Earnings Call Transcript - SWX Q4 2025

Operator, Operator

Welcome to the Southwest Gas Holdings Fourth Quarter and Full Year 2025 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. I will now turn the call over to Tyler Franik, Manager of Investor Relations of Southwest Gas Holdings.

Tyler Franik, Manager of Investor Relations

Thank you, John, and hello, everyone. We appreciate you joining the call today. This morning, we issued and posted to Southwest Gas Holdings website our Fourth Quarter and Full Year 2025 earnings release and filed the associated Form 10-K. 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 impacts of future economic conditions, regulatory approvals, and a significant capital project at Great Basin Gas Transmission Company. This cautionary note as well as a note regarding non-GAAP measures is included on Slides 2 and 3 of this presentation, in today's press release, and in our filings with the Securities and Exchange Commission, all of which we encourage you to review. 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 statement. As shown on Slide 4, on today's call, we have Karen Haller, President and CEO of Southwest Gas Holdings; Justin Forsberg, Chief Financial Officer and Treasurer of Southwest Gas Holdings; and Justin Brown, President of Southwest Gas Corporation as well as other members of the management team available to answer your questions during the Q&A portion of the call today. I will now turn the call over to Karen.

Karen Haller, President and CEO

Thanks, Tyler. Good morning, everyone, and thank you for joining us today. Last year, we turned the page on our transformational strategy with the successful disposition of Centuri in September. The important milestone completed our transition to a fully regulated natural gas business. This strategic step enabled us to fully pay down the remaining holding company debt, strengthened our balance sheet, and unlocked meaningful capital to reinvest in our core operations. With our focus now fully centered on our regulated natural gas business, we are approaching 2026 with a stronger foundation and greater flexibility to execute on our strategic priorities and the opportunities ahead. As a result of our full separation of Centuri, termination of the Icahn Cooperation agreement, and strong strategic position, I determined that after nearly three decades with the company, it is the right time for me to retire. One of the most significant responsibilities of the CEO and Board of Directors is to plan for the CEO succession. The Board was prepared for this milestone and appointed Justin Brown as Southwest Gas' next CEO, effective May 8. As President of our Utility Operations over the last few years, Justin has played a critical role in executing on our strategy and positioning the company for future success. He has a proven track record leading our utility operations, and the Board has full confidence in him as Southwest Gas' next Chief Executive Officer. Justin and I have worked closely together for many years, and I'm confident that he is the right leader to guide the company in its next phase. I will remain involved as an adviser to the company through the end of this year to ensure a smooth transition. With that, let's turn to Slide 5. In 2025, we delivered strong financial performance with Southwest Gas adjusted net income finishing above the top end of our previously stated guidance range. This performance drove Southwest Gas adjusted return on equity to 8.3% for the year and was supported by our ongoing utility optimization efforts, effective cost management, and constructive regulatory outcomes. Together, these results demonstrate the strength of our regulated business and our commitment to driving consistent, sustainable value for our customers and shareholders. We also remain optimistic about the future as we introduce 2026 and long-term guidance ranges, which we will cover in more detail later. We are initiating a $4.17 to $4.32 per share 2026 adjusted earnings per share guidance range from continuing operations. We expect to see significant earnings per share growth of 12% to 14% from 2025 to 2030, driven by anticipated improvements in our regulatory environment with the inclusion of Arizona's formula rates and alternative ratemaking in Nevada, along with the opportunity we project to materialize at Great Basin in Northern Nevada. Because of these opportunities, this growth is expected to be front-end loaded over the first three years. So we expect the earnings growth rate to be even higher through 2028 to 2029. And Jay Forsberg will walk you through the guidance in a few minutes. As we move to 2026, our strategy is anchored in operational excellence, financial discipline, and regulatory progress. The work we accomplished in 2025 positioned us to focus on the priorities that we believe matter most in the year ahead: continuing to improve returns, advancing customer-focused investments, strengthening our regulatory frameworks, and capturing growth opportunities across the service territories. Of note, we were pleased to announce earlier today that the Board of Directors approved a 4% increase in our annual dividend, beginning with the second quarter 2026 payout. We intend to maintain a disciplined strategy focused on investing in the company's capital plans, while sustaining responsible annual dividend growth. On the next slide, I will outline the key priorities that will guide our efforts throughout 2026. As you can see on Slide 6, we achieved a lot in 2025 with an active regulatory calendar, the introduction of and progress made on the 2028 Great Basin expansion project, the completion of our financing plan, and of course, the simplification of our business model through the full separation of Centuri. We are initiating our 2026 strategic priorities for the first time in decades as a fully regulated natural gas business. We are excited to direct our attention entirely to executing our regulatory strategy, achieving the next steps of the Great Basin project, and preserving our balance sheet strength by implementing our 2026 financing plan. On Slide 7, I'd like to highlight that following the completion of our Centuri disposition, S&P upgraded Southwest Gas Holdings' issuer and Southwest Gas Corporation's senior unsecured long-term debt credit ratings each to BBB+ with stable outlooks. This enhanced corporate risk profile further demonstrates the positive impact of our simplification strategy. As of the end of 2025, our cash balance was nearly $600 million, which we expect to utilize to fully fund current year dividend payments and to redeploy during 2026 into the utility business, and we have more than $1.3 billion of liquidity across the business, which has enabled us to make strategic investments that are expected to generate stable, long-term returns. I'd also like to highlight the utility's substantial net income growth, which was primarily driven by positive regulatory outcomes and strong economic activity in our service area and further enhanced by cost optimization efforts. We are enthusiastic about the company's future, and we are confident in the promising opportunities ahead. With that, I'll turn the call over to Justin for a regulatory and economic update.

Justin Brown, President of Southwest Gas Corporation

Thank you, Karen, for your generous words. And more importantly, thank you for your leadership and contributions to Southwest Gas over the past 29 years. I'm grateful for both our friendship and your continued partnership during this transition. It is both an honor and a responsibility to step into this role. I'm energized by the opportunity ahead and I look forward to continuing to work alongside our extraordinary team as we strive each day to exceed the expectations of our customers and our regulators in delivering safe, reliable, and affordable natural gas service. We have a strong foundation, a clear strategy, and the right team to deliver. I'm confident in our ability to execute our plan with discipline and create long-term value for our stockholders while simultaneously driving meaningful outcomes for all our stakeholders. Let me begin my portion of the presentation by turning your attention to Slide 9, where I'd like to begin with key regulatory developments in both Nevada and Arizona, as we prepare to file rate cases and what we anticipate will be catalysts for better aligning capital recovery with our investments, thereby improving long-term earnings visibility. In Arizona, we anticipate filing our rate case this week with new rates next year, and we plan to file our Nevada rate case next month. Under the statutory 210-day process, new rates would become effective in the fourth quarter of this year. Importantly, both states now allow for potential alternative ratemaking adjustments following approval of a general rate case. While any mechanism remains subject to regulatory approval, we view these frameworks as constructive steps toward reducing regulatory lag and better aligning capital recovery. This slide provides a potential timeline for how our alternative ratemaking opportunities in Nevada and Arizona could develop over the next few years, and we remain confident in our ability to work collaboratively with all stakeholders on meeting these milestones. While any mechanism remains subject to regulatory approval, we view these developments as constructive steps toward reducing regulatory lag and enhancing capital recovery alignment. In Nevada, Senate Bill 417, signed into law in June of 2025 by Governor Joe Lombardo, authorizes alternative rate-making plans. The Public Utilities Commission of Nevada has continued its rule-making workshops to implement the legislation, with recent sessions focused on draft policy language and stakeholder consensus. We are encouraged by the progress, and we continue to work collaboratively with all stakeholders. We currently expect the rulemaking to conclude in the coming months, which could allow alternative ratemaking adjustments to begin as early as 2028. In Arizona, the Arizona Corporation Commission adopted a policy statement in December of 2024, signaling their openness to having regulated utilities propose formula rate plans as part of future rate cases, and the commission recently approved its first formula rate plan last week. We have developed a formula rate plan that will be included in our rate case filing, which I will discuss in more detail on the next slide. Overall, we believe these regulatory developments represent meaningful progress toward a modernized regulatory construct in both jurisdictions. Turning to Slide 10. As mentioned, we expect to file our Arizona rate case this week, with rates anticipated to become effective in April of next year. Key elements of our filing include a revenue increase of over $100 million with a proposed rate base of $3.9 billion and a requested ROE of 10.25% plus a fair value return on rate base of 20 basis points relative to our equity ratio of approximately 50%. This case is primarily driven by the need to start recovering on the nearly $900 million in capital investments we've made for the benefit of our Arizona customers to ensure safe and reliable natural gas service. These investments result in a proposed increase in rate base of roughly $700 million, including post-test year adjustments of approximately $360 million through November of 2026. As I mentioned previously, we will also be including a formula rate adjustment proposal. The proposal resembles the guidelines established in the commission's policy statement as well as some of the other recent utility proposals currently pending in front of the commission, including the mechanism the commission approved last week. We are looking forward to working with all stakeholders to effectuate a constructive outcome that minimizes bill impacts to customers and allows us to more timely recover our capital investments. On average, the proposed revenue increase in our case translates to an expected bill impact of approximately $5 per month for our residential customers. We believe our proposal reflects a balanced approach that enhances safety and infrastructure reliability while maintaining customer affordability, and as always, the outcome remains subject to commission review and approval. Moving to Slide 11, we are initiating 2026 as long-term capital guidance, which now incorporates the 2028 Great Basin expansion project. This marks the first time we have included the Great Basin project in our forward outlook and represents an important evolution in our capital plan. While our capital plan remains anchored in utility distribution investments, underpinned by our commitment to safety, reliability, system modernization, and meeting the needs of our growing customer base, in 2026, we anticipate early stage spending related to the Great Basin expansion, including engineering, environmental reviews, permitting, and other preconstruction activities necessary to support an efficient project timeline. Over the next five years, we expect to invest approximately $6.3 billion, with roughly 73% directed towards Southwest Gas and 27% toward Great Basin. This capital mix positions Great Basin as a growing contributor to the company's growth story and long-term earnings platform. These investments support an expected five-year rate base CAGR of approximately 9.5% to 11.5%. The inclusion of Great Basin provides incremental upside and diversification beyond our distribution system investments that we believe will maintain a sustainable growth trajectory of nearly 7% over the same period. We believe the combination of our distribution investments, coupled with new opportunities emerging through Great Basin provide a compelling long-term capital framework for the company and offer meaningful earnings and cash flow growth for our investors... Turning to Slide 12. We continue to advance the 2028 Great Basin expansion project and remain on schedule across engineering, regulatory preparation, and commercial milestones. In December, we executed binding precedent agreements following a successful open season, resulting in nearly 800 million cubic feet per day of incremental capacity commitments. This supports an estimated $1.7 billion capital investment opportunity and reflects strong market demand for expanded transmission capacity. Upon placing the project in service, we estimate incremental annual margin of approximately $215 million to $245 million, representing a significant step-up in our Great Basin earnings profile. We expect to file our formal CPCN application before the end of this year following the completion of our engineering design, environmental, and cultural fieldwork. The FERC and NEPA review processes are expected to occur during 2027 with construction to begin following FERC approval and with anticipated in-service date near the end of 2028. We recently achieved an important milestone with pre-filing approval from the FERC. The FERC also encouraged evaluation of potential eligibility under Title 41 of the FAST Act, which is designed to streamline federal permitting through enhanced interagency coordination. We are currently assessing that pathway and its potential implications for project timing. As with any large-scale infrastructure project, timing remains subject to regulatory approvals, permitting outcomes, and supply chain dynamics. That said, we are proactively managing contractor engagement and procurement planning to mitigate execution risk and preserve schedule integrity. Capital deployment will ramp up as we move from engineering and permitting into construction in late 2027 and early 2028. We expect to accrue AFUDC on pre-service capital moderating near-term earnings impacts. From a financing standpoint, we are targeting a balanced 50-50 debt-to-equity structure. Debt is expected to be funded through Southwest Gas bond issuances, while equity requirements will be supported through a combination of holding company leverage capacity and modest equity issuances, including use of our existing ATM program. This approach supports project execution while preserving credit quality and long-term financial flexibility, preserving the strength of our balance sheet. We will continue to provide updates as we achieve key milestones throughout the course of this year. And with that, I'll turn the call over to Jay For, who will review our financial performance for the year.

Justin Forsberg, Chief Financial Officer and Treasurer

Thanks, Justin. Turning to Slide 14, consolidated GAAP earnings per diluted share for 2025 were $6.08, which included discontinued operations. During the year, the company sold its remaining shares of Centuri on September 5, 2025, concluding our exit and qualifying Centuri for discontinued operations reporting. This transaction resulted in a net gain of approximately $260 million, contributing $2.83 per diluted share to consolidated GAAP earnings when combined with Centuri's performance during our ownership period. For a detailed breakdown of consolidated earnings for the year, please refer to Slide 32 in the appendix. We present adjusted earnings per share from continuing operations here to provide clarity on underlying business performance. Adjusted earnings per diluted share from continuing operations rose nearly 19% from $3.07 in 2024 to $3.65 in 2025, improving by $0.58 year-over-year. This growth was driven by focused execution in our natural gas distribution business and significantly lower financing costs at Holdings. Southwest Gas earnings benefited from rate relief and ongoing customer growth, adding about $0.30 per share to EPS. However, these margin benefits faced some offset from increased depreciation and amortization due to ongoing capital investment, higher interest expense primarily linked to regulatory account balances from overcollected purchased gas costs, and modestly higher operations and maintenance expenses. Reduced expenses in the holding company stemmed from a significant decrease in interest expense after fully repaying prior holdco debt using proceeds from the Centuri transactions, which was crucial in improving earnings shown in the table. Moving to Slide 15, we observe the year-over-year change from 2024 to 2025 in adjusted net income for Southwest Gas. Adjusted net income grew by 8.7%, from $261.2 million in 2024 to $283.9 million in 2025, marking an increase of nearly $23 million year-over-year. These figures exceeded our net income guidance by nearly $9 million, primarily due to better than anticipated COLI results, higher interest income from increased cash balances, and some delays in service dates, which led to lower than expected depreciation and amortization. The predominant contributor to the year-over-year increase was a roughly $120 million improvement in operating margin, reflecting around $95.2 million from combined rate relief, mainly from our Arizona rate case outcome, $11.5 million from ongoing customer growth, along with about $8 million related to recovery and return mechanisms, and $5.9 million from the variable interest expense adjustment mechanism in Nevada associated with IDRBs. The last two margin improvements were fully offset within operating income through depreciation and amortization and interest expense, respectively. O&M expenses rose by $16.8 million compared to the previous year. Excluding the incentive compensation that exceeded target, the increase was about 1.9% over the prior year. Other factors included increased employee-related labor costs, higher expenses for cloud computing, and higher outside service costs. These cost increases were somewhat countered by reductions in leak survey and line locating expenses. Overall, O&M concluded the year close to budget, demonstrating our efforts to control costs while ensuring we deliver natural gas service reliably and safely to our customers. Depreciation and amortization increased by $27.6 million due to a 7% rise in average gas plants in service as we continued investing in pipeline replacement and new infrastructure, along with about $8 million higher amortization related to regulatory account balances that I mentioned being offset in margin earlier. Other income fell by a net $1.9 million, influenced by several offsetting items, with a notable expected $12.6 million decrease in interest income linked to carrying charges on deferred PGA balances. This decline was partially mitigated by gains in company-owned life insurance asset values, sales of miscellaneous assets, and timing differences in contributions to the Southwest Gas Foundation compared with 2024. Net interest deductions climbed by $19.4 million, mainly due to anticipated interest from overcollected PGA balances and increased variable interest expense adjustment mechanisms in Nevada concerning IDRBs. As previously mentioned, the impact of variable interest associated with the Nevada IDRBs is fully offset in margin. Taxes other than income taxes, primarily property taxes, rose by $5.1 million, and income tax expense also increased year-over-year due to higher pretax income. You'll notice that partly offsetting GAAP net income was a $16.4 million state income tax apportionment benefit tied to certain one-time events; we've adjusted this benefit for non-GAAP presentation to reflect the true net income run rate at Southwest Gas. In conclusion, the year-over-year improvement in adjusted net income reflects a strong regulated utility story driven by robust operating margin growth from rate relief and customer additions, slightly countered by modestly higher O&M, depreciation and amortization, interest expense, and taxes. Now moving to Slide 16, we detail our expected near-term financing plan, which indicates disciplined funding supported by a strong liquidity position. We started 2026 with a significant consolidated cash balance of nearly $600 million, primarily from the remaining proceeds of the Centuri separation completed in September 2025, after using part of those proceeds to distribute dividends to stockholders in the latter half of 2025. The liquidity at the holding company provides substantial financial flexibility as we pursue our capital program, and we plan to fully fund stockholder dividends in 2026 using that holding company cash while also planning to invest nearly an equivalent amount into Southwest Gas to support our 2026 capital plan. The execution of this plan is projected to leave a nominal cash balance at Southwest Gas Holdings by year-end 2026. Throughout 2026, we expect around $325 million in net bond issuances from Southwest Gas, along with limited revolver usage at the operating company. Crucially, we do not foresee any equity issuance requirements during the year under the existing ATM program. Overall, our $1.25 billion capital plan outlines the main allocation of funds. This investment includes approximately $925 million for natural gas distribution system infrastructure, with the remainder bouncing into our planned 2028 Great Basin expansion project. In summary, our 2026 plan demonstrates balanced funding, robust internal cash generation, disciplined capital investment, and a clear pathway to executing our growth strategy without necessitating additional external equity. Looking ahead, and transitioning to Slide 17, we point out that our credit strategy is deliberately aligned with our long-term capital plan, which we believe supports maintaining a solid BBB+ profile as optimal for Southwest Gas Holdings amid this investment cycle. For 2025, we estimate S&P adjusted funds from operations to debt at about 19.7% for Southwest Gas Holdings and 18.6% for Southwest Gas Corporation. These figures significantly exceed S&P's 13% downgrade threshold for both entities and surpass our targeted long-term operational range of over 17%. This long-term credit metric strategy aims to provide more than 300 basis points of coverage above the downgrade trigger throughout our forecast period, as we find this to be a suitable level of planned headroom to accommodate potential external events such as weather, commodity price fluctuations, interest rates, and the timing of regulatory results. This disciplined credit stance supports a balanced 50-50 capital structure at Southwest Gas and ensures effective access to debt markets as we execute over $6 billion of planned investments through 2030. Given our strengthened balance sheet and credit margin, we believe we can forgo high-volume equity issuances while utilizing the ATM for modest equity needs and reestablishing holding company leverage capacity as financing strategies. Importantly, this approach directly endorses our stockholder value framework. By ensuring visible leeway above downgrade thresholds, we believe this discipline will allow us to maintain lower-cost capital access while building the foundation for consistent annual dividend growth and retaining crucial flexibility during peak investment periods. In essence, our goal is not to maximize a single credit metric but to strategically manage our balance sheet to sustain a BBB+ rating throughout the capital cycle. This discipline facilitates efficient funding for growth while safeguarding our investment-grade standing and delivering long-term value to stockholders. As we highlighted on the prior slide, maintaining strong credit metrics is a core priority for both Southwest Gas Holdings and Southwest Gas Corporation. Slide 18 reinforces how our current capital structure, liquidity position, and ratings profile support that commitment and provide flexibility as we execute our plan. On a consolidated basis, total net debt at year-end 2025 was approximately $3.2 billion after adjusting for the nearly $600 million of cash on hand and the roughly $300 million of purchased gas costs or PGA balances. Notably, all of our outstanding debt is held by the utility. You'll see all of our current credit ratings on the right-hand side of the slide, both entities maintain solid investment-grade profiles with stable outlooks from all three major agencies. Turning to Slide 19, returning value to stockholders through consistent dividend growth remains a core component of our long-term strategy. The company has paid a dividend every year since 1956, reflecting the durability of our regulated utility model. Today, we announced that our Board approved a 4% increase in the annual dividend, bringing it to an annualized $2.58 per share for 2026, up from $2.48 previously. We intend to recommend future annual dividend increases to the Board while maintaining a disciplined strategy focused on investing more than $6 billion in the company's capital plans and sustaining responsible annual dividend growth. Looking further ahead, as earnings and cash flows strengthen, particularly as the planned 2028 Great Basin project comes into service and as projected regulatory outcomes improve, this disciplined framework creates meaningful upside potential for larger dividend increases over time as cash earnings grow. Moving now to Slide 21, I'll walk through our newly initiated 2026 and forward-looking financial guidance. We are initiating both 2026 guidance and long-term targets that reflect our current expectations for improvement in the regulatory construct in both Arizona and Nevada as well as the projected contribution from the potential 2028 Great Basin expansion project. Building on strong 2025 performance as a base year, we are initiating 2026 EPS guidance to land in the range of $4.17 to $4.32 per share. We expect the primary drivers of our projected performance to be continued operating margin expansion at Southwest Gas, supported by ongoing customer growth and rate relief across all our jurisdictions. In addition, we expect meaningfully lower interest expense related to holdco debt following the elimination of all debt outstanding at that level. I'll further outline the underlying assumptions supporting our plans on the next slide. Overall, the combination of strong core utility fundamentals and a more solid capital structure supports our confidence in the 2026 earnings outlook. Looking further out, we are targeting a 5-year adjusted EPS compound annual growth rate of 12% to 14% through 2030. This growth trajectory, using an adjusted 2025 base year, reflects continued customer additions, expected improvement in rate relief mechanisms and disciplined cost management along with incremental earnings from the expansion project at Great Basin as we currently expect it to come into service in late 2028. As Karen mentioned earlier, we currently expect our growth rate to be front-end loaded through 2028 and 2029 with about a 15% to 17% EPS growth rate over those periods, depending on how you model the timing of construction spending and associated AFUDC earnings as well as the anticipated improvement in earned ROEs from 2026 to 2028. As Justin Brown mentioned a moment ago, large projects are always subject to regulatory approvals, permitting outcomes, and supply chain dynamics, and our robust plan is also contingent on regulatory outcomes. We expect robust rate base growth supported by capital expenditures of approximately $1.25 billion in 2026, with a total of approximately $6.3 billion for the 5 years ending in 2030. This capital plan is focused on safety, system integrity, reliability, and new business distribution system growth in the utility, along with the incremental investment required to support the growing transmission business. We are also initiating a 5-year rate base CAGR of 9.5% to 11.5%, also starting from a 2025 base, which is approximately $6.7 billion. Notably, when excluding the 2028 Great Basin expansion project, our run rate utility rate base growth is expected to be about 7% annually over the same period. Now turning to Slide 22, we show additional detail on the fundamental drivers and financing assumptions that underpin our guidance outlook through 2030. Beginning with margin, our plan reflects a clear regulatory cadence across our jurisdictions. As Justin previously outlined, the potential implementation of formula and alternative-based rate mechanisms in both Arizona and Nevada are expected to meaningfully impact margin as we refresh rates and implement the expected regulatory improvements. Further out, we expect incremental contributions from our other jurisdictions. Supporting this regulatory roadmap, we expect steady customer growth of approximately 1.4% annually across our service territories. For O&M, we remain focused on operational discipline with our target to keep O&M flat on a per customer basis, excluding the nonservice component of pension costs. We assume approximately $6 million to $7 million annually from company-owned life insurance, and we plan for normal natural gas price fluctuations based on current forward pricing curves over the planning horizon. With respect to income taxes, we expect that utilizing existing net operating losses should minimize cash tax payments and result in an effective tax rate in the high teens, barring any future corporate income tax policy changes. We utilize currently anticipated forward corporate debt curves as we model interest expense when incorporating future bond issuances. The timing of bond issuances is consistent with the capital plan we outlined earlier. As I mentioned, our strategy is designed to preserve balance sheet strength and flexibility while funding our elevated capital plan. Back to you, Karen.

Karen Haller, President and CEO

Thank you, Jay Fors. Before we move into the Q&A portion of the call, I'd like to draw your attention to Slide 23, where we highlight our commitment to delivering exceptional customer service, disciplined financial management, maintaining a constructive regulatory engagement, and preserving strategic flexibility while advancing our strategic priorities and achieving strong financial performance. I am confident in our trajectory as a leading pure play fully regulated natural gas business. The team is focused on ensuring we safely, reliably, and affordably meet the needs of our customers every day to deliver value to our stockholders. With that, let's open the call for questions.

Operator, Operator

We will take our first question from Julien Dumoulin-Smith from Jefferies.

Julien Dumoulin-Smith, Analyst

Just really nicely done. I got to say at the outset, this is an incredible update, lots to ask here, but really got acknowledged at the outset. And obviously, Karen, Justin congrats to each of you, respectively here. Really great high note here. If I can pivot into the questions real quickly, though, just to kind of start at the top, I'm sure others will have a bunch. Just talk about the equity, right? I mean big plan, big chunk that you guys are biting off here. How do you think about the timing of equity? Have you engaged with the rating agencies? To what extent are you going to get some latitude or give yourselves latitude in the metrics through the construction cycle here? Just trying to gauge, obviously, you've disclosed '26 equity or lack thereof, but how are you thinking about the ramp '27, '28. And that's the first question. I've got a follow-up.

Karen Haller, President and CEO

Thank you, first of all. I appreciate it. And I'll let Jay Fors answer that question.

Justin Forsberg, Chief Financial Officer and Treasurer

I appreciate the question, Julien. It's a good question. When considering the credit metrics, we are currently more than 500 basis points above our downgrade threshold. We are committed to targeting that to be greater than 300 basis points in our plan. Regarding our anticipated equity needs for our capital plan at the utility, we believe we can leverage significant capacity in the holding company to minimize equity needs. While we don't expect to need anything this year, looking ahead, we have a shelf that expires at the end of 2026, which we will be renewing and extending. We do not plan to upsizing our existing $340 million ATM.

Julien Dumoulin-Smith, Analyst

Yes, I suppose that's a signaling in and of itself as to how you think about the total equity needs you'll need through the plan, right?

Justin Forsberg, Chief Financial Officer and Treasurer

Yes, we think so.

Julien Dumoulin-Smith, Analyst

Excellent. Let's discuss the project itself. You mentioned the capacity subscribed of nearly 800 MCF. Can you provide more details about the overall scope of the project? Obviously, there is some additional interest beyond that. Please share more about the customer interest and whether the 1.7 could potentially grow larger. I want to understand the total eventual opportunity here, as well as any other interests that may arise. You mentioned data centers in Nevada that would serve that kind of customer load. What are you observing in that area?

Justin Brown, President of Southwest Gas Corporation

Julien, it's Justin. To your point, we went through an extended multi open season process last year, largely driven by various inquiries we received. As we've mentioned before, we eventually needed to settle on an in-service date that most were focused on, which we chose to be 2028. We had to establish a deadline for customers interested in service by the end of calendar year 2028. Regarding future demand and interest, I believe there is potential since we received significantly more inbound requests than those who actually signed up. However, it's important to consider the timing of different interests and projects. Moving forward, I encourage you to keep in mind a couple of things: we are still working on design aspects. When we have confirmed capacity at a specific dekatherm per day, the system design won't match that number exactly, which is almost impossible. Once we complete the design, we'll compare it to the actual capacity. If there's a chance for a supplemental open season to fill any remaining capacity based on the design, we will pursue it. We are confident there is interest and demand for that. Additionally, regarding dates beyond 2028, we will continue collaborating with prospective shippers to evaluate their interest and timing, and we can consider another open season for different dates in the future.

Julien Dumoulin-Smith, Analyst

Right. Last nuance here, if I can squeeze it in. Just the cadence of earnings uplift. I mean obviously, it's back-end weighted here. But can you speak to that as well as what you're thinking on closing the gap on lag here in Arizona and Nevada as part of this updated plan.

Justin Brown, President of Southwest Gas Corporation

Yes. I'll start with kind of the regulatory construct and kind of how we're looking about our continued effort and focus on reducing regulatory lag in our jurisdiction. So obviously, as I mentioned in my prepared remarks, this next couple of years is going to be very big for us in terms of we've got two sizable rate bases. We're getting ready to file. We think they're really going to be a catalyst moving forward in terms of being able to request formula rate adjustments as part of the rate case or in Nevada's case, using this rate case as kind of the springboard for that. And so I think when we think about kind of those mechanisms and how they're going to be designed, obviously, each state is going to be a little bit different. But I think you can look at the UNS Gas decision from last week, and I think that's a pretty good proxy when you think about the facts and circumstances of UNS Gas kind of triangulating that with the policy statement and then some of the other proposals that are pending. I think we've always said we kind of look at hopefully being able to reduce kind of what has been kind of our historical gap of 160 basis points pertaining at any time. I think in combination with Nevada and Arizona, we're hoping to cut off about 100 basis points is what our goal is.

Justin Forsberg, Chief Financial Officer and Treasurer

Julien, I can elaborate on the cadence that both Karen and I mentioned. The guidance is indeed more front-end loaded, which I believe is not what you're implying. We have a run rate base growth of about 7%, which supports the earnings trajectory model you might consider for our five-year plan. As we narrow that lag, it should align well with rate base growth. The earnings, particularly EPS growth, should be promising, especially given our expectations for minimal equity issuances. Furthermore, considering the factors Justin mentioned and the anticipated in-service at Great Basin, we project an EPS growth rate of around 15% to 17% from now until 2028 to 2029.

Operator, Operator

Your next question comes from the line of Elias Jossen from JPMorgan Chase.

Elias Jossen, Analyst

Maybe just thinking about the kind of post-Great Basin and service earnings contribution. I know you've talked quite a bit about the back half versus the front half of the earnings CAGR. But can you just talk about maybe in 2030 when we start to see the full benefit of Great Basin what that earnings contribution could look like on a run rate basis? And because I think about some real inflection sort of in that 2030 time period based on those earnings contributions.

Justin Forsberg, Chief Financial Officer and Treasurer

Yes, Elias. I think we can refer to the margin that Justin mentioned, which is the expected margin of $215 million to $245 million from Great Basin. As we approach the end of the year and the in-service date in 2028, we anticipate that margin contribution will be fully realized in 2029 and 2030. I want to remind everyone that we expect to execute a minimum 20-year transportation service agreements before going into service, which will bring in that margin. This is essentially the Great Basin contribution to our margin for those two outer years. Additionally, as I noted earlier, there is a 7% rate base growth for the underlying utility.

Elias Jossen, Analyst

Got it. I think you briefly mentioned this earlier, but can we separate the rate case outcomes based on the percentage of the request and then consider whether the formula rate adjustments would be additional to that? I'm interested in understanding the earnings contributions related to that specifically.

Justin Brown, President of Southwest Gas Corporation

Elias, it's Justin. Yes, I think that's a fair way to look at it in terms of kind of just our historical success, if you will, in terms of the spread between our ask and what we receive. And I think that's a reasonable way to look at it.

Operator, Operator

Your next question comes from the line of Chris Ellinghaus from Siebert Williams Shank.

Christopher Ellinghaus, Analyst

Congratulations, Karen and Justin. Have a great retirement, Karen. I really appreciate the new disclosures, by the way. Justin, can you talk about the progress in the Nevada workshops thus far? And any thoughts you have?

Justin Forsberg, Chief Financial Officer and Treasurer

The legislation was passed last summer, with the first workshop held in September and another in January and February. They are currently working on draft language and regulations. The commission is emphasizing consensus among stakeholders, which involves evaluating competing interests and the various language requested as well as legislative requirements. There has been considerable back and forth to build this consensus. The most recent workshop occurred last Friday, and we feel optimistic about nearing a conclusion. We expect to see draft consensus regulations from the commission in the next month or two.

Christopher Ellinghaus, Analyst

Okay. That helps. vis-a-vis the UNS Gas outcome, have you got any thoughts about ROE, and relative to your discussion about the 100 basis point improvement target, does that incorporate your thoughts about where their head is on ROE?

Justin Brown, President of Southwest Gas Corporation

Yes, this is Justin again. The decision just came out last week, and we've always been considering it. I believe this was the first decision the commission announced, and it seems quite positive overall. As they've mentioned, they want to evaluate cases for each utility, whether it's larger gas, smaller gas, or electric. We're going to learn more as APS and TEP proceed with their processes and as we continue to engage with stakeholders. The encouraging aspect is that the framework is outlined when looking at the various proposals, the policy statement, and the recent UNS Gas case. This sets a defined path for everyone involved, allowing us to collaborate and see the outcomes with the different utilities.

Christopher Ellinghaus, Analyst

Okay. And I guess this is somewhat of a difficult question, but the 7% sort of longer-term base Southwest Gas rate base growth that you talked about. I assume that's not necessarily consolidated in maybe the 2030 sort of endpoint is part of it. But that doesn't include any kinds of upsides that you see for Great Basin longer term. Is that right?

Justin Brown, President of Southwest Gas Corporation

Yes, Chris, Justin again. You're correct. When we consider the historical and current investment in the utility, that's what it was designed for. We anticipate steady and strong growth at the utility, and that is what this reflects. It does not account for any one-time events or additional Great Basin opportunities that could arise in the future.

Christopher Ellinghaus, Analyst

Okay. Lastly, when you're talking about utilizing parent leverage for the Great Basin funding. Do you expect that to be permanent? Do you ever expect to push down any of the financing costs into Great Basin?

Justin Forsberg, Chief Financial Officer and Treasurer

Yes, I think it's a great question, Chris. From our perspective, we don't expect it to be permanent. We sold Centuri, an asset that was not contributing to the dividend, and now we have those funds to redeploy into an asset that is expected to generate significant cash earnings once it becomes operational. Great Basin will have the capability to provide a substantial dividend to the parent, which will assist us in managing any leverage we apply to the parent at that time.

Christopher Ellinghaus, Analyst

Okay. Let me ask you one more thing. Can we assume that there might be greater potential for dividend growth once Great Basin is operational?

Justin Forsberg, Chief Financial Officer and Treasurer

Yes, I think that's fair. Kind of along the same lines, what I just mentioned.

Operator, Operator

Your next question comes from the line of Gabe Moreen from Mizuho.

Gabe Moreen, Analyst

Congratulations again to Karen and Justin. I have a question about Great Basin, which has several parts. I want to explore further the variables regarding costs, such as E&C compressors and pipe, and understand where you currently stand in that process and how you plan to mitigate some of those risks at this time. If you could address that, I would appreciate it.

Justin Brown, President of Southwest Gas Corporation

Yes, Gabe, it's Justin. As I mentioned earlier, we're taking a proactive approach regarding our supply chain and are currently going through the pre-filing process with FERC to mitigate typical project risks. Shipper risk is another factor we've considered, which is why we engaged in a lengthy process to secure firm precedent agreements to further reduce risks associated with the project. We will continue to work through these processes. Regarding your question about our current status, we feel confident that our cost estimate is solid. We are collaborating with our EPC contractor, and I want to note that when we file the formal application with FERC at the end of this year, we will provide an updated cost at that time. This will serve as a good reference point for our best estimate right now. After this process, we expect to have more clarity in nine months, and our filing with FERC will allow us to refine our estimates further. So, that’s a key milestone to monitor concerning the anticipated final project cost.

Justin Forsberg, Chief Financial Officer and Treasurer

Gabe, I can just add something. I think you're getting at as well. It is a balance, which I think is what you're kind of pointing to between trying to minimize the spending prior to getting a certificate from the FERC with making sure that we're mitigating some of these supply chain issues that Justin talked about. And so from that perspective, the precedent agreement is just as a reminder, I think you guys know this, but it does require a certain amount of surety that the shippers have to put up as we spend dollars in this early time period.

Gabe Moreen, Analyst

I know I had one question, but one minor follow-up. To the extent you're going through the open season and you've got 800 million a day of capacity. To what extent were any further upstream constraints on procuring gas or capacity constraint on some of your customers here signing up for capacity?

Justin Brown, President of Southwest Gas Corporation

Yes, Gabe, this is Justin again. Our understanding is that our customers haven't indicated any restrictions in that area. It's ultimately their responsibility, as we provide the pipeline for them to transport the gas supply they purchase. We're not aware of any issues, and we believe there is enough capacity from the upstream suppliers to fulfill those requirements.

Operator, Operator

Your next question comes from the line of Ryan Levine from Citigroup.

Ryan Levine, Analyst

I have a couple of questions regarding your guidance. By 2030, are you assuming that you will be at a 300 basis point distance from the downgrade threshold? Is that part of your plans? Could you provide any details about what is included in your 2030 estimate?

Justin Forsberg, Chief Financial Officer and Treasurer

Yes, that's a valid question. The target of more than 300 basis points should be viewed in relation to the peak leverage we anticipate at the holding company, considering our strategies for addressing equity needs through holding company leverage. This doesn’t necessarily imply we will reach this by 2030. As I mentioned earlier during one of the Q&A sessions regarding Great Basin, the situation regarding permanent debt at the holding company is not as we would like. However, we expect to see some improvement in our current plan, especially in the FFO to debt metrics beyond what we anticipate as the trough year, likely around 2028.

Ryan Levine, Analyst

Okay. And then similarly, around the regulatory lag improvement in your plan. Is the 100 basis points embedded in the 13% EPS growth rate? Or is that if you exceed that, would you be above that or conversely, if you underperform? Are those the key drivers of the outlook?

Justin Brown, President of Southwest Gas Corporation

Ryan, it's Justin. Yes, I think the guidance that we provided, we've made some reasonable assumptions around kind of the timing of formula rates and kind of what that might look like. So that's embedded in that range.

Ryan Levine, Analyst

Okay. Well, congratulations to Karen and Justin and appreciate the comprehensive update.

Operator, Operator

Your next question comes from the line of Paul Fremont from Liebenberg.

Paul Fremont, Analyst

Congratulations on the update and best wishes to Karen and also to Justin. Really two questions. One, if I go back to Justin's earlier comment of 15% to 17% through sort of Great Basin, which I guess the first full year would be 2029. If I use that, I would come up with 2029, somewhere between 640 and 680. Am I thinking about that correctly? Or am I missing something there?

Justin Forsberg, Chief Financial Officer and Treasurer

Yes, Paul, thank you for the question. We can't provide specific guidance at that distance, but I believe you are considering the run rate as I described it. The year 2029 is indeed the first full year of operations. Therefore, it will depend on your perspective regarding the timing of construction spending and related earnings as we approach that period. However, for the full operational year, we anticipate that to align with our plans for 2029.

Paul Fremont, Analyst

Great. And then my other question relates to the RUCO challenge to the policy statement, which had initially been turned down by the courts. But I understand that at a higher level, there's now a hearing that's been scheduled on their complaint. Any comments on that update and what you're expecting to come out of that?

Justin Forsberg, Chief Financial Officer and Treasurer

Justin stated that he and Paul share similar views on the RUCO challenge. He believes there has been no change in their perspective since the beginning of the process, even after the court's initial denial and the subsequent decision by the Superior Court to allow RUCO to present their case. This is a normal part of the process, giving them the chance to argue their position. Justin expressed confidence that there is a strong precedent for the commission to maintain exclusive jurisdiction over ratemaking as part of rate cases, and noted that various regulatory mechanisms have endured scrutiny over time. From their viewpoint, there is no significant concern about the challenge or its current procedural status.

Operator, Operator

This concludes the Q&A portion of today's conference. I would now like to turn the call back over to Tyler Franik for closing remarks.

Tyler Franik, Manager of Investor Relations

Thanks again, John, and thank you all for joining us today and for your questions. This concludes our conference call. We appreciate your interest in Southwest Gas Holdings and look forward to speaking with many of you soon.

Operator, Operator

This concludes the Southwest Gas Holdings Fourth Quarter and Full Year 2025 Earnings Call and Webcast. You may now disconnect your line at this time. Have a wonderful day.