Southwest Gas Holdings, Inc.

Welcome to the Southwest Gas Holdings Investor Call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. 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 for Southwest Gas Holdings. Please go ahead.

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 Daley, 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 two and three 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 five, 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 Mountain West and the spin of Century. We announced the close of the Mountain West sale to Williams on February 14, 2023. with the $1.1 billion in net proceeds going toward debt reduction at Southwest Gas Holdings, creating more flexibility with our balance sheet and financing needs. I'm pleased to report the century 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 six, the spend of century 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 RAS-RES 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, we had two favorable rate case outcomes in Arizona and Nevada, which Justin will discuss further. We are pleased to see these positive regulatory developments as Southwest Gas Holdings moves to its next chapter. Turning to the next slide, we're excited for Southwest Gas Holdings' future as a fully regulated natural gas utility business. Moving to a pure play utility model enhances visibility and alignment with our investors. Resetting the business mix also creates a clear strategic focus on utility optimization and stable recurring cash flow generation that will drive value for our stockholders. As we look to our future as a pure play, Southwest Gas Corporation has a strong performance track record with a diversified, fully regulated business mix and growing customer base. Today, we serve more than 2 million customers across Arizona, California, and Nevada. And in 2022, we installed more than 41,000 first-time meter sets, exceeding our expectations for the year. Southwest Gas Corporation also has a constructive regulatory backdrop that will help to propel future growth. Our rate base is fully decoupled in our service territories, and as of this past February, our allowed rate base increased from $4.2 billion to $4.9 billion. As Justin will discuss shortly, we have favorable demand dynamics across our footprint, and we continue to work constructively with our regulators to enhance our rate base, including an upcoming filing in Nevada, which we expect in the third quarter of 2023. In short, we are well positioned to achieve our goals of reaching 5% to 7% 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 we show on slide 9, Sentry has a strong profile with a long tenured blue chip utility customer base across the United States and Canada. As a standalone company, Sentry is positioned for continued growth with a diversified platform and comprehensive capabilities across the entire utility value chain. Sentry is expected to benefit from strong tailwinds to support long-term growth as they continue to expand into new markets and support the energy transition, which Paul will discuss further. With a committed, experienced leadership team, we're confident in Sentry's path forward as a standalone utility infrastructure services leader. Moving on to slide 10, I would like to provide some highlights from the past year across all of our operating companies and discuss how our continued progress underscores our excitement about the future of Southwest Gas Holdings. Starting with Holdings, we reported adjusted EPS this year of $3 per share. We were able to negotiate our Southwest Gas Holdings revolver this past December, providing us more financial flexibility going forward. We also published our 2022 sustainability report, highlighting both Southwest Gas Holdings' role in the energy transition and the positive impact we have in the communities we serve. At Southwest Gas Corporation, we continued our industry-leading operational performance. We delivered another year of award-winning customer satisfaction and outstanding damage prevention while continuing to deliver reliable and safe energy to our customers. Century delivered record revenues of $2.8 billion this year, marking the 13th consecutive year of revenue increases. And although Mountain West is no longer under Southwest Gas Holdings' umbrella, the company contributed $80 million in adjusted net income. Those are just a few highlights from the year. Our CFO, Rob Stefani, and our OpCo presidents, Justin Barone from Southwest Gas Corporation, and Paul Daly from Sentry, will go into more detail shortly. With that, I'd like to hand over the call to Rob, who will be reviewing our financial performance of the year. Thanks, Karen.

Turning to slide 12, we provide an overview of our earnings per share performance this past year. The company's consolidated gap 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 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 non-recurring 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 utility's 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 contributed an additional $17 million in the margin. Southwest Gas Corporation has a number of long-term growth drivers which will benefit our business for years to come, and we are confident that we can deliver on these opportunities ahead. We did see higher O&M expenses nearly net out margin this year, coming in at $53 million higher than the previous year due to inflationary pressures, higher labor and employee-related costs, heightened costs surrounding pipeline integrity, reliability, and engineering service, and higher reserves for uncollectibles, primarily due to COVID termination restrictions, among other factors. O&M discipline is a key focus area in our utility optimization plan, and we are working diligently to manage these costs going into 2023. Depreciation and amortization alone increased by nearly 10 million from the prior year due to increases in average gas plant and service, which includes pipeline capacity reinforcement, pipe replacement work, franchise requirements, and new infrastructure. Interest expense was also considerably higher than last year, increasing by $18 million due to high financing costs surrounding the senior notes issued in 2021 and 2022. Moving on to Century's results this past year, slide 14 includes a waterfall chart detailing the main contributors to the Century results. We are encouraged by Century's revenue growth as they experienced record revenues in 2022, increasing $602 million from the year prior. The past year's century experienced considerable cost headwinds from high inflation and fuel costs, as well as customer supply chain challenges stemming from equipment delays with expenses increasing $574 million over the prior period. On top of the fuel costs and inflation, there were also increased expenses resulting from the inclusion of rigs dissler and incremental costs due to the higher volume of work. Century also experienced a loss on a large gas infrastructure bid project due to higher than anticipated costs and scheduling delays. Century is continuing to take decisive action to adjust its cost structure and eliminate a significant number of salaried positions, which going forward should provide $21 million in fully loaded annualized pre-tax cost savings. Finally, I'll highlight that higher borrowing costs also played a considerable role in Century's performance this year. with a $30 million after-tax increase year-over-year. Outstanding borrowings associated with the revolving credit and term line from the Riggs-Disler acquisition, along with higher interest rates surrounding their outstanding variable rate borrowings, drove the increase. As we spend century, we will be looking at a variety of alternatives to de-lever the company. Turning to slide 15, as Tara noted earlier, we engaged the rating agencies through RAS-RES to review the credit implications of our financing strategy. And I'm happy to share our planned capital markets activity that we expect will enhance our balance sheet flexibility and maintain an investment-grade profile while maximizing values for stockholders. We have already made considerable debt reduction through the sale of Mountain West. We were able to repay $1.075 billion of the holdings term loan through the use of net sales proceeds in February of this year. Additionally, about $430 million of Mountain West debt transferred with the sale. At Holdings, we plan to target an FFO to debt ratio of approximately 14% by 2025, and our recent debt reduction financing plan puts us on a path toward that. As mentioned earlier, we plan to issue $250 million of equity and $550 million in debt at the Holdings level in 2023. The slide outlines the sources and uses of those issuances. As you can see, the debt and equity raise will enable Southwest Gas Holdings to invest in the utility business while de-levering both the Holdings and Southwest Gas Corporation balance sheet. We are separately planning $300 million of debt issuance by Southwest Gas Corporation Utility in 2023 to partially support the repayment of the $450 million utility term loan that was put in place in January of this year to fund gas acquisition costs. Turning to century, which isn't included on this slide, we plan to deleverage century prior to a spin and included approximately $300 million in our RAS-RES analysis toward that objective. We do not expect to issue equity to support that deleveraging at century. We will continue to assess different spinoff structures pending capital market conditions regarding that funding. Lastly, as Karen noted, we do not anticipate meaningful equity needs in 2024 through 2025. In total, for the 2024 through 2025 period, we expect less than $100 million in equity issuance at Southwest Gas Holdings. Paul will discuss Century's performance in greater detail a little later on in the call. Now I'll turn it over to Justin Brown, President of the utility, to review Southwest Gas Corporation's operational highlights.

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 our system remains safe and reliable will eventually translate into rate-based 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 the continuation of our fully decoupled rate design and the authorization to make adjustment for a full 12 months of post-test year plan, resulting in a total increase in rate base of approximately $700 million. This will help us minimize regulatory lag over our next rate case cycle. As shown on slide 19, in addition to our traditional investment opportunities, we've been partnering with all stakeholders over the past couple years to establish frameworks across our jurisdictions to support investment opportunities in emerging technology energy initiatives. This strategy has proven to be effective as we have partnerships across our service territory to repurpose methane from waste and to help facilitate the delivery of renewable natural gas. We're also committed to continuing to help communities and customers reduce economy-wide greenhouse gas emissions by displacing higher carbon-intensive fuels with natural gas, as well as piloting hydrogen creation and then blending hydrogen into our system as an exciting clean fuel and emerging technology. As Karen mentioned, we recently published our 2022 sustainability report that is available on our website, and it highlights our recent environmental, social, and governance accomplishments, philanthropic activity in our communities, and our ongoing efforts to advance clean fuel technology research, development, and demonstration. Please refer to slide 37 in the appendix for additional details and recent ESG highlights. Turning to slide 20, It provides an overview of some of the key accomplishments throughout the year. We successfully welcomed over 5,000 new customers through our Graham County acquisition. And for the third consecutive year, we ranked number one by J.D. Power for gas utilities and business and residential customer satisfaction. We are focused on continuous improvement and being an industry leader when it comes to customer satisfaction, safety, and operational efficiency as evidenced by our customer satisfaction scores and damages per thousand ticket statistics and emergency response times. Turning to slide 21, we provide an overview of our recent rate case activity across all our jurisdictions, including our two most recent outcomes that I mentioned previously in Nevada and Arizona. We currently estimate that we'll file a new rate case in Nevada later this year with rates effective in the first half of 2024. We have constructive gas cost recovery mechanisms in each of our jurisdictions. Slide 22 provides an update of our PGA balances and an overview of each of our mechanisms. We have seen an increase in our receivable balances due to the higher natural gas prices we have experienced over the past two heating seasons. However, each of our jurisdictions allows us to recover these costs with monthly or quarterly rate changes through our various gas cost recovery mechanisms. And historically, they've been supportive of incremental adjustments to these mechanisms in the form of surcharges or surcredits. to help manage significant swings in the balances. In fact, we recently filed an application in Arizona to supplement our mechanism to better reflect the costs we're experiencing with what is actually being reflected in rates. The filing requests the Commission implement a surcharge to recover the balance in a more timely fashion, or alternatively, to update the carrying cost on the balance to more accurately reflect our carrying costs, which will incrementally improve the mechanics of our mechanism, but minimize the immediate bill impact to our customers. Lastly, we want to provide an update on our utility optimization plan on slide 23. We've recently hired consultants, including a top business and management consulting firm, to complement the work we have been doing internally to assist us in our deep dive review into our current cost structure of the utility to make sure the investments we're making are efficient, targeted and positively contributing to building a solid foundation for future success. We believe this evaluation will help us identify cost savings and efficiency opportunities for us to execute over the next couple years, and that will help support the tremendous growth we have across our service territory, pass on savings to our customers, and improve ROEs and result in positive returns for our stockholders. We believe these efforts will also complement our commitment to delivering excellent customer service and operational efficiency. I'll now turn the call over to Paul to provide an update on Sentry.

Thanks, Justin. Turning to slide 25, we have built Sentry into an innovative, high-growth utility infrastructure services leader throughout the US 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 US and Canada. As you can see on slide 26, 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 MPL'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 standalone 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 Century's overall total gross profit. With our highly recurring, predictable revenue, underpinned by long-term master services agreements and stable contracts, Century is poised to continue to generate strong cash flows that we can allocate towards de-levering and investing in our continued growth. Slide 28 highlights Century's consistent growth and strong financial performance over the past decade. We have a proven track record of top and bottom line growth. with CAGRs of 17.4% and 12.7% respectively over the past 10 years. Between 2013 and 2022, we delivered an organic revenue CAGR of 11.6%. As you can see, we experienced exponential growth in 2022, culminating in our record revenues of nearly $2.8 billion. And as Karen previously noted, 2022 was our 13th consecutive year of top line record growth. We did this while also achieving record adjusted EBITDA each of the past five years and nine of the last 10 years. As Rob mentioned earlier, we were able to achieve these record results despite several macro headwinds, including increased operating expenses due to continuing inflationary pressures, which particularly impacted fuel and subcontractor expenses. Additionally, supply chain challenges to our customers in their procurement of materials and equipment led to changed work mix, work sequencing difficulties, and decreased productivity for our crews, along with several higher margin electrical transmission projects being pushed out into subsequent years. We took significant steps to mitigate these headwinds over the course of 2022, and we will continue to proactively work with our operating companies and customers alike to enhance efficiencies across our business. Importantly, as we work towards our pending spin, we have the resources, capabilities, and business structure to continue to deliver our growth opportunities. Lastly, turning to slide 29, With our strong geographic footprint and comprehensive capabilities that span the entire utility value chain, we are confident that Century is extremely well positioned to continue to expand into high-growth markets. We see additional strong tailwinds across utility and markets that support Century's long-term growth, and we expect this growth will accelerate as we deliver on opportunities and the electric T&D gardening and expansion, 5G data build-out, offshore wind, and other renewable energy transition programs. There are also opportunities for gas services within the energy transition, as evidenced by a recent award of $100 million-plus contract to bring natural gas to an electric vehicle battery facility in Indiana. During 2022, We secured more than $24 million and have annualized incremental revenue increases on existing customer contracts, which has helped offset certain inflationary cost increases. As a reminder, these increases are all incremental to our normal contract revenue adjustment clauses and increase our base rates, which means that this will benefit 2023 and future years. As we look to Sentry's future as an independent company, we are incredibly well positioned to benefit from the energy transition as we support our utility clients across North America. And we expect investment in renewable energy to continue to rapidly accelerate in the coming years. We are making significant progress expanding our clean energy projects. Sentry delivered $94 million in revenue related to sustainable offshore wind support energy projects during 2022, which we're projecting to grow to approximately $250 million in 2023. To date, we have signed nearly $355 million in offshore wind contracts. Our South Fork and Revolution projects for Orsted are well underway in Rhode Island where we are at or ahead of schedule on all deliverables. with revenue and cost at budgeted expectations. Additionally, we anticipate soon having over half a billion dollars of offshore wind contracts in hand, with execution during the first quarter of 2023 of another offshore wind contract for work in New York, totaling approximately $170 million. We expect these offshore wind projects will continue to drive growth and increased margins in 2023 and beyond. Finally, we continue to enhance our restoration services, which delivered revenues of $70 million in 2022. Most recently, our crews responded across the Southeast U.S., United States, and into Canada after both Hurricane Fiona and Hurricane Ian left countless communities without power. We are excited to share our progress in the coming year as we advance towards Century Spin, which is expected to be completed during the fourth quarter of this year or the first quarter of 2024. Now I'll turn it back to Karen.

Thanks, Paul. As you can see, on July 31, Southwest Gap 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 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 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 to $215 million for the full year. Long-term earnings growth will be supported by healthy, organic rate-based 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 investment for the benefit of customers while ensuring a fair return to our stockholders. Century expects $2.8 to $3 billion in revenue for 2023, an 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 plain natural gas utility as we deliver healthy, organic rate-based 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 spin of country, putting the company in a better position to align with stockholders and de-lever the business organically with healthy cash flow generation. With that, I'd like to open the call for questions.

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Chris Ellinghouse from Siebert Williams. Please go ahead. How are you? Good. How are you doing? Hi, Chris. Can you talk about the utility in the fourth quarter? It seemed particularly weak. Was that gas costs, or can you sort of give us some details on what led to a weaker fourth quarter? Sure.

Hey, Chris, it's Rob Stephane. I think, you know, in thinking about where we were with guidance to kind of where the utility finished the year, I'd highlight several factors. You know, I think first, just bad debt and the resulting uncollectibles that stem from the COVID termination provisions contributed about $6 million. Additionally, we had legal settlement, which we outlined on our bridge walk that It took us down about another $6 million. We took a reserve on an IT project associated with our gas acquisition costs, which was approximately $6 million after tax as well. And then just with respect to overall interest costs 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 kind of the gap between where guidance was and where we finished.

Some of these are one-time-ish type issues. Is any of that reflected in the O&M inflation for the year?

Yeah, 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 consistent with what was experienced this year. you know, the employee costs associated with kind of the reliability work and the locates work, you know, did increase. You know, the one-off items, certainly the legal settlement coming in, you know, that was one-off. And then, you know, the funding plan with respect to the utility, we don't expect to see, you know, 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? 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.

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

This is Chad at Sweden. I'm the CFO of Century. 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 than 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 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 magnitude of improvement at the corporate level you're expecting?

Well, you know, Chris, I first pointed 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. You know, 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, you know, the utility, but also at the holdings level given, you know, the go-forward plan with respect to Century. You know, we will continue, and obviously you can appreciate this, you know, as we embark on, you know, executing on the century spin, which we're laser focused on now. You know, we're going to incur expenses associated with that. It's, you know, getting a Form 10 together, you know, making the filings, making the public or the private letter ruling filings. And, you know, taking the necessary steps to get Century into a position to spend in the fourth quarter, first quarter of 2024, you know, we'll have some transaction expenses at the holdings level.

Okay. Thanks for all the details today. I appreciate it. You bet, Chris. Our next question comes from Ryan Levine from Citi. Please go ahead.

Hi, everybody. I wanted to start off on page 31. There's some language here about a dividend policy post the separation of century. 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 from beyond if the deal is executed on?

Hey, 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. What we do with respect to the dividend pro forma this spin of century, we're going to evaluate it at the you know, closer to the timing of the spend. You know, I think what we're signaling here is that we are going to, you know, as always, look to pay a competitive dividend to our peers with respect to, you know, payout ratios.

Okay, thank you. And then in terms of the O&M cost initiative or consultants being hired over the last few years, that's been in 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?

Hey, Ryan, it's Justin. Yeah, 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 you know, 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 that then we can prioritize and execute on. And so I think it's going to be a combination. I think there's some things that we've 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 century's spin, it was outlined for Q this year, first quarter next year. The extensive financing markets more broadly are harder to forecast how available or attractive they'll be. Could you see the timeline move faster or get delayed if the cost of incremental capital becomes cheaper or less attractive?

Hey, Ryan, it's Rob. You know, first and foremost, I'd say, you know, we're going to continue to evaluate, you know, the timing. There's, you know, a number of items with respect to the Form 10 and outcome of the private letter ruling that's going to drive timeline 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, you know, 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, you know, some type of monetization option down at the century level, then obviously we'll consider that. You know, and that could take the form of, you know, the IPO markets are obviously clearly closed, but that could be an option. You know, like we said on the 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 process was that, you know, we do have the capacity to, you know, issue debt up top to support a deal every above century. So we would anticipate that, you know, we just continue to watch market conditions, continue to assess kind of what that spend is, option may be, but we'll continue to execute down the path of the spin with the Form 10, you know, going through this year. So I think the timing is going to be more predicated on the Form 10 and the PLR.

Great. Appreciate the call.

The next question comes from David Frank from Walleye Capital. Please go ahead.

Hi. Good day. Good day. I was hoping you could... Hi. 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. 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. Can you just update what was the second part of your question?

Yeah, 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?

Yeah, 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 process. there, we did, and it's on an early portion of the presentation, we did include approximately $300 million. So, if you flip to slide six, the fourth bullet, we did include approximately $300 million of planned deleveraging at Century at the time of the spend. So, you know, we're going to continue to assess that, but, you know, that's between centuries, kind of organic deleveraging from EBITDA growth, as well as, you know, the evaluation of potentially delevering up to $300 million. You know, that's where we're focused.

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

Yeah, 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, you know, positioning Century to have balance sheet flexibility and position the business. You know, like I said, we'll go through the ratings work later this year.

Okay, excellent. And I'm sorry, if I could just bother you for one quick question. Could you tell us your previously or remind us of your previously stated payout I think it's around 60% midpoint for the company, if I'm not incorrect.

Yeah, that's correct, 55% to 65%.

Got it.

Okay. Thank you very much. Again, as a reminder, if you have a question, please press star, then 1. Our next question comes from Stephen D'Ambrisi from Granite Lane. Please go ahead.

Hi, everyone. Thanks very much for taking my question. I just had a quick one, just about, or a quick couple. Just on the old co-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?

Yeah, so that $550 million of debt would be issued up top at the holdings level.

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

So, yes, we did include that as a potential option. What I would say is that, you know, 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 spinoff 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, you know, a retained stake that would then use proceeds to repay any kind of debt issued would be 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 SPF. Okay.

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 creative options were not available, the ratings agency would be fine with that level of debt at the holdco.

Yeah, I won't speculate. We did include that in the analysis, and we're comfortable with our plan, and that even in a worst-case scenario based on the projections, great ratings. Okay.

And then the only other question I had was, I guess, just when I, 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 80 or 90% on the pro forma business. And so is, is what would you say is a competitive advantage? dividend payout ratio? Is it just the peer average or can you pay higher than that? How do you think about that commentary?

Yeah, 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. We will evaluate the dividend policy in conjunction with the spin later this year. All right.

I appreciate the time. Thank you guys very much. Thanks, David.

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

Good afternoon, and thanks for taking my question. I wanted to ask about the holding company drag. It looks like about 63 cents 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?

You know, so post-spin, Tim, and 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, you know, will be issued in conjunction with the 2023 financing plan. That'll be the post-separation. Obviously, over the course of 2023, we're going to incur transaction costs associated with prepping century for the spend. But following that, expect a much more normalized run rate where the majority of the expenses, interest expenses associated with the financing to support this plan to push capital down the utility and repay existing expenses. debt up top at holdings in your 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?

Hi, Sam. This is Karen. You know, 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 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 res-res process, establishing what our capital structure will be and the equity levels 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.

Again, if you have a question, please press star, then 1. 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.