Southwest Gas To Carve Out Centuri In IPO

On March 1, 2022, Southwest Gas Holdings SWX , Inc. (NYSE: SWX; $72.86; Market Capitalization: $5.2 billion) announced its decision to separate Centuri from Southwest Gas Holdings. On December 4, 2023, Southwest Gas Holdings, Inc. announced its plan to pursue an initial public offering (IPO) of Centuri Holdings. On March 22, 2024, Centuri Holdings, Inc. (Utility Infrastructure business) publicly filed a Form S-1 with the US Securities and Exchange Commission (SEC) relating to a proposed initial public offering (IPO) of its common shares. On April 8, 2024, Centuri Holdings (“CTRI”) filed an amended Form S-1 to provide further details and announced the launch of the roadshow for the IPO. Centuri intends to offer 12.4 million common shares with an expected pricing range of $18.00 - $21.00 per share. Centuri has been approved to list its common stock on the New York Stock Exchange (NYSE) under the “CTRI” ticker. Moreover, the Company also intends to grant the underwriters a 30-day option to purchase up to an additional 1.86 million common shares of Centuri at the IPO price, less the underwriting discounts and commissions to cover over-allotments. Following the IPO, SWX is expected to hold ~82.7% of the common shares of Centuri, or 81.0% of the common shares of Centuri, if the underwriters’ over-allotment option is exercised in full and Centuri will remain a “controlled company”. The primary use of cash proceeds from the IPO is expected to be the repayment of outstanding debt at Centuri to enhance its financial flexibility postseparation. UBS Investment Bank, BofA Securities and J.P. Morgan are acting as joint lead book-running managers for the proposed offering. Wells Fargo Securities is acting as a book-running manager for the proposed offering. Baird, KeyBanc Capital Markets and Siebert Williams Shank will act as co-managers for the proposed offering.

Valuation and Recommendation

We value Southwest Gas Holdings (SWX) using SOTP methodology and Centuri business (Utility Infrastructure) separately. Our SOTP framework values the Natural gas segment (including a partial parent drag allocation) using a 2025e P/E multiple of 13.5x (~7.4% discount to median peer multiple of 14.6x) to arrive at an intrinsic value of $49.00 per SWX share. The discount to the peer multiple factors in the Arizona regulatory risk and below-average rate-making mechanics. Moreover, we also include Company-Owned Life Insurance (COLI) policies in our SOTP valuation. As the COLI policies are non-core in nature and the unpredictable timing of death benefits, we value COLI policies considering net cash surrender value (FY23: $146.5 million) and arrive at an intrinsic value of $2.00 per SWX share. Moreover, we also include an 82.7% Centuri stake (valued at the midpoint of the pricing range). Our consolidated target price of $74.50 per share (Previously: $80.00) implies a potential upside of 2.3% from the current market price of $72.86 as of 4/12, and we maintain our ‘Hold’ rating to the stock. Risks to our target price include unfavorable changes to the rate regulatory framework in Arizona, Nevada, and California states, economic recession, inflation, and operational risks.

We assign 2025e EV/EBITDA multiple of 10.1x to Centuri (~11.7% discount to its closest peer MYRG with 2025e EV/EBITDA multiple of 11.4x) and arrive at an intrinsic value of $27.00 per share. Our intrinsic value of $27.00 per CTRI share implies an upside of 38.5% to the midpoint of the IPO pricing range ($19.50).

Based on an ownership ratio of 1.001, at a midpoint of the IPO pricing range of $19.50 for CTRI, we arrive at an embedded value for CTRI in SWX at $19.52.

Investment commitments prior to IPO

In connection with the IPO, Icahn Partners LP and Icahn Partners Master Fund LP, investment entities affiliated with Carl C. Icahn (the “Icahn Investors”), have agreed to purchase 2,591,929 shares of CTRI common stock at a price per share equal to the IPO price in a concurrent private placement. The sale of such shares will not be registered under the Securities Act of 1933, as amended (the “Securities Act”). The concurrent private placement is expected to close immediately following the closing of this offering and is subject to customary closing conditions, including the completion of this offering.

Valuation

A] Southwest Gas Holdings Inc:

Post Separation, SWX (Stub) will primarily include the Company’s Natural gas segment. We value the Natural gas segment using the P/E methodology. We apply a 13.5x multiple (~7.4% discount to median peer multiple of 14.6x) to our 2025e adjusted diluted EPS estimate of $3.62 per share to arrive at a fair value estimate of $49.00 per share for the Natural gas segment. The discount to the peer multiple factors in the Arizona regulatory risk and below-average ratemaking mechanics. Moreover, we also include Company-Owned Life

Insurance (COLI) policies in our SOTP valuation. As the COLI policies are non-core in nature and the unpredictable timing of death benefits, we value COLI policies considering net cash surrender value (FY23: $146.5 million) and arrive at an intrinsic value of $2.00 per SWX share. Moreover, we also include an 82.7% Centuri stake (valued at the mid-point of the pricing range). Our consolidated target price of $74.50 per share (Previously: $80.00) implies a potential upside of 2.3% from the current market price of $72.86 as of 4/12, and we maintain our ‘Hold’ rating to the stock.

B] Centuri Holdings Inc. (Carve-out):

Post carve-out, Centuri will be a pure-play utility services platform diversified across the US and Canada. Centuri is positioned to support the energy transition given its extensive infrastructure capabilities and attractive blue-chip customer base comprised of a diverse range of utilities. We estimate 2025e Adjusted EBITDA of $323.2 million for Centuri. Factoring in the information given in the amended S-1 filing, we have considered the net debt of $925 million (including non-controlling interest) for the Centuri. Our fair value estimate for Centuri (Carve-out) stands at $27.00 per CTRI share based on a 2025e EV/EBITDA multiple of 10.1x to Centuri (~11.7% discount to its closest peer MYRG with 2025e EV/EBITDA multiple of 11.4x). Our intrinsic value of $27.00 per CTRI share implies an upside of 38.5% to the midpoint of the IPO pricing range ($19.50).

Company Description

Southwest Gas Holdings, Inc. (Parent)

Incorporated in March 1931, Southwest Gas Holdings, Inc., a Delaware corporation, is a holding company headquartered in Las Vegas, Nevada. Southwest and its subsidiaries provide regulated natural gas delivery services to customers in portions of Arizona, Nevada, and California. The Company operates through Natural Gas Distribution and Utility Infrastructure Services. It also provides trenching, installation, and replacement of underground pipes and maintenance services for energy distribution systems. Southwest Gas is engaged in purchasing, distributing, and transporting natural gas in portions of Arizona, California, and Nevada, serving over 2.3 million customers. Southwest Gas is Arizona and Nevada’s largest natural gas distributor, serving large metropolitan areas, including Phoenix, Tucson, and Las Vegas. In addition, Southwest Gas serves customers in portions of California, including the Lake Tahoe area and the high desert and mountain areas in San Bernardino County. The Company recorded total revenues of $5.4 billion in FY23, of which ~$2.5 billion were natural gas operations revenues.

Centuri Holdings, Inc. (Carve-out)

Centuri is a comprehensive utility services enterprise that delivers diverse solutions to North America’s gas and electric providers. This growing network of well-established brands includes NPL Construction Co. (NPL), NPL Canada Ltd. (NPL Canada), New England Utility Constructors, Inc. (Neuco), Linetec Services, LLC (Linetec), and Riggs Distler & Company, Inc. (Riggs Distler). Centuri Group, Inc. operates in major markets across the United States and Canada. Centuri has strategically expanded its geographic reach and service offerings through organic and inorganic growth to meet better diverse customer needs across electric and gas infrastructure, including growing customer attention to achieving environmental objectives. Centuri completed the acquisition of Drum Parent LLC, formerly Drum Parent, Inc. (Drum), including Drum’s most significant operating subsidiary, Riggs Distler, in August 2021, thereby expanding Centuri’s electric footprint in the northeast and mid-Atlantic regions of the US. In FY23, Centuri recorded $2.9 billion in total revenues.