Welcome to Southwest Gas Holdings Fourth Quarter and Year End 2023 Earnings Conference Call. Today's call is being recorded and our webcast is live. A replay will be available later today and for the next 12 months on the Southwest Gas Holdings website. [Operator Instructions] I will now turn the call over to Justin Forsberg, Vice President of Investor Relations of Southwest Gas Holdings. Please go ahead.

Thank you, Rocco and hello, everyone. We appreciate you joining our call. This morning, we issued and posted a Southwest Gas Holdings website, our fourth quarter and full year 2023 earnings release and the associated Form 10-K. The slides accompanying today's call are also available on Southwest Gas Holdings' website. We'll refer to those slides by number throughout the call today. Please note that on today's call, we 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 on what the future holds, but are subject to several risks and uncertainties, including uncertainties surrounding the impacts of future economic conditions and regulatory approvals. This cautionary note as well as a note regarding non-GAAP measures is included on Slides 2 and 3 of this presentation. Today's press release and our filings with the Securities and Exchange Commission, which we encourage you to review. These risks and uncertainties may cause actual results to differ materially from statements made today. We caution you against placing undue reliance on any forward-looking statements, and we assume no obligation to update any such statement. As shown on Slide 4, on today's call, we have Karen Haller, President and CEO of Southwest Gas Holdings; Rob Stefani, Chief Financial Officer of Southwest Gas Holdings; Justin Brown, President of Southwest Gas Corporation; and Bill Fehrman, President and CEO of Centuri Group, along with other members of the management team available to answer your questions during the Q&A portion of the call today. I'll now turn the call over to Karen.

Thanks, Justin. Thank you for joining us today to discuss the Southwest Gas Holdings fourth quarter and full year results. Turning to Slide 5. We are making good progress on our transformational strategy of returning Southwest Gas to its core foundation as a premier, fully regulated natural gas utility. We achieved significant milestones throughout 2023 to position the utility for strength and success, while also advancing the separation of Centuri into a standalone utility infrastructure services leader. Notably, we made progress on the regulatory strategy at Southwest during the year and delivered record full year results, which were above our expectations. Customer growth and demand remained strong and the entire Southwest Gas team is acutely focused on safely addressing the needs of our customers, investing in the communities we serve and delivering value for our shareholders. We are strategically deploying capital and investing in our operations so that we can meet the demand for safe, reliable and affordable energy solutions, while also working constructively with our regulators and legislators to complement our strong organic rate base growth. We are confident in our momentum at Southwest, which delivered an 8.2% ROE in 2023, a 220 basis point improvement over 2022. Our confidence is also demonstrated by our expected 10% to 12% net income growth rate from 2024 to 2026. While the nature of expected revenue increases from rate cases, will cause net income growth to be nonlinear over the forecast period, we are confident in our guidance. We expect to benefit from our refreshed rate structures to catch up with the historic inflationary environment we have experienced, and the significant system investments we have made for the benefit of our customers over the past few years. Our confidence in our future is further demonstrated by an increase in our expected rate…

Thanks Karen. On slide 10, we outline our earnings per share performance for the year. The company's consolidated GAAP and adjusted EPS are shown by each operating company. As Karen mentioned earlier, the utility and Centuri each had an excellent year. The utility generated strong net income and adjusted net income, while Centuri also produced record revenue and adjusted EBITDA. On an adjusted basis, Southwest Gas Holdings ended 2023 with EPS of $3.36 per share, an improvement of $1.26 per share when compared to 2022, which had included 12 months of Mountain West compared to less than two months of Mountain West in 2023. The utility performance during the year was driven by our ability to achieve constructive regulatory outcomes, lower overall non-pension related costs and an increase in interest income from the PGA. We also saw unexpected increases in company-owned life insurance, which are difficult to predict and were more than $5 million above the upper end of our guided range. In the fourth quarter higher-than-expected COLI results lower O&M expenses and lower income tax related to higher excess accumulated deferred income taxes resulted in full year 2023 utility net income above what we had forecasted last November. At Centuri, we continue to see significant improvements in GAAP and adjusted earnings. We increased core electric infrastructure services revenues, continued to advance offshore wind projects and generated margin improvement throughout the year as a result of improved master service agreement terms. In the appendix, we provide a reconciliation of adjustments by operating company. The vast majority of the annual adjustments relate to the Centuri separation costs, consulting fees related to utility optimization and costs associated with the impairment and sale of Mountain West that was completed in February of 2023. Now I'll provide a walk through on the performance of…

Thanks Rob. There are exciting things happening in Las Vegas, Phoenix and other parts of our service area which are driving expansions in both core and new business sectors. We added more than 40,000 first-time meter sets, during 2023. And we expect to continue to benefit from a strong demographic and economic growth as Phoenix and Las Vegas continue to be among the top destinations for relocation and economic development. In Arizona, particularly in Phoenix, jobs were back to their pre-pandemic trend in 2023 and according to the Arizona Commerce Authority expansions are occurring throughout the state. We're proud to partner with several of these new large customers including Semiconductor, Battery and Electric Vehicle manufacturers as well as expansions among several Agricultural and Farming customers. Las Vegas continues to be a prime destination for the Sports, Entertainment and Hospitality Industry and is continuing to drive job growth in the area. Las Vegas hosted a The Formula One race last November, and Super Bowl XXVIII, a couple of weeks ago. 2023 also saw two new Casino Resort opening, the opening of the Sphere and the announcement of a new Oakland A' Stadium. This vast economic activity continues to translate to new customer growth and this is reiterated by S&P Global's projection that between 2024 and 2028, population growth in Arizona and Nevada will continue to outpace the national average. Our investments to support this population growth combined with our investment in safety and integrity management programs are the cornerstones of our $2.4 billion three-year capital expenditure program. These types of investments have translated to double-digit rate base growth since 2017, and our current capital investment plan is expected to translate to rate base growth of 6.5% to 7.5% through 2026. There are two primary drivers supporting our expected 10% to 12%…

Thanks, Justin, and good morning to all of you on the call. I really appreciate the chance to talk about Centuri and why I decided to join the company. I've been in this industry for over four decades, and for the past 17 years, helped lead the growth of Berkshire Hathaway Energy. I retired from BHG in October of 2023, knowing that after a short break, I would really want to dive into a new leadership opportunity. I learned to the Centuri President and CEO position and what tip the scales was a chance to dive into Centuri separation from Southwest Gas and then be on the ground floor of its new existence as a public company. These leadership opportunities do not come around very often. And after meeting with Karen, Rob and members of the Southwest Board, I decided to jump in with both and now using my business experience to position Centuri for the future. At BHG, we are successful because of the operating discipline, focus on customers and cost management that was in our DNA. This is the focus I intend to bring to Centuri as we build on an already strong foundation and work to grow the business. I was attractive to Centuri because of its great history, long-standing relationships with blue-chip utility customers and its strong positioning to take advantage of, what I know is significant infrastructure spend and progress and planned in the sector that can drive long-term growth. As I get started in this role, I'm pleased to have Greg Eisenstark alongside me as our CFO. Greg has been acting CFO over the last several months and prior served as Centuri's Chief Accounting Officer. Greg has a comprehensive understanding of this business, knows the numbers better than anybody, has significant SEC reporting experience…

Thanks, Bill. Our 2023 results are evidence of the progress we continue to make executing our strategy and we are enthusiastic about 2024. On Slide 24, we are initiating our 2024 Southwest net income guidance to be in the range of $228 million to $238 million. We are confident that strong regional economic outlook in our service territories will drive 2024 results within these guidance ranges. Recall that Rob indicated, we had more than $15 million of benefits to 2023 in net income that are not expected to recur in 2024, which you can see on the bottom of Slide 24. We expect to lose approximately $30 million in pre-tax interest income largely associated with the PGA balances as well as $6 million of COLI earnings at the midpoint of the range. We are not expecting any further property write-downs in 2024 like the $5 million we saw associated with the sale of our old corporate headquarters in 2023. Additionally, as Rob also pointed out, we saw an $8 million out period adjustment early last year, related to net cost of gas sold that benefited 2023 earnings and is not expected to recur. Higher expected average utility plant and service balances, along with higher amortization of regulatory assets is expected to drive higher depreciation and amortization expense, in 2024 and we expect higher pension expenses largely driven by the assumed discount rate change and slightly higher O&M. Other changes assumed are higher income from equity AFUDC driven by higher expected construction spending, and higher overall income and other general taxes. As you can see on the slide, we expect a significant increase in gross margin driven by forecasted customer growth and a rate increase in Nevada, and all we expect these changes will provide for strong utility earnings in 2024.…

Thank you. [Operator Instructions]. And today's first question comes from Richard Sunderland with JPMorgan. Please go ahead.

Hi. Good morning. Can you hear me?

Yes we can. Good morning Richard.

Great. Thank you. I appreciate all the utility detail here. I'd like to start with the cost efforts relative to new utility outlook. How do you think about sustainability of earned returns after the current rate case cycle with this new flat O&M per customer target? And then similarly what would the SIB be worth to that earned return outlook if you're able to secure it in the rate case?

Yes Rich. So, yes, it's a great question. Obviously, we're looking to implement rates here in 2024 for Nevada and then looking to Arizona in 2025. Given that rates will come in in Arizona in 2025, we build to more of that run rate ROE in 2025 and beyond. So, as Karen and I had highlighted on the call, we had an extensive amount of PGA related interest income that obviously helped with the ROE. That was the anticipated and we'll see the rate structure in Nevada and Arizona in 2024 and 2025 really bring us to those run rate levels of ROE. With respect to the SIB program, I think it's -- obviously that was just included in the rate case and we'll have to navigate that with the commission and regulators over the course of this coming year. And we'll obviously, we'll update you and investors as we progress on that front.

And the optimization initiatives that we've talked about will help keep O&M flat and I think that will help us as well on that ROE and maintaining that as it goes forward. So, that's worked into our plan moving forward is to continue to execute on those optimization initiatives and keep O&M on a flat trend.

Okay. Got it. And I know this goes back a little bit, but maybe a year or two years ago, you had highlighted an 8% earned ROE or being above 8% as one of the metrics in focus. Is that still where you're focused when you say run rate ROE? Or has that thinking evolved at all?

Yes. I think that certainly achieving 8% and beyond 8% we're laser focused on that between cost optimization between pursuits of regulatory strategy including that SIB tracker program. That would obviously reduce flag and benefit ROEs. But what I think you're seeing as far as unfolding the regulatory strategy in Nevada, the cadence of the filing in Arizona, the cadence of the filing and the tracker, our focus on cost optimization efforts which will benefit ROEs in the near-term, but will also benefit customer bill in the longer term. But all of those should lead to continued ROE recovery at and above that 8% level. Although, we're not providing specific guidance, I think that where you're heading with your question is certainly our focus.

Got it. Very helpful. And then for my second question, just digging into this new mechanism a little bit further. It sounds like there's been some early engagement on this process in advance of the application. Could you speak a little bit more to that engagement? How this aligns with local goals around safety any other considerations around the request and the application?

Yeah. Rich, it's Justin. How are you doing? Yeah. We spent a concerted amount of time working with the Pipeline Safety division at the Arizona Corporation Commission bringing them out, sharing information regarding our system, doing demonstrations that are off centers, just educating them on the challenges we have with our system, right and focused on specific pipe types and that kind of evolved to really kind of just all code and regulatory. And so, I think it's been a very collaborative process, where we've tried to solicit their feedback on things that they might be comfortable with, based on things they've approved for water companies years ago versus some of the things they've done more recently on some of the electric generation mechanism. So again, we're just -- we're trying to work with them collaboratively on ways to minimize regulatory lag. And we're somewhat indifferent on what that looks like as much as trying to find a path forward to make some incremental improvement. We think this mechanism really strikes that balance.

Got it. Appreciate the color. And thanks for the time today.

Thanks, Rich.

And our next question comes from Julien Dumoulin-Smith with Bank of America. Please go ahead.

Hey, good morning, congrats Bill on joining here. Maybe just following up on the last question a little bit, just to start on that front. I mean, I hear you guys on the SIB effort. I'd be curious, how do you think about the efforts to foot driven by the commission around forward-looking mechanisms here? I get it's not quite the same thing, gets at the broader subject of rate lag. How do you think about that pairing up, maybe not necessarily in the current instance because as you think about future efforts, maybe how -- what is reflected ultimately as you think about this 10% to 12% CAGR in terms of earned returns across jurisdictions in the 2026 timeframe? But really emphasis on the ACC efforts on reducing lag via perhaps other forward-looking mechanisms.

Yeah, Julien, it's Justin. And we've talked a lot about this over the last year and some of the commentary coming from the ACC and their sincere commitment to try to make improvements in that regard. Obviously, last year Commissioner Myers opened a docket to look at that. I think just recently they announced a workshop that will happen next month. So again, I think that's great progress. But to your point, the timing of which we've got a rate case pending right now. We need to find a way to kind of bridge those two. And so, that's how we look at this mechanism as a way to kind of help. And then we'll continue to participate and work with them on -- around education efforts different ideas about things that we can do structurally in Arizona to help whether that be through future test year, constructs, whether it be through a Formula rate making. I think there's a lot of different opportunities. And again, we're somewhat agnostic to the types of mechanisms or the structure as much as hey let's work together on making incremental improvement because I think there's a lot of opportunity.

Yeah. But maybe the punch line is given the time line of the hearings and the present case I mean even for 2026 that might be a little ambitious to really have that -- the full extent of those benefits reflected, right? But maybe it'd be 2027 onwards by the time you actually get a rate case.

Yeah, correct. You're exactly right.

Excellent. And just clarifying a little bit further, earned returns by jurisdiction or as much commentary you can provide? I mean, obviously, the 10% to 12% net income CAGR is better than the updated and improved rate base CAGR of roughly 7%. How do you think about just what's reflected in this call it medium-term 2026 target, if you can speak a little bit to that, and obviously kudos on progress outside of Arizona including Nevada here?

Yeah, Julien great question. The differential between net income growth and the rate base growth clearly driven by regulatory outcomes. I think you're seeing us get in for rate cases within that period. And so that's why the net income growth associated off of the 2024 base year net income is outpacing the rate base growth. Obviously these are always significantly impacted in those interim periods. But by 2026 we've got the run rates bill impacts and whatnot associated with Nevada and Arizona filings and having been fully settled by them.

Excellent. And lastly if I can, I mean, Bill I know a new role for you and obviously great precedent that you're coming from and having engaged with some of the large utilities in the country here. How do you think about the strategy and any enhanced elements that you could bring to the Centuri business? Again I get that this is a little difficult to comment too much. But as best you can opine on how you think about expanding the scope and or improving the efforts underway already. I'd love to hear.

Sure. Well, clearly I have a lot of relationships across the industry and we'll use those to reach out to those companies and look for opportunities to grow. And then with just the various amounts of infrastructure improvements that are going to go on across the country there's very clear opportunity there for us to engage and really go much further than that probably isn't possible right now. But I think if anyone looks at the landscape, it's very clear that there's massive amounts of infrastructure spending that's going to go on and we're going to try very hard to take a good share of that.

Got it. I’ll leave it there. Look forward to chatting more. All the best guys.

Thanks, Julien.

Thank you. And our next question today comes from Ryan Levine with Citi. Please go ahead.

Good morning. I appreciate the added guidance in terms of longer-term earnings outlook for the core utility recognizing there's ongoing rate proceedings in your jurisdictions. Maybe could you speak to where -- what would put you towards the higher and lower end of the ranges outside of maybe cost of capital and rates of that?

Yes. So I think obviously we've got -- just starting with some of the easier ones. The -- we've modeled a market discount rate on the pension. And obviously that contributed to about a $6 million decline from 2023. So certain assumptions like the impact of the interest rate environment on the pension. With that I will call your attention to the 10-K which we highlight changes we've made to the pension fund over this past year of going to a 50-50 allocation and putting a 90% overlay in place there to help dampened some impacts of potential forward interest rate movement. But something like where interest rates ultimately had obviously there could be upside or downside from their rate case outcomes clearly. Although in Nevada we have settled kind of everything but the cost of capital which we can put a bandwidth around that could drive us upward in the range. The -- clearly we obviously model in a baseline on taxes if there were to be a tax change that could impact. And then as we've discussed we are laser-focused on the cost management and we've modeled in a certain level of cost savings that obviously allows us to continue to achieve a flat O&M per customer growth rate over the forecast period. To the extent that we're able to accelerate more cost savings into the front couple of years of the forecast then that could clearly help on the CAGR as far as what we achieved by 2026. And then overall just we do provide and obviously, I think, our cap structure is I think well understood at this point. But to a certain extent the other thing that can clearly impact is just the interest rate assumptions like how quickly the Fed moves on rates and while we don't have a lot of financing requirements, but we also generate some interest income from the cash certainly that were collected to the PGA this year. And so obviously, we've made assumptions around kind of the dot plot and whatnot around setting our guidance with respect to interest income. Does that help, Ryan?

Yeah. I appreciate the color. On Centuri, recognizing the sensitivity around providing forecasts but to date, since the management change there was highlighted a number of operational initiatives underway around contracts and staff. Is there any way of quantifying what impact the recent changes have been to maybe the cost structure or some type of operating metrics? And to date, has there been -- is this part of a 100-day plan that the company has underway?

So as I noted in my comments, one of the first things that we did was removed two layers of management that was between me and the operating company Presidents and the purpose of that was so that I can get much more into the details of these businesses, understand the opportunities for growth. And as you can imagine, I've been in the role for about a month. So that work is just now beginning and will be more clearly articulated as we go through the IPO process here in a few weeks. And so there isn't a specific 100-day plan. This is the direction of the organization and will be the DNA of the organization, which is to be a very efficient and effective deployer of infrastructure services and I'm excited to continue to move that forward. But again, as we move into the IPO process, this will be much more articulated in that information.

Great. Thanks for taking my question.

Thank you. This concludes our question-and-answer session. I'd now like to turn the call back over to Justin Forsberg for closing remarks.

Thanks again, Rocco, and thanks, everyone, for joining the call today and for your questions. This concludes our conference call, and we look forward to seeing many of you soon as we participate in conference activities next week in New York, such as the Bank of America Power & Utilities, Clean Energy Conference, followed by the West Coast Utilities Conference hosted right here in Las Vegas by Siebert Williams Shank later in March, among other events. Slide 26 continues to include my content information. As always, feel free to reach out at any time. Thank you for your interest in Southwest Gas Holdings. Have a good day.

This concludes today's Southwest Gas Holdings Fourth Quarter and Full Year 2023 Earnings Call and Webcast. You may now disconnect your lines at this time, and having a wonderful day.