Good morning, and welcome to the Southwest Gas Holdings First Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Tom Moran, General Counsel, Southwest Gas Holdings. Please go ahead.

Thank you, Gashnabi. Hello, everyone, and welcome to the Southwest Gas Holdings first quarter 2023 earnings call. Throughout the call, we will be referencing presentation slides, which we have posted on our Investor Relations website. I'm 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; Paul Daily, President and CEO of Centuri Group; and Chad Van Sweden, the CFO of Centuri 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 Slides 2 and 3 of this presentation and in 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'll now turn the call over to Karen.

Thanks, Tom. I'm pleased you're joining us today to discuss the Southwest Gas Holdings first quarter results. Turning to Slide 5. We are making significant process on our transformational strategy of returning Southwest Gas to its core foundation as a premier fully regulated natural gas utility. We are enhancing efficiency and productivity across our operations and pursuing constructive rate case outcomes at the utility, while also preparing Centuri for its future as a strong stand-alone infrastructure services leader. Customer growth and demand remains strong and we continue to benefit from population growth across our service territories. As a result, we believe Southwest Gas is uniquely positioned for continued growth and success as we safely address the needs of our customers, invest in the communities we serve and deliver value for our shareholders. We are strategically deploying capital, investing in our operations so that we can meet the demand for safe, reliable and affordable energy solutions while working constructively with our regulators and legislators to complement our strong organic rate-based growth. We are confident in our momentum and remain on track to deliver 5% to 7% CAGR in rate base growth over the next three years, while also maintaining a strong investment grade balance sheet and delivering a competitive dividend to our stockholders. As you can see on Slide 6, we are making excellent progress on our 2023 strategic priorities. We completed several key strategic milestones during the first quarter, including the $1.5 billion sell of MountainWest and the RAS/RES process earlier this year to confirm our financing plan for 2023. Under the financing plan, during the first quarter, we issued $247 million of equity at Southwest Holdings and $300 million of debt at Southwest GAAP. In mid-April, we issued a $550 million term loan at Southwest Holdings. We continue to…

Thanks, Karen. On Slide 11, we outlined our earnings per share performance for the first quarter. The company's consolidated GAAP and adjusted EPS are shown by each operating company. As Karen mentioned earlier, the utility and Centuri each had a record-setting first quarter. The utility recorded its highest quarterly net income on record. Centuri recorded its highest ever first quarter revenue and EBITDA. On an adjusted basis, we finished the first quarter of 2023 with EPS of $1.69 per share versus an adjusted EPS of $1.74 per share from the year prior, which included a full three months of MountWest. The company concluded the sale of MountainWest in February 2023. Excluding MountainWest from each quarter, the first quarter adjusted EPS increased approximately 11% from the prior year first quarter. In the appendix, we provide a reconciliation of adjustments by operating company. The vast majority of the first quarter adjustments related to the sale of MountainWest, about $73 million pretax, including expenses associated with the disintegration with a small incremental amount related to the Centuri spend and incremental MountainWest costs prior to the sale. Now I'd like to provide a walk through the performance of each operating company. Moving on to Slide 12, you will see the year-over-year performance drivers for our utility Southwest Gas Corporation. In the first quarter of 2023, utility gross margin increased by $34 million compared to last year. This improvement was primarily driven by the combination of customer growth and rate relief, New rates went into effect for the full quarter in Nevada in 2023 and since February 1, 2023 in Arizona, including approved regulatory trackers. Also included is revenue from the Arizona vintage steel pipe and customer-owned yard line programs and other increases we described in our Form 10-Q filed earlier this morning. O&M increased…

Thank you, Rob. Starting on Slide 16, we provide an overview of our most recent Arizona rate case with new rates that became effective February 1. In addition to being the single largest increase we've ever experienced in a rate case, there are several other key aspects of the case that are important to highlight. First, reach an agreement prior to hearing to use a target equity layer of 50% and an improved authorized ROE of 9.3%. Second, authorization to use a post-test year plan adjustment consisting of 12 months, a finding that all our gas purchases were prudently incurred. And lastly, the continuation of key regulatory mechanisms like our full revenue decoupling, our customer-owned yard line program, our property tax tracker and our income tax tracker. We believe that each of these items and this outcome helps demonstrate our collaborative approach and constructive relationships with the ACC, ACC staff and other stakeholders. We're also actively preparing for and evaluating other future rate case filings across our various jurisdictions. We remain on schedule to file a Nevada rate case later this year and we're continuing to target a third quarter filing. We are currently evaluating our needs in Arizona and determining the appropriate time for filing our next Arizona rate case. Given our existing five-year rate case schedule in California, we plan to file our next rate case in the third quarter of 2024. And lastly, we're also evaluating the timing of our next Great Basin rate case. And due to a prior settlement commitment, we know that, that filing will occur prior to June of 2025. Turning to Slide 17. We highlight other recent regulatory filings that are currently pending before commissions as well as some other recent constructive outcomes. First, in Arizona, we have three filings currently pending.…

Thanks, Justin. Turning to Slide 20. We are excited about our continued progress towards our future as a stand-alone strategic utility infrastructure services leader. We continue to benefit from strong tailwinds across utility end markets that support Centuri's long-term growth, and we expect this growth will accelerate as we deliver on opportunities in the electric T&D hardening and expansion, 5G datacom build-out, offshore wind and other renewable and energy transition programs. Importantly, as we work towards our pending spin, we have the resources, capabilities and business structure to continue to deliver on our growth opportunities. On Slide 21, I will dive deeper into our customer and project expansion efforts. Our customer relationships are built on a strong foundation of partnerships and collaboration, and we are trusted to support their long-term capital spending programs. We are also building new relationships and expanding our work across North America. During the quarter, we signed and began work on $125 million gas pipeline construction contract in Indiana to an electric vehicle battery plant. We expect to continue to benefit from the strong sector tailwinds across our gas and electric T&D markets as well as significant multi-year opportunities in 5G and offshore wind-related infrastructure. We are making particularly strong progress in expanding our clean energy projects. To date, we have secured wind contracts worth more than $525 million for the supply and fabrication of wind tower, secondary steel assemblies capable of generating 2.9 gigawatts of clean energy. We recorded $47.5 million of revenue during the first quarter for our sustainable wind energy projects and we're projecting to deliver approximately $250 million of wind energy revenues for the full year. To date, our start-up productivity fabricating the first 5% of the tower assemblies is close to achieving budgeted full production performance metrics. With our scale and…

Thanks, Paul. On Slide 24, we cover our outlook and guidance for the remainder of the year. We are reaffirming company guidance at both the utility and Centuri. We are confident that each business strong first quarter performance will help drive full year results in line with the guidance we initiated last quarter. As you know, Centuri's business is seasonal with most of that activity occurring in the second and third quarters. On Slide 25, we would like to reiterate that Southwest Gas Holdings remains committed to paying a competitive dividend to our stockholders. We are holding the dividend flat in 2023, and we'll revisit our pro forma dividend policy closer to the execution of the Centuri spend in the fourth quarter of 2023 or first quarter of 2024. Looking ahead, we expect to maintain a payout ratio competitive with utility peers and expect to consider the run rate level of earnings of the fully regulated business, considering expected rate case outcomes in California, Arizona and Nevada. Before we open the call up to Q&A, I want to emphasize that our teams are focused on executing our 2023 strategic priorities, delivering strong financial results and providing exceptional service to our customers. At Southwest Gas Holdings, we are confident in our path forward as a premier pure-play natural gas utility. We will continue delivering steady organic rate base growth through strong regional demand dynamics as well as earnings growth through financial discipline, operational excellence and constructive regulatory relationships. We're advancing towards the planned tax-free spin of Centuri, putting the company in a better position to align with stockholders and deleverage the business organically with healthy cash flow generation. With that, I'd like to open the call for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Chris Ellinghaus with Siebert Williams Shank. Please go ahead.

Hey, everybody.

Hey, Chris.

On Centuri growth, the 9% to 11% EBITDA, does that suggest that you anticipate more offshore wind contracts that will help to fill in the gap for your contracted EBITDA over the next couple of years?

It does not assume any additional contracts from what we have currently contracted for, which is about $525 million. We do anticipate that there'll be additional offshore wind revenues, but it's not dependent on there being additional offshore wind revenue.

So are you anticipating any sort of ongoing maintenance value in the offshore business?

We're not expecting to have MSA contracts like we do for our gas and electric utility services on the offshore wind side.

Also given the sort of population growth that you talked about, which is really quite strong. Is there anticipated upside to the 3-year rate base CAGR for the gas utility?

Hey, Chris. It’s Justin. At this point in time, we're continuing to monitor. We saw a little bit of a downturn last fall, right? But then we've noticed this first quarter, things continue to go pretty well. And so I think it's something we're monitoring closely. But at this time, we're still kind of in line with what our expectations are on CapEx growth for the guidance we've given.

Okay. Justin, can you also sort of address what you're seeing in migration in your housing markets, given what's up with the economy and interest rates of late.

Yeah. I mean I think I actually saw something recently where like Penske had some survey where they do on trucks moving and it's like Arizona and Nevada in the top 4 and they have been the last two years. So I think to your point, I think our service territory continues to remain at a very attractive part of the country where people are relocating to. And I think that's why when we look over the last couple of years and the fact that we added 42,000 first-time meter sets over the last 12 months, it's just something we continue to see growth, and we're excited about.

Okay. Great. Thanks. One last thing, the PGA balances, where do you see the PGA (ph) ending up at the end of '24. So what is sort of that drawdown from the $900 million-plus that you expect?

Yeah. So I think a lot of it is definitely dependent on gas prices, right? Because as you draw down, you backfill with gas prices. But I think if you look at that chart, I think that kind of gives you a ballpark idea of kind of what we expect to come in, assuming kind of a stabilized level of gas prices.

Okay. Great. Thanks a lot. Appreciate the color.

[Operator Instructions] Our next question comes from Julien Dumoulin-Smith with Bank of America. Please go ahead.

Hey. Good morning, team. Thank you all very much for the commentary. Karen, if I can, just to jump in, I heard your commentary about pursuing a deep dive into the current cost structure. Obviously, expecting the FX rate to spin hopefully later this year, if not early next. What's the time line for kind of a fully revamped view inclusive of some of these latest cost efforts at the -- on the utility side and/or across both, right? I mean when do you think you'll come back with kind of an updated view on your overall earnings profile, if you will. Is that something prior to the spin?

Yeah. Well, we're currently working with our consultants and looking at all of the deep dive right now. So we're continuing to go through that process, and we'll do so through the second quarter. I believe by the third quarter, we should be able to start looking at identifying what some of those initiatives are going to be and then looking at prioritizing those in the third and fourth quarter as we move forward to execute all of those. So it's a process that we're in process. I believe that for the spend depending upon the timing of the spend, you may be able to execute or start executing on some of those optimization initiatives, but a lot of that will depend upon that answer depends upon the timing of the spend, which we've identified as the fourth quarter or first quarter of next year.

Got it. So it sounds like it aligns really well. And then just on the credit side, I heard the commentary today and nicely done on the latest efforts here. But can you elaborate a little bit more about the target leverage metrics at the SpinCo just to kind of think through what that looks like in tandem with your expectations on achieving the 14% at, call it, ParentCo by ‘25. Just I want to make sure I understand where the debt allocation is traveling and just what your expectations are on what that might cost, et cetera., on the SpinCo?

Hey, Julien. This is Rob. Thanks for the question. I think as was exhibited in the first quarter, Centuri is able to organically delever and they delevered about half a turn from the prior quarter. We'll look for them to continue that progress throughout the year. We went through the RAS/RES process and as indicated in the year-end call, we targeted approximately a $300 billion deleveraging effort at Centuri. We'll continue to evaluate the amount, but we expect that, that would put them kind of in line with the current comp universe, who has also done acquisitions recently. The Centuri Group continues to integrate the Riggs acquisition. And I think as you're seeing from this quarter's financial results, we're starting to get an uptick in EBITDA from that acquisition. So net-net, I think if you look at the comps, use the guidance that we provided with respect to that $300 million push down, that's effectively what we're targeting.

Got it. Okay. Fair enough.

The form of that may not -- the form of that is probably important to highlight the form of that may not be a push down. It could be -- if the IPO markets were going to reopen that could provide a structure to provide the deleveraging as well as the sponsored spin transaction or as stated, we could push it down and also look to do a retained stake or just do a straight spin with the debt raise up top at Holdings.

Right. Yeah. Indeed. Thank you. And by the way, what was that the peer metric that you were talking about on like exposed debt to EBITDA? Sorry to clarify that. Just what are you seeing amongst period.

Yeah. And I think if you take a look at the comps and you also need to fast forward, right, like taking the EBITDA kind of growth that Chad had highlighted earlier in the Q&A. But in that kind of 3 times to 3.5 times range seems to be where the comps are sitting today. Some are obviously lower. But I think if you look at the comps that have done acquisitions, it's in that range.

Yeah. Indeed. And sorry to clarify this earlier, the commentary on Centuri, how lumpy is the win supposed to be? I mean, obviously, nice success this year at about $0.25 billion. But in future periods, obviously, this offshore stuff is fairly lumpy. Just I want to make sure I heard your commentary right there.

Yeah. Excuse me, the wind business is more project-driven than our traditional utility services work. So we'll be a bit lumpier, we have $525 million under contract currently. We expect to do about $250 million in offshore wind revenue this year. We have a nice pipeline of opportunities that are building is that market in the U.S. further develops. We currently have visibility of about $2.5 billion of future projects with similar scope of services to what we're currently performing at about $2.6 billion of related future work to connect the offshore wind projects to the existing electric power grid. So there will certainly be competition for those future opportunities, but we're pleased with the competitive position that rig distiller is established with a first-mover advantage for participation in the significant number of the initial projects currently under development.

Hey, Julien. This is Rob. Just to build on what Chad just said, the growth in that business has been significant. I think the Centuri Group's citing contrast almost every month on these wind projects. And while it may be lumpy, it's obviously extremely positive for the rigs business. It demonstrates their ability to execute. And it's a business that we're not doing. It's important to clarify, we're not doing the work out in the water. We're pouring foundations and doing that work onshore.

Hey, Julien. This is Paul. One thing that's note, although, we don’t have an MSA like our traditional T&D MSAs, we do have a framework agreement with our client that is long term. In fact, there’s no end date to it, that as they get additional contracts or additional work, we’ll get additional work, too. So…

Excellent. Glad to hear. Thank you guys for clarifying that. I really appreciate all the details and take care. Good luck. We will see soon.

Thanks, Julien.

And we have no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Tom Moran for any closing remarks.

Thank you, Gashnabi, and 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.

This concludes today's Southwest Gas Holdings first quarter 2023 earnings call and webcast. You may disconnect your line at this time. Have a wonderful day.