Southwest Gas Holdings, Inc. Q2 FY2025 earnings call

Regulatory Progress - Nevada: Signed SB 417 by Governor Lombardo, enhancing regulatory framework for natural gas utilities, allowing alternative ratemaking to reduce lag and support stability. - California: Near completion of rate case proceeding. - Arizona: Received approval of System Integrity Mechanism but with a $50 million cap on qualifying capital, evaluating options including rehearing, using the mechanism, or accelerating next rate case. ### Centuri Exit - Successfully executed 2 secondary public offerings of Centuri shares, generating over $470 million in net proceeds to repay debt and strengthen balance sheet. Ownership in Centuri now over 52%, continuing to evaluate separation options. ### Utility Optimization - Southwest Gas posted record net income for the first half of 2025 with modest O&M expense increases. Reaffirmed 2025 net income guidance of $265 million to $275 million. ### Great Basin Expansion - Ended open season for 2028 Great Basin expansion project with total interest from shippers at ~1.76 billion cubic feet of capacity. Begun negotiating precedent agreements with new shippers, expecting to complete in third quarter of 2025, with incremental capital expenditures potentially ranging from $1.2 billion to $1.6 billion.

Southwest Gas posted record net income for the first half of 2025 with only modest increases in O&M expenses compared to the same period last year. The trailing 12-month ROE ended the quarter at 8.3%. Centuri successfully executed 2 secondary public offerings of its shares during the second quarter, generating over $470 million in net proceeds, with ownership in Centuri now at just over 52%. Southwest Gas represents about 65% of the overall business, while Centuri is a separate segment. The utility's net income growth is driven by rate relief and customer growth, while Centuri's earnings are influenced by reduced interest expense.

Net Income - Reaffirmed full year net income guidance of $265 million to $275 million. ### Capital Spending - Expect robust capital spending driven by safety, reliability, and economic activity in service territories. ### Centuri Separation - Continuing to evaluate options for completing Centuri separation to optimize value and limit execution risk for stockholders. ### Rate Base Growth - Expect rate base to have a compound annual growth rate of 6% to 8% over the next 5 years, with about 50% of planned spending for safety and reliability and 30% for economic development and new business growth.

Uncertainties - Uncertainties surrounding impacts of future economic conditions and regulatory approvals, which may cause actual results to differ materially from forward-looking statements. ### Arizona SIM Cap - $50 million cap placed on qualifying capital under Arizona's System Integrity Mechanism, creating execution risk as we evaluate options.

Q: Wanted to ask first on Great Basin. That was terrific to see, obviously, the upward expansion from the $800 million to $1.2 billion, moving the range up to $1.2 billion to $1.6 billion. I just wanted to confirm if you could provide a bit more granularity, is that just purely volume driven from the 1.76 Bcf a day up from 1.25? Or are you seeing scope expansion beyond the initial project parameters?

A: James, it's Justin Brown. Yes, it's just volume. It's just additional shippers asking for incremental capacity, which would result in just additional upsizing.

Q: Given the 14 to 17 dekatherm monthly rate range, how should we think about the return profile just high level of this investment relative to your typical distribution CapEx? And maybe if you could just speak a little bit to AFUDC. Obviously, we're modeling that, but just be helpful as things keep advancing here to just get a bit of color from you.

A: Yes. We have a different FERC authorized rate of return, obviously. So I'd look at the Great Basin authorized return from our last rate case. And then, yes, we would anticipate AFUDC on the project, no different than any other project.

Q: Last one I've got is just on Nevada. And when you think about the potential time line overlap for your next Nevada rate case and then the time frame to get alternative ratemaking in place, would you consider delaying a traditional rate case filing if that would help accelerate formula rates? Do you think of them as separate from each other? How should we kind of think about just the evolving construct in Nevada?

A: Yes. So in Nevada, we're currently going to be starting. I think the commission just published kind of their notice of rulemaking, asking for comments. It's hard to gauge how long that will take. We anticipate it could be completed within the year. I think the nice thing is with the Nevada rate case and the way the legislation was constructed is that whenever we file our next rate case, if we include the formula rate proposal on the front end of that or the legislation allows us to use that next rate case as the baseline starting point for formula rates. And so we could always make a separate application filing after we receive an order in that case. So I don't think -- from our perspective, we don't see any advantage to delaying our next rate case. I think they're going to work very much complementary to each other in terms of the legislation and our next rate case.

Q: You sure did have tons of stuff going on. The SB 417 process, have you got a sense of how long you think it will take the Nevada Commission to sort of get that to a place where -- I guess the question is, so if you plan to stay on sort of the typical cadence for Nevada filing, but you have that 6-month lead time upon the conclusion of the case, do you feel pretty comfortable that, that rulemaking process will be completed in an appropriate amount of time to be comfortable with the timing of the Nevada filing?

A: Chris, it's Justin. Yes, I think so. When we look at -- I think a couple of factors play into that. One is, as you may recall from prior conversations, the legislation is really modeled after kind of an omnibus electric bill that was ran a few years ago, and the commission went through a rulemaking. So I think as long as we're able to kind of use that experience and kind of use some of the same platform from that rulemaking to kind of have it be our starting point, I think it will help accelerate the process is what we're hoping. I think secondly, just when we think about other prior rulemakings that we've gone through on different new legislative initiatives, we kind of look at kind of an average length of time, assuming there's not new things that come up on the commission's radar that slows the process down to where we feel like it's something that could be completed within the next 12 months. But I think until we kind of get the process started, which is I believe the commission has asked for comments later this month. I think we'll know more in the next couple of months kind of how that fits into kind of the way we're looking at it from just kind of our historical experience and practice as well as kind of the idea of being able to use the prior electric bill as kind of a starting point for some of the discussions around the rulemaking.

Q: In the Arizona SIM, in the reduction sort of discussion amongst the commissioners, it seemed like it was basically an invitation to file your next rate case and to implement formula rates quicker. What are your thoughts on the cadence there? And given the time it takes to execute an Arizona case and add to that the extra complications of formula rates, can you just sort of talk about what your thought process is on the cadence and duration of that case?

A: Yes, Chris, all of the above. There's a lot of thoughts going through our mind right now. Obviously, through the open meeting process, I agree with you. I mean I think one of the encouraging things from that was clearly from the commission kind of an indication of a preference for formula rates, and we appreciate that, which is why we're evaluating kind of do we just accelerate the timing of our next Arizona rate case? Or do we look at also trying to maybe provide some information to help address what we perceived as maybe some confusion around kind of what the SIM was attempting to accomplish. And so we're evaluating both. The timing obviously plays into that because regardless of what filing you undertake, you can kind of contemplate certain time periods with that. I think one of the other things we're evaluating, as we talked about previously, is you have a couple of other rate cases that are currently pending that are probably halfway through the process that have asked for formula rates. And so I think there's some benefit of just kind of seeing how those play out and how those could then inform what your proposal looks like. So I think there's a variety of different things that we're evaluating that will ultimately drive kind of the timing on the different paths that we're exploring.

Q: I found the argumentation in the SIM meeting pretty inconsistent with some of the commissioners arguing you're replacing pipe too fast and others arguing you're replacing pipe too slow. Is there anything that you can sort of clarify your take on what they're trying to accomplish there?

A: Yes. Chris, I think that's where when we're looking at the potential for an application for rehearing, I think that's probably what's maybe motivating us to explore that is, I think, to your point, I think our takeaway was perhaps there was some confusion about some of the information that was in the record or that may be information that certain commissioners kind of latched on to. And so the thought would be is if we're able to summarize that and lay that out in a more kind of summarized and kind of clarifying way to address some of those things, it would -- I think it would help some of the commissioners kind of understand kind of what the historical spend has been, what the prospective spend is anticipated to be and then how the SIM fits into that and how the parties evaluated each of those when we came up with our all-party settlement. So those are the things that we're evaluating. But yes, I agree. It just -- it seemed like maybe there was some confusion. And so that was one of the things we were kind of motivating us to want to just kind of clarify that for some of the commissioners.

Q: Relative to Great Basin. So there is quite a bit of theoretical rate base addition there in the expansion project. Do you need to get a result from the CPCN to be comfortable to make an adjustment at your typical year-end for what your rate base and CapEx looks like going forward? Or do you feel comfortable enough with that process that once you've decided to proceed and made that filing that, that project is adequately confident to change your numbers?

A: Yes. I think a couple of things, Chris. I think really the critical point for us is really getting signed precedent agreements from shippers because that really locks everyone in, and that will allow us then to revisit our internal estimate and kind of CapEx estimates. I think to your point, the next critical step is that FERC filing. I think the good thing about this proposed expansion is it's in an existing footprint and right of way. And so you're really just upsizing and looping the pipe and adding compressors. So I think from a FERC oversight review, I think it's kind of your best-case scenario. So to your point, I think we would feel pretty confident with the FERC process and the approval process. But I think for purposes of kind of getting a better understanding and grasp around what the CapEx amount is, it's really going to be driven by that precedent agreement negotiation and what parties actually sign those agreements and provide the information that we're requesting as part of those agreements.

Q: If you do make the CPCN filing, can we infer from that, that you feel comfortable with the level of agreements that you've signed to date at that point? That you're proceeding given what you've obtained on the agreements?

A: Yes. Absolutely, because that's what's required in that filing. So I think to your point, that implicit in that filing is going to be a pretty strong confidence of what we think is the project is ultimately going to look like.