Southwest Gas Holdings Inc. will separate its regulated natural gas business from its energy infrastructure construction unit, executing a long-telegraphed move amid a hostile takeover attempt by Carl Icahn.
Southwest Gas announced on March 1 that its board of directors decided unanimously to cleave off Centuri Group Inc., which provides utility services throughout the U.S. and Canada. The separation will transform Southwest Gas into a purely regulated company comprising its three-state Southwest Gas Corp. utility business and a gas transmission and storage segment.
The announcement ends years of speculation about a separation, as Southwest Gas scaled up Centuri through acquisitions. That business expansion process culminated with the acquisition of Riggs Distler & Company Inc. in June 2021, Southwest Gas Chairman Michael Melarkey said in a March 1 news release.
"With Centuri nearly doubling its revenue over the last four years and poised for continued growth as a stand-alone platform, our board determined that now is the right time to separate Centuri and unlock the significant value we have built over the last decade," Melarkey said.
Southwest Gas recently signaled that it could spin off or sell a stake in Centuri to create shareholder value and help finance its nearly $2 billion purchase of Dominion Energy Questar Pipeline LLC, which now operates as MountainWest Pipelines Holding Co. In the news release, Southwest Gas said the separation would give the company flexibility to reduce equity financing needs, including to fund the Questar deal.
Those financing needs are at the heart of Icahn's bid to take control of Southwest Gas through a tender offer and proxy contest. Icahn did not support the Questar acquisition and said raising equity would dilute shareholder value. However, the billionaire investor advocated for a business split, and the announcement could alleviate his concerns about equity issuances.
Southwest Gas said it would execute the separation with "the goal of maximizing value" for stockholders. The company is finalizing separation plans and said it would disclose details, including the structure of the separation, at a future date. Southwest Gas expects the separation to occur within nine to 12 months.
The separation would enhance value transparency by allowing more direct comparisons between the two companies and their industry peers, according to Southwest Gas. Their financial profiles would more accurately reflect their strengths and opportunities, allowing them to more efficiently finance their operations and offer targeted investment opportunities, the company said. They would additionally boast improved capital allocation efficiency, strategic flexibility and distinct market opportunities, Southwest Gas said.
"Just as Riggs Distler opens up new avenues for growth for Centuri, the acquisition of MountainWest provides us with the scale to create value across our regulated operations by sharing best practices, instilling operational excellence and delivering efficiencies, while driving strong, rate-regulated earnings and cash flow," Southwest Gas President and CEO John Hester said in the release.
Centuri President and CEO Paul Daily will continue to lead the company, which will remain based in Phoenix. Southwest Gas plans to release details about Centuri's board of directors later.
