Southwest Gas considering Centuri stake sale to finance Questar purchase

Southwest Gas Holdings Inc. is revisiting the idea of selling a stake in its Centuri Group Inc. energy infrastructure construction business as the gas utility operator seeks to finance a nearly $2 billion deal to purchase Questar Pipeline Co., executives told analysts.

The stake sale is "definitely" one option that management and the board of directors are reviewing, Southwest Gas President and CEO John Hester said during a Nov. 9 quarterly conference call. The board has "probably" considered the option each year for several years, Hester added, adding that a stake sale could satisfy some of the Questar deal's financing needs.

Hester did not say whether management and the board favor a spinoff of the entire Centuri business or an equity carve-out, in which the parent company typically retains a majority stake in the business. Analysts have long speculated about Southwest Gas separating its regulated utility operations in Arizona, California and Nevada from the unregulated energy construction and services business.

Interest in the topic has resurfaced, partly due to the Questar deal and the growing scale of Centuri's business following its acquisition of Riggs Distler & Company Inc. Activist investor Carl Icahn has also indicated he would likely separate the business if he succeeds in his bid to take over Southwest Gas through a tender offer, which the Southwest Gas board urged shareholders on Nov. 9 to reject.

Executives defend strategy amid takeover attempt

Icahn has complained that Southwest Gas management has long touted the option of selling Centuri without taking action. The billionaire investor opposes the Questar deal and instead favors selling Centuri to improve the company's balance sheet.

During the conference call, Hester and management defended several aspects of their business that Icahn has criticized, including the decision to grow the company through acquisitions. Hester argued that by diversifying Centuri's geographic footprint and business mix, management has produced a fivefold increase in EBITDA over the past 10 years.

"While this business could have been sold two, four, or six years ago, its continued growth under the stewardship of the holding board has allowed continued polish of this gem of a business, while EBITDA valuation multiples for the infrastructure services sector have expanded dramatically over those same periods," the CEO said.

Hester said Centuri is poised to increase the parent company's profitability while continuing to provide growing cash flow to fund capital investment in the regulated utility business.

Asked about the timing of planned equity issuances to permanently fund the Questar acquisition, Hester said they could begin before year-end, with the bulk of issuances expected in the first quarter of 2022. The CEO said the deal is on pace to close by the end of 2021.

Q3 performance and guidance

Southwest Gas on Nov. 9 reported a third-quarter net loss of $11.6 million, compared with net income of $18.3 million in the year-ago period. Excluding adjustments of $5 million for legal reserves at the utility and $13 million in transaction costs tied to the Riggs Distler purchase, net income for the quarter was $3.1 million.

Southwest Gas posted an EPS loss of 19 cents and adjusted EPS of 5 cents, compared with earnings of 32 cents a year ago and expectations for 22 cents in the third quarter.

The company lowered the top end of its 2021 EPS guidance range by 10 cents and now expects full-year earnings of $4-$4.10 per share. Including transaction costs tied to the Questar and Riggs Distler deals and expenses linked to its shareholder activism response, Southwest Gas guided to 2021 EPS of $3.25 to $3.40.