 million) associated with $26.6 million in capital projects completed in
2018. The ACC ultimately issued an Order in October 2019 authorizing Southwest
to retain the existing annual surcharge in place, while it reviewed the program
as part of the general rate case. Southwest also included an estimated
$21.1 million related to the 2019 COYL capital projects as part of the rate
case. Parties to the rate case stipulated to continue the COYL program and
recommended recovery of the plant as part of Southwest's filed post-test year
plant adjustment, with inclusion of related amounts in base rates. Further
consideration in the rate case decision limited post-test year plant to six
months (inclusive of COYL plant), and limited future COYL activity to the
replacement of leaking COYLs, or in cases when other replacement activity is
taking place in the vicinity. A filing in the second quarter of 2021 will
propose the recovery of the revenue requirement associated with the 2019 and
2020 COYL activity and plant placed in service following the six-month post-test
year inclusion period of the recently concluded rate case.
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 in Arizona. As part of the
program, Southwest proposed to begin replacing the pipe on an accelerated basis
and recover the costs through an annual surcharge filing. Once implemented,
surcharges to collect the annual revenue requirement associated with the capital
expenditures were designed to be revised annually under the program. In February
2019, Southwest requested to increase its surcharge revenue by $9.5 million (to
$11.9 million) associated with the replacement of approximately $100 million in
2018 VSP capital projects. The ACC issued an Order in October 2019 authorizing
Southwest to retain the existing annual surcharge, and indicated it would review
the program as part of the general rate case. Southwest also proposed to have
the ACC review an estimated $103.4 million of 2019 VSP capital projects as part
of the rate case. As noted above, the decision in the general rate case provided
for a post-test year plant adjustment period of six months (inclusive of VSP).
However, the ACC ultimately decided to discontinue the accelerated VSP program
at this time. A filing in the second quarter of 2021 will propose the recovery
of the revenue requirement associated with the 2019 and 2020 VSP activity and
plant placed in service following the six month post-test year inclusion period
of the recently concluded rate case.
Customer Data Modernization Initiative. Southwest embarked on an initiative to
replace its customer service system and gas transaction systems, each to be
utilized to support all Southwest service territories. Combined, these
undertakings are referred to as the Customer Data Modernization Initiative (the
"CDMI"). In March 2019, Southwest filed an application with the ACC seeking an
accounting order to track and defer all costs associated with the CDMI to
mitigate adverse financial implications associated with this multi-year
initiative. The commission issued a decision in this matter in early April 2021
denying Southwest's request for a regulatory asset, indicating that the
requested recovery mechanism was not warranted. Therefore, the costs will be
considered as part of a future general rate proceeding. The total cost for the
CDMI was estimated at approximately $174 million, $96 million of which would be
allocable to the Arizona rate jurisdiction. The customer service system was
placed in service in May 2021 and the gas transaction system will follow later
in 2021.
California Jurisdiction
California General Rate Case. In August 2019, Southwest filed a general rate
case based on a 2021 test year, seeking authority to increase rates in its
California 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. The proposed
combined revenue increase of $12.8 million was net of a $10.9 million revenue
reduction associated with changes from U.S. tax reform, which included the
amortization of $9.8 million (approximately $2 million annually over five years)
associated with the difference in authorized income tax expense and actual
incurred income tax expense for years 2019 and 2020, which when returned would
impact cash flows, but not expected to have an impact on earnings. Southwest
tracked those amounts, as directed, and reserved them for return to customers.
The overall revenue request also included $1.6 million of EADIT proposed to be
returned to customers each year until the amount is reset as part of a future
rate case. Southwest's proposal included an ROE of 10.5%, relative to a 53%
equity ratio; continuation of annual post-test year margin adjustments of 2.75%;
implementation of various safety-related programs, including a targeted pipe
replacement program and a meter
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SOUTHWEST GAS HOLDINGS, INC.                 Form 10-Q
                 SOUTHWEST GAS CORPORATION               March 31, 2021



protection program (with a combination of measures, such as snow sheds, excess
flow valves, upgraded meter set piping and upgraded Encoder Receiver Transmitter
protocol); as well as an expansion of the school COYL replacement program.
Southwest reached an agreement in principle with the Public Advocate's Office
for settlement of the general rate case, which was unanimously approved by the
Commission on March 25, 2021, including a $6.4 million total combined revenue
increase with a 10% ROE, relative to a 52% equity ratio. Approximately
$4 million of the original proposed increase of $12.8 million was associated
with a North Lake Tahoe project that would not ultimately be completed by the
beginning of 2021; consequently, the parties agreed to remove it from the base
rate increase and instead provide for recovery of the cost of the project
through a future surcharge. The decision also maintains Southwest's existing
2.75% annual attrition adjustments, the continuation of the pension balancing
account, and a proposed increase in the residential basic service charge from
the existing $5.00 to $5.75 per month. It also includes a cumulative total of
$119 million over the five-year rate cycle to implement risk-informed proposals,
consisting of the school COYL replacement, meter protection, and pipe
replacement programs. Although new rates were originally anticipated to be in
place by January 1, 2021, in light of an administrative delay, Southwest was
granted authority to establish a general rate case memorandum account to track
the margin/revenue impacts related to the delay in the implementation of new
rates. Such rates were ultimately implemented April 1, 2021.
Attrition Filing. Since Southwest's general rate case test year is 2021, there
is no separate attrition increase for 2021; however, the PTY attrition increases
of 2.75% will continue in 2022, as approved in the most recent rate case
decision.
Greenhouse Gas ("GHG") Compliance. California Assembly Bill Number 32 and
regulations promulgated by the California Air Resources Board, require
Southwest, as a covered entity, to comply with applicable requirements
associated with California GHG emissions reporting and the California Cap and
Trade Program. The CPUC issued a decision in 2018 adopting an allocation
methodology to distribute the net revenues or costs. Southwest began amortizing
its then existing net cost balance over a 12-month period with recovery rates
effective July 2018 for all applicable rate schedules. In addition, for years
2019-2020, the decision adopted an allocation methodology to distribute the
revenue proceeds through a California Climate Credit to active residential
customers in April of each year, following initial required credits in October
2018. Amounts distributed in April 2019 and 2020 were comparable. GHG compliance
costs recovered through rates have no impact on earnings.
Renewable Natural Gas. In February 2019, Southwest filed an application that,
among other things, sought to formally allow renewable natural gas (or
biomethane) as an includible component of Southwest's gas supply portfolio
through the Biomethane Gas Program ("BGP"). This proposal was designed to
further the goals of the California Global Warming Solutions Act of 2006, the
California Low Carbon Fuel Standard, Senate Bills 1383 and 1440, as well as
current or future legislative or regulatory efforts to reduce greenhouse gas
emissions. Implementation of the BGP addresses cost recovery as part of
Southwest's existing Gas Cost Incentive Mechanism related to the purchase or
sale of biomethane. The CPUC issued a final decision approving the proposal in
March 2020.
Customer Data Modernization Initiative. 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.
Approximately $19 million of the estimated $174 million total for the CDMI would
be allocable to the California rate jurisdiction. Southwest filed a separate
request to establish a memorandum account while the CPUC considered its
application request to establish the two-way balancing account. Effective
October 2019, the CPUC granted Southwest's memorandum account request, which
would allow 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. The balance tracked in the memorandum
account would be transferred to the two-way balancing account, if approved. In
January 2020, Southwest and the Public Advocates Office reached a settlement
agreement to adopt Southwest's Application and the CPUC issued a final decision
approving the settlement agreement as filed in July 2020. A rate to begin
recovering the balance accumulated through June 30, 2020 was established and
made effective September 1, 2020, further updated in January 2021, and will be
updated annually thereafter each January.
Emergency Relief Program Related to COVID-19. In March 2020, in light of the
COVID-19 pandemic, Southwest requested to establish a memorandum account to
track costs as part of customer protections under Emergency Relief regulations
implemented in California in 2019 (in the event of a state or federal declared
emergency or disaster). The CPUC passed an emergency resolution on April 16,
2020 authorizing and directing utilities to implement customer protections and
to establish memorandum accounts to track the financial impacts of complying
with the resolution. On May 1, 2020, Southwest requested to establish a COVID-19
Pandemic Protections Memorandum Account ("CPPMA") to record all incremental
costs and lost revenues incurred by Southwest associated with its implementation
of the COVID-19 customer protections as outlined in the CPUC resolution. The
customer protections were retroactively applied to March 4, 2020, the date
Governor Gavin Newsom declared a state of emergency related to COVID-19. The
CPPMA was originally effective March 4, 2020 through April 16, 2021, but was
extended through June 30, 2021. These customer protections focus on flexible
payment plan options, additional
                                           36


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SOUTHWEST GAS HOLDINGS, INC.                 Form 10-Q
                 SOUTHWEST GAS CORPORATION               March 31, 2021



protections for income-qualified customers, as well as the suspension of
disconnections for non-payment and the waiver of deposit and late fee
requirements. Tracked amounts will be considered by the CPUC for future
recovery.
Nevada Jurisdiction
Nevada General Rate Case. Southwest filed a general rate case application with
the PUCN in February 2020, which requested a statewide overall general rate
increase of approximately $38.3 million. The request sought an ROE of 10%
relative to a proposed capital structure of 50% equity and continuation of the
General Revenues Adjustment ("GRA") mechanism (full revenue decoupling). The
request also proposed the recovery of previously excluded costs attributable to
several software applications. In June 2020, Southwest submitted its
certification filing to update certain balances through May 31, 2020, which
increased its overall proposed rate increase to $38.5 million. The commission
issued its final order in September 2020, which provided for an authorized
combined revenue increase of approximately $23 million for northern and southern
Nevada and continuation of the currently authorized 9.25% ROE, with a capital
structure of 49.26% equity and 50.74% debt. Southwest's existing GRA was
authorized to continue without modification. Full cost recovery of the
unamortized balance of excluded software projects from the previous general rate
case was authorized in this case, along with the inclusion of all proposed Gas
Infrastructure Replacement ("GIR") and Mesquite Expansion projects in rate base,
and full recovery of test year and certification operations and maintenance
expenses associated with the CDMI project. Rates became effective in October
2020.
In association with the previous Nevada rate case decision in December 2018,
management requested reconsideration of several issues in the case; however, the
PUCN ultimately granted no further rate relief. Management decided to seek
judicial review of the PUCN's rate order, which was considered in January 2020.
The District Court Judge deferred to the PUCN's original findings. In March
2020, Southwest filed an appeal with the Nevada Supreme Court, which remains
active; the resolution will likely take 12-24 months from the date of the
appeal.
General Revenues Adjustment. The continuation of the GRA was affirmed as part of
Southwest's recently concluded general rate case, effective October 2020.
Southwest makes Annual Rate Adjustment ("ARA") filings to update rates to
recover or return amounts associated with various regulatory mechanisms,
including the GRA. In June 2019, Southwest made its annual filing, which
provided for a decrease of approximately $8 million for an over-collected
balance in southern Nevada and an increase of approximately $2 million in
northern Nevada. The proposed changes were approved, with rates effective
January 2020. In May 2020, Southwest made its most recent ARA filing, which
proposed an annualized margin decrease of $5.3 million in southern Nevada and an
increase of $1.6 million in northern Nevada. The ARA filing was resolved through
a settlement of the parties, in which the proposed changes associated with the
GRA were approved, effective January 2021. 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.
Infrastructure Replacement Mechanism. In 2014, the PUCN approved final rules for
the GIR mechanism, which defers and provides for recovery of certain costs
associated with accelerated replacement of qualifying infrastructure that would
not otherwise currently provide incremental revenues. Associated with the
replacement of various types of pipe infrastructure under the mechanism (Early
Vintage Plastic Pipe, COYL, and VSP), the related regulations provide Southwest
with the opportunity to file a GIR "Advance Application" annually, generally in
May, to seek preapproval of qualifying replacement projects.
Furthermore, a GIR rate application is generally filed each October to reset the
GIR recovery surcharge rate related to previously approved and completed
projects, with new rates typically becoming effective each January. On October
1, 2019, Southwest filed a rate application to reset the recovery surcharge to
include cumulative deferrals through August 31, 2019. This surcharge rate became
effective February 2020, designed to result in a reduction in annual revenue of
approximately $5.3 million in southern Nevada and no incremental revenue in
northern Nevada. On September 30, 2020, Southwest filed its latest rate
application to reset the recovery surcharge to include cumulative deferrals
through August 31, 2020. The updated surcharge rate is expected to result in a
reduction in annual revenue of approximately $11.8 million, and became effective
January 2021.
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 its June 2019 ARA
filing, Southwest proposed annualized margin increases of $3.2 million and
$880,000 in southern and northern Nevada, respectively. However, Southwest
entered into a stipulation and agreement to modify these amounts to $6.2 million
and $1.1 million in southern and northern Nevada, respectively, which reflected
the recovery of a related but separate program balance to be rolled into
customer rates with the same effective date. The modification was approved, and
rates became effective January 2020. In its May 2020 ARA filing, Southwest
proposed annualized margin decreases of $313,000 and $55,000 for southern and
northern Nevada, respectively, which were approved and became effective January
2021.
Expansion and Economic Development Legislation. In January 2016, final
regulations were approved by the PUCN associated with legislation ("SB 151")
previously introduced and signed into law in Nevada. The legislation authorized
natural gas utilities
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SOUTHWEST GAS HOLDINGS, INC.                 Form 10-Q
                 SOUTHWEST GAS CORPORATION               March 31, 2021



to expand their infrastructure to provide service to unserved and underserved
areas in Nevada.
In November 2017, Southwest filed for preapproval of a project to extend service
to Mesquite, Nevada, in accordance with the SB 151 regulations. Ultimately, the
PUCN issued an order approving Southwest's proposal for the expansion. The order
approved a capital investment of approximately $28 million and the construction
of approximately 37 miles of distribution pipeline (including the approach
main). The annual revenue requirement associated with the project is
$2.8 million. A volumetric rate, applicable to all southern Nevada customers
(including new customers in Mesquite), was implemented in October 2019 to
recover the cost. Southwest's May 2020 ARA filing, which proposed an annualized
margin increase of $185,000, reflects the cumulative deferred revenue
requirement associated with the Mesquite facilities that were placed in service
through April 30, 2020. During 2020, Southwest continued serving certain
customers in Mesquite from an approved "virtual" pipeline network, providing
temporary natural gas supply using portions of the approved distribution system
and compressed natural gas. Construction of the tap site, approach main, as well
as distribution mains was completed and facilities were placed in service in
December 2020.
In June 2019, Southwest filed for preapproval to construct the infrastructure
necessary to expand natural gas service to Spring Creek, Nevada, and to
implement a cost recovery methodology to timely recover the associated revenue
requirement consistent with the SB 151 regulations. Expansion to the Spring
Creek area near Elko, Nevada consists of a high-pressure approach main and
associated regulator stations, an interior backbone, and the extension of the
distribution system from the interior backbone system. The total capital
investment was estimated to be $61.9 million. A stipulation in this matter was
reached with the parties and approved by the PUCN in December 2019, which
largely accepted Southwest's proposal with modifications reflected in the rate
recovery allocations split amongst northern Nevada, Elko, and Spring Creek
expansion customers. Construction of the initial phase of the expansion began in
the third quarter of 2020, and service commenced to the first Spring Creek
customers in December 2020.
Customer Data Modernization Initiative. In March 2019, Southwest filed a request
seeking authority to establish a regulatory asset to defer the revenue
requirement related to the CDMI to mitigate the financial attrition associated
with the multi-year project. Approximately $59 million of the estimated $174
million cost of the CDMI would be allocable to the Nevada rate jurisdictions. A
hearing on this matter was held in August 2019 and the PUCN issued its decision
in September 2019, denying Southwest's request for regulatory asset treatment,
finding a general rate case to be the most appropriate avenue to address such
costs. In response to the PUCN's decision, Southwest filed a Petition for
Reconsideration in October 2019, which was denied. As part of Southwest's
recently approved general rate case filing, Southwest was authorized to include
CDMI operations and maintenance costs since the beginning of the test year as
part of its revenue requirement in the case. The customer service system portion
of the project was placed in service in May 2021, and the gas transaction system
portion is expected to follow later in 2021.
Regulatory Asset Related to COVID-19. The PUCN issued an order directing
utilities within the state to establish regulatory asset accounts, effective
March 12, 2020, the date that Governor Steve Sisolak 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 costs will be
considered by the PUCN for future recovery.
FERC Jurisdiction
General Rate Case. Paiute Pipeline Company ("Paiute"), a wholly owned subsidiary
of Southwest, filed a general rate case with the FERC in May 2019. The filing
fulfilled an obligation from the settlement agreement reached in the 2014 Paiute
general rate case. In January 2020, Paiute reached an agreement in principle
with the FERC Staff and intervenors to settle its most recent general rate case.
In addition to continuing the term-differentiated rate structures with its
shippers, the agreement requires Paiute's three largest transportation customers
and all of its storage customers to extend their service agreements to have
primary terms of at least five years. The settlement resulted in a revenue
reduction of approximately $700,000 and is based on a 9.90% pre-tax rate of
return. Also as part of this agreement, Paiute agreed not to file a rate case
prior to January 1, 2022, but no later than May 31, 2025.
In January 2020, Paiute requested, and was granted, the authority to place the
settlement rates into effect on an interim basis, effective February 2020. On
March 30, 2020, Paiute filed the proposed settlement agreement with the FERC for
review and approval. On July 6, 2020, the FERC issued a letter order approving
the settlement, and the order became final on August 5, 2020.
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                 SOUTHWEST GAS HOLDINGS, INC.                 Form 10-Q
                 SOUTHWEST GAS CORPORATION               March 31, 2021



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, 2021, under-collections in each of
Southwest's service territories resulted in an asset of $238.9 million on the
Company's and Southwest's Condensed Consolidated Balance Sheets. The significant
change in the PGA balance was due to incremental natural gas costs associated
with an extreme weather event in the central U.S. in mid-February 2021. 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 profit margin. However, gas cost deferrals and recoveries can
impact comparisons between periods of individual consolidated income statement
components. These include Gas operating revenues, Net cost of gas sold, Net
interest deductions, and Other income (deductions).
The following table presents Southwest's outstanding PGA balances
receivable/(payable):
(Thousands of dollars)         March 31, 2021       December 31, 2020       March 31, 2020
Arizona                       $       194,446      $           (3,901)     $       (17,538)
Northern Nevada                         3,036                  (8,601)              (3,154)
Southern Nevada                        31,849                 (42,134)              (2,585)
California                              9,555                   2,053               (3,221)
                              $       238,886      $          (52,583)     $       (26,498)


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 accelerated activity has
necessitated the issuance of both debt and equity securities to supplement cash
flows from operations. The Company endeavors to maintain an appropriate balance
of equity and debt to preserve investment-grade credit ratings, which should
minimize interest costs.
Cash Flows
Southwest Gas Holdings, Inc.:
Operating Cash Flows. Cash flows from consolidated operating activities
decreased $324 million in the first three months of 2021 as compared to the same
period of 2020. The decline in cash flows primarily resulted from amounts under
purchased gas adjustment mechanisms, including amounts resulting from the
temporary escalation in gas commodity prices during the first quarter of 2021
associated with the extreme cold temperatures in the central U.S. (see Note 1 -
Background, Organization, and Summary of Significant Accounting Policies), and
also from a decrease ($25 million) in recoveries related to the Arizona
decoupling mechanism balance between three-month periods.
Investing Cash Flows. Cash used in consolidated investing activities decreased
$56 million in the first three months of 2021 as compared to the same period of
2020. The change was primarily due to a decrease in capital expenditures in both
reportable segments.
Financing Cash Flows. Net cash provided by consolidated financing activities
increased $265 million in the first three months of 2021 as compared to the same
period of 2020. The change was primarily due to Southwest's $250 million Term
Loan issued in the first quarter of 2021 to fund the increased cost of natural
gas supply noted above during the extreme cold weather event. Additionally, the
Company issued $46 million in common stock under its equity shelf program in the
first three months of 2021. Other changes relate to borrowing and repayment
activity related to the credit facilities between comparative periods in both
segments, and proceeds from a $50 million equipment loan in the prior-year
quarter.
During the three months ended March 31, 2021, the Company also issued 49,500
shares of common stock through the Dividend Reinvestment and Stock Purchase
Plan, raising approximately $3.1 million.
The capital requirements and resources of the Company generally are determined
independently for the natural gas operations and utility infrastructure services
segments. Each business activity is generally responsible for securing its own
external debt
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SOUTHWEST GAS HOLDINGS, INC.                 Form 10-Q
                 SOUTHWEST GAS CORPORATION               March 31, 2021



financing sources. However, the holding company may raise funds through stock
issuances or other external financing sources. See Note 4 - Common Stock.
Southwest Gas Corporation:
Operating Cash Flows. Cash flows from operating activities decreased
$354 million in the first three months of 2021 as compared to the same period of
2020. The decline in operating cash flows was primarily attributable to the
impacts related to deferred purchased gas costs and the Arizona decoupling
mechanism noted above.
Investing Cash Flows. Cash used in investing activities decreased $44 million in
the first three months of 2021 as compared to the same period of 2020. The
change was due to a decrease in capital expenditures in 2021. See also Gas
Segment Construction Expenditures and Financing below.
Financing Cash Flows. Net cash provided by financing activities increased
$304 million in the first three months of 2021 as compared to the same period of
2020. The increase was primarily due to Southwest's $250 million Term Loan
issued in the first quarter of 2021 to fund the increased cost of natural gas
supply noted above related to the extreme cold weather event. Additionally, in
the prior-year period, Southwest had more repayment activity for the portion of
its revolving credit facility that is designated for working capital purposes.
See Note 5 - Debt.
Gas Segment Construction Expenditures and Financing
During the twelve-month period ended March 31, 2021, construction expenditures
for the natural gas operations segment were $647 million. The majority of these
expenditures represented costs associated with scheduled and accelerated
replacement of existing transmission, distribution, and general plant.
Management estimates natural gas segment construction expenditures during the
three-year period ending December 31, 2023 will be approximately $2.1 billion.
Of this amount, approximately $700 million is scheduled to be incurred in 2021.
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 50% of the funding for gas operations and total
construction expenditures and dividend requirements. Any additional cash
requirements, including construction-related and paydown or refinancing of debt,
are expected to be provided by existing credit facilities, 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.
In May 2019, the Company filed with the Securities and Exchange Commission (the
"SEC") an automatic shelf registration statement for the offer and sale of up to
$300 million of common stock from time to time in at-the-market offerings under
the prospectus included therein in accordance with the Sales Agency Agreement,
dated May 8, 2019, between the Company and BNY Mellon Capital Markets, LLC. The
Company issued the remaining capacity ($46 million) under this equity program
during the quarter ended March 31, 2021. During the twelve months ended
March 31, 2021, 2,623,469 shares were issued in at-the-market offerings at an
average price of $66.96 per share with gross proceeds of $175.7 million, agent
commissions of $1.8 million, and net proceeds of $173.9 million under this
equity shelf program.
In April 2021, the Company entered into a Sales Agency Agreement between the
Company and BNY Mellon Capital Markets, LLC and J.P. Morgan Securities LLC 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 the
SEC the same month. Net proceeds from the sales of common stock under this
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 the 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.
Bonus Depreciation
In 2017, with the enactment of U.S. tax reform, the bonus depreciation deduction
percentage changed from 50% to 100% for "qualified property" placed in service
after September 27, 2017 and before 2023. The bonus depreciation tax deduction
phases out starting in 2023, by 20% for each of the five following
years. Qualified property excludes most public utility property. The
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SOUTHWEST GAS HOLDINGS, INC.                 Form 10-Q
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Company estimates bonus depreciation will defer the payment of approximately
$20 million of federal income taxes for 2021, none of which relates to natural
gas operations.
Dividend Policy
Dividends are payable on the Company's common stock at the discretion of the
Board of Directors (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 and expected external funding
needs, in addition to our ability to maintain strong credit ratings and
liquidity. The Company has paid dividends on its common stock since 1956 and has
increased that dividend each year since 2007. In February 2021, the Board
elected to increase the quarterly dividend from $0.57 to $0.595 per share,
representing a 4.4% increase, effective with the June 2021 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 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. At March 31, 2021, the combined balance in the PGA accounts
totaled an under-collection of $239 million. See PGA Filings for more
information.
In March 2021, Southwest issued a $250 million Term Loan that will mature in
March 2022, or 364 days after issuance. The proceeds were used to fund the
increased cost of natural gas supply during the month of February 2021 caused by
extreme weather conditions in the central U.S.
Southwest Gas Holdings, Inc. has a credit facility with a borrowing capacity of
$100 million that expires in April 2025. This facility is intended for
short-term financing needs. At March 31, 2021, $43 million was outstanding under
this facility.
Southwest has a credit facility, with a borrowing capacity of $400 million,
which expires in April 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, as noted below) during the first
three months of 2021 was $150 million, the same amount which was outstanding as
of March 31, 2021. The maximum amount outstanding on the short-term portion of
the credit facility during the first quarter of 2021 was $125 million. As of
March 31, 2021, $17 million was outstanding on the short-term portion 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.
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 2021 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. At
March 31, 2021, there was $50 million outstanding under this program.
Centuri has a senior secured revolving credit and term loan facility with
borrowing capacity of $590 million (refer to Note 5 - Debt). The line of credit
portion comprises $325 million; associated amounts borrowed and repaid are
available to be re-borrowed. The term loan facility portion has a limit of
approximately $265 million. The $590 million credit and term loan facility
expires in November 2023. It is secured by substantially all of Centuri's assets
except those explicitly excluded under the terms of the agreement (including
owned real estate and certain certificated vehicles). Centuri assets securing
the facility at March 31, 2021 totaled $1.3 billion. The maximum amount
outstanding on the combined facility during the first three months of 2021 was
$249 million, at which point $223 million was outstanding on the term portion.
As of March 31, 2021, $26 million was outstanding on the revolving credit
facility, in addition to the $223 million that remained outstanding on the term
loan portion of the facility. Also at March 31, 2021, there was approximately
$267 million, net of letters of credit, available for borrowing under the line
of credit.
                                           41

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SOUTHWEST GAS HOLDINGS, INC.                 Form 10-Q
                 SOUTHWEST GAS CORPORATION               March 31, 2021



Interest rates for the credit facilities of the holding company, Southwest, and
Centuri, and for Southwest's Term Loan contain LIBOR-based rates. Upon the
occurrence of certain events providing for a transition away from LIBOR, or if
LIBOR is no longer a widely recognized benchmark rate, the holding company and
Southwest may amend their respective credit facility as set forth in the credit
facility agreement, and also in the case of Southwest's Term Loan, to
accommodate a replacement benchmark as set forth in the agreements. LIBOR is
scheduled to be discontinued as a benchmark or reference rate after 2021. In
order to mitigate the impact of a discontinuance on the Company's and
Southwest'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 and Southwest can provide no assurances as to the impact a
LIBOR discontinuance will have on their financial condition or results of
operations. Any alternative rate may be less predictable or less attractive than
LIBOR.
The Company has a Sales Agency Agreement with BNY Mellon Capital Markets, LLC
and J.P. Morgan Securities LLC for the offer and sale of up to $500 million of
common stock from time to time in at-the-market offerings, which is an
additional source of liquidity.
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 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, 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, expected impacts of valuation
adjustments associated with any redeemable noncontrolling interest, the impacts
of U.S. tax reform including disposition in any regulatory proceeding and bonus
depreciation tax deductions, the impact of recent PHMSA rulemaking, the amounts
and timing for completion of estimated future construction expenditures, plans
to pursue infrastructure programs or programs under SB151 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, the outcome of judicial review of the
previous Nevada rate case, 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, and the timing and results of future rate hearings,
including any ongoing or future general rate cases and other proceedings, the
final resolution for recovery of the CDMI in all jurisdictions, 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 on
commerce 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 efficacy of vaccines, the ability to collect on
customer accounts due to the current or an extended moratorium on late fees or
service disconnection, 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 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 following
the ongoing resumption of commerce in our territories, and decisions of Centuri
customers as to whether to pursue capital projects due to economic impacts
resulting from the pandemic or
                                           42


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SOUTHWEST GAS HOLDINGS, INC.                 Form 10-Q
                 SOUTHWEST GAS CORPORATION               March 31, 2021



otherwise, the ability to recover and timing thereof related to costs associated
with the PGA mechanisms or other regulatory assets, 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 from U.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 associated
with a discontinuance of LIBOR including in relation to amounts of indebtedness
then outstanding, changes in construction expenditures and financing, changes in
operations and maintenance expenses, effects of pension expense forecasts,
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, future acquisition-related
costs, 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, impacts from work
awarded or failing to be awarded from significant customers, the mix of work
awarded, the amount of work awarded to Centuri following the lifting of 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, competition, our
ability to raise capital in external financings, our ability to continue to
remain within the ratios and other limits subject to our debt covenants, and
ongoing evaluations in regard to goodwill and other intangible assets. In
addition, the Company can provide no assurance that its discussions regarding
certain trends relating to its financing and operating expenses will continue 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 ended December 31, 2020.
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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