10-Q: Southwest Gas Reports Mixed Q2 Amid Centuri Spinoff

Southwest Gas Holdings reports a net loss for Q2 2025 due to Centuri separation costs, while its core natural gas business shows strong growth.

Summary

• Southwest Gas Holdings, Inc. reported a consolidated net loss of $12.883 million for the three months ended June 30, 2025, compared to a net income of $18.333 million for the same period in 2024.
• Year-to-date consolidated net income attributable to Southwest Gas Holdings, Inc. was $100.987 million for the six months ended June 30, 2025, down from $106.070 million in the prior year.
• The Natural Gas Distribution segment's net income increased by $6.1 million to $33.677 million for Q2 2025 and by $13.2 million to $176.619 million year-to-date, driven by rate relief and customer growth.
• The Utility Infrastructure Services segment (Centuri) reported a net income of $5.771 million for Q2 2025, up from $5.054 million in Q2 2024, and its year-to-date net loss improved from $31.176 million to $14.197 million.
• Consolidated operating revenues decreased to $1.120 billion for Q2 2025 from $1.182 billion in Q2 2024, and to $2.417 billion year-to-date from $2.763 billion in the prior year.
• Operating income for Southwest Gas Holdings increased to $95.456 million for Q2 2025 from $83.221 million in Q2 2024, and to $295.878 million year-to-date from $241.346 million.
• The company completed secondary public offerings and private placements of Centuri common stock in May and June 2025, generating net proceeds of $448.7 million, used to repay outstanding indebtedness.
• An additional private placement of Centuri stock closed in July 2025, yielding $22.0 million, further reducing debt.
• Southwest Gas Holdings' ownership in Centuri decreased to 53.3% at June 30, 2025, and 52.1% at July 8, 2025.
• A $45.4 million net charge to income tax expense was recognized in Q2 2025 due to the tax deconsolidation of Centuri and the establishment of related deferred tax liabilities and assets.
• The Natural Gas Distribution segment added approximately 40,000 first-time meter sets over the past 12 months, representing a 1.8% growth rate.
• Construction expenditures for the natural gas distribution segment were $362.5 million year-to-date, with an estimated $2.6 billion planned for the three-year period ending December 31, 2027.
• The PGA (Purchased Gas Adjustment) balance was an over-collection (liability) of $349.0 million as of June 30, 2025, compared to an over-collection of $81.5 million at June 30, 2024.
• Southwest Gas Holdings prepaid $325.0 million of its term loan, reducing the balance from $550.0 million to $225.0 million.
• The company entered into a new $300.0 million revolving credit agreement maturing in August 2029, replacing a facility set to expire in December 2026.
• Centuri amended its credit agreement in July 2025, refinancing its term loan to $800.0 million (maturing July 2032) and increasing its revolving credit facility to $450.0 million (maturing July 2030), while decreasing interest rate margins.
• The Arizona Corporation Commission approved an $80.2 million annual rate increase and a System Integrity Mechanism (SIM) with a $50 million annual investment limit for the Natural Gas Distribution segment.
• The Public Utilities Commission of Nevada approved regulatory accounting treatment for line locate activity expenses, effective January 1, 2025.
• The One Big Beautiful Bill Act (OBBBA) was signed into law on July 4, 2025, making permanent many 2017 tax provisions, with no material impact expected on results of operations.

Sentiment

Score: 7

Explanation: The core natural gas distribution business shows strong operational improvements driven by rate relief and customer growth. The Centuri separation is progressing, leading to significant debt reduction and a simplified business structure, despite incurring one-time tax charges that negatively impacted consolidated net income. While operating cash flow decreased due to regulatory mechanisms, overall liquidity remains strong with extended credit facilities.

Positives

• Natural Gas Distribution segment's net income increased by $6.1 million in Q2 2025 and $13.2 million year-to-date, driven by rate relief and customer growth.
• Operating margin for the Natural Gas Distribution segment increased by $26.6 million in Q2 2025 and $65.5 million year-to-date, primarily due to combined rate relief across all territories.
• Customer growth in the Natural Gas Distribution segment saw approximately 40,000 first-time meter sets over the past 12 months, a 1.8% growth rate.
• Utility Infrastructure Services segment's net loss improved significantly year-to-date, from $31.176 million to $14.197 million, indicating operational improvements.
• Utility Infrastructure Services revenues increased by 8% in Q2 2025 and 6% year-to-date, driven by increased electric utility infrastructure services.
• Successful secondary public offerings and private placements of Centuri stock generated over $470 million in net proceeds, used for debt repayment.
• Southwest Gas Holdings prepaid $325.0 million of its term loan, reducing its balance and improving its debt profile.
• New revolving credit agreements for Southwest Gas Holdings and Centuri extend maturities and enhance financial flexibility.
• Regulatory approvals in Arizona for an $80.2 million annual rate increase and a System Integrity Mechanism (SIM) support future investments and revenue.
• The Great Basin 2028 expansion project's binding open season resulted in potential incremental capacity of up to ~1.76 Bcf per day, indicating future growth opportunities.
• The company no longer expects to issue equity in 2025, suggesting sufficient liquidity from other sources.

Negatives

• Southwest Gas Holdings, Inc. reported a consolidated net loss of $12.883 million for Q2 2025, a significant decline from a $18.333 million net income in Q2 2024.
• Consolidated net income attributable to Southwest Gas Holdings, Inc. decreased year-to-date to $100.987 million from $106.070 million in the prior year.
• A $45.4 million net charge to income tax expense was recognized in Q2 2025 due to the tax deconsolidation of Centuri, negatively impacting consolidated net income.
• Consolidated operating revenues decreased by $61.798 million in Q2 2025 and $346.257 million year-to-date, primarily due to lower regulated operations revenues.
• Operating cash flows decreased significantly by $432.7 million year-to-date, primarily due to a substantial reduction in the collection of previously deferred purchased gas costs, as PGA balances shifted to a net liability position.
• The PGA balance was an over-collection (liability) of $349.0 million as of June 30, 2025, which is expected to impact near-term liquidity due to required refunds to customers.
• Gas utility infrastructure services revenues decreased year-to-date by $25.5 million, attributed to adverse weather conditions and certain budgetary constraints, as well as bid project delays.

Risks

• Customer growth rates and conditions in the housing market can impact business.
• Inflation, interest rates, and related government actions, including tariffs, can affect costs and financial results.
• Sufficiency of labor markets and ability to timely hire qualified employees or similar resources pose operational risks.
• Acquisition and divestiture decisions, including prices paid or received, adjustments, indemnifications, or commitments, can lead to impairments, write-downs, losses, or expenses.
• Impacts from pandemics, including on employees, customers, business, financial position, earnings, bad debt expense, and work deployment, create uncertainties.
• The ability to collect on outstanding customer accounts receivable in any or all jurisdictions and obtain regulatory recovery of related costs is a risk.
• Decisions of Centuri customers (including Southwest Gas) regarding capital projects due to economic impacts can affect the infrastructure services business.
• The ability to recover or requirement to return costs associated with PGA mechanisms or other regulatory assets or programs, and the timing thereof, is a risk.
• Effects of regulation/deregulation, governmental or regulatory policy regarding pipeline safety, greenhouse gas emissions, and potential prohibitions on natural gas use are significant risks.
• The timing and amount of rate relief and the impact of other regulatory proceedings can affect earnings.
• Changes in rate design and impacts of other tax regulations, including from deferred tax balances, are risks.
• Variability in volume of gas or transportation service sold to customers can impact revenue.
• Changes in capital requirements and funding, and the impact of credit rating actions and capital market conditions on financing costs, are financial risks.
• Changes in federal policies affecting U.S. relations with other countries, including taxes, trade policies, and tariffs, can have broader impacts.
• Levels of or changes in operations and maintenance expenses, or other costs, including fuel costs and those impacted by inflation, are ongoing risks.
• Results of Centuri bid work, the impact of weather, delays, or customer budgetary plans on Centuri's operations, and projections about acquired businesses' earnings are specific to the infrastructure segment.
• Differences between actual and originally expected outcomes of Centuri bid or other fixed-price construction agreements, and outcomes from contract and change order negotiations, pose financial risks for Centuri.
• Ability to successfully procure new work and impacts from work awarded or failing to be awarded from significant customers or related to significant projects are critical for Centuri.
• The timing and ability of management to successfully consummate the Centuri separation following the completed Centuri IPO is a key strategic risk.
• The impact on stock price or credit ratings due to undertaking or failing to undertake acquisition or divestiture activities or other strategic endeavors is a market risk.
• The impact on stock price, costs, actions, or disruptions related to significant stockholders and their activism is a corporate governance risk.
• The ability to raise capital in external financings and to continue to remain within debt covenants are financial risks.
• Ongoing evaluations in regard to goodwill, other intangible assets, and regulatory approvals for the Great Basin 2028 expansion project along with negotiation and execution of binding transportation agreements and capital construction costs are project-specific risks.

Future Outlook

The company intends to fully dispose of its ownership in Centuri through sales of common stock, exchange offers for company shares, or a combination thereof. Natural gas segment construction expenditures are estimated at approximately $2.6 billion for the three-year period ending December 31, 2027, with $880.2 million expected in 2025. Cash flows from gas operations are projected to fund approximately 74% of these expenditures and dividend requirements. The company expects to reevaluate its dividend policy upon completion of the Centuri separation, aiming for a level consistent with industry peers. The recently signed OBBBA is not expected to have a material impact on results of operations. New rates from California's general rate case are expected to be effective in January 2026.

Management Comments

• Management qualitatively assessed that no goodwill impairment occurred in the continuing segments of the company during the first six months of 2025.
• Management believes operating margin provides investors and other interested parties with useful and relevant information to analyze Southwest Gas financial performance in a rate-regulated environment.
• The company no longer expects to issue equity in 2025.
• The Board currently intends to reevaluate the dividend upon the completion of the Centuri separation, and it is anticipated that we will pay a dividend at a level consistent with industry peers.

Industry Context

The natural gas distribution segment operates in a highly regulated environment, with rate structures designed to decouple volumetric sales from revenue, mitigating weather and conservation impacts. Utilities continue to implement system integrity management programs, driving multi-year replacement projects. The utility infrastructure services sector is influenced by utility capital budgets, weather, and regulation, with increasing attention on electric grid modernization. Both segments are subject to broader economic conditions, including inflation, interest rates, and labor market costs, which can impact operational expenses.

Comparison to Industry Standards

• The Arizona Corporation Commission authorized a return on common equity of 9.84% for Southwest Gas, relative to a 48.5% equity ratio, which can be compared to authorized ROE for other regulated utilities in similar jurisdictions.
• The Public Utilities Commission of Nevada approved a return on common equity of 9.5% for Southwest Gas, including the use of a hypothetical capital structure of 50% debt and 50% equity, providing a benchmark for capital structure and return expectations in that state.
• Great Basin's FERC rate case settlement approved a 9.76% pretax rate of return on an increased rate base of approximately $191 million, offering a specific comparable for interstate pipeline returns.
• The company's dividend payout strategy, which will be reevaluated to be consistent with industry peers post-Centuri separation, implies a comparison to the dividend policies of other publicly traded utility holding companies and infrastructure service providers.

Legal Proceedings

• The company and Southwest Gas are named as defendants in various legal proceedings, none of which are expected to have a material adverse impact on financial position or results of operations.

Related Party Transactions

• Centuri accounts for services provided to Southwest Gas at contractual prices, with accounts receivable for these services totaling $5.877 million as of June 30, 2025.
• In May and June 2025, Southwest Gas Holdings completed private placements of Centuri stock with Icahn Partners LP and Icahn Partners Master Fund LP, investment entities associated with Carl C. Icahn.

Stakeholder Impact

• Shareholders: Impacted by the consolidated net loss due to Centuri separation costs, but also benefit from strategic debt reduction and potential future dividend reevaluation.
• Customers (Natural Gas Distribution): Benefit from rate relief, regulatory mechanisms that mitigate weather and volume variability, and planned infrastructure investments for system integrity and reliability.
• Customers (Utility Infrastructure Services): Benefit from increased electric utility infrastructure services and improved margins on bid projects.
• Employees: Impacted by changes in employee-related labor and benefit costs, including incentive compensation, and severance costs in the Utility Infrastructure Services segment.
• Creditors: Positively impacted by debt reduction and extended maturity dates on credit facilities, maintaining investment-grade credit ratings.

Next Steps

• Fully dispose of ownership in Centuri in one or more disposition transactions, including sales of Centuri common stock or exchange offers for company shares.
• Finalize the estimated $30.2 million deemed capital contribution to Centuri upon filing of the 2024 and 2025 final consolidated or combined federal and state income tax returns.
• Consideration of the Arizona DCA request for the under-collected balance of $40.7 million is anticipated in the third or fourth quarter of 2025.
• The next quarterly adjustment for Nevada's DEAA (effective October 1) is to be calculated consistent with the statutory cap range.
• A final decision for California's general rate case is anticipated in the fourth quarter of 2025, with new rates expected to be effective in January 2026.
• Southwest Gas plans to continue requesting regulatory support for projects and to accelerate projects for system improvement or expansion.
• Reevaluate the dividend upon the completion of the Centuri separation, with anticipation of paying a dividend at a level consistent with industry peers.

Key Dates

Recommendation

While the core natural gas distribution segment demonstrates robust growth and favorable regulatory outcomes, the consolidated financial results are significantly impacted by the ongoing Centuri separation. The reported net loss for the quarter, driven by a substantial one-time tax expense related to Centuri's tax deconsolidation, obscures the underlying operational improvements. The reduction in operating cash flow due to PGA balance shifts is a temporary liquidity factor, not a fundamental operational decline. The strategic divestment of Centuri is progressing as planned, leading to debt reduction and a more focused utility business. However, the short-term financial volatility and the remaining steps in the Centuri separation warrant a 'Hold' recommendation until the full impact of the separation is realized and the financial statements reflect a more stable, post-separation state.

Keywords

Natural Gas Distribution, Utility Infrastructure Services, SEC Filing, Quarterly Report, Centuri Separation, Rate Case, PGA Balance, Debt Reduction, Capital Expenditures, Regulatory Approvals, SWX, Energy Utilities, Infrastructure, Natural Gas, Electric Power