Southwest Gas Holdings, Inc.: Form 10-Q for the period ended Jun 30, 2023

Southwest Gas Holdings, Inc. is a holding company that owns all of the shares of common stock of Southwest Gas Corporation (“Southwest” or the “natural gas distribution” segment) and all of the shares of common stock of Centuri Group, Inc. (“Centuri,” or the “utility infrastructure services” segment). Southwest Gas Holdings, Inc. and its subsidiaries are collectively referred to as the “Company.”

In December 2022, the Company announced that its Board of Directors (the “Board”) unanimously determined to take strategic actions to simplify the Company’s portfolio of businesses. These actions included entering into a definitive agreement to sell 100% of MountainWest in an all-cash transaction that closed on February 14, 2023. Additionally, the Company determined it would pursue a spin-off of Centuri (the “Centuri spin-off”), to form a new independent publicly traded utility infrastructure services company. The Centuri spin-off is currently expected to be completed towards the end of the first quarter of 2024 and to be tax free to the Company and its stockholders for U.S. federal income tax purposes. See Note 8 - Dispositions for more information.

Southwest is engaged in the business of purchasing, distributing, and transporting natural gas for customers in portions of Arizona, Nevada, and California. Southwest is the largest distributor of natural gas in Arizona and Nevada, and distributes and transports natural gas for customers in portions of California. Additionally, through its subsidiaries, Southwest operates two regulated interstate pipelines serving portions of Southwest’s service territories.

As of June 30, 2023, Southwest had 2,207,000 residential, commercial, industrial, and other natural gas customers, of which 1,182,000 customers were located in Arizona, 820,000 in Nevada, and 205,000 in California. Over the past twelve months, first-time meter sets were approximately 42,000, compared to 39,000 for the twelve months ended June 2022. Residential and small commercial customers represented over 99% of the total customer base. During the twelve months ended June 30, 2023, 54% of operating margin (Regulated operations revenues less the net cost of gas sold) was earned in Arizona, 34% in Nevada, and 12% in California. During this same period, Southwest earned 84% of its operating margin from residential and small commercial customers, 5% from other sales customers, and 11% from transportation customers. These patterns are expected to remain materially consistent for the foreseeable future.

Southwest recognizes operating revenues from the distribution and transportation of natural gas (and related services) to customers. Operating margin is a financial measure defined by management as Regulated operations revenues less the net cost of gas sold. However, operating margin is not specifically defined in accounting principles generally accepted in the United States (“U.S. GAAP”). Thus, operating margin is considered a non-GAAP measure. Management uses this financial measure because Regulated operations revenues include the net cost of gas sold, which is a tracked cost that is passed through to customers without markup under purchased gas adjustment (“PGA”) mechanisms. Fluctuations in the net cost of gas sold impact revenues on a dollar-for-dollar basis, but do not impact operating margin or operating income. Therefore, management believes operating margin provides investors and other interested parties with useful and relevant information to analyze Southwest’s financial performance in a rate-regulated environment. The principal factors affecting changes in operating margin are general rate relief (including impacts of infrastructure trackers) and customer growth. Commission decisions on the amount and timing of relief may impact our earnings. Refer to the Summary Operating Results table below for a reconciliation of gross margin to operating margin, and refer to Rates and Regulatory Proceedings in this Management’s Discussion and Analysis, for details of various rate proceedings.

The demand for natural gas is seasonal, with greater demand in the colder winter months and decreased demand in the warmer summer months. All of Southwest’s service territories have decoupled rate structures (alternative revenue programs), which are designed to eliminate the direct link between volumetric sales and revenue, thereby mitigating the impacts of unusual weather variability and conservation on operating margin, allowing Southwest to pursue energy efficiency initiatives.

Centuri is a strategic infrastructure services company that partners with regulated utilities to build and maintain the energy network that powers millions of homes and businesses across the United States (“U.S.”) and Canada. With an unwavering commitment to serve as long-term partners to customers and communities, Centuri’s employees enable regulated utilities to safely and reliably deliver natural gas and electricity, as well as achieve their goals for environmental sustainability. Centuri operates in 87 primary locations across 45 states and provinces in the U.S. and Canada. Centuri operates in the U.S., primarily as NPL, Neuco, Linetec, and Riggs Distler, and in Canada, primarily as NPL Canada.

Utility infrastructure services activity can be impacted by changes in infrastructure replacement programs of utilities, weather, and local and federal regulation (including tax rates and incentives). Utilities continue to implement or modify system integrity management programs to enhance safety pursuant to federal and state mandates. These programs have resulted in multi-year utility system replacement projects throughout the U.S. Likewise, there has been similar attention placed on electric grid modernization through national infrastructure legislation and related initiatives. The Department of Energy estimates more than 70% of the nation’s grid transmission lines and power transformers are over 25 years old, creating vulnerability exacerbated by seasonal storm and extreme weather events. Generally, Centuri revenues are lowest during the first quarter of the year due to less favorable winter weather conditions. Revenues typically improve as more favorable weather conditions occur during the summer and fall months. In cases of severe weather, such as following a regional storm, Centuri may be engaged to perform restoration activities related to above-ground utility infrastructure, and related results impacts are not solely within the control of management. In addition, in certain circumstances, such as with large bid contracts (especially those of a longer duration), or unit-price contracts with revenue caps, results may be impacted by differences between costs incurred and those anticipated when the work was originally bid. Work awarded, or failing to be awarded, by individual large customers can impact operating results.

All of our businesses may be impacted by economic conditions that impact businesses generally, such as inflationary impacts on goods and services consumed in the business, rising interest rates, labor markets and costs (including in regard to contracted or professional services), and the availability of those resources. Certain of these impacts may be more predominant in certain of our operations, such as with regard to fuel costs for work equipment and skilled/trade labor costs at Centuri.

This Management’s Discussion and Analysis (“MD&A”) of Financial Condition and Results of Operations should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto, as well as the MD&A included in the 2022 Annual Report to Stockholders, which is incorporated by reference into Southwest’s and the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “2022 Form 10-K), in addition to the Risk Factors included in these documents, and as updated from time to time.

Executive Summary

The items discussed in this Executive Summary are intended to provide an overview of the results of the Company’s and Southwest’s operations and are covered in greater detail in later sections of MD&A.

Summary Operating Results

(In thousands, except per share amounts)

2nd Quarter 2023 Overview

Southwest Gas Holdings highlights include the following:

• Application for Centuri separation approved by the Arizona Corporation Commission
• Confidentially submitted a draft Registration Statement on Form 10 relating to the Centuri spin-off to the SEC
• Corporate and administrative expenses include $7.7 million in interest expense related to borrowings and $2.5 million in Centuri spin costs

Natural gas distribution highlights include the following:

• 42,000 first-time meters sets occurred over the past 12 months
• Operating margin increased $26 million in the second quarter of 2023, including Arizona rate relief
• $381 million capital investment during the quarter
• COLI results increased $9.1 million compared to the prior-year quarter

Utility infrastructure services highlights include the following:

• Record revenues of $806 million in the second quarter of 2023, an increase of $99.7 million, or 14%, compared to the second quarter of 2022
• Record operating income of $53 million in the second quarter of 2023, an increase of $32.2 million, or 153%, compared to the second quarter of 2022
• $65 million storm restoration services revenue earned in the first half of 2023, an increase of $46 million over the first half of 2022
• Completed contracted work with customer acceptance on first offshore wind project

Results of Natural Gas Distribution

Quarterly Analysis

Results from natural gas distribution operations improved $21.4 million between the second quarters of 2023 and 2022. The improvement was primarily due to an increase in Operating margin and Other income (deductions) and a decrease in Operations and maintenance expense, offset by increases in Depreciation and amortization and Net interest deductions.

Operating margin increased $25.5 million quarter over quarter. Approximately $3 million of incremental margin was attributable to customer growth, including 42,000 first-time meter sets during the last twelve months. Combined rate relief added approximately $14 million of combined margin, nearly all of which relates to our recently concluded Arizona case. Additionally, a $16 million increase in recovery/return associated with regulatory account balances contributed to the increase; an associated comparable increase is also reflected in amortization expense between periods (discussed below). Included in the $16 million is a mostly timing-related item associated with approximately $10 million returned to customers during the second quarter of 2022 under a California climate credit program, whereas the annual return to customers (of approximately $11 million) occurred during the first quarter in 2023. Partially offsetting collective favorable impacts to margin between periods was Vintage Steel Pipe (“VSP”) and Customer-owned Yard Line (“COYL”) revenue in Arizona, which (combined) decreased approximately $2 million between the comparable second quarter periods. The remaining variance primarily relates to miscellaneous revenue and customers outside of the decoupling mechanism.

Operations and maintenance expense decreased $3.1 million between quarters primarily due to an $8 million decrease in legal claim-related expenses between periods, offset by an increase in external contractor and professional services costs in various areas of the business, including a consulting arrangement for the identification, benchmarking, and assessment of business optimization opportunities ($2 million), as well as increases in other costs, including with regard to leak survey, line locating, and uncollectible customer accounts.

Depreciation and amortization expense increased $18.9 million, or 34%, between quarters, primarily due to the timing item noted in regard to the California climate credit program and other increases in regulatory account amortization, discussed above ($16 million combined between quarters). The remaining increase was a result of a $552 million, or 6%, increase in average gas plant in service since the corresponding second quarter of 2022. The increase in plant was attributable to pipeline capacity reinforcement work, franchise requirements, scheduled pipe replacement activities, and new infrastructure.

Other income increased $22.2 million. Interest income increased $11.3 million between quarters related to carrying charges associated with regulatory account balances, notably deferred purchased gas cost balances, which increased from $355 million as of June 30, 2022 to $786 million as of June 30, 2023. The non-service-related components of employee pension and other postretirement benefit costs decreased $5.4 million between quarters. Southwest also recognized a $9.1 million increase in COLI results, inclusive of net death benefits of $1.6 million, compared to the comparable quarter in the prior year. Offsetting these impacts was $3.25 million related to an uncompleted software project deemed non-recoverable from utility operations.

Net interest deductions increased $8.5 million in the second quarter of 2023, as compared to the prior-year quarter, primarily due to interest associated with $300 million of Senior Notes issued in December 2022 and $300 million of Senior Notes issued in March 2023.

Results of Natural Gas Distribution

Six-Month Analysis

Contribution from natural gas distribution operations to consolidated net income increased $44 million between the first six months of 2023 and 2022. The increase was primarily due to increases in Operating margin and Other income (deductions), offset by an increase in Depreciation and amortization, Operations and maintenance, and Net interest deductions.

Operating margin increased $59.8 million, including $8 million attributable to customer growth. Rate relief contributed an additional $28 million. Amounts related to the recovery/return associated with other regulatory programs of $15 million also contributed to the increase; such amounts also increase amortization expense below. Additionally, an $8 million out-of-period adjusting entry was made in the first quarter of 2023, which reduced Net cost of gas sold (See Basis of Presentation in Note 1 – Background, Organization, and Summary of Significant Accounting Policies in this Quarterly Report on Form 10-Q).

Operations and maintenance expense increased $8.5 million between periods, including increases in external contractor and professional services expenses in various areas of the business ($4 million), including $2 million for the optimization initiative noted earlier, as well as $3 million associated with customer-provided fuel for pipeline operations (offset in Operating margin) and approximately $2 million in vehicle/equipment fuel and related costs. A variety of other cost increases related to leak survey and line locating activities, reserves for customer accounts deemed uncollectible, and general office and related expenses were offset by approximately $7 million reduction in legal and claim-related costs.

Depreciation and amortization expense increased $21.5 million, or 17%, between periods primarily due to the increase in amortization related to regulatory account recoveries of approximately $15 million between periods, which is also reflected in Operating margin above. The additional increase was a result of a $542 million, or 6%, increase in average gas plant in service between periods. The increase in plant was attributable to pipeline reinforcement work, franchise requirements, scheduled pipe replacement activities, and new infrastructure.

Other income (deductions) increased $39.3 million. Interest income increased $21 million between periods related to carrying charges associated with regulatory account balances, notably deferred purchased gas cost balances, which have increased substantially since the comparable period in the the prior year. The non-service-related components of employee pension and other postretirement benefit costs decreased $10.6 million between periods. Southwest also recognized a $13.5 million increase in COLI policy cash surrender values and recognized death benefits in the current period compared to the comparable period in the prior year.

Net interest deductions increased $20 million between periods primarily due to interest associated with $600 million of Senior Notes issued in March 2022, $300 million of Senior Notes issued in December 2022, and $300 million of Senior Notes issued in March 2023. Additionally, increased interest resulted from short-term debt, primarily a $450 million term loan issued in January 2023 (paid off in full in April 2023).

Results of Natural Gas Distribution

Twelve-Month Analysis

Contribution from natural gas distribution operations to consolidated net income increased approximately $32 million between the twelve-month periods ended June 2023 and 2022. The increase was due primarily to increases in Operating margin and Other income (deductions), offset by an increase in Operations and maintenance expense, Depreciation and amortization, and Net interest deductions.

Operating margin increased $86 million between periods. Customer growth provided $14 million, and combined rate relief provided $32 million of incremental operating margin. Approved VSP and COYL revenue in Arizona contributed to the improvement between periods ($13 million), as did recovery surcharges associated with regulatory account balances ($17 million). The $8 million out-of-period adjustment to Net cost of gas sold during the first quarter of 2023 also contributed to the increase.

Operations and maintenance expense increased $24 million between periods. In addition to general increases in a variety of general office, labor and insurance expenses, specific increases related to external contractor and professional services in various areas of the business ($10 million), leak survey and line locating costs ($5 million), reserves for customer accounts deemed uncollectible ($6 million), and in the cost of fuel used in operations ($8 million), partially offset by a $13.2 million reduction in legal and claim-related expenses.

Depreciation and amortization expense increased $29 million, or 12%, between periods due to a $531 million, or 6%, increase in average gas plant in service since the corresponding period in the prior year. The increase in gas plant was attributable to pipeline capacity reinforcement work, franchise requirements, scheduled pipe replacement activities, and new infrastructure. Additionally, an increase in amortization of regulatory account balances of $17 million, as discussed in regard to Operating margin above, contributed to the increase.

Other income increased $38 million between the twelve-month periods of 2023 and 2022. Interest income increased $28 million between periods related to carrying charges associated with the significant increase in deferred purchased gas cost balances and interest on other regulatory account balances. Non-service-related components of employee pension and other postretirement benefit costs decreased $17.2 million between periods. Southwest also recognized a $12.3 million increase in COLI results between periods. Offsetting these impacts were $12 million related to uncompleted software projects deemed non-recoverable from utility operations, and $3 million in market adjustments on other property in 2022.

Net interest deductions increased $30 million between periods primarily due to $600 million of Senior Notes issued in March 2022, $300 million of Senior Notes issued in December 2022, and $300 million of Senior Notes issued in March 2023. Other impacts include increased interest associated with a higher amount of short-term debt and higher rates on variable-debt overall, including under Southwest’s credit facility.

Income tax expense in both periods includes the amortization of Excess Accumulated Deferred Income Taxes (“EADIT”), which reduces tax expense as amounts are returned to customers through the billing process; tax expense also gives effect for COLI results, which are without tax impacts, similar to the non-taxable nature of death benefit proceeds under the associated insurance policies.

Results of Utility Infrastructure Services

Quarterly Analysis

Utility infrastructure services revenues increased $99.7 million in the second quarter of 2023 when compared to the prior-year quarter, driven primarily by a $54.7 million increase in electric infrastructure revenues and a $26 million increase in offshore wind revenue, which is reflected as a component of other revenues (refer to Note 3 – Revenue in this Quarterly Report on Form 10-Q). Offshore wind revenue stems from three multi-year contracts whereby Centuri provides materials, subcontracts manufacturing, and self-performs fabrication and assembly of secondary steel components onshore, with delivery at a port facility. The increase in electric infrastructure services revenues was due to growth from both new and existing customers as well as revenues of $33.9 million from emergency restoration services following tornado and other storm damage to customers’ above-ground utility infrastructure in and around the Gulf Coast and eastern regions of the U.S., compared to $4.9 million in storm restoration work in the prior-year quarter. Centuri’s revenues derived from storm-related services vary from period to period due to the unpredictable nature of weather-related events, and when this type of work is performed, it typically generates a higher profit margin than core infrastructure services, due to improved operating efficiencies related to equipment utilization and absorption of fixed costs. The current quarter also included increased gas infrastructure services revenues of $14.6 million primarily resulting from $49.2 million of revenue related to a new bid contract that commenced during the first quarter of 2023, offset by lower volumes under certain existing customer master service agreements. Favorable weather in several operating locations, which allowed projects in those areas to be completed during an otherwise seasonally slow period also contributed to the increase.

Utility infrastructure services expenses increased $69.5 million in the second quarter of 2023 when compared to the prior-year quarter, driven primarily by a higher volume of work. Subcontractor costs increased during the second quarter of 2023 compared to the prior-year quarter primarily due to increased work under offshore wind projects. Despite continued inflationary pressures, operating margin in the second quarter of 2023 improved due to changes in the mix of work and increased operating efficiencies related to emergency restoration services, lower fuel prices, as well as favorable weather conditions in other locations between quarters. Also included in total Utility infrastructure services expenses were general and administrative costs, which increased approximately $2.5 million between quarters primarily due to higher incentive compensation based on improved results, partially offset by lower strategic review costs incurred. Gains on sale of equipment in the second quarter of 2023 and 2022 (reflected as an offset to Utility infrastructure services expenses) were approximately $1.2 million and $1.6 million, respectively.

Depreciation and amortization expense decreased $2 million between quarters, primarily attributable to a $1.1 million decrease in amortization expense at Riggs Distler related to an acquired backlog intangible asset becoming fully amortized during 2022.

The increase in net interest deductions of $11.9 million included higher interest rates on outstanding variable-rate borrowings.

Income tax expense increased $6.3 million between quarters, primarily due to an increase in pre-tax income in 2023.

Results of Utility Infrastructure Services

Six-Month Analysis

Utility infrastructure services revenues increased $229.1 million in the first six months of 2023 when compared to the same period in the prior year, driven primarily by a $106.4 million increase in electric infrastructure revenues and a $69.3 million increase in offshore wind revenue, which is reflected as a component of other revenues. The increase in electric infrastructure services revenues during the first six months of 2023 was due to growth from both new and existing customers as well as revenues of $64.5 million from emergency restoration services following tornado and other storm damage to customers’ above-ground utility infrastructure in and around the Gulf Coast and eastern regions of the U.S., compared to $19 million in storm restoration work in the same period in the prior year. The current six month period also included $51.3 million of increased gas infrastructure services revenues primarily resulting from $78.9 million of revenue related to a new bid contract that commenced during the first quarter of 2023, partially offset by lower volumes under certain existing customer master service agreements.

Utility infrastructure services expenses increased $170 million in the first six months of 2023 when compared to the same period in the prior year, driven primarily by a higher volume of work. Subcontractor costs increased during the first six months of 2023 compared to the prior year primarily due to increased work under offshore wind projects. Despite continued inflationary pressures, operating margin in the first six months of 2023 improved due to changes in the mix of work and increased operating efficiencies related to emergency restoration services, lower fuel prices, and favorable weather conditions in certain locations between periods. Also included in total Utility infrastructure services expenses were general and administrative costs, which increased approximately $2.4 million between periods primarily due to higher incentive compensation based on improved results, partially offset by lower strategic review costs incurred. Gains on sale of equipment (reflected as an offset to Utility infrastructure services expenses) were approximately $1.8 million and $2 million, during the first six months of 2023 and 2022, respectively.

Depreciation and amortization expense decreased $1.7 million between periods, primarily attributable to decreased amortization expense of Riggs Distler related to the acquired backlog intangible asset becoming fully amortized during 2022.

The increase in net interest deductions of $23.2 million was primarily due to higher interest rates on outstanding variable-rate borrowings.

Income tax expense increased $11.3 million during the first six months of 2023, primarily due to increased pre-tax income in 2023.

Results of Utility Infrastructure Services

Twelve-Month Analysis

Utility infrastructure services revenues increased $493.4 million in the current twelve-month period compared to the corresponding period of 2022, including a $313.7 million increase at Riggs Distler (acquired in August 2021), of which $132.8 million related to offshore wind projects that are reflected as a component of other revenues. Revenues from electric infrastructure services overall increased $189.2 million in the current twelve-month period when compared to the prior year, with $79 million attributable to Riggs Distler. Included in the incremental electric infrastructure revenues during the twelve-month period of 2023 was $115.2 million from emergency restoration services following storm damage to customers’ above-ground utility infrastructure in and around the Gulf Coast and eastern regions of the U.S. and Canada, as compared to $72.1 million in similar services during the twelve-month period in 2022. The current twelve-month period also included $170 million of increased gas infrastructure services revenues primarily resulting from $78.9 million of revenue related to a new bid contract that commenced during the first quarter of 2023, as well as growth with existing gas infrastructure customers under master service and bid agreements.

Utility infrastructure services expenses increased $408.7 million between periods. The overall increase included $289.5 million from Riggs Distler, and incremental costs related to the generally higher volume of work. Changes in the mix of work caused by customers’ supply chain challenges, as well as inflation, led to higher input costs including subcontractor expenses, as well as increased project-related travel and equipment rental costs incurred to fulfill electric infrastructure services. A loss of $6.7 million was incurred on a gas infrastructure bid project during the current twelve-month period due to higher costs than anticipated and scheduling delays. General and administrative costs, included in total Utility infrastructure services expenses, decreased approximately $6.2 million between comparative periods attributable to $13.2 million of professional fees incurred during the twelve-month period of 2022 in connection with the Riggs Distler acquisition that did not recur in 2023. Other administrative costs increased due to the growth in the business and higher incentive compensation based on improved results. Gains on sale of equipment (reflected as an offset to Utility infrastructure services expenses) were approximately $6.3 million and $4.8 million for the twelve-month periods of 2023 and 2022, respectively.

Depreciation and amortization expense increased $9.5 million between comparative twelve-month periods primarily related to Riggs Distler.

Net interest deductions increased $43.1 million between periods due to incremental outstanding borrowings under Centuri’s $1.545 billion amended and restated secured revolving credit and term loan facility which funded the 2021 acquisition of Riggs Distler, in addition to higher interest rates on outstanding variable-rate borrowings.

The increase in income tax expense of $9.1 million between the current and prior-year twelve-month period was primarily due to increased pre-tax income.

Rates and Regulatory Proceedings

Southwest is subject to the regulation of the Arizona Corporation Commission (“ACC”), the Public Utilities Commission of Nevada (the “PUCN”), the California Public Utilities Commission (the “CPUC”), and the Federal Energy Regulatory Commission (the “FERC”).

Arizona Jurisdiction

Arizona General Rate Case. Southwest filed a general rate case application in December 2021, primarily to reflect in rates the substantial capital investments that were made since the end of the test year in an earlier case, including investments in a customer information system implemented in May 2021. At a hearing held in September 2022, Southwest, the Utilities Division Staff (the “Staff”), and the Residential Utility Consumer Office jointly stipulated to several issues, including a target capital structure consisting of 50% equity and 50% debt; a 9.30% return on equity; and foregoing a premium related to the Graham County acquisition as well as the recovery of $12 million of waived late fees on customer account balances that would have otherwise applied to delinquent accounts in the absence of a COVID-19 moratorium on such fees. Approximately $12 million in costs related to the Liquefied Natural Gas facility deferred in an authorized regulatory asset was approved to be amortized over four years. The ACC’s final order authorized a $54.3 million increase, with new rates effective February 1, 2023.

Delivery Charge Adjustment. The Delivery Charge Adjustment (“DCA”) is filed each April, which along with other reporting requirements, contemplates a rate to recover/return the over- or under-collected margin tracker (decoupling mechanism) balance. An April 2022 request proposed a rate to return $10.5 million, the over-collected balance existing at the end of the first quarter 2022, which became effective July 1, 2022. The most recent filing was made in April 2023 to request a rate to address the over-collected balance of $53.5 million existing as of March 31, 2023. The requested rate to return the over-collected balance was approved and will become effective August 1, 2023.

Tax Reform. A Tax Expense Adjustor Mechanism (“TEAM”) was approved in Southwest’s 2019 general rate case to timely recognize tax rate changes resulting from federal or state tax legislation following the TEAM implementation. In addition, the TEAM tracks and returns/recovers the revenue requirement impact of changes in amortization of EADIT (including that which resulted from 2017 U.S. federal tax reform) compared to the amount authorized in the most recently concluded rate case. Following inaugural surcredit rate establishment under the TEAM mechanism, in December 2022, Southwest filed its most recent TEAM rate application, proposing to update the TEAM surcredit to refund $6.5 million of estimated net EADIT savings, which was approved by the ACC and was made effective May 1, 2023.

Customer-Owned Yard Line (“COYL”) Program. Southwest originally received approval, in connection with its 2010 Arizona general rate case, to implement a program to conduct leak surveys, and if leaks were present, to replace and relocate service lines and meters for Arizona customers whose meters were set off from the customer’s home, representing a non-traditional configuration. The COYL program has been subject to proceedings to recover investments since that time. In February 2023, Southwest requested approval to recover the outstanding revenue requirement of approximately $4.3 million associated with 2022 COYL investments, which will increase the COYL recovery rate. The new rate became effective July 1, 2023.

PGA Modification. On March 1, 2023, Southwest filed a request to adjust the interest rate applicable to the outstanding Purchased Gas Adjustment (“PGA”) balance to more closely match the interest expense incurred to finance the balance. In the alternative, the filing requested an expansion of the current gas cost balancing account (“GCBA”) adjustment to clear the then existing $351 million balance. In July, the ACC approved an increase to the GCBA rate (over a two-year period) effective August 1, 2023, to support the timely recovery of the approximately $358 million balance as of May 31, 2023. The increased GCBA rate will remain for two years or until the balance drops below $10 million, at which point the GCBA rate would be set to $0.00 per therm, where it will remain until the under collected balance exceeds $10 million or the over collected balance exceeds negative $10 million. The ongoing deferred energy rates, separate from the GCBA rates, continue to be updated monthly.

California Jurisdiction

Attrition Filing. Following the 2021 implementation of rates approved as part of the most recent general rate case, the continuation of annual Post Test Year (“PTY”) attrition increases of 2.75% began in January 2022, with the most recent annual attrition increase effective January 1, 2023. The PTY increase associated with the North Lake Tahoe Lateral revenue requirement became effective February 1, 2023.

Carbon Offset Program. In March 2022, Southwest filed an application to seek approval to offer a voluntary program to California customers to purchase carbon offsets in an effort to provide customers additional options to offset their respective greenhouse gas (“GHG”) emissions. A request to establish a two-way balancing account to track program-related costs and revenues was included as part of the application. The CPUC issued a decision dismissing Southwest’s application without prejudice. Southwest anticipates filing a new application in 2023 addressing points raised by third parties as part of the earlier request, which included a request to demonstrate that purchased offsets would result in actual GHG emissions reductions.

Nevada Jurisdiction

Nevada General Rate Case. Southwest concluded its most recent Nevada general rate case in February 2022, providing for a statewide revenue increase of $14.05 million, a return on common equity of 9.40% relative to a 50% target equity ratio, and continuation of Southwest’s full revenue decoupling mechanism, the General Revenues Adjustment (“GRA”). The stipulation was approved by the PUCN, and new rates became effective April 1, 2022.

General Revenues Adjustment. As noted above, the continuation of the GRA was affirmed as part of Southwest’s most recent general rate case with an expansion to include a large customer class (with average monthly throughput requirements greater than 15,000 therms), effective April 2022. Southwest makes Annual Rate Adjustment (“ARA”) filings to update rates to recover or return amounts associated with various regulatory mechanisms, including the GRA. Southwest made its most recent ARA filing in November 2022 related to balances as of September 30, 2022. Given the magnitude of the outstanding balances, further discussion with the parties resulted in a settlement of the issues and utilizing a more current GRA balance as of January 2023 to more closely align the rates implemented with the existing balance. Recovery rates and adjustments thereto as part of the ARA primarily impact cash flows but not net income overall. Updated rates for the GRA and other regulatory mechanisms included in the ARA became effective July 1, 2023.

Carbon Offset Program. In June 2021, Southwest filed an application to seek approval to offer a voluntary program to northern and southern Nevada customers to purchase carbon offsets in an effort to provide customers additional options to offset their respective GHG emissions. A request to establish a regulatory asset to track program-related costs and revenues was included as part of the application. The parties reached a stipulation that was approved by the PUCN in December 2021, approving Southwest’s proposal. The program opened for customer participation in the fourth quarter of 2022.

Nevada Leak Survey. In 2019, the PUCN opened an Investigation and Rulemaking action to consider certain amendments to the Nevada Administrative Code requiring annual leak surveys of distribution pipelines transporting natural gas or liquid petroleum. The increased survey activity was to focus on business districts and to be conducted generally on an annual basis (not exceeding 15-month survey intervals). The proposed regulations were permanently adopted with a January 1, 2023 effective date. Regulatory asset treatment was approved for the purpose of tracking incremental costs associated with implementing the increased leak surveys with recovery expected in the next general rate case.

FERC Jurisdiction

MountainWest Overthrust Pipeline. On September 22, 2022, during the period of Southwest Gas Holdings’ ownership of the MountainWest entities, the FERC issued an order initiating an investigation, pursuant to section 5 of the Natural Gas Act, to determine whether rates charged by MountainWest Overthrust Pipeline, LLC, a subsidiary of MountainWest, were just and reasonable and setting the matter for hearing (the “Section 5 Rate Case”). Unless earlier settled by the parties, a hearing on the matter was to commence in August 2023 with an initial decision from the presiding administrative law judge due by November 14, 2023. Under the terms of the purchase and sale agreement entered into in connection with the MountainWest sale, the Company became obligated, for a period of four years following the closing of the MountainWest sale, to indemnify Williams and MountainWest for any damages and liabilities resulting from the Section 5 Rate Case, including any reduction to the current applicable rate, up to a cap of $75 million. Williams, in collaboration with the Company, agreed to a settlement of the Section 5 Rate Case, which is pending approval by the FERC. As a result of the settlement, the Company recorded a charge of $28.4 million, the amount expected to be obligated in regard to the revenue reduction of the settlement, which was recognized during the first quarter of 2023 in Goodwill impairment and loss on sale, and continues to be reflected as such on the Company’s Condensed Consolidated Statements of Income for the six- and twelve- months ended June 30, 2023.

PGA Filings

The rate schedules in all of Southwest’s service territories contain provisions that permit adjustment to rates as the cost of purchased gas changes. These deferred energy provisions and purchased gas adjustment clauses are collectively referred to as “PGA” clauses. Differences between gas costs recovered from customers and amounts paid for gas by Southwest result in over- or under-collections. Balances are recovered from or refunded to customers on an ongoing basis with interest. As of June 30, 2023, under-collections in each of Southwest’s service territories resulted in an asset of $786 million on the Company’s and Southwest’s Condensed Consolidated Balance Sheets.

Filings to change rates in accordance with PGA clauses are subject to audit by state regulatory commission staffs. PGA changes impact cash flows but have no direct impact on operating margin. However, gas cost deferrals and recoveries can impact comparisons between periods of individual consolidated income statement components. These include Regulated operations revenues, Net cost of gas sold, Net interest deductions, and Other income (deductions).

The following table presents Southwest’s outstanding PGA balances receivable/(payable):

Capital Resources and Liquidity

Historically, cash on hand and cash flows from operations have provided a substantial portion of cash used in investing activities (primarily for construction expenditures and property additions). In recent years, Southwest has undertaken significant pipe replacement activities to fortify system integrity and reliability, including on an accelerated basis in association with certain gas infrastructure replacement programs. This activity has necessitated the issuance of both debt and equity securities to supplement cash flows from operations. More recently, a number of conditions, such as winter storms and market forces (including historically low storage levels) have caused gas prices to spike and remain higher during extended periods as compared to previous historical levels. The Company’s capitalization strategy is to maintain an appropriate balance of equity and debt to preserve investment-grade credit ratings, which help minimize interest costs.

Cash Flows

Southwest Gas Holdings, Inc.:

Operating Cash Flows. Cash flows from consolidated operating activities decreased $251 million in the first six months of 2023 as compared to the same period of 2022. The decline in cash flows primarily resulted from the impacts of changes in components of working capital overall, including the timing and amount of accounts payable and other current asset and liability balances. Additionally, the decline was impacted by the change in purchased gas costs for Southwest, including amounts incurred and deferred, as well as impacts related to when amounts are incorporated in customer bills to recover or return deferred balances. Amounts were greatly impacted due to higher than expected natural gas costs during the most recent winter period, which was reflected in higher Deferred purchased gas cost balances in advance of rates to recover the balance.

Corporate and administrative expenses/outflows for Southwest Gas Holdings, Inc. in the six- and twelve-month periods ended June 30, 2023 mainly include charges related to the MountainWest sale that closed in February 2023, interest paid on borrowings, and costs associated with the Centuri spin-off.

Investing Cash Flows. Cash flows from consolidated investing activities increased $1 billion in the first six months of 2023 as compared to the same period of 2022. The overall increase was driven by $1.05 billion in proceeds received in connection with the MountainWest sale (which is net of cash sold), partially offset by an increase in capital expenditures in both the natural gas distribution and utility infrastructure services segments.

Financing Cash Flows. Cash flows from consolidated financing activities decreased $641 million in the first six months of 2023 as compared to the same period of 2022. The overall decrease was primarily due to the first quarter 2023 repayment ($1.1 billion) of the term loan entered into by Southwest Gas Holdings, Inc. in November 2021 in connection with the acquisition of MountainWest. Other impacts included proceeds from the issuance of common stock in underwritten public offerings in each period ($200 million lower than in the 2022 period), $300 million of Senior Notes (the “March 2023 Notes”) issued by Southwest compared to $600 million in notes issued by Southwest in the first quarter of 2022. In March 2023, Southwest repaid the remaining indebtedness ($225 million) related to a $250 million Term Loan (the “March 2021 Term Loan”), whereas, in the first six months of 2022, Southwest repaid $300 million, including $275 million related to two maturing debt obligations and $25 million in regard to a portion of the March 2021 Term Loan. Separately, Southwest Gas Holdings entered into a $550 million Term Loan Credit Agreement in April 2023. A substantial portion of the term loan proceeds were contributed to Southwest as equity, which in turn was primarily used by Southwest to repay term loan indebtedness entered into to finance an escalation in purchased gas costs. Other financing cash flows include borrowings and repayment under the companies’ credit facilities.

The capital requirements and resources of the Company generally are determined independently for the individual business segments. Each business segment is generally responsible for securing its own debt financing sources. However, the holding company may raise funds through stock issuances or other external financing sources in support of each business segment.

Southwest Gas Corporation:

Operating Cash Flows. Cash flows from operating activities decreased $189 million in the first six months of 2023 as compared to the same period of 2022. The decline in operating cash flows was primarily attributable to Deferred purchased gas costs changes and the other working capital balances (as discussed above).

Investing Cash Flows. Cash used in investing activities increased $112 million in the first six months of 2023 as compared to the same period of 2022. The change was primarily due to increases in capital expenditures in 2023 and decreases related to customer advances for construction (amounts collected and/or returned) as compared to the same period in the prior year. See also Gas Segment Construction Expenditures, and Debt Maturities, and Financing below.

Financing Cash Flows. Net cash provided by financing activities increased $379 million in the first six months of 2023 as compared to the same period of 2022. The increase was primarily due to $530 million in parent capital contributions in the current period, offset by the $225 million repayment of the March 2021 Term Loan. A $450 million term loan in January 2023 to finance the escalation in purchased gas cost (noted above), was repaid following the parent capital contribution in the second quarter of 2023. Dividends paid and borrowing and repayment activity under the credit facility comprise the remaining activity between periods. See Note 5 – Debt.

Gas Segment Construction Expenditures, Debt Maturities, and Financing

During the twelve-month period ended June 30, 2023, construction expenditures for the natural gas distribution segment were $771 million (not including amounts incurred for capital expenditures not yet paid). The majority of these expenditures represented costs associated with the replacement of existing transmission and distribution pipeline facilities to fortify system integrity and reliability, as well as other general plant expenditures.

Management estimates natural gas segment construction expenditures during the three-year period ending December 31, 2025 will be approximately $2.0 billion. Of this amount, approximately $700 million to $720 million is expected to be incurred during calendar year 2023. Southwest plans to continue to request regulatory support to undertake projects, or to accelerate projects as necessary for the improvement of system flexibility and reliability, or to expand, where relevant, to unserved or underserved areas. Southwest may expand existing, or initiate new, programs. Significant replacement activities are expected to continue well beyond the next few years. See also Rates and Regulatory Proceedings. During the three-year period ending December 31, 2025, cash flows from operating activities of Southwest are expected to provide approximately 75% of the funding for gas operations of Southwest and total construction expenditures and dividend requirements. Additional cash requirements, including construction-related, and pay down or refinancing of debt, are expected to be provided by existing credit facilities, equity contributions from the Company, and/or other external financing sources. The timing, types, and amounts of additional external financings will be dependent on a number of factors, including the cost of gas purchases, conditions in capital markets, timing and amount of rate relief, timing and amount of surcharge collections from, or amounts returned to, customers related to other regulatory mechanisms and programs, as well as growth levels in Southwest’s service areas and earnings. External financings may include the issuance of debt securities, bank and other short-term borrowings, and other forms of financing.

Dividend Policy

Dividends are payable on the Company’s common stock at the discretion of the Board. In setting the dividend rate, the Board considers, among other factors, current and expected future earnings levels, our ongoing capital expenditure plans, expected external funding needs, and our ability to maintain investment-grade credit ratings and liquidity. The Company has paid dividends on its common stock since 1956. In February 2023, the Board determined to maintain the quarterly dividend at $0.62 per share, effective with the June 2023 payment.

Liquidity

Several factors (some of which are out of the control of the Company) that could significantly affect liquidity in the future include: variability of natural gas prices, changes in ratemaking policies of regulatory commissions, regulatory lag, customer growth in the natural gas distribution segment, the ability to access and obtain capital from external sources, interest rates, changes in income tax laws, pension funding requirements, inflation, and the level of earnings. Natural gas prices and related gas cost recovery rates, as well as plant investment, have historically had the most significant impact on liquidity.

On an interim basis, Southwest defers over- or under-collections of gas costs to PGA balancing accounts. In addition, Southwest uses this mechanism to either refund amounts over-collected or recoup amounts under-collected as compared to the price paid for natural gas during the period since the last PGA rate change went into effect. At June 30, 2023, the combined balance in the PGA accounts totaled an under-collection of $786 million. See PGA Filings for more information. The market price of natural gas spiked as a result of numerous market forces including historically low storage levels, unexpected upstream pipeline maintenance events, and cold weather conditions across the western region in the latter part of 2022 and continuing into January 2023. As a result of this increase in pricing, in January 2023, Southwest entered into a 364-day $450 million term loan in order to fund the incremental cost. This indebtedness was repaid in April 2023 (refer to Note 5 – Debt in this Quarterly Report on Form 10-Q). We may be required to incur additional indebtedness in connection with future spikes in natural gas prices as a result of extreme weather events or otherwise.

In March 2023, Southwest issued $300 million aggregate principal amount of 5.450% Senior Notes. The notes will mature in March 2028. Southwest used the net proceeds to repay amounts outstanding under Southwest’s credit facility and the remainder for general corporate purposes.

In April 2023, Southwest Gas Holdings, Inc. entered into a $550 million Term Loan Credit Agreement that matures in October 2024. Southwest Gas Holdings, Inc. utilized a majority of the proceeds to make an equity contribution to Southwest. On April 17, 2023, Southwest utilized the equity contribution to repay, in full, amounts outstanding under its $450 million 364-day term loan entered into in January 2023, with the remainder of the equity contribution used for working capital and general corporate purposes.

Southwest Gas Holdings, Inc. has a credit facility with a borrowing capacity of $300 million that expires in December 2026. This facility is intended for short-term financing needs. At June 30, 2023, $15.5 million was outstanding under this facility.

Southwest has a credit facility with a borrowing capacity of $400 million, which expires in April 2025. Southwest designates $150 million of the facility for long-term borrowing needs and the remaining $250 million for working capital purposes. The maximum amount outstanding on the long-term portion of the credit facility (including a commercial paper program) during the first six months of 2023 was $150 million. The maximum amount outstanding on the short-term portion of the credit facility during the first six months of 2023 was $75 million. At June 30, 2023, no borrowings were outstanding on either the long-term or short-term portions of the facility. The credit facility can be used as necessary to meet liquidity requirements, including temporarily financing under-collected PGA balances, or meeting the refund needs of over-collected balances. The credit facility has generally been adequate for Southwest’s working capital needs outside of funds raised through operations and other types of external financing. Any additional cash requirements would include the existing credit facility, equity contributions from the Company, and/or other external financing sources.

Southwest has a $50 million commercial paper program. Any issuance under the commercial paper program is supported by Southwest’s current revolving credit facility and, therefore, does not represent additional borrowing capacity. Any borrowing under the commercial paper program is designated as long-term debt. Interest rates for the commercial paper program are calculated at the current commercial paper rate during the borrowing term. At June 30, 2023, there were no borrowings outstanding under this program.

Centuri has a senior secured revolving credit and term loan multi-currency facility. The line of credit portion comprises $400 million; associated amounts borrowed and repaid are available to be re-borrowed. The term loan facility portion provided approximately $1.145 billion in financing. The term loan facility expires on August 27, 2028 and the revolving credit facility expires on August 27, 2026. This multi-currency facility allows the borrower to request loan advances in either Canadian dollars or U.S. dollars. The obligations under the credit agreement are secured by present and future ownership interests in substantially all direct and indirect subsidiaries of Centuri, substantially all of the tangible and intangible personal property of each borrower, certain of their direct and indirect subsidiaries, and all products, profits, and proceeds of the foregoing. Centuri assets securing the facility at June 30, 2023 totaled $2.6 billion. The maximum amount outstanding on the combined facility during the first six months of 2023 was $1.184 billion. As of June 30, 2023, $184 million was outstanding on the revolving credit facility, in addition to $1 billion that was outstanding on the term loan portion of the facility. Also at June 30, 2023, there was approximately $139 million, net of letters of credit, available for borrowing under the line of credit.

In the first quarter of 2023, the Company paid off (primarily with proceeds from the MountainWest sale) the remaining balance on the $1.6 billion term loan entered into in November 2021 in connection with the acquisition of MountainWest.

In March 2023, the Company issued through a separate prospectus supplement under the Universal Shelf, an aggregate of 4.1 million shares of common stock, at an underwritten public offering price of $60.12 per share, resulting in net proceeds to the Company of $238.4 million, net of an underwriter’s discount of $8.3 million and estimated expenses of the offering. The Company used the net proceeds to repay outstanding amounts under the Company’s credit facility, with remaining amounts used to pay a residual portion of amounts outstanding under the term loan entered into in connection with the MountainWest acquisition, and the remainder of the proceeds were used for working capital and other general corporate purposes.

In April 2021, the Company entered into a Sales Agency Agreement between the Company and BNY Mellon Capital Markets, LLC and J.P. Morgan Securities LLC (the “Equity Shelf Program”) for the offer and sale of up to $500 million of common stock from time to time in at-the-market offerings under the related prospectus supplement filed with the SEC. There was no activity under this multi-year program during the second quarter of 2023. Net proceeds from the sale of shares of common stock under the Equity Shelf Program are intended for general corporate purposes, including the acquisition of property for the construction, completion, extension, or improvement of pipeline systems and facilities located in and around the communities served by Southwest, as well as for repayment or repurchase of indebtedness (including amounts outstanding from time to time under the credit facilities, senior notes, or other indebtedness), and to provide for working capital. The Company had approximately $341.8 million available under the program as of June 30, 2023. See Note 4 – Common Stock for more information.

Forward-Looking Statements

This quarterly report contains statements which constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (“Reform Act”). All statements other than statements of historical fact included or incorporated by reference in this quarterly report are forward-looking statements, including, without limitation, statements regarding the Company’s plans, objectives, goals, intentions, projections, strategies, future events or performance, negotiations, and underlying assumptions. The words “may,” “if,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “continue,” “forecast,” “intend,” “endeavor,” “promote,” “seek,” “pursue,” and similar words and expressions are generally used and intended to identify forward-looking statements. For example, statements regarding plans to refinance near-term maturities, to separate from Centuri by means of a spin-off from the Company, by other means or at all, those regarding operating margin patterns, customer growth, the composition of our customer base, price volatility, seasonal patterns, the ability to pay debt, the Company’s COLI strategy, the magnitude of future acquisition or divestiture purchase price true-ups or post-closing payments and related impairments or losses related thereto, estimates regarding contractual commitments for the MountainWest Overthrust Pipeline rate case settlement, replacement market and new construction market, impacts from pandemics, including on our employees, customers, business, financial position, earnings, bad debt expense, work deployment and related uncertainties, expected impacts of valuation adjustments associated with any redeemable noncontrolling interests, the profitability of storm work, mix of work, or absorption of fixed costs by larger infrastructure services customers including Southwest, the impacts of U.S. tax reform including disposition in any regulatory proceeding and bonus depreciation tax deductions, expectations of a tax-free nature of a spin-off of Centuri, the impact of recent Pipeline and Hazardous Materials Safety Administration rulemaking, the amounts and timing for completion of estimated future construction expenditures, plans to pursue infrastructure programs or programs under SB 151 legislation, forecasted operating cash flows and results of operations, net earnings impacts or recovery of costs from gas infrastructure replacement and VSP programs and surcharges, funding sources of cash requirements, amounts generally expected to be reflected in future period revenues from regulatory rate proceedings including amounts requested or settled from recent and ongoing general rate cases or other regulatory proceedings, rates and surcharges, PGA administration, recovery and timing, and other rate adjustments, sufficiency of working capital and current credit facilities or the ability to cure negative working capital balances, bank lending practices, the Company’s views regarding its liquidity position, ability to raise funds and receive external financing capacity and the intent and ability to issue various financing instruments and stock under the existing at-the-market equity program or otherwise, future dividends or increases and the Board’s current payout strategy, pension and postretirement benefits, certain impacts of tax acts, the effect of any other rate changes or regulatory proceedings, contract or construction change order negotiations, impacts of accounting standard updates, statements regarding future gas prices, gas purchase contracts and pipeline imbalance charges or claims related thereto, recoverability of regulatory assets, the impact of certain legal proceedings or claims, and the timing and results of future rate hearings, including any ongoing or future general rate cases and other proceedings, and statements regarding pending approvals are forward-looking statements. All forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act.

A number of important factors affecting the business and financial results of the Company could cause actual results to differ materially from those stated in the forward-looking statements. These factors include, but are not limited to, customer growth rates, conditions in the housing market, inflation, interest rates and related government actions, sufficiency of labor markets and ability to timely hire qualified employees or similar resources, acquisition and divestiture decisions including prices paid or received, adjustments, indemnifications, or commitments related thereto, and their impacts to impairments, write-downs, or losses or expenses generally, the impacts of pandemics including that which may result from a restriction by government officials or otherwise, including impacts on employment in our territories, the health impacts to our customers and employees, the ability to collect on customer accounts due to the suspension or lifted moratorium on late fees or service disconnection or otherwise in any or all jurisdictions, the ability to obtain regulatory recovery of related costs, the ability of the infrastructure services business to conduct work and the impact of a delay or termination of work, and decisions of Centuri customers (including Southwest) as to whether to pursue capital projects due to economic impacts resulting from a pandemic or otherwise, the ability to recover and timing thereof related to costs associated with the PGA mechanisms or other regulatory assets or programs, the effects of regulation/deregulation, governmental or regulatory policy regarding pipeline safety, greenhouse gas emissions, natural gas, including potential prohibitions on the use of natural gas by customers or potential customers, including related to electric generation or natural gas appliances, or regarding alternative energy, the regulatory support for ongoing infrastructure programs or expansions, the timing and amount of rate relief, the impact of other regulatory proceedings, including with regard to the MountainWest Overthrust Section 5 rate case before the FERC, the timing and methods determined by regulators to refund amounts to customers resulting from U.S. tax reform, changes in rate design, impacts of other tax regulations, variability in volume of gas or transportation service sold to customers, changes in gas procurement practices, changes in capital requirements and funding, the impact of credit rating actions and conditions in the capital markets on financing costs, changes in construction expenditures and financing, levels of or changes in operations and maintenance expenses, or other costs, including fuel costs and other costs impacted by inflation or otherwise, geopolitical influences on the business or its costs, effects of pension or other postretirement benefit expense forecasts or plan modifications, accounting changes and regulatory treatment related thereto, currently unresolved and future liability claims and disputes, changes in pipeline capacity for the transportation of gas and related costs, results of Centuri bid work, the impact of weather on Centuri’s operations, projections about acquired business’ earnings, or those that may be planned, future acquisition-related costs, differences between the actual experience and projections in costs to integrate or stand-up portions of newly acquired business operations, impacts of changes in the value of any redeemable noncontrolling interests if at other than fair value, Centuri utility infrastructure expenses, differences between actual and originally expected outcomes of Centuri bid or other fixed-price construction agreements, outcomes from contract and change order negotiations, ability to successfully procure new work and impacts from work awarded or failing to be awarded from significant customers (collectively, including from Southwest) or related to significant projects, the mix of work awarded, the amount of work awarded to Centuri following the lifting of work stoppages or reduction, the result of productivity inefficiencies from regulatory requirements, customer supply chain challenges, or otherwise, delays or challenges in commissioning individual projects, acquisitions and management’s plans related thereto, the ability of management to successfully finance, close, and assimilate any acquired businesses, the timing and ability of management to successfully consummate the Centuri spin-off, the impact on our stock price or our credit ratings due to undertaking or failing to undertake acquisition or divestiture activities or other strategic endeavors, the impact on our stock price, costs, actions or disruptions or continuation thereof related to significant stockholders and their activism, competition, our ability to raise capital in external financings, our ability to continue to remain within the ratios and other limits subject to our debt covenants, and ongoing evaluations in regard to goodwill, other intangible assets, and optimization initiatives. In addition, the Company can provide no assurance that its discussions regarding certain trends or plans relating to its financing and operating expenses will continue, proceed as planned, or cease to continue, or fail to be alleviated, in future periods. For additional information on the risks associated with the Company’s business, see Item 1A. Risk Factors and Item 7A. Quantitative and Qualitative Disclosures About Market Risk in the Annual Report on Form 10-K for the year ended December 31, 2022.

All forward-looking statements in this quarterly report are made as of the date hereof, based on information available to the Company and Southwest as of the date hereof, and the Company and Southwest assume no obligation to update or revise any of its forward-looking statements, even if experience or future changes show that the indicated results or events will not be realized. We caution you not to unduly rely on any forward-looking statement(s).

See Item 7A. Quantitative and Qualitative Disclosures about Market Risk in the 2022 Annual Report on Form 10-K filed with the SEC. No material changes have occurred related to the disclosures about market risk.

Management of Southwest Gas Holdings, Inc. and Southwest Gas Corporation has established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to provide reasonable assurance that information required to be disclosed in their respective reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to management of each company, including each respective Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and benefits of controls must be considered relative to their costs. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or management override of the control. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

Based on the most recent evaluation, as of June 30, 2023, management of Southwest Gas Holdings, Inc. and Southwest Gas Corporation, including the Chief Executive Officer and Chief Financial Officer, believes the Company’s and Southwest’s disclosure controls and procedures are effective at attaining the level of reasonable assurance noted above.

There have been no changes in the Company’s or Southwest’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the second quarter of 2023 that have materially affected, or are likely to materially affect the Company’s internal control over financial reporting.