ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Southwest Gas Holdings, Inc. is a holding company that owns all of the shares of common stock of Southwest Gas Corporation (“Southwest” or the “natural gas operations” segment) and all of the shares of common stock of Centuri 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 June 30, 2021, Southwest had 2,141,000 residential, commercial, industrial, and other natural gas customers, of which 1,142,000 customers were located in Arizona, 797,000 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 June 2020. The remaining increase in active customer accounts compared to the June 30, 2020 total of 2,102,000 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 moratorium on disconnections for non-payment is expected to end in the latter half of 2021 across all of our jurisdictions. Residential and small commercial customers represented over 99% of the total customer base. During the twelve months ended June 30, 2021, 53% of operating margin (gas operating revenues less the net cost of gas sold) was earned in Arizona, 35% in Nevada, and 12% 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 43 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. In June 2021, Centuri entered into an agreement for the acquisition of Drum Parent, Inc. (“Drum”) and its U.S. operations, consisting principally of the utility infrastructure services operations of Drum’s primary subsidiary, Riggs Distler & Company, Inc. (“Riggs”), serving utility customers in the Northeast and Mid-Atlantic regions. The transaction is expected to be completed in the third quarter of 2021. The acquisition remains subject to certain conditions, and we can provide no assurances that it will be completed within the anticipated timeline or at all.
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SOUTHWEST GAS HOLDINGS, INC.
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Form 10-Q
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SOUTHWEST GAS CORPORATION
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June 30, 2021
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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, the level of commerce opening or re-opening, as well as impacts from new virus variants on these economies. 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; management has introduced plans for employees to begin returning to the office environment in the third quarter of 2021. At the same time, management is also focused on the need for adaptability in an environment of virus variants and governmental actions related thereto. Both segments continue to facilitate administration, communication, and all critical functions, supported by deployed technology whenever employees are working remotely. 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 that is expected to be lifted in the latter half of 2021 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 and its variants. 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, six, and twelve months ended June 30, 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 June 30, 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.
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Form 10-Q
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SOUTHWEST GAS CORPORATION
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June 30, 2021
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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 73% 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
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Period Ended June 30,
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Three Months
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Six Months
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Twelve Months
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(In thousands, except per share amounts)
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2021
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2020
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2021
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2020
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2021
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2020
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Contribution to net income
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Natural gas operations
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$
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11,413
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$
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11,942
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$
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130,128
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$
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95,541
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$
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193,705
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$
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151,954
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Utility infrastructure services
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15,116
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26,267
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14,257
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16,063
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73,056
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57,581
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Corporate and administrative
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(1,410)
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(244)
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(1,973)
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(1,097)
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(2,532)
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(1,957)
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Net income
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$
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25,119
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$
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37,965
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$
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142,412
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$
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110,507
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$
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264,229
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$
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207,578
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Weighted average common shares
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58,607
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55,462
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58,106
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55,386
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57,348
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55,105
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Basic earnings per share
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Consolidated
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$
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0.43
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$
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0.68
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$
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2.45
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$
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2.00
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$
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4.61
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$
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3.77
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Natural Gas Operations
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Reconciliation of Revenue to Operating Margin (Non-GAAP measure)
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Gas operating revenues
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$
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292,796
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$
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262,434
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$
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814,728
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$
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765,261
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$
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1,400,052
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$
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1,354,812
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Less: Net cost of gas sold
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76,496
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67,473
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232,517
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228,294
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347,060
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355,672
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Operating margin
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$
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216,300
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$
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194,961
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$
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582,211
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$
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536,967
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$
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1,052,992
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$
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999,140
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2nd 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 $21 million
•Company-Owned Life Insurance (“COLI”) income was $3.1 million in the current quarter versus $12 million in the prior-year quarter
•Filed Arizona applications for COYL and VSP recovery
•Implemented modernized customer information system in May 2021
Utility infrastructure services highlights include the following:
•Utility infrastructure services revenues increased $34 million, or 7%
•Utility infrastructure services expenses increased $48 million, or 11%
•Twelve-month revenues reached record level of $2 billion
•Announced planned acquisition of Riggs Distler & Company for $855 million
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SOUTHWEST GAS HOLDINGS, INC.
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Form 10-Q
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SOUTHWEST GAS CORPORATION
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June 30, 2021
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Results of Natural Gas Operations
Quarterly Analysis
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Three Months Ended
June 30,
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(Thousands of dollars)
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2021
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2020
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Gas operating revenues
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$
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292,796
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$
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262,434
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Net cost of gas sold
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76,496
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67,473
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Operating margin
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216,300
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194,961
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Operations and maintenance expense
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103,137
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99,320
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Depreciation and amortization
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57,631
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53,198
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Taxes other than income taxes
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19,338
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|
15,342
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Operating income
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36,194
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27,101
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Other income (deductions)
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(1,165)
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7,838
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Net interest deductions
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24,175
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23,991
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Income before income taxes
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10,854
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|
|
10,948
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Income tax benefit
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(559)
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(994)
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Contribution to consolidated net income
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$
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11,413
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|
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$
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11,942
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Contribution from natural gas operations to consolidated net income decreased $529,000 between the second quarters of 2021 and 2020. The decline was primarily due to a decrease in Other income, offset by an increase in Operating margin.
Operating margin increased $21 million. Approximately $2 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 $15 million of margin. Also contributing to the increase were late fees that were $1.8 million greater in the current quarter. A moratorium on such fees commenced in all of our territories in March 2020; however, resumption of the assessments in most of our territories occurred in April 2021 (California is subject to specific governmental protocols, and therefore related assessments have not yet recommenced). Amounts collected from and returned to 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 quarters.
Operations and maintenance expense increased $3.8 million, or 4%, between quarters primarily due to higher customer service-related costs, increased expenditures for pipeline damage prevention programs, and an increase in the service-related component of employee pension cost and other benefits.
Depreciation and amortization expense increased $4.4 million, or 8%, between quarters, primarily due to a $549 million, or 7%, increase in average gas plant in service compared to the corresponding quarter a year ago. Amortization related to regulatory account recoveries increased approximately $1.1 million between quarters and is also reflected as an increase in operating margin above. The increase in plant was attributable to pipeline capacity reinforcement work, franchise requirements, scheduled pipe replacement activities, and new infrastructure, as well as a new customer information system, which was placed in production in May 2021.
Taxes other than income taxes increased $4 million between quarters primarily due to an increase in Arizona property taxes.
Other income decreased $9 million between quarters primarily due to a decline in income from COLI policies. The current quarter reflects a $3.1 million increase in COLI policy cash surrender values and recognized death benefits, while the prior-year quarter reflected a $12 million increase. These fluctuations primarily result from changes in the the portion of the cash surrender values that are associated with equity securities; changes generally are directionally consistent with the broader securities markets. Amounts associated with the allowance for funds used during construction (“AFUDC”) are lower in the current quarter due to an update to the assumptions related to the impact short-term borrowings have on AFUDC. Offsetting these combined impacts is a decrease in the non-service-related components of employee pension and other postretirement benefit costs between quarters.
The income tax amount in both quarters includes the amortization of Excess Accumulated Deferred Income Tax (“EADIT”) balances and the impacts of COLI cash surrender value increases, which are recognized without tax consequences.
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SOUTHWEST GAS HOLDINGS, INC.
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Form 10-Q
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SOUTHWEST GAS CORPORATION
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June 30, 2021
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Results of Natural Gas Operations
Six-Month Analysis
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Six Months Ended
June 30,
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(Thousands of dollars)
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2021
|
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2020
|
Gas operating revenues
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$
|
814,728
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|
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$
|
765,261
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Net cost of gas sold
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232,517
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|
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228,294
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|
Operating margin
|
|
582,211
|
|
|
536,967
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|
Operations and maintenance expense
|
|
209,272
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|
|
202,408
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|
Depreciation and amortization
|
|
126,329
|
|
|
117,923
|
|
Taxes other than income taxes
|
|
40,025
|
|
|
31,720
|
|
Operating income
|
|
206,585
|
|
|
184,916
|
|
Other income (deductions)
|
|
(615)
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|
|
(12,698)
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|
Net interest deductions
|
|
46,341
|
|
|
49,049
|
|
Income before income taxes
|
|
159,629
|
|
|
123,169
|
|
Income tax expense
|
|
29,501
|
|
|
27,628
|
|
Contribution to consolidated net income
|
|
$
|
130,128
|
|
|
$
|
95,541
|
|
Contribution from natural gas operations to consolidated net income increased $34.6 million between the first six months of 2021 and 2020. The increase was primarily due to an improvement in Operating margin and Other income (deductions) and a decline in Net interest deductions, offset by increases in Depreciation and amortization, Operations and maintenance expense, and Taxes other than income taxes.
Operating margin increased $45.2 million, including $8 million attributable to customer growth. Rate relief contributed an additional $33 million in operating margin. Offsetting these impacts are lower late fees (approximately $800,000) and connect/re-connect charges during the moratorium, as discussed earlier. Residual impacts include those related to regulatory mechanisms, including recovery/return of regulatory program balances (primarily offset in amortization expense), in addition to margin from customers outside the decoupling mechanisms.
Operations and maintenance expense increased $6.9 million, or 3%, between periods primarily due to an increase in the service-related component of pension cost, incremental expenditures for pipeline damage prevention programs associated with a growing infrastructure and customer base, and increases in information technology and customer service-related costs, in addition to higher legal claim-related costs.
Depreciation and amortization expense increased $8.4 million, or 7%, between periods primarily due to a $550 million, or 7%, increase in average gas plant in service between periods. The increase in plant was attributable to pipeline capacity reinforcement work, franchise requirements, scheduled pipe replacement activities, and new infrastructure, as well as the implementation of the customer information system. Recoveries associated with regulatory account balances, as noted above, also resulted in increases in amortization expense ($1.8 million compared to the first six months of 2020).
Other income (deductions) improved $12.1 million overall between periods. The current period reflects $5.8 million in income from the combined effects of an increase in COLI policy cash surrender values and recognized death benefits, while the prior-year period reflected a $3.5 million decline in values, net of recognized death benefits. The non-service cost components of employee pension and other postretirement benefits were $3 million lower between periods. Lower equity AFUDC in the current period partially offset the impact of these improvements.
Net interest deductions decreased $2.7 million between periods primarily due to amortization of an interest-related regulatory balance in Arizona.
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SOUTHWEST GAS HOLDINGS, INC.
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Form 10-Q
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SOUTHWEST GAS CORPORATION
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June 30, 2021
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Results of Natural Gas Operations
Twelve-Month Analysis
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|
|
|
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|
Twelve Months Ended June 30,
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(Thousands of dollars)
|
|
2021
|
|
2020
|
Gas operating revenues
|
|
$
|
1,400,052
|
|
|
$
|
1,354,812
|
|
Net cost of gas sold
|
|
347,060
|
|
|
355,672
|
|
Operating margin
|
|
1,052,992
|
|
|
999,140
|
|
Operations and maintenance expense
|
|
413,246
|
|
|
414,049
|
|
Depreciation and amortization
|
|
243,701
|
|
|
226,588
|
|
Taxes other than income taxes
|
|
71,765
|
|
|
62,716
|
|
Operating income
|
|
324,280
|
|
|
295,787
|
|
Other income (deductions)
|
|
5,493
|
|
|
(10,719)
|
|
Net interest deductions
|
|
98,440
|
|
|
97,631
|
|
Income before income taxes
|
|
231,333
|
|
|
187,437
|
|
Income tax expense
|
|
37,628
|
|
|
35,483
|
|
Contribution to consolidated net income
|
|
$
|
193,705
|
|
|
$
|
151,954
|
|
Contribution to consolidated net income from natural gas operations increased $42 million between the twelve-month periods ended June 2021 and 2020. The increase was due primarily to an increase in Operating margin and Other income, offset by increases in Depreciation and amortization, as well as Taxes other than income taxes.
Operating margin increased $54 million between periods. Customer growth provided $14 million, and combined rate relief provided $39 million of incremental operating margin. Offsetting these impacts was a reduction in late fees ($3.8 million) due to the pandemic-period moratorium on these fees from March 2020 through April 2021 (still continuing in our California jurisdictions). Regulatory account balance return and recoveries impacted both periods, in addition to margin from customers outside the decoupling mechanisms.
Operations and maintenance expense decreased $803,000 between periods. Lower travel and in-person training costs in the COVID-19 environment and other cost saving initiatives by management more than offset higher levels of service-related pension and post-retirement benefit costs, expenditures for pipeline damage prevention programs associated with a growing infrastructure and customer base, and information technology and customer-related costs.
Depreciation and amortization expense increased $17.1 million, or 8%, between periods primarily due to a $604 million, or 8%, increase in average gas plant in service since the corresponding period in the prior year and due to a $1.2 million increase in regulatory account amortization.
Taxes other than income taxes increased $9 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 $16.2 million between the twelve-month periods of 2021 and 2020, primarily due to a current-period $18.5 million increase in COLI policy cash surrender values and recognized death benefits, while the twelve months ended June 30, 2020 reflected a $2.9 million increase.
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.
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|
Form 10-Q
|
SOUTHWEST GAS CORPORATION
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June 30, 2021
|
Results of Utility Infrastructure Services
Quarterly Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
(Thousands of dollars)
|
|
2021
|
|
2020
|
Utility infrastructure services revenues
|
|
$
|
528,625
|
|
|
$
|
494,813
|
|
Operating expenses:
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|
|
|
|
Utility infrastructure services expenses
|
|
478,640
|
|
|
430,224
|
|
Depreciation and amortization
|
|
25,217
|
|
|
24,019
|
|
Operating income
|
|
24,768
|
|
|
40,570
|
|
Other income (deductions)
|
|
(146)
|
|
|
86
|
|
Net interest deductions
|
|
1,632
|
|
|
2,239
|
|
Income before income taxes
|
|
22,990
|
|
|
38,417
|
|
Income tax expense
|
|
6,519
|
|
|
10,234
|
|
Net income
|
|
16,471
|
|
|
28,183
|
|
Net income attributable to noncontrolling interest
|
|
1,355
|
|
|
1,916
|
|
Contribution to consolidated net income attributable to Centuri
|
|
$
|
15,116
|
|
|
$
|
26,267
|
|
Utility infrastructure services revenues increased $33.8 million in the second quarter of 2021 when compared to the prior-year quarter, primarily due to increased work under gas infrastructure blanket and bid contracts with certain customers in the central and eastern U.S. regions and Canada. Revenues from electric infrastructure services increased $2.4 million in the second quarter of 2021 when compared to the prior-year quarter, including an offsetting reduction in emergency restoration storm support services of $4 million between periods due to the unpredictable nature of weather-related events. 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. Partially offsetting the increased revenues in the above noted regions was reduced work with two significant customers during the second quarter of 2021 (totaling $27 million), due to timing and mix of projects under each customer’s multi-year capital spending programs.
Utility infrastructure services expenses increased $48.4 million in the second quarter of 2021 when compared to the prior-year quarter, primarily due to costs to complete gas infrastructure work. The significant reductions in revenue from major customers, as discussed above, had an unfavorable impact on profit margins due to reduced operating efficiencies from equipment and facility utilization and under-absorption of other fixed costs. The prior-year period was favorably impacted by certain customers’ response to COVID-19, which allowed for an increase in main line replacement work as compared to service-line related work, resulting in greater operating efficiencies. Higher fuel costs and equipment rental expense were also incurred due to the mix of work and in support of growth in our electric infrastructure business. Centuri recognized $1.8 million in wage and rent subsidies from the Canadian government amidst the continuing COVID-19 environment during the second quarter of 2021, compared to $3.4 million in the prior-year quarter. These subsidies were recorded as a reduction in Utility infrastructure services expense. Also included in total Utility infrastructure services expenses were general and administrative costs, which increased approximately $1 million between comparative periods, associated with approximately $600,000 in professional fees related to Centuri’s pending acquisition of Riggs, and other costs resulting from general growth in the business.
Depreciation and amortization expense increased $1.2 million between quarters attributable to equipment purchased to support the growing volume of infrastructure work. Depreciation expense, relative to the revenues recorded, was generally consistent during the second quarter of 2021 compared to the prior-year quarter.
The decrease in Net interest deductions of $600,000 was 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
|
|
June 30, 2021
|
Results of Utility Infrastructure Services
Six-Month Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
(Thousands of dollars)
|
|
2021
|
|
2020
|
Utility infrastructure services revenues
|
|
$
|
892,600
|
|
|
$
|
828,306
|
|
Operating expenses:
|
|
|
|
|
Utility infrastructure services expenses
|
|
814,254
|
|
|
749,538
|
|
Depreciation and amortization
|
|
49,961
|
|
|
46,947
|
|
Operating income
|
|
28,385
|
|
|
31,821
|
|
Other income (deductions)
|
|
(248)
|
|
|
(156)
|
|
Net interest deductions
|
|
3,254
|
|
|
5,138
|
|
Income before income taxes
|
|
24,883
|
|
|
26,527
|
|
Income tax expense
|
|
7,719
|
|
|
8,085
|
|
Net income
|
|
17,164
|
|
|
18,442
|
|
Net income attributable to noncontrolling interest
|
|
2,907
|
|
|
2,379
|
|
Contribution to consolidated net income attributable to Centuri
|
|
$
|
14,257
|
|
|
$
|
16,063
|
|
Utility infrastructure services revenues increased $64.3 million in the first six months of 2021 when compared to the same period in the prior year, primarily due to incremental electric infrastructure revenues of $24 million from expansion of work with existing customers and securing work with new customers. Included in the incremental electric infrastructure revenues during the first six months of 2021 was $12.2 million from emergency restoration services performed by Linetec following tornados and ice storms, primarily in Texas, compared to $7.3 million in the first six months of the prior year. The remaining increase in revenues was attributable to favorable weather in several areas and customer scheduling, which allowed increased work under existing master service agreements and bid projects for gas infrastructure services in the central and eastern U.S. regions and Canada, offset by a reduction of $44 million in gas infrastructure services with the two large customers noted earlier.
Utility infrastructure services expenses increased $64.7 million in the first six months of 2021 when compared to the same period in the prior year, primarily due to costs to complete additional electric and gas infrastructure work. Operating efficiencies during the first quarter of 2021 from favorable weather conditions and reduced COVID-19 restrictions from the prior year were normalized in the second quarter of 2021 by higher fuel costs, equipment rental expense, payroll-related expenses, and subcontractor costs caused by changes in the mix of work and continued growth in our electric infrastructure business. The significant reduction in revenues with two large customers, as noted earlier, resulted in an unfavorable impact on profit margins during the first six months of 2021, due to reduced operating efficiencies from equipment and facility utilization and under-absorption of other fixed costs. Included in total Utility infrastructure services expenses were general and administrative costs, which increased $4.2 million in 2021 compared to 2020, associated primarily with growth of the business and $800,000 in professional fees incurred related to Centuri’s pending acquisition of Riggs. Gains on sale of equipment (reflected as an offset to Utility infrastructure services expenses) were approximately $4 million and $300,000 in the six-month periods in 2021 and 2020, respectively.
Depreciation and amortization expense increased approximately $3 million between periods, 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 $1.9 million during the first six months of 2021 due to lower incremental borrowing rates associated with decreased outstanding borrowings under Centuri’s $590 million secured revolving credit and term loan facility.
|
|
|
|
|
|
|
|
|
SOUTHWEST GAS HOLDINGS, INC.
|
|
Form 10-Q
|
SOUTHWEST GAS CORPORATION
|
|
June 30, 2021
|
Results of Utility Infrastructure Services
Twelve-Month Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended June 30,
|
(Thousands of dollars)
|
|
2021
|
|
2020
|
Utility infrastructure services revenues
|
|
$
|
2,012,582
|
|
|
$
|
1,812,122
|
|
Operating expenses:
|
|
|
|
|
Utility infrastructure services expenses
|
|
1,794,145
|
|
|
1,620,101
|
|
Depreciation and amortization
|
|
99,746
|
|
|
93,638
|
|
Operating income
|
|
118,691
|
|
|
98,383
|
|
Other income (deductions)
|
|
(300)
|
|
|
(88)
|
|
Net interest deductions
|
|
7,384
|
|
12,498
|
|
Income before income taxes
|
|
111,007
|
|
|
85,797
|
|
Income tax expense
|
|
30,762
|
|
24,477
|
|
Net income
|
|
80,245
|
|
|
61,320
|
|
Net income attributable to noncontrolling interest
|
|
7,189
|
|
3,739
|
|
Contribution to consolidated net income attributable to Centuri
|
|
$
|
73,056
|
|
|
$
|
57,581
|
|
Utility infrastructure services revenues increased $200.5 million, or 11%, in the current twelve-month period compared to the corresponding period of 2020, primarily due to incremental electric infrastructure revenues of $134.2 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 $86.5 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 $13.6 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 $174 million between periods, largely due to incremental costs related to electric infrastructure work of $87.2 million, including costs associated with storm restoration work, and due to costs necessary for the completion of additional gas infrastructure work. 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. Also included in Utility infrastructure services expenses were general and administrative costs, which increased $19.5 million during the twelve-month period in 2021 when compared to 2020, due to higher payroll and operating costs associated with continued growth of the business and higher profit-based incentive compensation. 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 approximately $5.6 million and $4.9 million for the twelve-month periods in 2021 and 2020, respectively.
Depreciation and amortization expense increased $6.1 million between the current and prior-year period. The increase was primarily attributable to incremental costs related to electric infrastructure depreciation of $4.3 million. The remaining increase is attributable to property and equipment purchased to support the growing volume of work being performed.
The decrease in Net interest deductions of $5.1 million was due to lower incremental borrowing rates associated with decreased outstanding borrowings under Centuri’s $590 million secured revolving credit and term loan facility.
|
|
|
|
|
|
|
|
|
SOUTHWEST GAS HOLDINGS, INC.
|
|
Form 10-Q
|
SOUTHWEST GAS CORPORATION
|
|
June 30, 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 later updated its request multiple times, in order to reflect the actual amortization of 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, and to reflect certain other 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, including continuing the COYL program; establishing 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; including a 10-year amortization of EADIT associated with deemed “unprotected” plant; addressing other aspects regarding EADIT; incorporating various tariff proposals; and incorporating other ratemaking adjustments. 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 the legal briefing process, the updated proposal reflected a request to increase rates by $80.7 million.
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. The overall increase reflects the inclusion of six months (as compared to eleven months previously contemplated) of post-test year plant additions, including additions with regard to the LNG facility, as well as the COYL and VSP programs. An ROE of 9.1% was approved with a capital structure comprised of 48.9% long-term debt and 51.1% common equity. See additional discussion related to the LNG facility, in addition to the COYL and VSP 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 conducted a workshop in May 2021 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, instead, the modest balance existing at the end of February 2020. Ultimately, the ACC elected to set the rate to zero in an effort to provide some measure of customer relief in light of 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). For 2021, once again, the balance at the end of the preceding calendar year was a modest positive balance, but in an over-collected status by the time rates would be requested to be re-set. Therefore, the zero rate will be maintained until the next annual filing date.
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 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
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|
|
|
|
|
|
|
|
SOUTHWEST GAS HOLDINGS, INC.
|
|
Form 10-Q
|
SOUTHWEST GAS CORPORATION
|
|
June 30, 2021
|
approved as part of Southwest’s recently approved 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 recently concluded general rate case, were deferred in the previously authorized regulatory asset and will be included for consideration in the next Arizona general rate case application.
COYL Program. Southwest originally 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 are 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. As indicated earlier, parties to the rate case stipulated to continue the COYL program and recommended recovery of certain plant as part of a post-test year plant adjustment, with inclusion of related amounts in base rates. The ACC final 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 May 2021 proposed the recovery of the remaining 2019 and 2020 revenue requirement associated with prior COYL program activity. The filing proposes the associated revenue requirement (approximately $13.7 million) be recovered over one year. A decision is expected before year end.
VSP Program. As part of a settlement agreement from its 2016 Arizona general rate case, Southwest received approval to implement a VSP replacement program. 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’s October 2019 Order authorizing Southwest to retain the existing annual surcharge indicated the program would be subject to review as part of the general rate case. As noted above, the decision in the most recent general rate case provided for a post-test year plant adjustment period of six months (including for VSP). However, the ACC ultimately decided to discontinue the accelerated VSP program at this time. A filing in May 2021 proposed the recovery of the otherwise unrecovered revenue requirement (associated with years 2019 through 2022), related to VSP plant investment during 2019 and 2020, which was not included as part of the recently concluded rate case. The filing proposes the associated revenue requirement (approximately $60 million) be recovered over a three-year period. A decision is expected before year end.
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 were 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 ACC 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, and that Southwest could, instead, seek to recover the costs as part of a future rate case. The total CDMI costs were estimated at approximately $174 million, of which $96 million would be allocable to the Arizona rate jurisdiction. The customer service system was placed in service in May 2021.
Graham County Utilities. In April 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 associated customers. Approval of the application would provide for transfer of the natural gas system of GCU to Southwest for the purchase price of $3.5 million and the addition of more than 5,000 customers. A decision is expected in the fourth quarter of 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. The overall revenue request also included $1.6 million of EADIT proposed to be returned to customers each year until the amount is reset again later 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
|
|
|
|
|
|
|
|
|
SOUTHWEST GAS HOLDINGS, INC.
|
|
Form 10-Q
|
SOUTHWEST GAS CORPORATION
|
|
June 30, 2021
|
safety-related programs, including a targeted pipe replacement program and a meter 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, which was unanimously approved by the CPUC 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 was associated with a North Lake 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, 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 expenditures totaling $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 impacts related to the delay in the implementation of new rates for purposes of later recovery. New rates were ultimately implemented April 1, 2021.
Attrition Filing. Following the 2021 implementation of new rates approved as part of the recently concluded general rate case, Southwest is also authorized to implement annual PTY attrition increases of 2.75% starting in 2022.
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, which has continued in the current year. 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 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. 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, further updated in January 2021, and is expected to be updated annually thereafter each January. As noted earlier, the customer service system, the largest of the two systems associated with the CDMI, was placed in service in May 2021.
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 incremental costs and lost revenues incurred by Southwest associated with its implementation of the protections outlined in the CPUC resolution. The 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 September 30, 2021. These customer protections focus on flexible payment plan options, additional protections for income-
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|
|
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|
SOUTHWEST GAS HOLDINGS, INC.
|
|
Form 10-Q
|
SOUTHWEST GAS CORPORATION
|
|
June 30, 2021
|
qualified customers, as well as the suspension of disconnections for non-payment and waiver of deposit and late fee requirements. Tracked amounts will be considered by the CPUC for future recovery.
Nevada Jurisdiction
Nevada General Rate Case. In June 2021, Southwest filed a Notice of Intent to file a general rate case, anticipated to occur in the third quarter of 2021.
Southwest’s previous general rate case application was filed 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 PUCN 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 previously authorized 9.25% ROE, with a capital structure of 49.26% equity and 50.74% debt. Southwest’s 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, as well as full recovery of test year and certification operations and maintenance expenses associated with the CDMI. Rates became effective in October 2020.
In association with an earlier Nevada rate case decision in December 2018, management requested reconsideration of several issues in the case; however, the PUCN ultimately granted no further 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 up to 24 months from the date of the appeal.
General Revenues Adjustment. As noted above, 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 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 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 Vintage Plastic Pipe, COYL, and VSP), the 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. 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, expected to result in a reduction in annual revenue of approximately $11.8 million, became effective in 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, to reflect 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 in January 2021. In May 2021, Southwest filed its proposed Conservation and Energy Efficiency plan for the years 2022 – 2024, with a proposed annual budget amount of approximately $3 million. A decision is expected in the fourth quarter 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.
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Form 10-Q
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SOUTHWEST GAS CORPORATION
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June 30, 2021
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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, including 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. A distribution loop, included in the initial estimated cost, is expected to be in service later this year.
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 was reached with the parties and approved by the PUCN in December 2019, largely accepting Southwest’s proposal with modifications in the rate recovery allocations 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. The expansion overall, as part of the earlier estimate, is anticipated to be completed in 2026.
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 was held in August 2019 and the PUCN issued a 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 its 2020 general rate case filing, Southwest was authorized to include CDMI operations and maintenance costs since the beginning of the associated test year as part of its revenue requirement in the case. The customer service system portion of the CDMI was placed in service in May 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.
Proposed Carbon Offset Program. In June 2021, Southwest filed an application to seek approval to offer a voluntary program to northern and southern Nevada 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. A decision is expected in the first quarter 2022.
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 an earlier general rate case. In January 2020, Paiute reached an agreement in principle with the FERC Staff and intervenors to settle the case, the results of which would not significantly impact revenues overall. The agreement required Paiute’s three largest transportation customers and all storage customers to have primary terms of at least five years under their agreements, provided for the continuance of term-differentiated rates generally, and included a 9.90% pre-tax rate of return. Interim rates were made effective February 2020, and in August 2020 an earlier FERC letter order approving the settlement became final. As part of the settlement, Paiute agreed not to file a rate case prior to January 1, 2022, but no later than May 31, 2025.
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SOUTHWEST GAS HOLDINGS, INC.
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Form 10-Q
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SOUTHWEST GAS CORPORATION
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June 30, 2021
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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 June 30, 2021, under-collections in each of Southwest’s service territories resulted in an asset of $235.1 million on the Company’s and Southwest’s Condensed Consolidated Balance Sheets. The significant change in the PGA balance was due to incremental natural gas costs associated with an extreme weather event in the central U.S. in mid-February 2021. See also Deferred Purchased Gas Costs in Note 1 – Background, Organization, and Summary of Significant Accounting Policies in this quarterly report on Form 10-Q.
Filings to change rates in accordance with PGA clauses are subject to audit by state regulatory commission staffs. PGA changes impact cash flows but have no direct impact on profit margin. However, gas cost deferrals and recoveries can impact comparisons between periods of individual consolidated income statement components. These include Gas operating revenues, Net cost of gas sold, Net interest deductions, and Other income (deductions).
The following table presents Southwest’s outstanding PGA balances receivable/(payable):
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(Thousands of dollars)
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June 30, 2021
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December 31, 2020
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June 30, 2020
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Arizona
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$
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194,107
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$
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(3,901)
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$
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(18,598)
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Northern Nevada
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417
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(8,601)
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(13,648)
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Southern Nevada
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35,865
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(42,134)
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(32,867)
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California
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4,715
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2,053
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(4,825)
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$
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235,104
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$
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(52,583)
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$
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(69,938)
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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 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 $374 million in the first six 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). Other impacts include a decrease ($45 million) in recoveries related to the Arizona decoupling mechanism balance between six-month periods, and the impact of changes in components of working capital overall.
Investing Cash Flows. Cash used in consolidated investing activities decreased $93 million in the first six months of 2021 as compared to the same period of 2020. The change was primarily due to a decrease in capital expenditures in the natural gas operating segment.
Financing Cash Flows. Net cash provided by consolidated financing activities increased $94 million in the first six months of 2021 as compared to the same period of 2020. The change was primarily due to Southwest’s $250 million short-term loan issued in the first quarter of 2021 to fund the increased cost of natural gas supply during the extreme cold weather event (noted earlier), and borrowing and repayment activity between comparative periods under the credit facilities in both segments. The prior-year period included the issuance of $450 million in notes by Southwest and $70 million in equipment loans at Centuri. Additionally, the Company issued $66 million more in common stock under its equity shelf programs in the first six months of 2021 compared to issuances in the prior year.
During the six months ended June 30, 2021, the Company also issued 91,000 shares of common stock through the Dividend Reinvestment and Stock Purchase Plan, raising approximately $5.8 million.
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SOUTHWEST GAS HOLDINGS, INC.
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Form 10-Q
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SOUTHWEST GAS CORPORATION
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June 30, 2021
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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 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 $383 million in the first six 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, and other working capital changes.
Investing Cash Flows. Cash used in investing activities decreased $82 million in the first six months of 2021 as compared to the same period of 2020. The change was primarily due to a decrease in capital expenditures in 2021 as compared the same period in the prior year. See also Gas Segment Construction Expenditures and Financing below.
Financing Cash Flows. Net cash provided by financing activities increased $148 million in the first six 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 during the extreme cold weather event, and changes in borrowings and repayments between periods under Southwest’s credit facility. Increased capital contributions to Southwest from Southwest Gas Holdings, Inc. also occurred during the first six months of 2021. The prior year included proceeds from the issuance of $450 million in senior notes. See Note 5 – Debt.
Gas Segment Construction Expenditures and Financing
During the twelve-month period ended June 30, 2021, construction expenditures for the natural gas operations segment were $614 million. The majority of these expenditures represented costs associated with the replacement of existing transmission, distribution, and general plant (including costs to implement our customer service system).
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 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 (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 the Securities and Exchange Commission (the “SEC”) the same month. The Company issued $70.4 million under this multi-year program during the second quarter of 2021. 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.
In May 2019, the Company filed an earlier automatic shelf registration statement with the SEC for the offer and sale of up to $300 million of common stock from time to time in at-the-market offerings under the related prospectus and sales agency agreement. The Company issued the remaining capacity ($46 million) of this equity program during the quarter ended March 31, 2021.
During the twelve months ended June 30, 2021, 2,953,854 shares were issued in at-the-market offerings at an average price of $66.36 per share with gross proceeds of $196 million, agent commissions of $2 million, and net proceeds of $194 million under the equity shelf programs noted above. See Note 4 – Common Stock for more information.
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SOUTHWEST GAS HOLDINGS, INC.
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Form 10-Q
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SOUTHWEST GAS CORPORATION
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June 30, 2021
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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 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, expected external funding needs, and 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 June 30, 2021, the combined balance in the PGA accounts totaled an under-collection of $235 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 June 30, 2021, $27 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) during the first six months of 2021 was $150 million, the same amount which was outstanding as of June 30, 2021. The maximum amount outstanding on the short-term portion of the credit facility during the first six months of 2021 was $125 million. As of June 30, 2021, $41 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 June 30, 2021, there was $50 million outstanding under this program.
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SOUTHWEST GAS HOLDINGS, INC.
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Form 10-Q
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SOUTHWEST GAS CORPORATION
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June 30, 2021
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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 June 30, 2021 totaled $1.4 billion. The maximum amount outstanding on the combined facility during the first six months of 2021 was $291 million. As of June 30, 2021, $69 million was outstanding on the revolving credit facility, in addition to $219 million that remained outstanding on the term loan portion of the facility. Also at June 30, 2021, there was approximately $214 million, net of letters of credit, available for borrowing under the line of credit. Centuri intends to enter into a new term loan in order to complete the Riggs acquisition, which is expected to close in the third quarter of 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 when LIBOR is no longer a widely recognized benchmark rate, the holding company and Southwest each may amend their respective credit facility as set forth in their credit facility agreement, which is also the case of Southwest’s Term Loan, in order to accommodate a replacement benchmark as set forth in the agreements. 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 after June 2023. 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. The Company had approximately $429.6 million available under the program as of June 30, 2021.
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, 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 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-related amounts and balances in any jurisdiction and VSP and COYL amounts in Arizona, and statements regarding
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SOUTHWEST GAS HOLDINGS, INC.
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Form 10-Q
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SOUTHWEST GAS CORPORATION
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June 30, 2021
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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 virus variants 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 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 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 following the ongoing resumption of commerce in our territories, 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 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 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 such as that currently planned in regard to Riggs, 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, 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 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 and in this quarterly report on Form 10-Q.
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).