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Leases

3 Months Ended

Mar. 31, 2019

Note 4 – Leases

The Company and Southwest adopted Topic 842 as of January 1, 2019. In association with the adoption, the Company recorded adjustments to its Condensed Consolidated Balance Sheet to record right-of-use (“ROU”) assets and lease liabilities of $58.4 million and $60.8 million, respectively. Included in those amounts, Southwest recorded $1.9 million related to both its ROU assets and lease liabilities. Neither the Company nor Southwest experienced a material impact to the Condensed Consolidated Statements of Income from the adoption and no cumulative-effect adjustment to the opening balance of retained earnings was recognized. Management elected to adopt the standard under the optional transition method (refer to Recent Accounting Standards Updates in Note 1 – Background, Organization, and Summary of Significant Accounting Policies), and elected the following Topic 842 practical expedients and accounting policy elections:

•

To use the “package”, which is a set of three practical expedients that must be elected as a package and applied consistently to all of Southwest’s and Centuri’s leases. These include: not reassessing whether any expired or existing contracts are or contain leases; not reassessing the lease classification for expired or existing leases (that is, existing operating and capital leases in accordance with current lease guidance will in each case be classified as operating and finance leases, respectively, under the updated guidance); and not reassessing initial direct costs for any existing leases.


•	To utilize the practical expedient to exclude all easements in place prior to January 1, 2019 from treatment under Topic 842. However, Southwest will evaluate new easements entered into after the effective date of the standard to determine if the arrangements should be accounted for as leases.


•	To make an accounting policy election by asset class to include both the lease and non-lease components (as defined in the guidance) as a single component.


•	To make an accounting policy election to not apply Topic 842 to short-term leases, as permitted.


•	To not elect to use hindsight in determining the lease term and in assessing impairment of ROU assets.


•	To utilize a portfolio approach to effectively account for the operating lease ROU assets and liabilities with regard to certain equipment leases at Centuri.

Southwest and Centuri determine if an arrangement is a lease at inception. ROU assets represent the right to use an underlying asset for the lease term; lease liabilities represent obligations to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of Southwest’s and Centuri’s leases do not provide an implicit interest rate, an incremental borrowing rate based on information available at commencement is used in determining the present value of lease payments; an implicit rate, if readily determinable, is used. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised.

Southwest’s leases are comprised primarily of operating leases of buildings, land, and equipment. Southwest has no finance leases and no significant short-term leases. Southwest’s leases have a remaining term of 1 to 10 years, some of which include options to extend the lease up to 3 years. Southwest is currently not a lessor in any significant lease arrangements. Southwest’s ROU assets are included in Gas plant, and its lease liabilities are included in, depending upon maturity, Other current liabilities or Other deferred credits and other long-term liabilities on the Company’s and Southwest’s Condensed Consolidated Balance Sheet as of March 31, 2019.

Centuri has operating and finance leases for corporate and field offices, construction equipment, and transportation vehicles. Centuri is currently not a lessor in any significant lease arrangements. Centuri’s leases have remaining lease terms of 1 to 14 years. Some of these include options to extend the leases, generally for optional terms of up to 5 years, and some include options to terminate the leases within 1 year. Centuri’s equipment leases may include variable payment terms in addition to the fixed lease payments if machinery is used in excess of the standard work periods. These variable payments are not probable of occurring under the current operating environment and have not been included in consideration of lease payments. Expense for short-term leases of Centuri during the quarter ended March 31, 2019 was $2.6 million, and such leases were not accounted for under the provisions of Topic 842, as permitted. Due to the seasonality of Centuri’s business, expense for short-term leases will fluctuate throughout the year with higher expense incurred during the warmer months. Centuri’s ROU assets are included in Other property and investments, and its lease liabilities for operating and finance leases are included, depending upon maturity, in Other current liabilities or Other deferred credits and other long-term liabilities on the Company’s Condensed Consolidated Balance Sheet as of March 31, 2019.

The components of lease expense were as follows:



(Thousands of dollars)	Three Months Ended
	March 31, 2019
Southwest:
Operating lease cost	$	406

Centuri:
Operating lease cost	$	2,805

Finance lease cost:
Amortization of ROU assets	$	35
Interest on lease liabilities	7
Total finance lease cost	42
Short-term lease cost	2,575
Total lease cost	$	5,828

Supplemental cash flow information related to leases for the three months ended March 31, 2019 was as follows:



(Thousands of dollars)	Southwest		Centuri		Consolidated Total
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	396	$	2,555	$	2,951
Operating cash flows from finance leases	—		7		7
Financing cash flows from finance leases	—		51		51

ROU assets obtained in exchange for lease obligations:
Operating leases	$	523	$	2,321	$	2,844
Finance leases	—		84		84

Supplemental information related to leases, including location in the Condensed Consolidated Balance Sheets, is as follows:



(Thousands of dollars)	March 31, 2019
Southwest:
Operating leases:
Net Utility Plant	$	1,977

Other current liabilities	$	745
Other deferred credits and other long-term liabilities	1,253
Total operating lease liabilities	$	1,998

Weighted average remaining lease term (in years)	4.22
Weighted average discount rate	3.39		%

Centuri:
Operating leases:
Other property and investments	$	57,267

Other current liabilities	7,178
Other deferred credits and other long-term liabilities	52,647
Total operating lease liabilities	$	59,825

Finance leases:
Other property and investments	$	639

Other current liabilities	256
Other deferred credits and other long-term liabilities	239
Total finance lease liabilities	$	495

Weighted average remaining lease term (in years)
Operating leases	9.33
Finance leases	1.63

Weighted average discount rate
Operating leases	4.08		%
Finance leases	5.84		%

The following is a schedule of maturities of lease liabilities as of March 31, 2019:



(Thousands of dollars)	Operating leases
Southwest:
2020	$	800
2021	556
2022	295
2023	124
2024	78
Thereafter	307
Total lease payments	2,160
Less imputed interest	162
Total	$	1,998



(Thousands of dollars)	Operating leases		Finance leases
Centuri:
2020	$	10,394	$	281
2021	9,327		128
2022	8,328		67
2023	7,645		38
2024	5,710		25
Thereafter	31,303		—
Total lease payments	72,707		539
Less imputed interest	12,882		44
Total	$	59,825	$	495

As the Company and Southwest adopted Topic 842 using the optional transition method referred to in Note 1 – Background, Organization, and Summary of Significant Accounting Policies, the recent annual disclosure of rental and lease payments as of December 31, 2018 in accordance with Topic 840 is presented in the table below:



	2018		2017
Southwest Gas Corporation	$	4,556	$	4,926
Centuri	59,491		62,310
Consolidated rental payments/lease expense	$	64,047	$	67,236

The following is a schedule of future minimum lease payments for operating leases (with initial or remaining terms in excess of one year) as of December 31, 2018 (thousands of dollars):



	Southwest		Centuri		Consolidated Total
2019	$	898	$	10,053	$	10,951
2020	363		7,656		8,019
2021	299		5,760		6,059
2022	163		5,163		5,326
2023	79		3,681		3,760
Thereafter	177		10,511		10,688
Total minimum lease payments	$	1,979	$	42,824	$	44,803

As of December 31, 2018 Centuri leased certain construction equipment under capital leases arrangements which were not significant.

Leases