Southwest Gas Q2 2023 Earnings Call Transcript

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August 9, 2023

There are 9 speakers on the call.

Operator

Ladies and gentlemen, good day and welcome to the Southwest Gas Holdings Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the prepared recorded. I would now like to turn the call over to Tom Moran, Vice President, General Counsel and Corporate Secretary for Southwest Gas Holdings. Please go ahead.

Speaker 1

Thank you, Kate. Hello, everyone, and welcome to the Southwest Gas Holdings 2nd quarter 2023 earnings call. Throughout the call, we will be referencing presentation slides, which we have posted on our Investor Relations website. I am joined on today's call by Karen Holler, President and CEO of Southwest Gas Holdings Rob Stefani, Chief Financial Officer of Southwest Gas Holdings Justin Brown, President of Southwest Gas Paul Daly, President and CEO of Century Group and Chad Van Sweenen, the CFO 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.

Speaker 1

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 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. I'll now turn the call over to Karen.

Speaker 2

Thanks, Tom. Thank you for joining us today to discuss Southwest Gas Holdings' 2nd quarter results. Turning to Slide 5. We are pleased with our progress on our transformational strategy of returning Southwest Gas to its core foundation of a premier fully regulated natural gas utility. We achieved significant milestones this quarter building on our progress in the first quarter, which continues to position the utility for strength and success, while also advancing the separation of Sentry into a standalone infrastructure services leader.

Speaker 2

Notably, we received constructive regulatory outcomes at the Utility during the quarter and delivered solid quarter results as we realized benefits from our efficiency and productivity enhancement efforts. Customer growth and demand remains strong and the 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 legislatures to complement our strong organic rate base growth. We are confident in our momentum. We remain on track to deliver 5% to 7% CAGR and rate base growth over the next 3 years and maintain a strong investment grade balance sheet and competitive dividend.

Speaker 2

Additionally, Centuri has As you can see on Slide 6, we are making excellent progress on our 2023 strategic priorities, completing several key At Holdings, we completed our 2023 financing plan with a 5 $50,000,000 term loan in the middle of April. We continue to see limited near term equity needs for 2024 2025 and anticipate equity needs of less than $100,000,000 in total through the end of 2025. At Sintri, the spend remains well on track. We received ACC approval for a separation of Fentry has confidentially submitted a draft registration statement on Form 10 with the SEC. We look forward Capital activities associated with ultimate spend structure options could occur earlier.

Speaker 2

At the utility, we continue to execute on our business plan. We received APC approval of the PGA surcharge in Arizona and remain on track with our expected Nevada rate case filing in the Q3. We're also announcing today an expected Arizona rate case filing in the Q1 of 2024. Additionally, we are focused on the utility optimization review and we'll begin prioritizing initiatives during the remaining months of 2023 as I will cover in more detail later on this call. We are pleased with our continued progress and our strategic plan is on track.

Speaker 2

On Slide 7, we walk through our strong 1st quarter performance of Southwest and Sintry. We are proud to announce that at the utility, we delivered the highest second quarter net income on record. We experienced another quarter of strong customer growth, adding approximately 42,000 new meter sets over the last 12 months, while continuing to make investments to ensure our system remains safe and reliable for the benefit of our customers. As mentioned in the previous slide, we also received several constructive regulatory outcomes during the quarter. At Century, we announced record setting 2nd quarter revenue and EBITDA, which resulted in adjusted last 12 month EBITDA of $285,000,000 This strong second quarter performance was driven by strong storm restoration services, sustainable energy projects and nearing the completion of a large gas pipeline contract.

Speaker 2

As Paul will discuss, Century continues to win new business based on the strength of its relationships and capabilities and is well positioned to play a critical role in the continuing energy transition. We recently completed a comprehensive full cost opportunity assessment where we identified areas of opportunity for improvement and optimization, including operations and operations support, information technology, procurement among others. We also made several leadership and organizational changes, including the formation of the Office of Continuous Improvement and Optimization, led by Senior Vice President, Julie Williams. Julie and her team will work with our outside advisors to drive initiatives and positive change throughout the entire organization. We are now taking a deep dive into the opportunity assessment and developing specific initiatives that we believe will help us accomplish our goals of optimizing utility performance and accelerating our pursuit of operational excellence, identifying cost savings and efficiency opportunities for us to execute over the next couple of years.

Speaker 2

Further, these initiatives will help support the tremendous growth we have across our service territory, help pass on realized savings to our customers, improved ROEs and result in positive returns for our stockholders. As I mentioned previously, We added 42,000 first time meter sets during the past 12 months with approximately 20,000 year to date. We expect to continue to benefit from a strong demographic and economic growth in the Southwest. Between 20232028, population growth is projected to be 3.76% in Arizona and 3.95 percent in Nevada. New customer growth combined with our pipeline replacement activities associated with our safety and integrity management programs are the cornerstones of our $2,000,000,000 3 year capital expenditure program.

Speaker 2

The investments we have made to ensure safe and reliable energy service to our customers has translated to double digit rate base growth since 2017. With our current capital investment plan, we expect to continue to grow our rate base at a compound annual growth rate of 5% to 7% over the next 3 years. We are committed to pursuing timely recovery of these investments by working collaboratively with our regulators to reflect these investments in our authorized rate base in a timely manner, either through rate cases or tracker programs. I will now turn the call over to Rob, who will review our financial performance

Speaker 3

for the quarter.

Speaker 4

Thanks, Karen. On Slide 11, we outline our earnings per share performance for the Q2. The company's consolidated GAAP and adjusted Yes, are shown by each operating company. As Karen mentioned earlier, the Utility and Centuri each had a record setting second quarter. The utility recorded its highest 2nd quarter net income on record.

Speaker 4

Centuri recorded its highest ever second quarter revenue and EBITDA on record. On an adjusted basis, we finished the Q2 of 2023 with EPS of $0.47 a share, a $0.24 per share improvement when compared to the same time period of the year prior, which included a full 3 months of Mountain West. The utilities performance during the quarter is a product of our disciplined O and M management, regular pursuit of constructive regulatory outcomes, An improvement in interest income from the PGA and an increase in COLI. At Centuri, we are encouraged to see a significant quarter over quarter improvement in GAAP and adjusted earnings, signaling that we have transitioned past the headwinds of 2022. Centuri continued its work on a large gas infrastructure project and saw growth in storm restoration work and offshore wind.

Speaker 4

In the appendix, we provide a reconciliation of adjustments by operating company. The vast majority of the 2nd quarter adjustments In the Q2 of 2023, utility gross margin increased by approximately $26,000,000 compared to last year. This improvement was driven primarily by the recovery on prior investments in our utility infrastructure and associated regulatory account balances, as well as continued customer growth. Items offsetting these increases include decreased Arizona vintage steel pipe and customer owned yard line revenue, Miscellaneous revenue and customers outside of the decoupling mechanism. O and M decreased $3,000,000 between quarters, which was largely due to an $8,000,000 decrease in legal claim related expense.

Speaker 4

This benefit was offset by an increase The approximate $19,000,000 increase in depreciation and amortization between quarters was primarily due to the timing of California Climate Credit Program referenced in our 10 Q filing, with the remaining increase resulting from a 6% increase in average gas plant and service. Other income increased $22,000,000 compared to last year. This was driven by increased interest income related to the carrying costs associated with regulatory account balances largely related to the purchased gas cost recovery mechanisms Favorable quarter over quarter changes in non service related components of employee post retirement benefits as well as improvement in investment Returns underlying the company's own life insurance policy values. Offsetting these increases include a reserve taken on a software project. Interest expense increased by approximately $9,000,000 from the prior year, primarily due to interest associated with the senior notes issued in behind Centuri's 2nd quarter adjusted EBITDA results.

Speaker 4

Centuri's 2nd quarter revenues increased by approximately $100,000,000 compared to the prior year. This increase was driven by progress on a large gas infrastructure project delivering natural gas to a battery factory in the Midwest, expense primarily due to higher interest rates on the approximately $1,200,000,000 of outstanding variable rate borrowings largely associated with the Riggs Distler acquisition. Centuri is well positioned to continue serving its long term customers while leveraging our geographic reach and expertise to serve new customers and markets. We are excited about the opportunities and momentum we see in 2023 and beyond for Centuri given the national focus on infrastructure investment. On Slide 14, we outline our 2023 financing plan for Southwest Gas Holdings and Southwest Gas which was completed earlier in the quarter.

Speaker 4

As Kieran noted, we do not anticipate meaningful equity needs in 2024 through 2025. At Holdings, we reiterate that we plan to target an FFO to debt ratio of approximately 14% by 2025 And our executed financing plan puts us on a path toward that. Moving to Slide 15, we take a look at our balance sheet And our commitment to maintaining an investment grade profile. On the left hand side, we walk through net debt by operating company. When looking at the utility net debt levels, it is important to also consider the PGA balance, which represents working capital that Southwest spent for prior commodity purchases, which is currently owed to Southwest by its customers.

Speaker 4

We expect a timely recovery of this PGA balance and earn a cost of carry on it as is reflected in the chart in the appendix on Slide 29, which provides additional detail. Our recent Arizona Surcharge approval will continue to reduce the time to recovery. On the right hand side of the slide, we note that we have not had any changes to our credit ratings or outlook I would now like to turn the call over to Justin Brown to discuss the utility.

Speaker 5

Thank you, Rob. Starting on Slide 17, we provide an update on the anticipated timing of our upcoming rate cases. We remain on schedule to file Nevada rate case in the Q3 We're currently targeting a filing by the end of this month. We're also actively preparing for 2 rate cases in 2024. First, an Arizona rate case in the Q1 and then given our existing 5 year rate case schedule in California, we plan to file our next California rate case in the Q3 of next Lastly, we're also evaluating the timing of our next Great Basin rate case.

Speaker 5

And due to a prior settlement commitment, We know that that filing will occur prior to June of 2025. Turning to Slide 18, we highlight other recent regulatory filings and constructive outcomes. First, we received approval for 2 different filings in Arizona. As Karen mentioned previously, the Arizona Corporation Commission approved our request to modify our approval will provide approximately $130,000,000 in incremental annual revenues. We also received approval of our Annual customer owned yard line or coil surcharge filing, where we were authorizing increase of $4,300,000 to recover previous coil investments.

Speaker 5

In Nevada, we recently received approval of an all party settlement for our annual rate adjustment filing. As part of this proceeding, the parties in the commission also review our During the test period and found them to be reasonable and prudent. As we mentioned on the last call, we have 2 filings pending in California. And if the filings are approved, we believe both projects will be instrumental in the clean energy technology development and by demonstrating the role both our infrastructure and natural And helping support on-site combined heat and power and solar generation development. The FERC recently issued a certificate of public convenience and necessity for our proposed mainline replacement project and recently granted the notice to proceed with construction, which we anticipate will start sometime this summer.

Speaker 5

Completion of this project will coincide with the timing of our next rate case to minimize any lag associated with the investment in the project and recovery of that investment. Great Basin also has an application pending for proposed expansion project to meet the reliability and resiliency needs The growing population and demand for natural gas service. Upon approval, new rates will become effective immediately upon completion of the project Since it is a fully contracted expansion, we currently anticipate approval and completion of that project prior to the end of next year. Turning to Slide 19, earlier this year, Governor Lombardo issued an executive order in Nevada highlighting his energy priorities and policy objectives for the next decade. The As well as the important role energy plays in economic development and his commitment to ensure safe, reliable and affordable energy remains available to all Nevadans, including ensuring that Nevadans have access to natural gas for use in their homes and businesses.

Speaker 5

Consistent with this executive order, we work with various stakeholders, including the Public Utilities Commission of Nevada on legislation that would establish a robust and thoughtful approach to natural gas planning. The legislation was unanimously approved by both houses and was signed into law by Governor Lombardo in June. The legislation will require gas Utilities to make filings every 3 years identifying customer demands, resource plans for meeting those demands, including creating pathways for pursuing Clean fuel technologies like hydrogen and renewable natural gas, as well as expanded opportunities for energy efficiency programs for the benefit of our customers. The legislation will also ensure alignment among all stakeholders by providing Gas Utilities the opportunity to seek pre approval of these investments before investments actually made.

Speaker 3

I'll now turn the call over to Paul Daley, President and CEO of Century Group. Thanks, Justin. Turning to Slide 20, I'm proud of the performance delivered by the Centuri team during the Q2. With more than 12,000 employees in 43 states And provinces across the United States and Canada, Sentry has a very broad geographic reach and works with most of the largest blue chip investor owned utilities And there are 100 plus 1000000 customers across the U. S.

Speaker 3

And Canada. These strengths mean Centuri is well positioned to be a standalone Strategic utility services leader with the scale and capabilities to meet the evolving needs of utilities and utility holding companies. As Karen noted earlier, we are making continued progress towards Centuri's separation, which is on track to be completed in the first Quarter of 2024. Importantly, as we work towards our pending separation, we have the resources, capabilities and business structure to continue to deliver on our significant growth opportunities. On Slide 21, we detail Centuri's proven track record of strong financial performance.

Speaker 3

As both Karen and Rob mentioned, Century had record setting second quarter revenue and EBITDA performance driven by strong continued execution and project wins as well as strong demand from the ongoing energy transition, which I'll discuss further shortly. We have successfully managed through the inflationary pressures that we faced at this time last year and believe we are in a much better position as evidenced by our last 12 months adjusted EBITDA of $285,000,000 representing a $65,000,000 year over year growth in LTM adjusted EBITDA. While certain of our costs remain at Negotiate more than $24,000,000 of annualized incremental revenue increases on existing customer contracts and implemented $21,000,000 of annualized cost savings to offset certain of these inflationary cost increases. We are continuing to deliver growth across our operations, both through expanding our core electric and gas operations, While realizing more project work in support of the energy transition, our acquisition of Riggs Distler in 2021 Significantly increased our electric operations, helped further diversify our customer base, provided in the Northeast and provide significant opportunity in the offshore wind renewables market. As you can see on the right hand side, we have continued to diversify our portfolio to have a balance between electric and gas.

Speaker 3

We also remain diversified geographically with no one geography representing more than 11% of revenues. Our record financial and operational performance was driven in large part by our strong execution across our project pipeline as detailed on Slide 20 2, our winning model focused on serving the full scope of customer needs enables us to deepen our customer and expanding our work across North America. We are nearing completion of $125,000,000 gas pipeline construction contract In Indiana, which will expand an existing natural gas customer system with the installation of over 18 miles of new pipeline to provide service to a new manufacturing facility for electric vehicle batteries. This win highlights the need Our strong progress underscores our ability to deliver on very complex projects with hard and very fast timelines. We were also recently awarded a 3 year electric utility distribution services contract We're $15,000,000 to $20,000,000 per year for a new customer.

Speaker 3

While not an overly large contract, It is notable as it is an opportunity which arose from the quality of our storm restoration work for them last year. As you can see in the middle column, we are continuing to expand work supporting our customers as they execute on clean energy projects. We completed contract work for our 1st offshore wind project, which is the first ever advanced foundation components assembled installed in the United States. We are on schedule with our second project having completed assembly of 22 of the 65 platforms. We recorded approximately $100,000,000 of revenue associated with the sustainable wind energy projects during the first half of twenty twenty three, and we remain on track to deliver approximately 250,000,000 of wind energy revenues for the full year.

Speaker 3

With a total of just over $525,000,000 of wind contracts signed to date, We continue to see strong demand for offshore assembly, fabrication and port logistics for offshore wind projects in the Mid Atlantic and Northeastern United States, which we expect will continue in the near term along with additional opportunities to construct the infrastructure needed to connect renewable capacity to the grid. Finally, our scale and capabilities, Particularly the numbers and locations of our crews enables us to support our clients and their customers in times of need. This is particularly evident in our storm response and restoration services business. Year to date, we've deployed more than 1500 employees across 22 states for this restoration work, generating $64,500,000 in higher margin revenue. As we look towards the second half of the year, we believe the business is very well positioned to realize response opportunities Should we see an active summer or fall hurricane season?

Speaker 3

With our strong geographic footprint and Comprehensive capabilities that span the entire utility value chain, Centuri is incredibly well positioned to continue its trajectory. As summarized on Slide 23, Centuri will continue to benefit from the strong sector tailwinds across our gas and electric G and D markets as well as significant multi year opportunities in offshore wind related infrastructure. Given the aging infrastructure and electric utility distribution, 45% of which is at or near the end of its useful life, we expect continuing strong demand from customers Significant replacements and upgrades to maintain system performance and increase grid resiliency and reliability. Similarly, aging infrastructure and gas utility distribution has led to a regulatory driven multi decade replacement cycle with nearly half of gas distribution infrastructure near or at the end of its useful life of 40 years. In addition to the decades of work to support investments needed in the gas, electric, T and D infrastructure, Centuri is also uniquely positioned Investment in renewable energy continues to accelerate rapidly and we are confident that the energy transition will be a Key long term growth driver for Centuri.

Speaker 3

The Inflation Reduction Act and other federal infrastructure investments are driving opportunities for growth in areas where we are well positioned to perform work. We look forward to sharing our progress as we advance towards

Speaker 2

Thanks, Paul. Our year to date results are a testament to our ongoing efforts and we look to finishing the year strong. On Slide 27, we are reaffirming our 2023 utility net income and 2023 Century revenue and adjusted EBITDA margin guidance. We are confident that each business' strong performance to date will drive full year results within the guidance ranges we reaffirmed last quarter. Based on the results through the first half of the year, the 2023 utility net income is more likely to land in the upper half of our range.

Speaker 2

Additionally, we are making an upward revision to 20 20 3 utility CapEx guidance now $700,000,000 to $720,000,000 which is firstly a result of better than expected to respond to this increased demand for natural gas and to ensure we maintain a safe and reliable distribution system for the benefit of our customers. At Sintri, we affirm our guidance ranges. Based on first half twenty twenty three performance, we would expect revenue at the higher end of the range. Entry margin will depend on level of storm activity for the year. The Q3 is historically the most active quarter for major storms.

Speaker 2

Before we open the call up to Q and A, I want to emphasize that our teams are focused on executing our 2023 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 a planned tax free spin of Scentry, 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 up the call for questions.

Operator

You may remove yourself from the queue by pressing star then 2. We'll take our first question from Richard Sunderland of JPMorgan. Please go ahead.

Speaker 6

Hi, good morning. Thank you for the time today.

Speaker 2

Good morning. Good morning, Richard.

Speaker 6

Starting with the Century timeline, could you walk through some of the factors with the new late 1Q 2024 language relative to the prior 4Q 2023, 1Q 2024 outlook, what's influencing the latest perspective on timeline to complete?

Speaker 2

Sure. I think that we believe we're still on track. We filed the PLR and we are expecting Some kind of answer from the IRS on our PLR in the Q4. And so that's largely driving our change To clarify where we are on the Q1 spend, so we expect to get an answer from The IRS in the 4th quarter be able to spend the Q1, but we may access capital markets before that time.

Speaker 6

Understood, understood. And alongside all this, you've talked in the past about other options or routes to affect the separation. Any updated thinking there? Any new analysis on that front?

Speaker 2

No. We're still focused on the Then at this point, we obviously have fiduciary duty to our stockholders and if any other types of transactions Would become available, those are certainly things that the Board would look at. But we are focused at this point on the spend And the Q1 completing that as announced.

Speaker 6

Got it. That's helpful. And then just one last one if I could. The dividend, could you remind us what your latest outlook is and timeline to evaluate? Is that has the timeline, I guess, Been pushed out as well in consideration of the later Century separation timeline?

Speaker 2

No. The timeline really has not changed. And what we're looking at is, as we announced previously, we are committed to providing a competitive dividend with our peers. And so that has not changed at this point.

Speaker 6

And competitive meaning in terms of payout ratio?

Speaker 2

Correct.

Speaker 6

Okay, got it. Very helpful. Thank you for the time today.

Speaker 2

Thank you.

Operator

The next question is from Ryan Levine of Citi. Please go ahead.

Speaker 7

Good morning.

Operator

Hi, Ryan. Hi, Ryan. I had a couple

Speaker 7

of operational questions. First to start off, storm numbers seem to be a driver Quarter performance, given July activity seems to have accelerated some of the storm work. Are you seeing any of that across your business?

Speaker 8

Yes. We certainly this is Chad, Vince Wheaton, the Century CFO. We certainly saw much stronger storm activity in the first Half of the year than we've historically seen. Part of that is just weather. Part of that is that we have really sort of Formalized and organized our storm response capabilities and that we're able to capture more storm opportunities than we've As Karen mentioned, the Q3 tends to be the strongest quarter for storm activity And we are expecting a particularly active hurricane season this year.

Speaker 7

Okay. And then on CapEx, you raised your utility CapEx numbers. Where or what are the big drivers Is that across your service territories? And are there any other additional opportunities that you see to augment your capital spending program in the coming quarters?

Speaker 2

So the CapEx is largely driven by new business and investments in our infrastructure. And so we continue to see those opportunities. The growth, as I mentioned previously, has been very strong in both our jurisdictions in Nevada and Arizona and continues to drive that. We really did have better than expected growth, which is driving that number.

Speaker 7

Okay. And then last on operations. The consulting study seems to have been completed by now. Are any recommendations or any opportunities identified through 3rd party advisors Been implemented or could those be incremental opportunities to cut costs beyond what's in your current plan?

Speaker 5

Hey, Ryan, it's Justin. I think as Karen outlined, I guess it's kind of a multi phased approach, right? So As she described, we completed the kind of the cost opportunity assessment, right, which gives you general direction on Where to look and now we're embarking on Phase 2, which is actually identifying specific initiatives that we'll be able to identify into the future. So, Yes, those are things that are still into the future that we're evaluating as we develop those specific initiatives That will probably take up the 3rd and end of the Q4 and then the hope would be as we start to look at maybe implementing some of those in 2024.

Speaker 7

Thanks for taking my

Operator

questions. There are no other questions at this time. This concludes our question and answer session. I would like to turn the call back over to Tom Moran closing remarks.

Speaker 1

Thank you, Kate, and thank you all for joining us today. This concludes our conference call.

Operator

This concludes today's Southwest Gas Holdings 2nd quarter 2023 earnings call and webcast. You may disconnect your line at this time. Have a wonderful day.

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