SWX Q3 2026 earnings call transcript, November 4, 2026

Welcome to Southwest Gas Holdings 3rd Quarter 2026 Earnings Conference Call. Today's call is being recorded and our webcast is live. A replay will be available later today and for the next 12 months on the Southwest Gas Holdings website. All participants are currently in listen-only mode. A question-answer session will follow the prepared remarks. If you would like to ask a question at that time, please press star 1, then the number 1 on the table. If you would like to withdraw from your question, please press star 2. I will now turn the call over to Mr. Will Bautista, Director of Investor Relations, Sustainability, and Stakeholder Engagement. Please go ahead.

Thank you, Kelsey, and good morning, everyone. We appreciate you joining the call this morning. This morning, we issued and posted to Southwest Gas Holdings' website our third quarter 2026 earnings release and filed the associated Form 10-Q. The slides accompanying today's call are also available. on Southwest Gas Holdings' website. We'll refer to those slides by number throughout the call today. Please note that on today's call, we will address certain factors that may impact 2026 earnings and discuss longer-term guidance. Information that will be discussed today contains forward-looking statements. These statements are based on management's assumptions on what the future holds, but are subject to several risks and uncertainties, including uncertainties surrounding the impact of future economic conditions, regulatory approvals, and capital projects.

Thank you very much.

Cautionary note and a note regarding non-GAAP measures are included on slide two and three of this presentation. In today's press release and in our filings with the Securities and Exchange Commission, we encourage you to review each of these disclosures. These risks and uncertainties may cause actual results to differ materially from statements made today. We caution against placing undue reliance on any forward-looking statements, and we assume no obligation to update any such statements. As shown on slide four, on today's call, we have Justin. Brown, President and CEO, and Justin Forsberg, Chief Financial Officer and Treasurer. Other members of the management team are also available to answer your questions during the Q&A portion of the call today, if necessary. I will now throw the call over to Justin Brown.

Thanks, Will.

Good morning, everyone, and thank you for joining us today. Beginning on slide five, we deliver strong third quarter and year-to-date results while continuing to execute on our regulatory and growth priorities. Adjusted earnings per share from continuing operations of $0.20 compared with $0.06 in the third quarter of 2025, and year-to-date adjusted earnings per share from continuing operations of $2.69, which is up 18% from the same period last year. The improvement was primarily driven by constructive regulatory outcomes and disciplined cost management as we remain focused on delivering on our 2026 strategic priorities and key initiatives. Based on our current expectations, we are reaffirming our 2026 adjusted EPS guidance of 417 to 432 per share and our 12% to 14% long-term adjusted EPS growth target. In Arizona and Nevada, we are working to better align cost recovery with the pace of our investments, which benefits customers and investors alike. Importantly, our plan does not depend on any single outcome as we have multiple credible paths to our objectives regardless of how between. may unfold. We remain focused on delivering near-term performance and long-term value that starts with safe, reliable, and affordable natural gas service for our customers and extends to supporting economic development across the communities we serve, all backed by disciplined capital investment and cost management. Turning to slide six, we continue to execute on our 2026 strategic priorities and remain on track to deliver on each of our key initiatives.

We received final orders in both our California and Nevada rate cases, which together authorized approximately $80 million of incremental annual revenue. In Arizona, staff testimony was constructive, and I will cover it in more detail shortly. At Great Basin, we submitted our FAST41 draft application for the 2028 expansion project, and we remain on track for the FERC certificate application by year end and a targeted fourth quarter 2028 in-service date. On slide seven, at the utility, we delivered a 12-month-ended return on equity of 8%, and third quarter O&M expense remained relatively flat on a per-customer basis, consistent with our disciplined cost management efforts across the company. We ended the quarter with nearly $700 million of available liquidity after having invested more than $800 million in capital at Southwest Gas and Great Basin so far this year. We delivered these results before realizing the full benefits of our recent regulatory outcomes in Nevada, and while Arizona remains pending, underscoring the strength of our underlying business. With new California and Nevada rates now in effect, and as we work with the parties in the Arizona Commission to bring our case to a close, we expect the associated rate relief to further improve our results as we move into 2027. We continue to see constructive outcomes as we move through our general rate case cycle. In California, the final decision on cost of capital was received in August.

This completed our general rate case. The final decision authorized just over $32 million of incremental revenue, a 10% return on equity, and a 50% equity ratio with rates affected back to January 1st of 2026. A summary of the outcome is shown in the appendix on slide 26. Turning to slide 9, in Nevada, we received a final order on October 14th authorizing nearly $48 million of incremental annual revenue, maintaining our authorized return on equity of 9.5%, and we received a final order on equity of 9.5% return on equity of 9.5% return on equity of 9.5% return on equity of 9.5%. and an actual equity ratio of 51.35% up from the 50% in our prior case, with rates effective October of 2026. This outcome exceeds the roughly $40 million and 9.3% proposed by the other parties. While we were pleased with several elements of the outcome, we filed for reconsideration of certain post-test year plan that we believe should have been included in rate-based and not deferred to a future rate proceeding. If successful, this request could first... and further improve the overall revenue outcome in Nevada. We also expect the Commission to finalize its rules around surrounding alternative rate making by the end of 2026 and anticipate making a filing to implement alternative rates by early second quarter 2027. In Arizona, we received intervener testimony and notably the Commission staff recommends $53 to $58 million of incremental annual revenue, depending on the treatment of the fair value increment,

and a 9.75... return on equity. Staff also supports post-test year plants subject to in-service verification, and most notably, our proposal to transition to formula rates with some modifications. Our rebuttal testimony was filed November 2nd, and we updated our request to $91.3 million in annual revenue to reflect updated post-test year plant estimates and cash working capital assumptions, as well as other minor adjustments and corrections to our original filing of $101 million. Additional testimony is due... ...by the end of November, and the hearing is scheduled to begin December 7th, with anticipated rates becoming effective April 1st, 2027. Our Formula A proposal would provide an annual rate adjustment beginning one year after new base rates take effect with a 20-basis point deadband above and below the authorized return on equity and would replace several existing mechanisms. Staff supports the mechanism with some modifications to the deadband, proposing a 50-basis point deadband. and proposing some adjustments to our proposed timeline for the first filing, as well as recommending the lower end of their ROE range while RUCO just opposes it in its entirety. And we address each of these positions in our rebuttal testimony. Collectively, these proceedings strengthen earnings visibility, support timely recovery of prudent investment, and advances our focus on reducing regulatory lag while providing rate stability for our customers.

Across all three states, the strategy is the same. Pursue timely, constructive outcomes that align cost recovery with the pace of our investment. Turning to slide 11, we continue to advance our Great Basin 2028 expansion project, and preparation of our FERC certificate application remains on track for filing by year end. Recent progress includes filing key draft resource reports, submitting our draft Fast 41 application, conducting field surveys and public outreach, and advancing engineering and design work. Shippers have executed binding precedent agreements and posted surety supporting one BCF per day of contracted demand, and upon FERC approval of the certificate, they are required to execute transportation service agreements with a minimum term of 20 years. Based on that contracted demand, we expect the project's estimated $2.3 billion investment to generate approximately $270 to $300 million of incremental annual margin beginning at the expected fourth quarter, 2028. and service date. Because this is a cost of service project, the one BTF per day already under contract is expected to fully support that margin estimate. As a reminder, $600 million of the $2.3 billion estimate, along with the associated incremental margin, is not reflected in our long-term guidance. We don't expect the updated estimate to materially affect our 2026 capital expenditure guidance, and we will update long-term guidance with our annual five-year plan in February.

Importantly, the current 48-inch pipe design will serve the contracted one BCF per day and can accommodate greater throughput with relatively modest additional investment depending on shipper specifications. As such, additional demand served within that current design capacity is expected to lower the rate for all shippers subscribed to the 2028 expansion project. Capital spending is expected to be approximately 15% in 2026, 25% in 2027. And 60% in 2028, as shown on the slide. We anticipate a decision on our CPCN filing in late 2027, and AFUDC is expected to be capitalized into project costs and contribute to future invested capital upon placement into service. We remain focused on executing the project safely, efficiently, and in a manner that supports long-term value creation. I will now turn the call over to J4 to discuss our financial performance, the expected financing plans, and our guidance.

Thank you, Justin.

Turning to the EPS walk on slide 13, the quarter-over-quarter improvement at Southwest Gas was operationally driven by improved rates as well as customer growth. Lower interest expense at the holding company also contributed to the increase. While the third quarter tends to be our lowest earnings period, the earnings growth continues to support the benefits of our simplified, fully regulated natural gas business model, as well as our disciplined focus on. cost management, regulatory improvement, and purposeful capital allocation. On slide 14, you'll see the key drivers of the quarter-over-quarter change in Southwest GAS's adjusted net income, comparing the third quarter of 2026 to the same period in 2025. Operating margin increased $3.8 million, driven primarily by updated rates in California, as well as customer growth, which remains steady across our service territories, despite a prolonged higher interest rate. We also saw the margin benefits from the Arizona System Integrity Mechanism Capital Tracker. These and the other increases in recovery, return on regulatory account balances were partially offset by lower built margin across Arizona and Nevada, attributable to non-decoupled customers, as well as lower margin related to the Nevada VIR mechanism, the impact of which is offset in net interest deductions. Our team continues to deliver disciplined cost management. Year-to-date, O&M is relatively flat, and we expect our continued focus on operational efficiency to help us achieve our goal of maintaining flat O&M expense per customer at the utility over our five-year plan.

Depreciation and amortization increased by a net $1.8 million. The increase mostly reflects a 7% increase in gas plant and service compared to the third quarter of 2025. Partially offsetting the higher depreciation expense was an adjustment related to certain regulations. assets to more closely align the return on those assets with the time period over which those costs have been deferred. The increase in plant and service is consistent with our disciplined infrastructure investment strategy focused on safety, reliability, and customer growth. Lower net interest deductions primarily related to lower amounts incurred on over collected PGA balances for Nevada, as well as recoveries associated with the Nevada mirror mechanism I mentioned earlier, offset the margin, offset the margin. Also benefited results by $4.9 million. Although other income was flat, lower non-service pension-related income and lower interest income were nearly fully offset by higher Foley games and an increase in AFUDC equity driven mostly by capital investment in Great Basin's 2028 expansion project. Finally, even though adjusted earnings were higher, we had a net income tax benefit driven mostly by lower deferred state income taxes. Overall, we remain confident that we are on track to achieve our full year outlook. Starting to slide 15, I'll discuss our financing plans. We are in a strong financial position utilizing strategically sourced liquidity to support future growth.

We have yet to issue any equity outside of our dividend reinvestment plan so far in 2026, and we continue to anticipate no equity issuances for the remainder of this year. We currently plan issuing debt at the utility. which we anticipate sizing as needed to support liquidity and capital allocation priorities. Our strong liquidity across the company provides us with flexibility to optimize external financing sources across the enterprise as we navigate a relatively volatile interest rate market. Additionally, we have wide flexibility in terms of tenor as we monitor borrowing costs across the yield curve and evaluate laddering maturities against our current debt maturity profile. Recall that our five-year plan includes a mix of leverage capacity of the holding company, utility bond issuances, and modest ATM usage to finance our growing $6.3 billion capital plan, and we intend to optimize the lowest-cost source of funds when prudent. Later this month, when we extend the shelf registration, you'll see us update and extend our existing at-the-market equity program while retaining its capacity at $340 million. Maintaining ATM capacity remains a prudent financing tool and should not be interpreted as a change in our current financing expectations. We continue to only expect modest external equity needs to fund our capital plan, and we do not anticipate needing to draw meaningfully on the ATM to the end of our current planning horizon.

Our highly flexible and well-capitalized balance sheet positions us well to fund future growth. Over the long term, we continue to believe we have sufficient leverage capacity at the holding. company to absorb much of the anticipated equity needs of the utility that are driven by our capital plan. Supported by meaningful cushion above our current downgrade thresholds, we retain considerable flexibility in how we finance investment while preserving our financial strength. Briefly, on slide 16, at the end of the third quarter, consolidated net debt was approximately $3.7 billion when considering the purchase gas adjustment balances that are payable to customers. We maintain investment-grade ratings of stable outlooks across the country. We continue to target consolidated S&P FFO to debt above 17% over time, as the significant margin growth from the investments we are making are expected to support even further strengthening of the balance sheet, as well as potential capital reinvestment opportunities. Finally, on slide 17, based on current visibility, we are reaffirming our 2026 adjusted EPS guidance expectations to center around the midpoint of the range of $4.17 to $4.32. In addition, we are reaffirming 2026 capital expenditures and our long-term guidance metrics and drivers. As noted, those long-term metrics reflect $1.7 billion of Great Basin capital through 2030 and do not yet incorporate the updated $2.3 billion project estimate.

We intend to include the full estimate when we roll forward our five-year capital, financing, rate-based, and earnings assumptions this coming February. The successful execution of our current five-year capital program would nearly double our system-wide rate base from today, by the end of 2030. Taken together, we believe our year-to-date results, on-track plan execution, and the continued commercial interest in Great Basin's expansion opportunities reinforce the durability of our plan. We remain confident in our ability to deliver on our long-term financial objectives of receiving timely recovery of investments, improving earned returns, and...

preserving balance sheet strength. The progress we have made this year reinforces our confidence in achieving our long-term objectives regardless of the timing of individual regulatory outcomes. We remain committed to prudent capital allocation and to supporting long-term value creation for stockholders. With that, let's open the line for your questions. Thank you. Ladies and gentlemen, we'll now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone.

You will then hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift the hands up before pressing any keys. One moment, please, for your first question. Any first question comes from Constantine from Wells Fargo. Please go ahead.

Thank you. And your next question comes from Eli Johnson from JPMorgan. Please go ahead.

what their rationale is. And kind of where they start to place their votes. Thanks. Thank you. And your next question comes from James Ward from Jefferies. Please go ahead.

Thank you. And your next question comes from Gabrielle Maureen from MISU. Please go ahead.

Thank you. And your next question comes from Chris Ellinghaus from Cyber's William Schenck. Please go ahead.

Thank you. And your last question comes from Ryan Levine from Citi. Please go ahead.

This concludes our conference call.