In 2015, the Board of Directors (“Board”) of Southwest Gas Corporation
authorized management to evaluate and pursue a holding company reorganization
to provide further separation between regulated and unregulated businesses,
and to provide additional financing flexibility. As part of the holding company
reorganization, Centuri Construction Group, Inc. (“Centuri”) and
Southwest Gas Corporation would each be subsidiaries of the new publicly traded
parent holding company, Southwest Gas Holdings, Inc. (“Southwest Gas Holdings”);
whereas, historically, Centuri had been a direct subsidiary of Southwest Gas
Corporation. All of Southwest Gas Corporation’s outstanding debt securities
(not associated with Centuri) at the time of the reorganization would remain
at the Southwest Gas utility entity. Regulatory applications for preapproval
of the reorganization were filed with the Arizona Corporation Commission (“ACC”),
the California Public Utilities Commission (“CPUC”), and the Public
Utilities Commission of Nevada (“PUCN”) in October 2015. Approvals
were received from the CPUC, the PUCN, and the ACC in January, March, and May,
respectively, of 2016. The reorganization, which was approved by the Board of
Directors in December 2016, became effective in January 2017. Each outstanding
share of Southwest Gas Corporation’s common stock automatically converted
into a share of stock in Southwest Gas Holdings, on a one-for-one basis, and
the ticker symbol of the stock, “SWX,” remains unchanged. This report
is as of the balance sheet date of December 31, 2016 and periods up to that
date (prior to the effective date of the holding company formation), with disclosures,
where appropriate, for events following that date. Throughout this report, the
“Company” refers to Southwest Gas Corporation and subsidiaries for
periods prior to January 1, 2017 and to Southwest Gas Holdings, Inc. and subsidiaries
for periods subsequent to December 31, 2016.
The Company was incorporated in March 1931 under the laws of the state of California.
The Company is composed of two business segments: natural gas operations (“Southwest”
or the “natural gas operations” segment) and construction services.
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 Las Vegas metropolitan area and 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.
Centuri (the “construction services” segment), a 96.6% owned subsidiary
of the Company, is a comprehensive construction services enterprise dedicated
to meeting the growing demands of North American utilities, energy and industrial
markets. Centuri derives revenue from installation, replacement, repair, and
maintenance of energy distribution systems, and developing industrial construction
solutions primarily for energy services utilities. Centuri operations are generally
conducted under the business names of NPL Construction Co. (“NPL”),
NPL Canada Ltd. (“NPL Canada”, formerly Link-Line Contractors Ltd.),
W.S. Nicholls Construction, Inc. and related companies (“W.S. Nicholls”),
and Brigadier Pipelines Inc. (“Brigadier”). In May 2016, Centuri
completed the acquisition of two privately held, affiliated construction businesses:
Enterprise Trenchless Technologies, Inc. and ETTI Holdings (collectively, “ETTI”).
Rates that Southwest is authorized to charge its distribution system customers
are determined by the ACC, PUCN, and CPUC in general rate cases and are derived
using rate base, cost of service, and cost of capital experienced in an historical
test year, as adjusted in Arizona and Nevada, and projected for a future test
year in California. The FERC regulates the northern Nevada transmission and
liquefied natural gas (“LNG”) storage facilities of Paiute Pipeline
Company (“Paiute”), a wholly owned subsidiary, and the rates it
charges for transportation of gas directly to certain end-users and to various
local distribution companies (“LDCs”). The LDCs transporting on
the Paiute system are: NV Energy (serving Reno and Sparks, Nevada) and Southwest
(serving Truckee, South and North Lake Tahoe in California and various locations
throughout northern Nevada).
Rates charged to customers vary according to customer class and rate jurisdiction
and are set at levels that are intended to allow for the recovery of all prudently
incurred costs, including a return on rate base sufficient to pay interest on
debt as well as a reasonable return on common equity. Rate base consists generally
of the original cost of utility plant in service net of amounts associated with
costs borne by third parties, plus certain other assets such as working capital
and inventories, less accumulated depreciation on utility plant in service,
net deferred income tax liabilities, and certain other deductions.
Rate structures in all service territories allow Southwest to separate or “decouple”
the recovery of operating margin from natural gas consumption, though decoupled
structures (alternative revenue programs), vary by state. In California, authorized
operating margin levels vary by month. In Nevada, a decoupled rate structure
applies to most customer classes providing stability in annual operating margin.
In Arizona, a full revenue decoupling mechanism (currently, with a winter-period
monthly weather adjuster) is in place for most customer classes.
Southwest is responsible for acquiring and arranging delivery of natural gas
to its system in sufficient quantities to meet its sales customers’ needs.
Southwest’s primary natural gas procurement objective is to ensure that
adequate supplies of natural gas are available at a reasonable cost. Southwest
acquires natural gas from a wide variety of sources and a mix of purchase provisions,
which includes spot market and firm supplies. The purchases may have terms from
one day to several years and utilize both fixed and indexed pricing. During
2016, Southwest acquired natural gas from 40 suppliers. Southwest regularly
monitors the number of suppliers, their performance, and their relative contribution
to the overall customer supply portfolio. New suppliers are contracted when
possible, and solicitations for supplies are extended to the largest practicable
list of suppliers, taking into account each supplier’s creditworthiness.
Competitive pricing, flexibility in meeting Southwest’s requirements,
and demonstrated reliability of service are instrumental to any one supplier’s
inclusion in Southwest’s portfolio. The goal of this practice is to mitigate
the risk of nonperformance by any one supplier and ensure competitive prices
in the portfolio.
100 %