Southwest Gas Holdings Inc

Previous wording

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 through April 22, 2024, owned all of the shares of common stock of Centuri Group, Inc. (the “utility infrastructure services” segment). Southwest Gas Holdings, Inc. and its subsidiaries are collectively referred to as the “Company.” References to “Centuri” relate to Centuri Group, Inc., for periods prior to April 22, 2024, or more recently, to Centuri Holdings, Inc.

Current wording

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), until April 22, 2024, all of the shares of common stock of Centuri Group, Inc. (the “utility infrastructure services” segment), and until February 14, 2023, all of the shares of common stock of MountainWest Pipelines Holding Company (“MountainWest”). Southwest Gas Holdings, Inc. and its subsidiaries are collectively referred to as the “Company.” References to “Centuri” relate to Centuri Group, Inc., for periods prior to April 22, 2024, or subsequently, to Centuri Holdings, Inc.

Previous wording

As of June 30, 2024, South west had 2,241,000 residential, commercial, industrial, and other natural gas customers, of which 1,201,000 customers were located in Arizona, 834,000 in Nevada, and 206,000 in California. Over the past twelve months, first-time meter sets were approximately 40,000, compared to 42,000 for the twelve months ended June 2023. Residential and small commercial customers represented over 99% of the total customer base. During the twelve months ended June 30, 2024, 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 86% of its operating margin from residential and small commercial customers, 4% from other sales customers, and 10% from transportation customers. These patterns are expected to remain materially consistent for the foreseeable future.

Current wording

As of September 30, 2024, Southwest had 2,248,000 residential, commercial, industrial, and other natural gas customers, of which 1,205,000 customers were located in Arizona, 837,000 in Nevada, and 206,000 in California. Over the past twelve months, first-time meter sets were approximately 41,000, comparable to the number of new meter sets during the twelve months ended September 30, 2023. Residential and small commercial customers represented over 99% of the total customer base. During the twelve months ended September 30, 2024, 53% of operating margin (Regulated operations revenues less the net cost of gas sold) was earned in Arizona, 35% in Nevada, and 12% in California. During this same period, Southwest earned 86% of its operating margin from residential and small commercial customers, 4% from other sales customers, and 10% from transportation customers. These patterns are expected to remain materially consistent for the foreseeable future.

Previous wording

Centuri is a strategic infrastructure services company that partners with regulated utilities to build and maintain the energy network that fuels millions of homes and businesses across the United States (“U.S.”) and Canada. With a 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. It operates in the U.S., primarily as NPL, Neuco, Linetec, and Riggs Distler, and in Canada, primarily as NPL Canada.

Current wording

Centuri is a strategic infrastructure services company that partners with regulated utilities to build and maintain the energy network that fuels millions of homes and businesses across the United States (“U.S.”) and Canada. With a 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 88 primary locations across 45 states and provinces in the U.S. and Canada. It operates in the U.S., primarily as NPL, Neuco, Linetec, and Riggs Distler, and in Canada, primarily as NPL Canada.

Previous wording

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. 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.

Current wording

Utility infrastructure services activity can be impacted by changes in infrastructure replacement programs and capital budgets 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. 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.

Previous wording

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 2023 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, 2023, in addition to the Risk Factors included in these documents, and as updated from time to time.

Current wording

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 Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, in addition to the Risk Factors included in these documents as may be updated from time to time.

Previous wording

2nd Quarter 2024 overview and other recent developments

Current wording

3rd Quarter 2024 overview and other recent developments

Previous wording

•40,000 first-time meters sets occurred over the past 12 months

Current wording

•41,000 first-time meters sets occurred over the past 12 months

Previous wording

•$391 million capital investment year-to-date

Current wording

•$644 million capital investment year-to-date

Previous wording

•Revenues of $672 million in the second quarter of 2024, a decrease of $133.7 million, or 17%, compared to the second quarter of 2023 (which included favorable weather and more offshore wind work, as well more storm restoration work)

Current wording

•Revenues of $720 million in the third quarter of 2024 reflect a decrease of $54.8 million, or 7%, compared to the third quarter of 2023 (which included favorable weather and more offshore wind and storm restoration work)

Previous wording

•Operating income of $33.1 million in the second quarter of 2024, a decrease of $20.1 million, compared to the second quarter 2023 operating income

Current wording

•Operating income was $41.9 million in the third quarter of 2024, a decrease of $11 million, compared to the third quarter 2023 operating income

Previous wording

Results from natural gas distribution operations improved$8.5 million between the second quarters of 2024 and 2023. The improvement was primarily due to an increase in Operating margin and decrease in Depreciation and amortization, offset by an increase in Operations and maintenance expense and decrease in Other income.

Current wording

Results from natural gas distribution operations improved $3.8 million between the third quarters of 2024 and 2023. The improvement was primarily due to an increase in Operating margin and Other income, offset by an increase in Operations and maintenance expense, Depreciation and amortization, and net interest deductions.

Previous wording

Operating margin increased $10.8 million quarter over quarter. Combined rate relief in Nevada and California added approximately $18 million of incremental margin, and an additional $2 million is attributable to customer growth, including 40,000 first-time meter sets during the last twelve months. The combined impacts of certain customer rate components related to infrastructure and similar tracking mechanisms (not also impacting amortization expense), and the variable interest expense (“VIE”) adjustment mechanism in Nevada (for which amortization is recognized in interest expense), resulted in a combined $2 million of incremental margin between comparable periods. Furthermore, late fee assessments on customer account balances provided $1.2 million in incremental margin. Offsetting these impacts was a decrease in recoveries associated with other regulatory program balances of $16.1 million, for which an associated comparable decrease is also reflected in amortization expense (discussed below). The remaining variance primarily relates to changes in other miscellaneous revenue and revenue from customers outside of the decoupling mechanisms.

Current wording

Operating margin increased $22.9 million quarter over quarter. Combined rate relief in Nevada and California added approximately $16 million of incremental margin, and an additional $2 million was attributable to customer growth, including approximately 41,000 first-time meter sets during the last twelve months. The combined impacts of increases in recovery/return associated with regulatory account balances ($1 million), and the variable interest expense adjustment mechanism in Nevada ($2 million) (for which amortization is recognized in interest expense), also resulted in incremental margin between comparable periods. The remaining variance primarily relates to changes in other miscellaneous revenue and revenue from customers outside of the decoupling mechanisms.

Previous wording

Operations and maintenance expense increased $4.9 million or 4% between quarters. General cost increases were experienced in a variety of areas, including in employee labor-related and benefit costs, leak survey and line locating activities, as well as insurance costs. These increases were partially offset by a reduction in external contractor and professional services expenses.

Current wording

Operations and maintenance expense increased $7.5 million or 6% between quarters. General cost increases (net of amounts capitalized in Gas plant, where relevant, to support construction efforts) were experienced in a variety of areas, including $3.2 million (combined) of incremental labor-related and benefit costs, including incentive compensation costs, $1.6 million (combined) of incremental leak survey and line locating costs, $1.1 million of higher insurance costs, and $1.2 million of increased reserves for customer accounts deemed uncollectible. These increases, and others, were partially offset by a reduction in certain external contractor and professional services expenses.

Previous wording

Depreciation and amortization expense decreased $13.2 million, or 18%, between quarters, driven primarily by$16.1 million in lower amortization associated with regulatory program balances (noted above), including changes in the amount of, and a shift in the timing of, the California Climate Credit return (from being returned and therefore, amortized, during the first quarter of 2023 to reverting to the more typical timing in the second quarter of 2024). This decrease was partially offset by an increase in depreciation on gas plant, reflective of a $695 million, or 7%, increase in average gas plant in service since the corresponding second quarter of 2023. The increase in plant was attributable to pipeline capacity reinforcement work, franchise requirements, scheduled pipe replacement activities, and new infrastructure.

Current wording

Depreciation and amortization expense increased $4.9 million, or 7%, between quarters, primarily due to a $755 million, or 8% increase in average gas plant in service since the corresponding third quarter of 2023, in addition to $1 million of increased amortization related to regulatory account balances. The increase in plant was attributable to pipeline capacity reinforcement work, franchise requirements, scheduled pipe replacement activities, and new infrastructure.

Previous wording

Other income (which is net of other deductions) decreased $4.5 million. Interest income declined $5.4 million between quarters primarily reflecting a reduction in carrying charges associated with regulatory account balances, notably, deferred purchased gas cost balances, which, on a combined basis, decreased from an asset balance of $786 million as of June 30, 2023 to a net liability balance of $82 million as of June 30, 2024. Interest is earned when balances are assets and interest expense is incurred when balances are liabilities. A $2.9 million decrease in values (including net death benefits) associated with company-owned life insurance (“COLI”) policies and a $1.1 million increase in non-service-related costs associated with employee pension and other postretirement benefits also contributed to the decrease overall between periods. Offsetting these decreases was a $1.8 million increase in the equity portion of the allowance for funds used during construction, and approximately $3 million in software write-offs in the prior year period, which did not recur in 2024.

Current wording

Other income (which is net of other deductions) increased $2.1 million between quarters. The increase was primarily driven by a $4.7 million increase in values associated with company-owned life insurance (“COLI”) policies and a $1.9 million increase in the equity portion of the allowance for funds used during construction. Offsetting these increases was a $1 million increase in non-service-related costs associated with employee pension and other postretirement benefits and a $4.5 million decrease in interest income primarily reflecting a reduction in carrying charges associated with regulatory account balances, notably, deferred purchased gas cost balances, which, on a combined basis, decreased from an asset balance of $687 million as of September 30, 2023 to a net liability balance of $180 million as of September 30, 2024. Interest is earned when balances are assets and interest expense is incurred when balances are liabilities.

Previous wording

Net interest deductions increased approximately $2.7 million in the second quarter of 2024, as compared to the prior-year quarter, primarily due to the regulatory treatment associated with Southwest’s Industrial development revenue bonds (the VIE mechanism noted above), including the impacts of deferrals and return/recoveries included in revenue/operating margin that are amortized through interest expense.

Current wording

Net interest deductions increased approximately $6.5 million in the third quarter of 2024, as compared to the prior-year quarter, primarily due to the regulatory treatment associated with Southwest’s industrial development revenue bonds (the variable interest expense mechanism noted above), which incorporates the impacts of deferrals and return/recoveries. Surcharges/surcredits associated with the mechanism are included in revenue/operating margin when included in customer rates; however, related regulatory account amortization is reflected in interest expense. Additionally contributing to the increase was interest incurred on the over-collected balance of the PGA, and a lower level of debt-related allowance for funds used during construction (“AFUDC”). By its nature, debt-related AFUDC is recognized as a reduction/offset to interest expense; however, such offsetting amounts were lower in the third quarter of 2024 (more pronounced in the third quarter of 2023), thereby increasing interest expense between comparative periods.

Previous wording

Results from natural gas distribution operations improved approximately $10 million between the first six months of 2024 and 2023. The improvement was primarily due to an increase in Operating margin and decrease in Depreciation and amortization, offset by an increase in Operations and maintenance expense.

Current wording

Results from natural gas distribution operations improved approximately $13 million between the first nine months of 2024 and 2023. The improvement was primarily due to an increase in Operating margin, offset by an increase in Operations and maintenance expense and Net interest deductions.

Previous wording

Operating margin increased $20 million period over period. Approximately $7 million of incremental margin was attributable to customer growth, including 40,000 first-time meter sets during the last twelve months. Combined rate relief across all our service territories added approximately $28 million of incremental margin. Favorable impacts ($4.5 million, combined) were also realized in connection with certain rate components of infrastructure trackers and the Nevada VIE mechanism. Offsetting these increases was a decrease in recoveries associated with other regulatory programs, totaling $9.6 million, for which an associated comparable decrease is also reflected in amortization expense (discussed below). Furthermore, an $8 million out-of-period favorable gas cost adjustment in the prior-year period did not recur in 2024. Customary gas used in operations (the effects of which are offset in Operations and maintenance expense) also reduced operating margin ($3.8 million) in the current period. Changes in miscellaneous revenue and customers outside of the decoupling mechanisms comprise the remaining variance.

Current wording

Operating margin increased $43 million period over period. Approximately $9 million of incremental margin was attributable to customer growth, including approximately 41,000 first-time meter sets during the last twelve months. Combined rate relief across all our service territories added approximately $44 million of incremental margin. Favorable impacts ($6.4 million, combined) were also realized in connection with certain rate components of infrastructure trackers and the Nevada variable interest expense mechanism. Furthermore, late fee assessments on customer account balances provided approximately $3 million in incremental margin. Offsetting these increases was a decrease in recoveries associated with other regulatory programs, totaling $8.6 million, for which an associated comparable decrease is also reflected in amortization expense (discussed below). In addition, an $8 million out-of-period favorable gas cost adjustment in the prior-year period did not recur in 2024. Customary gas used in operations (the effects of which are offset in Operations and maintenance expense) also reduced operating margin ($3.8 million) in the current period. Changes in miscellaneous revenue and customers outside of the decoupling mechanisms comprise the remaining variance.

Previous wording

Operations and maintenance expense increased $4.6 million, or 2%, between periods. General cost increases were experienced in a variety of areas, including in employee labor-related and benefit costs ($2.4 million), leak survey and line locating activities ($3.7 million), and insurance costs. These increases were partially offset by impacts from the cost of fuel used in operations ($3.8 million, as noted above) and a reduction in other contractor and professional services ($3.3 million).

Current wording

Operations and maintenance expense increased $12 million, or 3%, between periods. General cost increases (net of amounts capitalized in Gas plant, where relevant, to support construction efforts), were experienced in a variety of areas, including $7.6 million of (combined) incremental employee labor-related and benefit costs, including incentive compensation costs, $5.3 million (combined) of incremental leak survey and line locating costs, and $2 million in higher insurance costs. These increases, along with others, were partially offset by impacts from the cost of fuel used in operations as noted above and a reduction in other contractor and professional services.

Previous wording

Depreciation and amortization expense decreased approximately $3 million, or 2%, between periods, due primarily to a decrease of$9.6 million in amortization associated with the recovery of regulatory program balances, including a sizeable difference in the amount of the California Climate Credit between periods. This decrease was offset by an increase in depreciation on gas plant, reflective of a $686 million, or 7%, increase in average gas plant in service since the corresponding period of 2023. The increase in plant was attributable to pipeline capacity reinforcement work, franchise requirements, scheduled pipe replacement activities, and new infrastructure.

Current wording

Depreciation and amortization expense increased approximately $1.9 million, or 1%, between periods, due primarily to an increase in depreciation on gas plant, reflective of a $710 million, or 7%, increase in average gas plant in service since the corresponding period of 2023. The increase in plant was attributable to pipeline capacity reinforcement work, franchise requirements, scheduled pipe replacement activities, and new infrastructure. This increase was largely offset by a decrease of $8.6 million in amortization associated with the recovery of regulatory program balances (noted earlier), including a sizeable difference in the amount of the California Climate Credit between periods.

Previous wording

Other income (which is net of other deductions) decreased approximately $4.9 million. Interest income declined $8.1 million between periods primarily reflecting a reduction to carrying charges associated with regulatory account balances, notably, deferred purchased gas cost balances, which decreased from an asset balance of $786 million as of June 30, 2023 to a net liability balance of$82 million as of June 30, 2024. Offsetting these decreases was a $3.7 million increase in the equity portion of the allowance for funds used during construction. Non-service components of postretirement benefit costs increased in 2024, but COLI policy death benefits and nonrecoverable software write-offs experienced in the prior year period did not recur in 2024.

Current wording

Other income (which is net of other deductions) decreased approximately $2.7 million. Interest income declined $12.6 million between periods primarily reflecting a reduction to carrying charges associated with regulatory account balances, notably, deferred purchased gas cost balances, which decreased from an asset balance of $687 million as of September 30, 2023 to a net liability balance of $180 million as of September 30, 2024. Additionally, non-service-related costs associated with employee pension and other postretirement benefits increased by $3 million. Offsetting these was a $5.5 million increase in the equity portion of the allowance for funds used during construction, a $3 million increase in values associated with COLI policies (the comparative prior-year period also included net death benefits), and $3.8 million related to nonrecoverable software write-offs and market adjustments on other property in the prior year period that did not recur in 2024.

Previous wording

Utility infrastructure services revenues decreased $259 million, or 18%, in the firstsix months of 2024 when compared to the prior-year comparative period, driven primarily by decreases in Electric revenuesof $148.9 million, and Gas revenues of $95.7 million. Thedecline in Electric revenues was primarily due to anet reduction in volume of work under MSAs, as well as a decrease in offshore wind revenues of $33.4 million due to timing of project completion, and due to a decrease in emergency restoration services of $18.9 million during the period ($45.6 million in the current period, compared to $64.5 million in the previous period). The decrease in Gas revenues was primarily due to a reduction in net volumes under existing customer MSAs and timing of bid projects, as the prior year benefited from the commencement of a large project that has since been completed.

Current wording

Utility infrastructure services revenues decreased $54.8 million, or 7%, in the third quarter of 2024 when compared to the prior-year quarter, driven primarily by decreased gas utility infrastructure services (“Gas”) revenues of $33.9 million and decreased electric utility infrastructure services (“Electric”) revenues of $14.3 million. The decrease in Gas revenues was primarily due to a reduction in net volumes under existing master services agreements (“MSAs”). The decrease in Electric revenues was primarily due to a decrease in offshore wind revenues of $38 million compared to the prior-year period, partially offset by an increase in emergency restoration services revenue of approximately $22.5 million.

Previous wording

Utility infrastructure services expenses decreased $111.2 million, or 16%, in the second quarter of 2024 when compared to the prior-year quarter due primarily to a lower volume of infrastructure services provided. Subcontractor costs decreased during the second quarter of 2024 compared to the prior-year quarter primarily due to decreased work under offshore wind projects and change in the mix of work. Margin on jobs in the second quarter of 2024 also decreased primarily due to lower margins on bid work, one-time severance incurred in the current period, decreased volumes leading to underutilization of fixed costs, and unfavorable changes in the mix of work. Included in total Utility infrastructure services expenses were general and administrative costs, which decreased approximately $9.4 million between quarters primarily due to lower incentive compensation during the current period and reductions in corporate salary and benefit costs. Gains on sale of equipment in the second quarter of 2024 and 2023 (reflected as an offset to Utility infrastructure services expenses) were approximately $1.1 million and $1.2 million, respectively.

Current wording

Utility infrastructure services expenses decreased $40.8 million, or 6%, in the third quarter of 2024 when compared to the prior-year quarter due primarily to a lower volume of infrastructure services provided. Subcontractor costs, a significant component of these expenses, decreased during the third quarter of 2024 compared to the prior-year quarter primarily due to decreased work under offshore wind projects and changes in the mix of work. Profit margin in the third quarter of 2024 also decreased on a relative basis, primarily due to lower margins on bid work (as the prior year quarter benefited from a highly profitable project bid that did not recur in the current quarter), decreased volumes on MSAs leading to underutilization of fixed costs, and unfavorable changes in the mix of work. Included in total Utility infrastructure services expenses were general and administrative costs, which increased approximately $0.6 million between quarters. Gains on sale of equipment in the third quarter of 2024 and 2023 (reflected as an offset to Utility infrastructure services expenses) were approximately $0.7 million and $1.1 million, respectively.

Previous wording

Depreciation and amortization expense decreased $2.5 million between quarters, primarily due to a number of small tools within Electric operations becoming fully depreciated in 2023 and not requiring replacement based on project needs. Additionally, more efficient utilization of existing fixed assets in recent periods has slowed the growth of the depreciable asset base, highlighted by capital expenditures of $106.6 million in 2023 compared to capital expenditures of $130.2 million in 2022, which impacted depreciation on a relative basis in the periods following.

Current wording

Depreciation and amortization expense decreased $3 million between periods, primarily due to a number of small tools within Electric operations becoming fully depreciated in 2023 and not requiring replacement based on project needs. Additionally, more efficient utilization of existing fixed assets in recent periods has slowed the growth of the depreciable asset base, with capital expenditures of $106.6 million in 2023 compared to capital expenditures of $130.2 million in 2022, which impacted depreciation on a relative basis in the periods following.

Previous wording

The decrease in net interest deductions of $1.9 million between quarters was primarily due to a reduction in the average debt balance as Centuri paid down $156 million of debt under its revolving credit facility and $160 million of debt under its term loan facility with proceeds from its April IPO and concurrent private placement.

Current wording

The decrease in net interest deductions of $2.2 million between quarters was primarily due to a reduction in the average debt balance, as Centuri paid down $156 million of debt under its revolving credit facility and $160 million of debt under its term loan facility with proceeds from its April 2024 IPO and private placement.

Previous wording

Utility infrastructure services revenues decreased $133.7 million, or 17%, in the second quarter of 2024 when compared to the prior-year quarter, driven by decreases in electric utility infrastructure services (“Electric”) revenues of$67.1 million, and $58.3 million gas utility infrastructure services (“Gas”) revenues. The decrease in Electric revenues was primarily due to a reduction in net volume of work under existing master services agreements (“MSAs”), and a decrease specific to offshore wind revenues of $20.8 million due to timing of project completion. Included in current period Electric revenue was $36.4 million from emergency restoration services following storm damage to U.S. customers’ above-ground utility infrastructure, compared to $33.9 million in emergency restoration services in the same quarter in the prior year. The decrease in Gas revenues was primarily due to a reduction in net volume of work under existing customer MSAs and timing of bid projects, as the prior year benefited from the commencement of a large project that has since been completed.

Current wording

Utility infrastructure services revenues decreased $313.8 million, or 14%, in the first nine months of 2024 when compared to the corresponding period in the prior year driven primarily by decreases in Electric revenues of $163.2 million, and $129.6 million in Gas revenues. The decline in Electric revenues was primarily due to a net reduction in volumes under MSAs, as well as a decrease in offshore wind revenues of $71.4 million compared to the prior-year period. Included in Electric revenue was $87 million from emergency restoration services following storm damage to customers’ above-ground utility infrastructure throughout the U.S. during 2024, compared to $83.4 million in emergency restoration services in the prior year. The decrease in Gas revenues was primarily due to a reduction in net volumes under existing customer MSAs and timing of bid projects, as the prior year benefited from the commencement of a large project that has since been completed.

Previous wording

Utility infrastructure services expenses decreased $199.2 million, or 15%, between periods. The overall decrease was primarily due to lower volume of infrastructure services provided. Subcontractor costs decreased during the period of 2024 compared to the prior-year period primarily due to decreased work under offshore wind projects and changes in mix of work. Margin on jobs also decreased in the current year-to-date period compared to the same period in the prior year due to unfavorable winter weather, lower margins on bid work, a reduction in more profitable emergency restoration services between periods, and underutilization of fixed costs due to the lower volume of work. General and administrative costs included in total utility infrastructure services expenses decreased approximately $4.4 million between comparative periods primarily due to lower incentive compensation and lower corporate salary and benefit costs during the current period, partially offset by an increase in one-time severance and strategic review costs. Gains on sale of equipment in the firstsix months of 2024 and 2023 (reflected as an offset to Utility infrastructure services expenses) were approximately$2 million and $1.8 million, respectively.

Current wording

Utility infrastructure services expenses decreased $240 million, or 12%, between periods. The decrease was primarily due to lower volume of infrastructure services provided overall. Subcontractor costs, a significant component of these expenses, decreased during the first nine months of 2024 compared to the comparable prior-year period, primarily due to decreased work under offshore wind projects and changes in mix of work. Profit margin also decreased on a relative basis in the current period as compared to the prior period, due to lower margins on bid work, decreased volumes leading to underutilization of fixed costs, and unfavorable changes in the mix of work. General and administrative costs included in total utility infrastructure services expenses decreased approximately $3.9 million between comparative periods, primarily due to lower incentive compensation and lower corporate salary and benefit costs during the current period, partially offset by an increase in one-time severance cost. Gains on sale of equipment (reflected as an offset to Utility infrastructure services expenses) were approximately $2.7 million and $3 million for the nine months ended September 30, 2024 and 2023, respectively.

Previous wording

Depreciation and amortization expense decre ased $6 million between periods, primarily due to a number of small tools within Electric operations becoming fully depreciated in 2023 and not requiring replacement based on project needs. Additionally, more efficient utilization of existing fixed assets in recent periods has slowed the growth of the depreciable asset base, as discussed above.

Current wording

Depreciation and amortization expense decreased $9.1 million between the current and prior-year nine-month periods, primarily due to a number of small tools within Electric operations becoming fully depreciated in 2023 and not requiring replacement based on project needs. Additionally, more efficient utilization of existing fixed assets in recent periods has slowed the growth of the depreciable asset base, with capital expenditures of $106.6 million in 2023 compared to capital expenditures of $130.2 million in 2022.

Previous wording

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 two of Southwest’s subsidiaries are subject to regulation by the Federal Energy Regulatory Commission (the “FERC”).

Current wording

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

Previous wording

Arizona General Rate Case. Southwest filed its 2024 Arizona rate case application in early February 2024, proposing an increase in revenue of approximately $126 million to reflect the continued significant capital investments in the state and to update rates to more closely align with Southwest’s current level of operations and maintenance expense. The request includes a return on common equity of 10.15% and a 0.81% fair value increment, relative to a 50% target equity ratio and a proposed twelve-month post-test year adjustment for non-revenue producing plant. In addition to proposing the continuation of full revenue decoupling under the Delivery Charge Adjustment (“DCA”) mechanism, Southwest proposed the establishment of the System Improvement Benefit (“SIB”) mechanism, a capital tracker designed to support required code and regulatory-related infrastructure replacements. Southwest also proposed to set the carrying cost for the interest component of the DCA and Gas Cost Balancing Account (“GCBA”) rate adjustment mechanisms to equal the Commission-authorized Weighted Average Cost of Capital, and to establish an Unrecovered Gas Cost Expense Provision (“UGCE”), which represents the gas cost-related portion of net write-offs of uncollectible customer accounts. The UGCE would allow Southwest to more timely recover commodity and related components of such accounts. Rates, following the conclusion of the rate case, are anticipated to become effective in the second quarter of 2025. Southwest’s existing general rates became effective February 1, 2023 following the conclusion of the previous general rate case.

Current wording

Arizona General Rate Case. Southwest filed its 2024 Arizona rate case application in early February 2024, proposing an increase in revenue of approximately $126 million to reflect the continued significant capital investments in the state and to update rates to more closely align with Southwest’s current level of operations and maintenance expense. The request included a return on common equity of 10.15% and a 0.81% fair value increment, relative to a 50% target equity ratio and a proposed twelve-month post-test year adjustment for non-revenue producing plant. In addition to proposing the continuation of full revenue decoupling under the Delivery Charge Adjustment (“DCA”) mechanism, Southwest proposed the establishment of a System Improvement Benefit (“SIB”) mechanism, a capital tracker designed to support required code and regulatory-related infrastructure replacements. Southwest also proposed to set the carrying cost for the interest component of the DCA and Gas Cost Balancing Account (“GCBA”) rate adjustment mechanisms to equal the Commission-authorized Weighted Average Cost of Capital, and to establish an Unrecovered Gas Cost Expense Provision (“UGCE”), which represents the gas cost-related portion of net write-offs of uncollectible customer accounts. The UGCE would allow Southwest to more timely recover commodity and related components of such accounts. While testimony has been filed by the Utilities Division Staff of the ACC and intervenors in the case, management can provide no assurances as to the ultimate outcome. Additional testimony dates and hearings are scheduled for late November 2024. A decision is expected in the first quarter of 2025, with new rates anticipated to become effective in the second quarter of 2025. Southwest’s existing general rates became effective February 1, 2023 following the conclusion of the previous general rate case.

Previous wording

Delivery Charge Adjustment. The DCA, or Arizona decoupling mechanism, as described above, includes a filing each April, which along with other reporting requirements, contemplates a rate to return/recover the over- or under-collected margin balance. The existing rate to return the over-collected balance existing as of March 31, 2023 was approved and became effective August 1, 2023. The most recent filing was made in April 2024, requesting to update rates to address the $17.5 million over-collected balance existing as of March 31, 2024, and is anticipated to be implemented in the third quarter of 2024.

Current wording

Delivery Charge Adjustment. The DCA, or Arizona decoupling mechanism, as described above, includes a filing each April, which along with other reporting requirements, contemplates a rate to return/recover the over- or under-collected margin balance. The existing rate to return the over-collected balance of $17.5 million existing as of March 31, 2024 was approved and became effective August 1, 2024.

Previous wording

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 the amortization of excess accumulated deferred income taxes (“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 the inaugural surcredit rate establishment under the TEAM mechanism in December 2022, Southwest has filed subsequent TEAM rate applications, including a recent filing, which proposed to update the TEAM surcredit to refund $5.03 million of estimated EADIT savings. The adjusted rate became effective June 1, 2024.

Current wording

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 the amortization of excess accumulated deferred income taxes (“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 the inaugural surcredit rate establishment under the TEAM mechanism in December 2022, Southwest has filed subsequent TEAM rate applications, including a recent filing, which proposed to update the TEAM surcredit to refund $5 million of additional estimated EADIT. The adjusted rate became effective June 1, 2024.

Previous wording

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 GCBA adjustment to clear the then existing $351 million balance. In July 2023, 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 up to two years or until the balance drops below $10 million, at which point the GCBA rate will be set to $0.00 per therm, where it will remain until the under- or over-collected balance exceeds $10 million. The ongoing deferred energy rates, separate from the GCBA rates, continue to be updated monthly.

Current wording

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 GCBA adjustment to clear the balance then existing. In July 2023, 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 was authorized to remain in place for up to two years or until the balance dropped below $10 million. The GCBA rate was later set to $0.00 per therm, effective October 1, 2024, where it will remain until the under- or over-collected balance exceeds $10 million. The ongoing deferred energy rates, separate from the GCBA rates, continue to be updated monthly.

Previous wording

General Revenues Adjustment. The General Revenues Adjustment (“GRA”), or Nevada decoupling mechanism, was affirmed as part of Southwest’s most recently concluded general rate case and adjustments are included in the Annual Rate Adjustment (“ARA”) filings intended to update rates to recover/return amounts associated with various regulatory mechanisms, including the GRA. Southwest made its most recent ARA filing in November 2023 related to the approximate $8.7 million over-collected balance as of September 30, 2023. Recovery of 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 filing became effective May 1, 2024, earlier than the typical July 1, 2024 effective date.

Current wording

General Revenues Adjustment. The General Revenues Adjustment (“GRA”), or Nevada decoupling mechanism, was affirmed as part of Southwest’s most recently concluded general rate case and adjustments are included in the Annual Rate Adjustment (“ARA”) filings intended to update rates to recover/return amounts associated with various regulatory mechanisms, including the GRA. Southwest made its most recent ARA filing in November 2023 related to the approximate $8.7 million over-collected GRA balance as of September 30, 2023. Recovery of 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 filing became effective May 1, 2024, earlier than the typical July 1, 2024 effective date. The next ARA filing will be made in November 2024, considering balances as of September 30, 2024. Updated rates are anticipated July 1, 2025.

Previous wording

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”) margin attrition increases of 2.75% began in January 2022. The most recent increase included the attrition component, along with adjustments related to the amortization of EADIT, the impact of the Automatic Trigger Mechanism (“ATM”) on authorized rate base, and margin associated with the North Lake Tahoe Lateral replacement project. The ATM adjusts the rate of return up or down (in this case, up) as a result of changes in the average utility bond yield that exceed 100 basis points. The cumulative impact resulted in an annual increase of $11.6 million effective January 2024 for Southwest’s combined southern California, northern California, and South Lake Tahoe rate jurisdictions. The PTY increase of $4.7 million associated with the North Lake Tahoe Lateral revenue requirement became effective February 1, 2024.

Current wording

Attrition Filing. Following the 2021 implementation of rates approved as part of the previous general rate case, the continuation of annual PTY margin attrition increases of 2.75% began in January 2022. The most recent increase included the attrition component, along with adjustments related to the amortization of EADIT, the impact of the Automatic Trigger Mechanism on authorized rate base, and margin associated with the North Lake Tahoe Lateral replacement project. The Automatic Trigger Mechanism adjusts the rate of return up or down (in this case, up) as a result of changes in the average utility bond yield that exceed 100 basis points. The cumulative impact resulted in an annual increase of $11.6 million effective January 2024 for Southwest’s combined southern California, northern California, and South Lake Tahoe rate jurisdictions. The PTY increase of $4.7 million associated with the North Lake Tahoe Lateral revenue requirement became effective February 1, 2024.

Previous wording

Service Area Extension. Southwest filed a request to expand its southern California certificated service area, a Certificate of Public Convenience and Necessity (“CPCN”), to include the Army’s National Training Center at Fort Irwin, located northeast of Barstow, California. The CPCN was approved by the CPUC in April 2024 and authorizes Southwest to construct approximately 21 miles of distribution main pipeline to deliver natural gas service to the newly certificated area in Fort Irwin, which at the time of filing was estimated to cost approximately $38.7 million.

Current wording

Service Area Extension. Southwest filed a request to expand its southern California certificated service area, a Certificate of Public Convenience and Necessity (“CPCN”), to include the Army’s National Training Center at Fort Irwin, located northeast of Barstow, California. The CPCN was approved by the CPUC in April 2024 and authorizes Southwest to construct approximately 21 miles of distribution main pipeline to deliver natural gas service to the newly certificated area of Fort Irwin, which at the time of filing was estimated to cost approximately $38.7 million.

Previous wording

General Rate Case. Great Basin Gas Transmission Company (“Great Basin”), a wholly owned subsidiary of Southwest, filed notice of a change in rates (pursuant to applicable regulations) on March 6, 2024, requesting that rates for natural gas service subject to the filing be made effective April 6, 2024. The FERC, however, suspended the case for a five-month period, which will allow rates to go into effect, subject to refund, September 6, 2024. The filing includes a request to continue a term-differentiated rate structure which was adopted as part of Great Basin’s last general rate case, an overall revenue increase of approximately $16 million, and a return on equity of 14.05% and 13.05% applicable to each category of shippers, as applicable, and a capital structure of 44% long-term debt and 56% common equity. A primary driver of the proposed increase is approximately $99 million of capital investments anticipated to be placed in service by the end of the August 31, 2024 test year. Motion rates, subject to refund, are anticipated to become effective in September 2024, with an initial decision during the second quarter of 2025.

Current wording

General Rate Case. Great Basin Gas Transmission Company (“Great Basin”), a wholly owned subsidiary of Southwest, filed notice of a change in rates (pursuant to applicable regulations) on March 6, 2024, requesting that rates for natural gas service subject to the filing be made effective April 6, 2024. The FERC, however, suspended the case for a five-month period, which allowed rates to go into effect, subject to refund, on September 6, 2024. The filing included a request to continue a term-differentiated rate structure which was adopted as part of Great Basin’s previous general rate case, provide an overall annual revenue increase of approximately $16 million, and a return on equity of 14.05% and 13.05% applicable to each category of shippers, as applicable, and a capital structure of 44% long-term debt and 56% common equity. A primary driver of the proposed increase was approximately $99 million of capital investments, much of which was placed in service by the end of the August 31, 2024 test year. Motion rates, subject to refund, became effective in September 2024, with an initial decision expected during the second quarter of 2025. A portion of the rates implemented subject to refund will be appropriately reserved pending the final outcome in the case.

Previous wording

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, 2024, under-collections in Arizona and California resulted in an asset of approximately $39.8 million and over-collections in southern and northern Nevada resulted in a liability of approximately $121.3 million on the Company’s and Southwest’s Condensed Consolidated Balance Sheets. The substantial reduction in balances between periods in the table below reflects a combination of specific recovery rates in place to collect the build-up of earlier balances as a result of the cost paid for gas in those earlier periods, and recent conditions whereby base rates under the mechanisms have exceeded the cost of recent gas purchases with suppliers, given substantially lower natural gas prices compared to those experienced heading into 2023.

Current wording

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 September 30, 2024, under-collections in California resulted in an asset of approximately $9.3 million and over-collections in Arizona and southern and northern Nevada resulted in a liability of approximately $189 million on the Company’s and Southwest’s Condensed Consolidated Balance Sheets. The substantial reduction in balances between periods in the table below reflects a combination of specific recovery rates in place to collect the build-up of earlier balances as a result of the cost paid for gas in those earlier periods, and recent conditions whereby base rates under the mechanisms have exceeded the cost of recent gas supply purchases by Southwest.

Previous wording

Operating Cash Flows. Cash flows provided by consolidated operating activities increased $838 million in the first six months of 2024 as compared to the same period of 2023. The increase was primarily driven by the collection of previously deferred purchased gas costs for Southwest. As noted above, in the previous year rates billed to customers for gas supply costs were lower than actual expenditures. These differences were deferred and are now being collected and have provided a significant source of available funds in the current period. The improvement in cash flows also reflects the impacts of changes in other components of working capital overall, including the timing and amount of accounts payable and other current asset and liability balances.

Current wording

Operating Cash Flows. Cash flows provided by consolidated operating activities increased $956 million in the first nine months of 2024 as compared to the same period of 2023. The increase was primarily driven by the collection of previously deferred purchased gas costs for Southwest. As noted above, in earlier periods rates billed to customers for gas supply costs were lower than actual expenditures. These differences were deferred and have since been collected, providing a significant source of available funds in the current period. The improvement in cash flows also reflects the impacts of changes in other components of working capital overall, including the timing and amount of accounts receivable/payable and other current asset and liability balances.

Previous wording

Investing Cash Flows. Cash flows provided by consolidated investing activities decreased $1.03 billion in the first six months of 2024 as compared to the same period of 2023. The overall decrease was driven by $1.05 billion in proceeds received in connection with the MountainWest sale (net of cash sold) in 2023, partially offset by proceeds from the sale of other property.

Current wording

Investing Cash Flows. Cash flows from investing activities decreased $1.04 billion in the first nine months of 2024 as compared to the same period of 2023. The overall decrease was driven by $1.05 billion in proceeds received in connection with the MountainWest sale (net of cash sold) in 2023, partially offset by proceeds from the sale of other property in 2024. Outflows for construction expenditures and property additions were also higher in the first nine months of 2024.