Business Overview and History

Southwest Gas Holdings, Inc. (SWX) is a leading natural gas utility company that has established a strong presence across the Western United States. With a focus on providing safe, reliable, and affordable energy solutions to its growing customer base, the company has demonstrated its ability to navigate industry challenges and capitalize on emerging opportunities.

Southwest Gas Holdings, Inc. traces its roots back to 1931 when it was incorporated in Delaware as Southwest Gas Corporation. Initially serving customers primarily in southern Nevada, the company gradually expanded its operations into Arizona and California, becoming the largest regulated distributor of natural gas in Arizona and Nevada. This expansion was not without challenges, as the company faced difficulties in the late 1990s and early 2000s during the deregulation of the natural gas industry in California, working diligently to secure regulatory approval for rate increases to offset rising natural gas prices.

In a significant move to expand its natural gas infrastructure, Southwest Gas Holdings, Inc. acquired MountainWest Pipelines Holding Company in 2021, which operated interstate pipelines serving portions of Nevada and California. However, in 2022, the company announced the sale of 100% of MountainWest in an all-cash transaction as part of a strategic initiative to simplify its portfolio of businesses.

Another notable development occurred in 2022 when the company announced its intention to separate its Centuri utility infrastructure services business, which provides installation, replacement, repair, and maintenance services for energy networks in the U.S. and Canada. This separation was realized in April 2024 when Southwest Gas Holdings, Inc. completed an initial public offering of Centuri's common stock, retaining an approximately 81% ownership stake in the subsidiary.

Throughout its history, Southwest Gas has consistently maintained investment-grade credit ratings, enabling the company to access capital markets to fund its growth initiatives and infrastructure upgrades. This financial prudence has been crucial in supporting the company's expansion and operational improvements over the years.

Today, Southwest Gas Holdings serves over 2.25 million residential, commercial, and industrial customers, making it the largest regulated natural gas distributor in Arizona and Nevada. The company's extensive pipeline network spans over 21,000 miles, providing natural gas transportation and distribution services to its growing customer base.

Financial Strength and Operational Efficiency

Southwest Gas Holdings has demonstrated financial discipline and operational efficiency, as evidenced by its strong financial performance. As of the latest reported quarter (Q3 2024), the company reported total revenues of $1.08 billion, a 7.7% decrease from the same period of the prior year. This decline was primarily attributable to lower volumes of infrastructure services work at Centuri, partially offset by increased rate relief at the utility.

The natural gas distribution segment, which accounts for the majority of Southwest Gas Holdings' operations, reported a 5% year-over-year increase in operating margin during the third quarter of 2024, driven by rate relief in Nevada and California, as well as customer growth throughout the company's service areas. This solid performance in the utility segment has enabled the company to maintain a healthy financial position, with a consolidated cash balance of $456.64 million as of the end of Q3 2024.

Financials

Southwest Gas Holdings' financial performance has been consistently strong, with the company reporting steady revenue growth and maintaining a healthy balance sheet. For the fiscal year 2023, the company reported total revenue of $5.43 billion and net income of $150.89 million. Operating cash flow for 2023 was $509.21 million, while free cash flow was negative $363.31 million.

In the most recent quarter (Q3 2024), Southwest Gas Holdings reported revenue of $1.08 billion and net income of $2.66 thousand. Operating cash flow for the quarter was $304.05 million, with free cash flow of $748.55 million. The company's total assets stood at $12.5 billion as of the end of Q3 2024, with total liabilities of $8.7 billion. The company's debt-to-equity ratio remains manageable at 0.0088, reflecting its prudent approach to financial management.

Liquidity

Southwest Gas Holdings maintains a strong liquidity position, with access to various sources of capital. As of Q3 2024, the company had $456.64 million in cash and cash equivalents. Southwest Gas Holdings, Inc. has a $300 million credit facility, while Southwest Gas Corporation has a $400 million credit facility. Both facilities were largely undrawn as of Q3 2024, providing additional financial flexibility. The company's current ratio and quick ratio both stand at 0.85, indicating a solid short-term liquidity position.

Regulatory Landscape and Rate Case Proceedings

Southwest Gas Holdings' operations are subject to regulatory oversight by state public utility commissions, as well as the Federal Energy Regulatory Commission (FERC) for its interstate pipeline subsidiaries. The company's ability to recover investments and earn a reasonable return on equity is crucial to its financial performance.

In 2024, the company made significant progress on its regulatory strategy, including the completion of a general rate case in Nevada, which resulted in a revenue increase of $59 million, as well as the filing of a general rate case in California seeking a $49 million increase in revenue. Additionally, the company's Arizona rate case, which proposes a $126 million revenue increase, is currently progressing through the regulatory process, with the company optimistic about reaching a constructive outcome.

These regulatory achievements, along with the company's focus on cost management and operational efficiency, have enabled Southwest Gas Holdings to maintain a strong financial position and provide consistent returns to shareholders. The company's rate base is expected to grow at a compound annual rate of 6.5% to 7.5% from 2024 to 2026, further solidifying its long-term growth prospects.

Centered on Customer Growth and Reliability

Southwest Gas Holdings' strategic focus on customer growth and system reliability has been a key driver of its success. The company has consistently added new customers to its natural gas distribution network, with approximately 41,000 new meter sets added over the past 12 months. This customer growth, coupled with the company's ongoing investments in infrastructure improvements and system integrity, positions Southwest Gas Holdings to meet the increasing demand for natural gas in its service areas.

The company's commitment to reliability is further demonstrated by its capital expenditure plans, with approximately $830 million expected to be invested in 2024 to maintain and upgrade its distribution system. Nearly 50% of this investment is related to maintaining a safe and reliable system. These investments, in conjunction with the company's regulatory strategies, have enabled Southwest Gas Holdings to provide safe, reliable, and affordable natural gas services to its growing customer base.

Navigating Industry Challenges and Emerging Opportunities

Southwest Gas Holdings has demonstrated its ability to navigate industry challenges, such as the ongoing shift towards renewable energy and the potential regulatory changes surrounding natural gas usage. The company has proactively engaged with regulators and policymakers to ensure that its natural gas infrastructure remains a vital component of the energy mix, both for residential and commercial customers.

Moreover, the company has identified emerging opportunities in the data center and peak shaving markets, where its natural gas-powered infrastructure can play a crucial role in supporting the energy needs of these industries. The company's strategic positioning and technical expertise position it well to capitalize on these growing market segments, further diversifying its revenue streams and strengthening its long-term growth prospects.

Business Segments and Performance

Southwest Gas Holdings operates through two reportable business segments: Natural Gas Distribution and Utility Infrastructure Services.

The Natural Gas Distribution segment, operated through Southwest Gas Corporation, is engaged in purchasing, distributing, and transporting natural gas for customers in portions of Arizona, Nevada, and California. For the first nine months of 2024, this segment reported regulated operations revenues of $1.92 billion, up from $1.80 billion in the prior-year period. The segment's operating margin increased to $937.97 million, up from $895.07 million, while net income rose to $163.99 million from $150.56 million in the prior-year period.

The Utility Infrastructure Services segment, operated through Centuri, provides strategic infrastructure services to regulated utilities across the United States and Canada. For the first nine months of 2024, this segment reported revenues of $1.92 billion, down from $2.23 billion in the prior-year period. Operating income decreased to $53.12 million from $117.89 million, while net income declined to $17.14 million from $28.76 million in the prior-year period.

Future Outlook and Guidance

Southwest Gas Holdings has provided positive guidance for its future performance. The company expects its 2024 utility net income to finish within the top half of its previously provided guidance range of $233 million to $243 million. The company has reaffirmed its guidance estimates, including utility capital expenditures of approximately $830 million in 2024, a utility net income compound annual growth rate of 9.25% to 11.25% from 2024 to 2026, and a utility rate base compound annual growth rate of 6.5% to 7.5% from 2024 to 2026.

The company plans total capital expenditures of $2.4 billion from 2024 to 2026. Southwest Gas Holdings is maintaining its dividend flat while evaluating options for the separation of Centuri. Importantly, the company no longer expects to issue equity in 2024 and now anticipates less than $100 million in equity needs in 2025, which it plans to cover through an ATM program.

Conclusion

Southwest Gas Holdings, Inc. (SWX) has established itself as a prominent player in the natural gas utility industry, demonstrating a strong track record of financial discipline, operational efficiency, and customer-centric growth. By navigating the regulatory landscape, investing in infrastructure, and capitalizing on emerging opportunities, the company has solidified its position as a trusted provider of safe, reliable, and affordable natural gas services across the Western United States. With a positive outlook for future growth and a commitment to shareholder value, Southwest Gas Holdings remains a compelling investment opportunity in the utility sector.