Good day, and welcome to the Southwest Gas Holdings Investor Call. All participants are in a listen-only mode. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Thomas Moran, Vice President, General Counsel and Corporate Secretary, Southwest Gas Holdings.

Thank you. Hello, everyone, and welcome to the Southwest Gas Holdings Fourth Quarter and Year-end 2022 Earnings Call. Throughout the call, we will be referencing presentation slides, which we have posted to our Investor Relations website. I am joined on today's call by Karen Haller, President and CEO of Southwest Gas Holdings. Rob Stefani, Senior Vice President and Chief Financial Officer; Justin Brown, President of Southwest Gas Corporation; and Paul Daily, President and CEO of Century Group. Please note that on today's call, the company will address certain factors that may impact this year's earnings and provide some longer-term guidance. 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 Pages 2 and 3 of the presentation and the press release as well as 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 statements. I will now turn the call over to Karen.

Thanks, Tom. I'm pleased you're joining us today to discuss the Southwest Gas Holdings fourth quarter and year-end results. Turning to Slide 5. I'd like to start the presentation with some strategic updates over the last few months. In December, we announced that we were moving forward with two transactions. The sale of MountainWest and the spin of Century. We announced the close of the MountainWest South Williams on February 14, 2023, and with the $1.1 billion in net proceeds going towards debt reduction at Southwest Gas Holdings, creating more flexibility with our balance sheet and financing needs. I'm pleased to report that Centuri spend is well underway. We are preparing to file an IRS private letter ruling this quarter to confirm the tax-free nature of the spend and we're drafting regulatory approval filings for Arizona Corporation Commission approval of the transaction. We have a full project management office and the Form 10 and audit planning has begun as well. We expect to complete the spend during the fourth quarter of 2023 or first quarter of 2024. As you can see on Slide 6, the spin of Centuri enhances stockholder alignment and value creation as the two separate independent companies will have differentiated value propositions in the market. As we announced in December, we reviewed plans to engage the rating agencies through the rate case process and we have arrived at the 2023 financing plan, which Rob will go through later on the call. We plan to issue $250 million of equity in 2023 and anticipate equity needs of less than $100 million in total in the period between 2024 through 2025. Our capital markets plan will strengthen our position in maintaining and improving the credit profile for Southwest Gas Holdings and Southwest Gas Corporation. Closing out our strategic updates,…

Thanks, Karen. Turning to Slide 12, we provide an overview of our earnings per share performance this past year. The company's consolidated GAAP and adjusted EPS for the fourth quarter and full year 2022 are shown by operating company. The company faced a number of headwinds in 2022. And as a result, adjusted EPS decreased year-over-year. On an adjusted basis, we finished the fourth quarter of 2022 with adjusted EPS and of $1.16 per share versus an adjusted EPS of $1.49 per share from the year prior. Full year 2022 adjusted EPS came in at $3 per share compared to $4 per share for 2021. Our appendix provides a reconciliation of adjustments by operating company. A significant adjustment is related to the loss on Mountain West of $349 million, including selling costs incurred at the holding level. There were also certain adjustments associated with integrating Mountain West, strategic review expenses, and shareholder activism costs that resulted in a discernible negative impact to financial results for the year. Our underperformance this year is mainly attributed to these nonrecurring items, and as such, we're confident that we will be able to meet guidance expectations in 2023. Now I'd like to take you through a deeper dive on the performance of each of our operating companies this past year. Moving on to Slide 13, you'll see the year-over-year performance drivers for our utility Southwest Gas Corporation. In 2022, the utilities margin came in $55 million higher than last year. This improvement was driven by our constructive regulatory relationships and improved regulatory trackers, specifically related to our vintage steel pipe programs and customer-owned yard lines which provided an additional $22 million in revenues. The utility was also awarded $14 million in rate relief from the Nevada rate case and our continued strong customer growth…

Thanks, Rob. Starting on Slide 17, we continue to see strong economic development and customer growth throughout the areas we serve. As Karen mentioned, we set over 41,000 first-time meter sets last year, which is the highest single year total in over 10 years. While we anticipate a slight reduction in first-time meter sets year-over-year, we're still expecting to see strong customer growth of between 1.5% to 2%. Turning to Slide 18. We anticipate that both strong demand for natural gas in the form of new business as well as investments in pipe replacement activity will continue to drive our estimated $2 billion capital investment plan over the next three years. Each of those prudent investments that are made to support both new business and to ensure a system remains safe and reliable will eventually translate into rate base growth as we work with our regulators and other stakeholders on both future rate cases and continued utilization of existing and new tracker programs. In fact, we completed two very significant rate cases during the year. First, we successfully reached an all-party settlement in Nevada that authorized an increase in revenues of $14 million and an improved allowed ROE of 9.4% relative to a rate base of $1.7 billion. An increase in rate base of $250 million. And earlier this year, the Arizona Corporation Commission approved our most recent Arizona rate case authorizing the largest revenue increase we've ever experienced of $54 million and an improved allowed ROE of 9.3%. This increase was largely driven by the tremendous investments we've made in Arizona to meet the needs of our customers and to ensure our system remains safe and reliable. Two important aspects of the case included a continuation of our fully decoupled rate design and the authorization to make adjustment for…

Thanks, Justin. Turning to Slide 25. We have built Centuri into an innovative, high-growth utility infrastructure services leader throughout the U.S. and Canada with more than 13,000 employees working within 75 local communities spread over 43 states and provinces, we serve most of the largest blue-chip investor-owned utilities and their 100 million customers across the U.S. and Canada. As you can see on Slide 26, a we've established incredibly strategic lasting relationships with our customers. Most of our customer relationships date back decades and our long-term contracts with them enable predictable revenues and resiliency even in times of recession. Although no longer among our top 20 customers due to the revenue growth of some of our newer customers, we are still under contract with NPL's very first customer, which is a 56-year continuous relationship. We have an overall average relationship of 24 years across our top 20 customers, which comprises 75% of our revenues. We see compelling growth opportunities ahead as we continue to strengthen these relationships as a stand-alone company. Moving on to Slide 27. A big part of what makes our story so compelling is a recurring low-risk revenue mix of our business. 82% of our revenue is from the lower risk profile master services agreement or MSAs, which are based upon unit rate or time and material price terms. Only 18% of our work is derived from the higher risk fixed price type contracts, and many of those are with our existing MSA customers. Over time, we have continued to diversify our revenues and expand our service offerings across both gas and electric customers. During 2023, we expect the electric and gas gross profit contribution to be about equal as a percent of Centuri overall total gross profit. With our highly recurring, predictable revenue underpinned by long-term…

As you can see on Slide 31, Southwest Gas Holdings remains committed to paying a competitive dividend to our stockholders. We plan to hold the dividend flat in 2023. We will revisit dividend policy at the time of the Century spend for any future changes and we'll continue our strategy of a payout ratio competitive with utility peers. Moving on to our outlook and guidance for the coming year on Slide 32. We are optimistic about the future for both Southwest Gas Corporation and Century. And I'd like to share a few points on how we can how we plan to deliver value to our stockholders in 2023 and beyond. With Southwest Gas Corporation, we plan to continue to make considerable investments in CapEx of roughly $665 million to $685 million per year through at least 2025 to support infrastructure development and system improvements for our growing customer base. In 2023, Southwest Gas Corporation will advance on its utility optimization plan focusing on supporting customer growth, engaging in cost discipline and optimizing rate case developments. We expect projected net income to land in the range of $205 million to $215 million for the full year. Long-term earnings growth will be supported by healthy organic rate base growth of 5% to 7% compounded annual growth over the next three years. We will continue to work with our jurisdictions on our regulatory constructs to ensure investments and benefit of customers while ensuring a fair return to our stockholders. Centuri expects $2.8 billion to $3 billion in revenue for 2023 and adjusted EBITDA margin of 9.5% to 11%. Closing out this call, I'd like to say that I'm excited about the future of Southwest Gas Holdings and the ability of both Southwest Gas Corporation and Century to unlock significant value for our stockholders. At Southwest Gas Holdings, we are confident in our path forward as a premier pure-play natural gas utility as we deliver healthy organic rate base growth through strong regional demand dynamics as well as earnings growth through financial discipline, operational excellence and constructive regulatory relationships. As I stated earlier, we're advancing towards a tax-free putting the company in a better position to align with stockholders and delever the business organically with healthy cash flow generation. With that, I'd like to open the call for questions.

[Operator Instructions] Our first question comes from Chris Ellinghaus from Siebert Williams. Please go ahead.

Can you talk about the utility in the fourth quarter? It seemed particularly weak. Was that gas cost or -- can you sort of give us some details on what led to a weaker fourth quarter?

Chris, it's Rob Stefani. I think in thinking about where we were with guidance to kind of where the utility finished the year, I'd highlight several factors. I think, first just bad debt and the resulting uncollectibles that stem from the COVID termination provisions contributed about $6 million. Additionally, we had a legal settlement, which we outlined on our bridge that took us down about another $6 million we took a reserve on an IT project associated with our gas acquisition costs, which is approximately $6 million after tax as low. And then just with respect to overall interest cost at the utility, I think it's as we had planned the year, we had anticipated pushing down about $250 million from Southwest Holdings to Southwest Gas that did not happen. And so Southwest Gas had to incur additional debt and corresponding interest expense which is reflective of the kind of the gap between where guidance was and where we faced.

These -- some of these is type issues -- is there any of that reflected in the O&M inflation for the year?

Yes. I think the O&M inflation for the year, I think on an apples-to-apples basis, we are in our guidance, we are reflecting higher forecasted bad debt more cost with what was experienced this year. The employee costs associated with kind of the reliability work and the locates work did increase. One of items. Certainly, the legal utility, we don't expect to see as much of a deviation there in the coming period.

Okay. Can you give us any insights on are you planning to use ATM for the equity? How are you going to execute that yet?

We're not going to get into any of the execution details at this time, Chris, but we are providing the overall details for the plan for the year. So hopefully, that's helpful in your work.

Okay. Centuri's EBITDA margin guidance is a pretty wide range. Can you give us any insights into what the variability might be there?

This is Chad Stewart [ph]. I'm the CFO of Centuri. It would be if there was some impact to our plan in the revenue on offshore wind projects. We're not expecting anything, but that tends to be higher-margin work and will be a larger percentage of our revenue in 2023 as it's been in historical periods. So, if something unexpected happens that would cause that work to be delayed and we realized lower revenue than what we expect. That could have an impact on our margin for the year. Similarly, storm work tends to be higher-margin work for us. So, if storms don't materialize as we expect this year, then that would have an impact on our EBITDA margin for the year as well.

The drag from corporate and other for 2022 obviously has distributed in it. But can you give us any color relative to the improvement that you expect for 2023 what those layers might be and any kind of magnets at the corporate level you're expecting?

Look, Chris, that first point towards -- with the sale of Mountain West, obviously, we're going to have the removal of the interest on the bridge loan, right? So that's going to be a primary driver I think as Justin alluded to, we're bringing in a consultant that's going to look at the overall cost structure just in the context of the utility but also at the holdings level given the go-forward plan with respect to Century, we will continue and obviously, you can appreciate this as we embark on executing on the Century spend, which we're laser-focused on now, we're going to incur expenses associated with that. It's getting a Form 10 together, making the filings, making the public -- or the private letter ruling filing and taking the necessary steps to get Century into position to spend in the fourth quarter or first quarter of 2024, we'll have some transaction expenses at the holdings level.

Our next question comes from Ryan Levine from Citi. Please go ahead.

Hi, everybody. Wanted to start off on Page 31. There is some language here about a dividend policy post the separation of the Centuri. Can you provide some color as to what you're trying to signal there? Are you suggesting that there may be a change or a reduction in your dividend policy post 2024 and beyond if the deal is executed?

Ryan, it's Rob. Thanks for the question. I think first and foremost, we're committed to paying a competitive dividend. And I think we're demonstrating that this year, we're holding the dividend flat -- the -- what we do with respect to the dividend pro forma to spin a Centuri, we're going to evaluate closer to the timing of the spend. I think what we're signalling here is that we are going to, as always, look to pay a competitive dividend to our peers with respect to payout ratios.

Okay. And then in terms of the O&M cost initiatives or consultants being higher over the last few years, that's going a lot of focus among a lot of key stakeholders. Is there anything new that you're hoping to bring to light through that consulting study? Or do you see a real opportunity to improve operations?

Ryan, it's Justin. Yes. So, we had announced kind of this internal review that we had embarked on in the fall, I think in the third call, and as we've gone through that, we've identified, I think, some opportunities, but we wanted to bring in someone that had kind of a greater lens with respect to the industry. And so, we've done that, and we anticipate working with them the first half of this year to identify different initiatives then we can prioritize and execute on. And so, I think it's going to be a combination I think there are some things that we have been able to identify, but it's going to be combined with their expertise to see what additional things we might be able to identify as well. So, I think it's a combination of the two.

Okay. And then last question for me. In terms of the timing of the Centuri spin, it was outlined for this year, first quarter next year, to the extent that financing markets more broadly are harder to forecast how available or attractive they'll be. Could you see the time line move faster or get delayed if the cost of incremental capital becomes cheaper or less attractive?

Ryan, it's Rob. First and foremost, I'd say we're going to continue to evaluate the timing. There's a number of items just with respect to the Form 10 and outcome of the private letter ruling that's going to drive time line and what the kind of comments that come back from the SEC or any kind of modifications that could be required with respect to that PLR. But suffice it to say, we're going to continue to keep options open with respect to the form of the spin. And so, if capital markets create an opportunity, either vis-a-vis sometime of monetization options down at the century level, then obviously we'll consider that. And that could take the form of the IPO markets are obviously clearly closed, but that could be an option. Like we said on the announcement of the transaction, we'll continue to look at sponsored spend. And I think what was revealed through our work with the agencies and the ras res [ph] process was that we do have the capacity to issue debt up top to support a delevering of Century. So, we would anticipate that we just continue to watch market conditions continue to assess kind of what that spend option may be, but we'll continue to execute down the path of the spin with the Form 10. -- going through this year. So, I think the timing is going to be more predicated on the Form 10 and the PLR

The next question comes from David Frank from [ph] Hale Capital. Please go ahead.

Hi. Good day. I was hoping you could I was hoping you could tell me what was the net debt balance at Century at the end of 2022. And then if you could please give us an indication in dollar terms of approximately how much debt you plan to place on the pro forma company at the time of the spin.

Yes. So, David, this is Rob. Slide 35 has a net debt position of Century. It's about $1.1 billion, and that's composed of as of the end of the year, just over $1 billion on the term loan and then just under $100 million under the revolving credit facility. As -- can you just update what was the second part of your question?

Yes, sure. Could you tell us approximately how much debt you plan to place on the pro forma company at the pro forma Century at the time of the spin.

Yes. We're going to do a rating agency process down at the century level later this year as we get closer to the spin, that's going to inform the leverage we did, and it's on an early portion of the presentation. We did include approximately $300 million. So, if you flip to Slide 6, the fourth bullet we did include approximately $300 million of planned deleveraging at Century at the time of the spin. So, we're going to -- we'll continue to assess that. But that between centuries kind of organic deleveraging from EBITDA growth as well as the evaluation of potentially delevering up to $300 million that's where we're focused.

Okay. And is the goal to get an investment grade rating or just that's not as important.

Yes. I think at this point, what we'd say is that I don't know that we're as focused on the rating as we are focused on positioning Century to have balance sheet it and position the business. Like I said, we'll go through the ratings work later this year.

Okay. Excellent. And I'm sorry, if I could just follow it for one quick question. Could you tell us your previously -- or remind us of your previously stated payout target? I think it's around 60% midpoint for the company from now or…

Yes, that's correct, $55 million to $65

Okay. Thank you, very much.

[Operator Instructions] our next question comes from Stephen Debris from Granite Lane. Please go ahead.

Hi, everyone. Thanks very much for taking my question. I just had a quick one. Just about a quick couple. Just -- on the eco financings that you're planning on doing in 2023, is the drag from the $550 million of debt -- is that included in the net income that's shown for Southwest Gas -- or do I have to -- like how does that get treated?

Yes. So that $550 million of debt would be issued up top at the holdings level.

Okay. So when -- and then I think you answered it in response to Ryan's question, but basically, as part of the spin and the reduction -- the deleveraging at Century, one of the options could be to put maybe an additional $300 million of Hold Co debt on the pro forma Southwest Gas company. Is that right? So, you could end up with $850 million of parent debt?

Yes. So yes, we did include that as a potential option. What I would say is that we don't anticipate issuing any equity to support that deleveraging at the holdings level. We could look at various structures, which would include issuing debt at the holdings lever to delever Century we could also look at spin-off structures that would monetize a portion of century. So that could take the form of a sponsored spin IPO, and we could also look at a retained stake that would then use proceeds to repay any kind of debt issued with the kind of the plan there. So, we'll look at all those structures kind of as we get further along in the process. We're not necessarily leaving things off the table as it relates to that deleveraging. We just acknowledge that we believe that a partial deleveraging will need to occur in association with the spin.

Okay. But – and then I think your other comment was the ratings agencies would be comfortable even if you did have -- like if all of those other more accretive options were not available, the ratings had would define with that level of debt at the Hold Co.

Yes. I mean we -- I won't speculate. We did include did include that in the analysis, and we're comfortable with our plan and that in a -- even in a worst-case scenario that based on the projections we showed the agencies that, that debt level would be supported, and we've maintained investment-grade ratings.

Okay. And then the only other question I had was, I guess, just when I factor in kind of that -- the higher share count from the equity that you guys have to do and kind of some of this drag, it does look like -- which I think is a question that multiple people have asked, but it looks like the payout is approaching to 90% on the pro forma business. And so, is -- what would you say as a competitive dividend payout ratio? Is it just the peer average? Or can you pay higher than that? Or just how do you think about that kind of period?

Yes, I would just direct you to the comp universe. I think the range that we've targeted and paid historically has been competitive with peers, and we will evaluate the dividend policy in conjunction with the spin later this year.

Our next question comes from Tim Winter from Gabelli Funds. Please go ahead.

Good afternoon, and thanks for taking my question. I wanted to talk -- ask about the holding company drag. It looks like about $0.63 for '22. I'm assuming most of that is debt that's going to go away. But how do we think about the holding company expense post spin?

So post-spin, Tim, this is Rob. I would think about it in terms of it should largely be driven by the interest expense associated with the holdings debt that will be issued in conjunction with the 2023 financing plan. That will be post separation. Obviously, over the course of 2023, we're going to incur transaction costs associated with prepping Centuri for the spend. But following that, we expect a much more normalized run rate where the majority of the expenses -- interest expense associated with the financing to support this plan to push capital down the utility and repay existing debt of top at holdings near term.

Okay. Thank you. And then if you could just talk a little bit more about the consulting firm that's going to help with efficiency. I believe prior presentations you discussed an 8%-plus ROE. How are you guys thinking about that currently?

Tim, this is Karen. With respect to the consultant, we have initiated that process. As Justin said, we've identified a number of initiatives ourselves that we're focused on in terms of improved -- that will help improve that ROE but we also anticipate that there will be some additional initiatives that come out of the consultant process as we move through that. We're still focused on reaching an 8% ROE. I think it's going to take us a little longer than what we had indicated earlier, and there's a couple of reasons for that. First of all, you'll recall, as you know, we're in historical test years. We did two recent rate cases in Arizona and Nevada. But both of those cases were test years in 2020 and 2021, right, during COVID. So, the O&M that's reflected in those most recent rate cases is lower than what our normal O&M would run. So that's putting some pressure on the ROE. As Justin indicated, we have plans to go in on new rate cases later this year, even with Nevada, which will reset that O&M. And then secondly, I think there's been some pressure, obviously, following the decisions on the transactions and we went through the redress process establishing what our capital structure will be and the equity level and things that play into a little pressure, I think, on the ROE in the near future. But I think we believe we're optimizing our structure and setting the company up really to obtain that 8% ROE.

Okay. Thank you.

[Operator Instructions]. There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Thomas Moran for any closing remarks.

Okay. Thank you all for joining us today. This concludes our conference call. Thank you for your interest in Southwest Gas Holdings, and have a good day.

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.