Southwest Gas Holdings outlook revised to stable by Fitch

Fitch Ratings affirmed Southwest Gas Holdings' (SWX) Long-Term IDR at 'BBB' and revised its outlook to Stable from Negative, reflecting significant progress in the Centuri Holdings Inc. separation and improved leverage metrics, notably the use of $472 million from Centuri stock sales to reduce holding company debt. This strategic move is expected to transform SWX into a pure regulated utility holding company, enhancing its business risk profile and projecting FFO leverage improvement to 5.0x by 2025 and 4.7x by 2026. Concurrently, its core utility subsidiary, Southwest Gas Corporation (SWG), maintained its 'BBB+' IDR with a Stable Outlook, supported by favorable rate case decisions and a robust $4.3 billion capital investment plan for 2025-2029, signaling continued stability and growth.

Analysis

Fitch Ratings has materially improved its credit outlook for Southwest Gas Holdings (SWX), revising the rating outlook to Stable from Negative while affirming the 'BBB' Long-Term IDR. This action is predicated on significant de-risking progress through the separation of its Centuri Holdings subsidiary and a tangible strengthening of its balance sheet. The company has already utilized $472 million from Centuri stock sales to reduce holding company debt, a key step in its transformation into a pure-play regulated utility, which Fitch views as a significant enhancement to its business risk profile. Fitch projects this deleveraging will lead to an improvement in FFO leverage to 5.0x by 2025 and 4.7x by 2026. The underlying stability of the core utility, Southwest Gas Corporation, is underscored by its own 'BBB+' rating and a series of recent constructive regulatory outcomes, including rate increases of $80.2 million in Arizona, $59 million in Nevada, and $9.6 million from FERC. Looking forward, a five-year, $4.3 billion capital investment program is expected to support a 6%-8% rate base growth, providing clear visibility into future earnings and suggesting the potential for future positive rating actions if execution continues.

Key Decisions for Investors

• Investors should assess Southwest Gas Holdings based on its enhanced, lower-risk profile as a pure-play regulated utility, as the successful execution of the Centuri separation mitigates previous balance sheet and strategic concerns.
• Monitor the company's progress toward achieving Fitch's projected FFO leverage targets of 5.0x in 2025 and 4.7x in 2026, as meeting these goals could trigger further positive credit rating actions and unlock shareholder value.
• Consider the company's visible 6%-8% rate base growth, fueled by its $4.3 billion capital program and supportive regulatory environment, as a primary driver for future earnings, while remaining mindful of valuation following recent positive developments.