Southwest Gas Holdings Inc (SWX) is a dynamic energy company committed to exceeding the expectations of its more than two million customers throughout Arizona, Nevada, and California. Through its primary operating subsidiary, Southwest Gas Corporation, the company engages in the business of purchasing, distributing, and transporting natural gas. Additionally, the company is the majority owner of Centuri, a strategic utility infrastructure services provider that partners with North America's gas and electric providers to build and maintain the energy network.
Business Overview Southwest Gas Holdings, Inc. has a rich history dating back to 1931 when Southwest Gas Corporation was originally incorporated in California. Over the decades, the company has grown to become the largest regulated distributor of natural gas in Arizona and Nevada. In addition to its natural gas distribution operations, Southwest Gas also operates two regulated interstate pipelines serving parts of Nevada and California through its subsidiaries.
The company has faced various challenges and regulatory hurdles throughout its history. In the early 2000s, Southwest Gas had to deal with natural gas price volatility and worked closely with regulators to implement mechanisms to help mitigate the impact on customers. The company has also navigated changing environmental regulations, investing in infrastructure and technology to ensure compliance.
In 2019, Southwest Gas Holdings, Inc. was formed as the new parent company, allowing for a more simplified corporate structure. This change positioned the company for future growth while maintaining its commitment to providing safe and reliable natural gas service to its expanding customer base across the Southwest region.
In December 2022, the company announced a strategic initiative to simplify its portfolio of businesses. This included the sale of its pipeline and storage subsidiary, MountainWest, for $1.5 billion and the pursuit of a separation of its Centuri utility infrastructure services business. The Centuri IPO was completed in April 2024, with Southwest Gas retaining an approximately 81% ownership stake.
Segment Performance Southwest Gas operates in two primary business segments: Natural Gas Distribution and Utility Infrastructure Services.
The Natural Gas Distribution segment is the core of the company's operations, accounting for over 85% of total operating margin in 2024. This segment serves approximately 2.26 million residential, commercial, and industrial customers across Arizona, Nevada, and California. The demand for natural gas is seasonal, with greater demand in the colder winter months. However, the company's decoupled rate structures in all three states help mitigate the impact of weather variability on operating margin.
In 2024, the Natural Gas Distribution segment reported operating margin of $1.33 billion, a 6% increase compared to 2023. This improvement was driven by $66 million in rate relief from prior investments, as well as $12 million in additional margin from customer growth. The segment's operating income increased to $412 million, up from $358 million in the prior year.
The Utility Infrastructure Services segment, operated through the Centuri subsidiary, provides comprehensive utility infrastructure services across North America. Centuri derives revenue primarily from the installation, replacement, repair, and maintenance of energy networks for gas and electric utilities. This segment's activity is seasonal, with peak periods typically occurring in the summer and fall months.
In 2024, the Utility Infrastructure Services segment reported revenues of $2.64 billion, a decrease of 9% compared to 2023. This was primarily due to a reduction in natural gas infrastructure services revenues and the conclusion of several offshore wind projects. Operating income for the segment decreased to $87 million from $136 million in the prior year.
Financial Performance For the full year 2024, Southwest Gas Holdings reported consolidated net income of $198.8 million, or $2.76 per diluted share. This represents an increase of over 8% compared to the prior year's net income of $150.9 million, or $2.13 per diluted share. The company's total revenue for 2024 was $5.11 billion.
The company's natural gas distribution operations were the primary driver of earnings growth, with utility net income increasing to $261.2 million in 2024 from $242.2 million in 2023. This was driven by the aforementioned improvements in operating margin, as well as the company's continued focus on cost management.
Southwest Gas Holdings maintained a strong balance sheet, finishing 2024 with over $360 million in cash and cash equivalents. The company's capital expenditures totaled $946 million in 2024, primarily focused on infrastructure replacement and new business growth. Management expects capital expenditures to be approximately $880 million in 2025, supporting an anticipated compound annual rate base growth of 6-8% from 2025 to 2029.
In the fourth quarter of 2024, Southwest Gas reported revenue of $1.27 billion, a 7.1% decrease compared to the same period in 2023. However, net income for the quarter increased by 15.8% to $92.5 million. The decrease in revenue was primarily due to lower gas infrastructure services revenue at Centuri, partially offset by higher utility margin.
Operating cash flow for the full year 2024 was robust at $1.36 billion, while free cash flow stood at $409.9 million. These strong cash flows provide the company with financial flexibility to fund its ongoing operations and growth initiatives.
Liquidity Southwest Gas Holdings has maintained a strong liquidity position, which is crucial for its ongoing operations and future growth initiatives. The company's robust cash flow from operations, combined with its available credit facilities, provides ample financial flexibility to fund its capital expenditure program and meet its near-term obligations.
As of the end of 2024, the company had $363.8 million in cash on hand. Southwest Gas Holdings has a $300 million credit facility, of which $130 million was outstanding as of December 31, 2024. Additionally, Southwest Gas Corporation has a $400 million credit facility, which was fully undrawn at year-end. These facilities, along with the company's cash on hand and expected cash flow from operations, position Southwest Gas Holdings well to navigate potential economic uncertainties and capitalize on growth opportunities.
The company's debt-to-equity ratio stood at 1.44 as of December 31, 2024, while its current ratio and quick ratio were both 0.80. These metrics indicate a balanced capital structure and adequate short-term liquidity.
Regulatory Environment and Growth Initiatives Southwest Gas operates in a highly regulated industry, with its rates, practices, facilities, and service territories subject to oversight by the Arizona Corporation Commission (ACC), the Public Utilities Commission of Nevada (PUCN), and the California Public Utilities Commission (CPUC). The company's ability to obtain timely rate relief is crucial for recovering its investments and earning a fair return.
In 2024, the company made significant progress on its regulatory strategy. In Nevada, it received approval for a $59 million revenue increase, representing 98% of its request. In California, the company's $50 million rate case is progressing on schedule, with new rates expected to be effective in January 2026. The company's Arizona rate case is also nearing completion, with the administrative law judge issuing a recommended opinion that includes a $96 million revenue increase and a 9.65% return on equity.
Looking ahead, Southwest Gas is focused on several growth initiatives to support its long-term strategy. The company is investing in infrastructure to accommodate customer demand associated with population growth and economic development activity in its service territories. It is also exploring opportunities to expand its natural gas service offerings, including the potential for renewable natural gas and hydrogen blending. Furthermore, the company is actively engaged in regulatory proceedings to establish constructive mechanisms, such as capital trackers and formula rate plans, to help mitigate regulatory lag and ensure timely recovery of its investments.
The company plans to invest approximately $4.3 billion in capital expenditures over the next 5 years (2025-2029) to support safety, reliability, and economic development across its service territory. About 50% of this planned capital spending is earmarked for safety and reliability, while 30% is allocated for economic development and new business growth. This investment is expected to drive a compound annual growth rate in rate base of 6% to 8% from 2025 to 2029, aligning with industry trends that have seen similar growth rates in recent years.
Risks and Challenges As a regulated utility, Southwest Gas faces various risks and challenges, including the potential for unfavorable regulatory decisions, changes in commodity prices, and weather variability. The company's ability to obtain timely and adequate rate relief is crucial for its financial performance and the successful execution of its growth strategies.
Additionally, the company's operations and infrastructure are vulnerable to natural disasters, cyber threats, and other external events that could disrupt service and result in significant costs. Southwest Gas mitigates these risks through insurance coverage, robust cybersecurity measures, and emergency response protocols.
The separation of the Centuri utility infrastructure services business also presents both opportunities and risks for Southwest Gas. While the separation could enhance the company's focus on its core natural gas distribution operations, it will also result in the loss of diversification and potential synergies between the two businesses.
Outlook and Conclusion Southwest Gas Holdings is well-positioned to continue delivering steady growth and value for its shareholders. The company's strategic investments in infrastructure, focus on cost optimization, and constructive regulatory relationships are expected to drive sustained improvements in operating margin and earnings.
For 2025, the company expects its utility net income to be within the range of $265 million to $275 million. This guidance reflects the anticipated benefits of recent rate case outcomes, continued customer growth, and the company's ongoing efforts to manage costs. The company added approximately 41,000 new meter sets in 2024, demonstrating solid customer growth of 1.8% over the past 12 months.
Southwest Gas remains committed to further improving its earned utility return on equity, maintaining an investment-grade balance sheet, and paying competitive dividends to shareholders. The company's utility net income has shown strength, with a return on equity over 8% for the second straight year in 2024.
Overall, Southwest Gas Holdings' strong market position, disciplined capital allocation, and commitment to operational excellence make it a compelling investment opportunity in the regulated utility space. The company's focus on reliability, sustainability, and customer service should continue to underpin its long-term success in the dynamic energy landscape of the southwestern United States.