Executive Summary / Key Takeaways

• Southwest Gas Holdings is executing a strategic transformation to become a premier, fully regulated natural gas utility, highlighted by the ongoing separation of its utility infrastructure services segment, Centuri.
• The core Natural Gas Distribution segment delivered strong first-quarter 2025 results, with net income increasing 5.2% year-over-year, driven by favorable rate relief outcomes in Arizona and Nevada, robust customer growth, and disciplined cost management.
• Significant capital investments are planned, totaling approximately $4.3 billion over the next five years (2025-2029), primarily focused on system safety, reliability, and supporting strong economic development and population growth in its service territories, projected to drive a 6-8% compound annual growth rate in rate base.
• Regulatory strategy is actively mitigating lag through successful rate cases and pursuit of mechanisms like the proposed System Integrity Mechanism (SIM) in Arizona and exploration of formula rates in Nevada, aiming for more timely cost recovery and predictable earnings.
• The company maintains a strong balance sheet and liquidity position, bolstered by the collection of deferred purchased gas costs, which is expected to limit external financing needs, with only modest equity issuance anticipated in 2025 contingent on the form of the Centuri separation.

The Transformation Underway: Focusing on the Core Utility

Southwest Gas Holdings, Inc. is in the midst of a significant strategic evolution, shedding its diversified structure to concentrate on its foundational strength: the regulated natural gas utility business. With a history dating back to 1956 as a publicly traded entity, the company has long served customers across Arizona, Nevada, and California. While it expanded into utility infrastructure services through its Centuri subsidiary and previously held pipeline assets, the recent strategic imperative has been simplification. This transformation gained significant momentum with the divestiture of the MountainWest pipeline assets in 2023 and the Initial Public Offering (IPO) of Centuri Holdings, Inc. (CTRI) in April 2024. Following the IPO, Southwest Gas Holdings retained approximately 81% ownership of Centuri and is actively pursuing options for a full separation, including potential taxable sales, share exchanges, or a tax-free spin-off, contingent on market conditions. This strategic pivot aims to create a more focused, pure-play natural gas utility, leveraging its established presence in high-growth western markets.

In the competitive landscape of U.S. natural gas distribution, Southwest Gas operates alongside larger peers like Atmos Energy (ATO) and NiSource (NI), as well as regional players such as ONE Gas (OGS) and Spire Inc. (SR). While these competitors may benefit from greater scale or broader geographic diversification, Southwest Gas's core strength lies in its specific service territories, which are experiencing some of the nation's most significant population and economic growth. This regional focus provides a distinct advantage in terms of organic customer additions, a key driver of rate base expansion. However, compared to some peers who have invested heavily in advanced digital monitoring or automated systems, Southwest Gas's technological focus centers more on foundational infrastructure investments for safety, reliability, and integrity management programs, rather than proprietary, differentiated technologies that offer quantifiable efficiency gains over standard industry practices. The company is, however, responding to the technological demands of large potential customers, such as data centers exploring natural gas turbines or fuel cells for power generation. While precise, directly comparable financial metrics across all competitors are not always uniformly detailed, Southwest Gas's operating and net margins, while solid, may trail some larger or more technologically advanced peers, reflecting the specific operational costs and regulatory environments of its service areas. Its strategic response involves aggressive capital investment in its network to meet the demands of its growing customer base and proactive engagement with regulators to ensure timely cost recovery.

Financial Performance Reflecting Strategic Focus

The first quarter of 2025 provided clear evidence of the benefits stemming from Southwest Gas's renewed focus on its utility operations. The Natural Gas Distribution segment reported a record net income contribution and saw its results improve by $7.1 million compared to the first quarter of 2024, representing a 5.2% year-over-year increase (or 9.4% excluding the impact of COLI policies). This performance was primarily fueled by a $38.9 million increase in operating margin. Key drivers included approximately $27 million from combined rate relief across its Arizona, Nevada, and California jurisdictions, and an additional $5 million attributable to robust customer growth, with approximately 40,000 new meter sets added over the preceding twelve months. Further contributing were increases in recovery associated with regulatory account balances ($4.8 million) and benefits from the variable interest expense adjustment mechanism in Nevada ($3.3 million).

Operational discipline also played a role, with Operations and Maintenance (O&M) expenses decreasing by 1% ($1.5 million) quarter-over-quarter, primarily due to lower pension service costs and reduced spending on contractors and outside services, partially offset by increases in insurance and compensation-related costs. This aligns with management's goal of keeping O&M costs nearly flat on a per-customer basis over the forecast period.

However, increased investment in the system led to higher depreciation and amortization expense, which rose by $8.9 million (10%), reflecting a 7% ($746 million) increase in average gas plant in service. Other income saw an $8.8 million decrease, largely due to lower COLI policy values ($5.3 million) and reduced interest income ($4 million) resulting from lower carrying charges on regulatory account balances, particularly the significant shift in deferred purchased gas cost (PGA) balances from an asset to a net liability position. Net interest deductions for the utility also increased by $8.2 million, influenced by regulatory mechanisms and interest on the over-collected PGA balance.

The Utility Infrastructure Services segment (Centuri), while still consolidated, saw revenues increase by 4% ($22.1 million) in Q1 2025, driven by growth in electric infrastructure services (up $52.1 million from increased volumes, bid work, and storm restoration, despite a $22.3 million decrease in offshore wind revenue) which more than offset a $30 million decrease in gas infrastructure services revenue (impacted by adverse weather and customer budgetary constraints). Despite the revenue increase, the segment reported a net loss, though the loss narrowed compared to the prior year quarter. Increased profitability from storm work and better fixed cost utilization contributed to improved margin within the segment.

Regulatory Strategy and Growth Investments

A cornerstone of Southwest Gas's strategy is its proactive engagement in the regulatory process to ensure timely recovery of investments and mitigate regulatory lag. Recent successes include the Arizona rate case approval in March 2025, authorizing an $80.2 million annual revenue increase with a 9.84% return on common equity. This decision also approved the continuation of full revenue decoupling and a property tax tracking mechanism, while the proposed mechanism for uncollectible gas costs was withdrawn. In Nevada, the most recent general rate case in 2023 resulted in a $59 million annual revenue increase and a 9.50% authorized ROE, with new rates effective in April 2024. The Great Basin pipeline subsidiary also received FERC approval in March 2025 for a settlement supporting a $9.6 million revenue increase.

Looking ahead, the company is actively pursuing several key regulatory initiatives. In Arizona, a settlement supporting the implementation of the System Integrity Mechanism (SIM) capital tracker is pending ACC consideration, with a final decision anticipated in the third quarter of 2025. If approved, the SIM would allow for annual surcharges to recover costs associated with eligible non-revenue-producing infrastructure investments (representing ~40% of Arizona CapEx), with the first filing potentially in March 2026. This mechanism is designed to significantly reduce regulatory lag on these critical safety and reliability investments. In Nevada, the company is seeking approval for a damage prevention cost mechanism to track line locate expenses and is working with policymakers on legislation (SB 417) that could enable alternative ratemaking methods like formula rates or multiyear plans, which could lead to more linear and predictable earnings growth compared to the current cycle-dependent pattern. The California general rate case, filed in September 2024 for a 2026 test year, is progressing, with hearings scheduled in Q2 2025 and a final decision expected in Q4 2025 for rates effective January 2026.

These regulatory efforts are crucial to support the company's substantial planned capital expenditures. Management estimates natural gas segment construction expenditures will total approximately $2.6 billion over the three-year period ending December 31, 2027, with about $880 million expected in calendar year 2025 alone. Over the next five years (2025-2029), total capital investment is projected at $4.3 billion. This significant spending is driven by the need to fortify system integrity and reliability (~50% of planned CapEx) and to support the strong economic development and population growth in its service territories (~30% of planned CapEx). This investment is expected to translate into a compound annual growth rate in rate base of 6% to 8% over the 2025-2029 period.

Liquidity, Financing, and Outlook

Southwest Gas Holdings maintains a solid financial position, ending the first quarter of 2025 with over $400 million in cash on a consolidated basis and more than $1 billion in liquidity. This strong cash balance is significantly influenced by the collection of previously deferred purchased gas costs, with the utility's PGA balance shifting from a $199 million asset in March 2024 to a $282 million net liability in March 2025.

The company expects cash flows from operations to fund approximately 74% of the utility's gas operations, construction expenditures, and dividend requirements over the 2025-2027 period.

The financing plan anticipates limited capital market needs through the end of 2025. The primary focus is on extending the $550 million term loan facility maturing in July 2025 and potentially amending/extending the $300 million short-term credit facility maturing in December 2026. Any need for new equity issuance in 2025 is expected to be less than $100 million via the existing ATM program and is contingent on the timing and form of the Centuri separation, as a taxable divestiture could generate cash proceeds. No significant utility debt issuance is foreseen until spring 2026. The company has maintained investment-grade credit ratings, supporting its financing strategy.

Management reaffirmed its 2025 utility net income guidance range of $265 million to $275 million, citing confidence from the completed Arizona rate case and the strong regional economic outlook. While net income growth is expected to be nonlinear due to the regulatory cycle, the combination of regulatory strategy, cost management efforts (flat O&M per customer), and robust rate base growth is expected to drive future results. The company remains committed to paying a competitive dividend and plans to reevaluate its policy upon the completion of the Centuri separation.

Conclusion

Southwest Gas Holdings is actively executing its strategy to become a focused, high-growth regulated natural gas utility. The first quarter of 2025 demonstrated the tangible benefits of this pivot, with the core utility segment delivering strong earnings growth driven by favorable regulatory outcomes and robust customer additions in its attractive service territories. The company's substantial planned capital investments are well-aligned with the demographic and economic tailwinds in its operating regions, providing a clear path for significant rate base expansion. While challenges remain, including managing regulatory lag and completing the Centuri separation, the proactive regulatory strategy, disciplined operations, and solid financial position underpin the investment thesis. As the company progresses towards its pure-play utility future, its ability to effectively manage regulatory processes, execute its large capital program, and finalize the Centuri divestiture will be key determinants of its long-term value creation for stockholders.