Ladies and gentlemen, good day, and welcome to the Southwest Gas Holdings Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the prepared remarks. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to Boyd Nelson, Vice President of Strategy and Investor Relations for Southwest Gas. Please go ahead.

Thank you, Gretchen. Hello everyone and welcome to the Southwest Gas Holdings second quarter 2022 earnings call. Throughout the call, we will be referencing presentation slides, which we have posted on our IR website. I am joined on today's call by Karen Haller, President and CEO of Southwest Gas Holdings; Justin Brown, President of Southwest Gas Corporation; and Greg Peterson, Senior Vice President and Chief Financial Officer. Please note that on today's call, the company will address certain factors that may impact this coming year's earnings and provide some longer-term guidance. Further, our attorneys have asked me to remind you that some of the information that will be discussed today contains forward-looking statements. These statements are based on management's assumptions, which may or may not come true, and you should refer to the language on slide 30 of this presentation, as well as in the press release, and also our SEC filings for a description of the factors that may cause actual results to differ from our forward-looking statements. All forward-looking statements are made as of today. And we assume no obligation to update any such statement. With that, I'll now turn the call over to Karen.

Thanks, Boyd. I'm pleased you are joining us today to discuss Southwest Gas second quarter results. Let me start by acknowledging that our quarterly results were not what we wanted to deliver to stockholders. But I want to make equally clear that our businesses are fundamentally strong and will deliver long-term value to our stockholders. Before we get to the earnings results and plans to unlock value, I want to discuss the strategic transaction process and our newest Board member. First, we have an update on our cooperation agreement with Mr. Icahn that was announced yesterday. Consistent with the agreement, we have appointed Ruby Sharma to the Board. As previously announced, Jose Cardenas has retired from the Board in coordination with his appointment. We want to thank Jose for his contributions throughout the years and we look forward to working with Ruby. Turning to slide five, I'd like to briefly cover the previously announced update on the ongoing strategic alternatives process. Earlier this year, our Board of Directors authorized a review of a full range of strategic alternatives to maximize stockholder value. As we've previously shared, we are currently undergoing a thorough strategic review based on indications of interest from prospective buyers. While we do not comment on any of the individual indications we have received, we provided an update on the overall strategic direction of the review last week. At that time, our Board unanimously determined that the best path forward to maximize stockholder value is to focus on the execution of the strategic plan and conclude the strategic review process for Southwest Gas Holdings and Southwest Gas Corporation. Continued review strategic alternatives for MountainWest, including the potential sale of Mountain West and continue to review strategic alternatives for Centuri, including a potential sale or a spin off of…

Thank you, Karen. Starting on slide nine, we remain focused on working constructively with our stakeholders to secure positive regulatory outcomes. During the quarter, we started to see rate relief from our settlement in our Nevada rate case that was approved by the commission with rates effective April 1st, 2022. The settlement resulted in an increase in revenues of just over $14 million relative to an increase in rate base of nearly $250 million for total authorized rate base in Nevada of $1.7 billion. We were also authorized an improved ROE of 9.4% and we received approval to utilize a 50% target equity ratio. We also have our $90 million Arizona rate case that was filed in December of 2021 that is currently pending with the Arizona Corporation Commission and we currently expect a decision in early 2023. This leads us to slide 10, which provides an overview of the first round of testimony from Intervenor’s in our rate case. The revenue requirement testimony was due last Friday August 5th and rate design testimony is due this coming Friday, August 12th. As shown on this slide, staff is proposing close to $54 million increase and RUCO is close to $43 million. An important distinction between our $90 million request and the staff's $54 million proposal as we included a $16 million property tax adjustment in our base case and the staff is proposing to not recover that in base rates, but rather to recover that amount through an existing tracker program that we have for property taxes. So a better comparison to staff position would be to exclude the $16 million from our $19 million request. Both Staff and RUCO are proposing an increase to our currently authorized ROE of 9.1%, Staff is proposing a 9.3% ROE and RUCO of…

Thanks, Justin. Our second quarter earnings press release and 10-Q were filed yesterday. Please refer to these documents for a comprehensive analysis of our second quarter results. Let's start with an overview of consolidated results. Slide 13 depicts consolidated operating results for the company and line items for each of the operating segments for the three, six and 12-months period. On an adjusted basis, consolidated EPS was $0.23 per diluted share for the second quarter of 2022 versus $0.43 for the prior year quarter. I'll discuss each of the operating segments in the upcoming slides, but will begin with the corporate and administrative line item on this slide. Corporate and administrative expense net of tax increased $22.7 million between quarters, primarily due to $17.1 million associated with the overall strategic review process, proxy contest and related litigation and settlement costs. These items are components of the $22.3 million of adjustments shown on the page. The corporate and administrative line also reflects incremental interest associated with the acquisition of MountainWest. Next, let's move to the operating segments and some transitory costs and headwinds that affected results in the current quarter, starting with utility results on slide 14. On a GAAP basis, utility results declined from $11 million in the second quarter of 2021 to a loss of $2 million in 2022 second quarter. Temporary changes in the cash surrender values of company-owned Life Insurance or COLI policies accounted for most of the decline. Operating margin grew by $15 million, primarily due to rate relief in Nevada and the addition of 39,000 customers. However, this improvement was overshadowed by higher interest expense and operations expense including $15 million of transitory costs that I will discuss on the next slide. Slide 15 provides a backdrop of items impacting the O&M comparison between quarters.…

Thank you, Greg. Before we open the call for questions, I'm going to touch on a couple of the key points we've made today. I want to emphasize that maximizing value for all stakeholders is what guide our strategic plan and the decisions we make. We are excited and confident in the future for Southwest Gas. Our new utility leadership team is focused on optimizing processes, challenging the way we've done things in the past and finding ways to improve the value and returns to stockholders. And we're energized by all the opportunities we have in front of us and committed to improved financial and operational performance against the great backdrop of our growing service territories. While we continue to advance the Centuri and MountainWest processes, we will remain focused on the performance of these business units and prioritize delivering growth across our rate base, ROE improvement, earnings and dividends growth followed while continuing to meet or exceed our customers' expectations. We look forward to continuing our company's transformation as a leading energy enterprise, delivering strong outcomes for all of our stakeholders as we forge ahead into today's evolving energy landscape. Franklin, you can now open the call for questions.

[Operator Instructions] We'll take our first question from Julien Dumoulin-Smith from Bank of America.

Hey, good afternoon. Thanks for the time. I appreciate it. If I may, I want to go back to where we started the call. What caused you to think about ending the review here? And how do you think about the timeline from here for the pending items that you've already articulated here, if you could elaborate? Just with respect to timing rather than necessarily exactly what you think about bids et cetera? I know you qualified that at the outset.

Hi, yes. Welcome and thanks for the question. I guess with respect to the process and ending the process, we really the Board unanimously after carefully evaluating the indications of interest and considering Southwest Gas Corporation's strong long-term rate base growth plans for improving ROEs and favorable demographics. The Board unanimously determines across alternative to maximize the value of the utility for stockholders is to optimize the utility and execute on the strategic plan. And we just recognize that we have a great opportunity to grow the business, while also working to enhance efficiency and cost discipline across the utility. And then moving forward with the Centuri and MountainWest processes to unlock value there was the best option.

Got it. All right. Fair enough. And then just if I may, just pivoting back to the core operations and brief here. I mean, can you talk a little bit about Centuri margins and the opportunity there? Obviously, things have been gyrating here and obviously in the prepared remarks you commented on costs and some of the pressure points there et cetera? But how do you think about the outlook on a more normalized basis here if you will?

Yes, Julien, this is Greg. I think that as I mentioned in my remarks and Karen alluded to as well, we're really bullish on what Centuri has up coming. We talk about what's going on at Riggs Distler and the offshore wind projects that we have. We know that these fuel costs really hurt us early on, right, if you kind of tap the fact that the fuel impact is about $0.12 in Q2 and another $0.6 in Q1. So that really hurt us from that thing. But as I mentioned, we're seeing fuel prices moderate and we're candidly are working with our customers to try and get some recoveries on those. So the base model for Centuri is strong and we're really excited about it.

Got it. All right, excellent. Sorry, and if I can may, just coming back on Centuri just here, pricing power and the ability to recruit that over time. Like, when do you get to a more normalized environment there as you think about those more discrete dynamics here?

Yes. If you're talking about the timeframe to get to normalized operations, I think we're already moving in that direction. Again, we've had some success in working with our customers and recouping some of those amounts, we're also putting those into either renewed master service agreements that we have to try and mitigate such items in the future. So that progress is taking place now. I'm not a good prognosticator hater of when fuel prices will get back to the levels they were a year ago, but they are headed in the right direction.

All right. Excellent. Thank you, guys.

Our next question comes from Richard Sunderland from JPMorgan.

Hi. Thank you for the time today. Maybe starting with the utility review, when does the path to staying improved in the utility operations? How does that factor in the review outcome? You're just thinking about the benefit of Arizona rates next year, but then over a longer term basis, how do you sustain that performance? And maybe how did you frame that in the review versus at least that initial offer that was quoted as being significantly larger than the $82 a share icon had out there?

Yes, I think so. We believe we have some really great opportunities for the utility. We are focused and earlier had talked about improving our ROE. We're looking at all of our O&M costs. We're doing a deep dive of all of those and looking at how we can improve on that, improve on our efficiencies, whether that's technology related, or any other manner that we look at it. So we think that there's room in O&M, we’re concentrating on our capital expenditure program and how we optimize the timing of our capital expenditures with our rate cases, optimizing those rate cases and the timing of all of those to bring the best results to our stockholders. So when we look at all of those different areas that we can execute on, we really feel bullish about how we move forward with the utility and felt that, that was the best option moving forward for the company. The initial offer or -- indication of offer that you mentioned obviously was an important part of the Board decision to commence a review of alternatives and with the assistance of their financial and legal advisers, the committee engaged with all the interested parties carefully evaluated all indications of interest at that time and really come to the conclusion that with our great jurisdictions that we offer radient from a growth standpoint, favorable demographics and our opportunities to improved on the utility that, that was the right way to go.

Understood, quickly following up on a point there around the O&M. The deep dive on your L&M analysis space potential incremental opportunity to 1% growth on a per customer basis, meaning you potentially either give even slatter declining?

Yes. I think overall, and this is Greg, Richard, we indicated that $15 million of transitory items were really is out of place with what the normal trajectory is. And when you pull those numbers out, you see that from 2019 the network that trajectory. And again, we still can continue to expect 1.7%, 1.8% customer growth, kind of, this $38,000 to $40,000 level of customer growth. So if O&M goes up 2.5% and customer growth is 1.7% or 1.8% that's how we keep in that trajectory of 1% per customer on the O&M front.

Got it. Got it. That's helpful. And just one last quick one from me. The updated cooperation agreement you referenced at the start with Icahn, does that impact the stake at all or ability to increase or reduce it?

I'm sorry, I couldn't -- I didn't catch the last part of the question.

If this cooperation agreement impacted stake in any way an ability to increase it or reduce it?

No, it does not. Does not change that portion of the cooperation agreement at all.

Great. Thank you for the time.

Our next question comes from Chris Ellinghaus from Siebert Williams Shank.

Hey, everybody. How are you?

Hey, Chris.

Thanks.

The transitory cost that you talked about, Greg, the $15 million, $8 million of that was temporary legal stuff, that remaining $7 million, how much of that sort of continues into the second half of the year?

Yes. There's really not much again, there was $2 million of that was uncollectibles. If you look back historically, uncollectibles for an annual period, we're in the $3 million to $4 million neighborhood. So we just really experienced this spike with the economy. We think that uncollectibles will go back down to their normal levels in Q3 and beyond. The stabilization cost for our customer information system again, that's been in place for about a year now and we're really in a good place. We did have some challenges with some staffing and had to bring in some incremental folks, but that worked out really well. And then we mentioned the incremental costs associated with doing some work on our mapping system and finding some of those stuff and that work is also substantially concluded. So I don't really think you're going to see a continuation of these items in Q3 and Q4.

Okay, great. Justin, the Arizona staff opinion is pretty good relative to the ask. Are you denoting or have you got any color on what your thoughts are on maybe [Technical Difficulty] in Arizona?

Yes, Chris. It's a good question. I mean, I think from our perspective, we've always really focused on maintaining good relationships with the staff and the commissioners and I think we've always felt like when you look at the history of how we've been treated in the state, albeit a challenging jurisdiction that we've always fared better than most. I mean, I think a lot of people had a lot of angst around the APS case from a year ago. I think that was really kind of a one-off situation. And so I think, kind of, implied in your question, I think from our perspective, this is kind of in line with where we thought we would be with respect to, kind of, how we file the case, the efforts we made to make sure that we presented a relatively clean case and then working with the staff in RUCO on their different positions through the discovery. I think we're pleased with where they came out and look forward to working with them on potentially stipulating issues to the extent there's that opportunity, but then also working through the remainder of the process to see if we can't make some improvement on some of the positions that they've taken.

Okay, great. Greg, when I look at Centuri the revenue guidance and the margin guidance, it sort of suggests Centuri will be in a similar, kind of, net income level, maybe a little bit higher. Can you to sort of talk about your considerably behind last year's earnings level on a year-to-date basis. Can you sort of talk about the second half? What do you see there that is really better than the first half?

Yes. I think one of the big things will be to ramp up our Riggs Distler. Again, while we made that acquisition in August of last year, it was really just starting to get moving. As we had mentioned, right? We've got $125 million of contracted work that we're doing on the offshore wind. So again, our work is onshore for that offshore wind. And then multi $100 million of work that we expect to get. So I think you're going to see a ramp up there, certainly Q3 and Q4, especially Q3 are potential storm months. I can't predict storm work, but that's another item that is variable in Q3. But it's really the strong performance things have kind of come back really well on the revenue front from the COVID impact that previously we're there. And so we're working with our customers and we think that Q3 and Q4 this year will be really solid performing quarters.

You also give us a little color on customer supply chain delays.

Yes, as you're -- I think you're referring to the discussion on Centuri's customers, right? Most of Centuri's customer just like Southwest Gas and we're one of Centuri's customers, we procure our own materials and then Centuri does the installation. So the Centuri's customers on the utility front have some challenges, whether it's getting transformers, whether it's getting certain pipe types. That's where the supply chain issues have been for them. And it's necessitated Centuri either to delay some work, because their customers can't provide the materials or to maybe switch and do less profitable work in the interim, while the customer continues to procure those materials. So I think in supply chain, it's starting to stabilize a little bit and it really is on a customer-by-customer basis, but that's some of the issues that they're incurring.

Okay. Thanks a lot for the color. Appreciate it.

The last question comes from Ryan Levine from Citi.

Hi, good afternoon.

Hi, Ryan.

Hi, everybody. In terms of the 1% O&M cost reduction, is that due to be relative to an inflation expectation? Or is that really on an absolute nominal basis?

Yes. Ryan, this is Greg. I think it's -- we're talking about a 1% O&M cost per customer increase over the long-term, not a reduction, but an increase of sub-1% per customer on over the longer term.

Phenomenal and this time relative to any inflation index?

No. We expect there'll be inflationary costs and those will come into play in the regular on it, but we also expect customer growth. And as we manage the cost going forward, we think that the increase will be nominal, certainly 1% per customer growth is much lower than the current inflationary environment we're in, but over the longer term, we expect to continue to be the inflationary impact.

Okay. And in your slides, you continue to highlight a potential spin of Centuri as part of the strategic review. Is there a timeline that you have in mind post what you've been through the last few months and when you would have to make a decision on the spin? Or is this more open ended at this point?

It's really more open ended. The decision to continue to spend by the Board was that they felt that keeping the spin option was additive to its efforts to maximize value and the spin option remains part of the overall strategic transaction process as we move into the next round on Centuri and MountainWest, we're very pleased with the indications of interest that we've received from both MountainWest -- for both MountainWest and Centuri and the decision to leave the spin on the table was just simply to because we believe it will maximize value as part of the process.

Okay. Appreciate the color. Thank you.

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

Thank you, Gretchen, and thank you everyone for joining us today. This concludes our conference call. Thank you for your interest in Southwest Gas Holdings. Have a great day.

This concludes today's Southwest Gas Holdings second quarter 2022 earnings call and webcast. You may disconnect your line at this time. Have a wonderful day.