John Hester - President, Chief Executive Officer of Southwest Gas Holdings Paul Daily - President, Chief Executive Officer of Centuri Karen Haller - Executive Vice President, Chief Legal and Administration Officer Greg Peterson - Senior Vice President, Chief Financial Officer Justin Brown - Senior Vice President, General Counsel Boyd Nelson - Vice President of Strategy, Investor Relations

Good day ladies and gentlemen, and welcome to the Southwest Gas Holdings, 2021 Year End Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this call is being recorded. I would now like to turn the conference over to Boyd Nelson, Vice President of Strategy and Investor Relations. You may begin.

Thank you, Michelle, and welcome everyone to the Southwest Gas Holdings Year End 2021 Earnings Call. My name is Boyd Nelson and I’m the Vice President of Strategy and Investor Relations. I’m assuming responsibilities for Investor Relations from Ken Kenny, our Vice President of Finance and Treasurer, who after a period of transition will focus full time on finance matters for the company. We have posted today’s presentation on our IR website. On today’s call we have John Hester, President and CEO of Southwest Gas Holdings; Paul Daily, President and CEO of Centuri; Karen Haller, Executive Vice President, Chief Legal and Administration Officer; Greg Peterson, Senior Vice President and CFO; and Justin Brown, Senior Vice President and General Counsel. Please note that on today’s call the company will address certain factors that may impact this coming year's earnings and provide some longer-term guidance. Further our attorneys have asked me to remind you that some of the information that will be discussed today contain 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 two and three of this presentation, as well as in the press release and also 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 statement. With that, I'd like to turn the call over to John.

Thanks Boyd. On slide six we present an agenda for today’s call. We’ve got a lot of existing content for today’s call, so let’s dive right in. Really big news today is the announced yesterday that Holdings will be pursuing an exciting separation of its Centuri business unit, an effort to continue facilitating its growth trajectory and create enhanced value for shareholders. For our call today I’ll kick things off with an overview of yesterday announcement, regarding our Board of Directors decision to pursue a separation of Centuri Infrastructure Services business unit and holdings. Karen will overview the value proposition, our ongoing regulated Natural Gas Operations continue to offer our shareholders. Justin will provide an update on major rate case activity and our continuing collaboration with regulators to safely and lively service our customers’ energy needs. Paul will overview the value proposition that our Infrastructure Services Unit offers our shareholders, especially with the newly announced separation and Greg will then review our recent operating results and outlook for 2022. Turning to slide eight, we provide some more perspective around the Centuri separation is and why we are confident and enthusiastic this is an optimal time to pursue the strategic course of action. Many of you are aware that we acquired Centuri’s predecessor entity in 1996 to fulfill a need for high quality, utility infrastructure services for our distribution systems. After our acquisition, we quickly saw a similar infrastructure contract by many other peer regulated utilities. The Centuri brand and organization was established in its current form in 2014. As the Board and Management Team, we regularly strategically review this business. In conjunction with outside advisors, to ensure our family of businesses is maximizing value for our shareholders. We’ve always been open minded about to possibilities of separation in some form…

Thank you, John. Let me open with slide 12. Under the Southwest Gas Holdings umbrella, we have built a premier gas delivery network in the Western United States. Post separation will be a pure play fully regulated natural gas business with strong collaborative relationships, with our State Regulatory Commission and the Federal Energy Regulatory Commission. Our collaborative approach to regulatory relationships contributed to near record growth in revenues and rate base in 2021, and we expect to continue to grow Southwest Gas’s customers, rate base, EBITDA and net income. Further our re-staff position at MountainWest provides a complementary and compelling suite of high return assets to drive value and earn in decretion. With unique strength and stability, MountainWest is both commercially and geographically adjacent to our regulated utility operations. With long term customer relationships, more than 90% of MountainWest revenue is contracted, and over 70% of revenues are backed by investment grade customers. So our strategy is clear, we look forward to advancing our growth and delivering significant value for our stockholders, as we continue to deliver reliable, affordable and clean energy across our service territories. Turning the page, I'm going to discuss some of the drivers we see for continued value creation in our regulated business. Our regulated natural gas operations provide stable and predictable cash flows and strong returns, and are the types of assets that will be the backbone of the energy transition. And this is reflected in a rate base that has nearly doubled in the last five years, driven by capital investment, achieving good outcomes in our rate cases thorough our strong relationships with our regulators, and of course the MountainWest acquisition. Rate based growth has and will continue to support earnings growth. That said, rate base growth does impact ROE and rate jurisdictions with…

Thanks Karen. We continue to see strong demand for natural gas service in our service territories. This demand translates into investment opportunities to support both customer growth, and pipe replacement activity, to ensure we continue to meet regulator and customer expectations when it comes to providing safe and reliable service. These investment opportunities underpin our expectation to deliver compound annual rate base growth of 7% over the next five years. A critical part to sustaining this growth is our focus on maintaining strong collaborative relationships with our state regulatory commissions. We're steadfast in our approach to ensuring we have continuous open, transparent and collaborative dialogue with all stakeholders, to help insure we work together on outcomes that are in everyone's best interests. Our most recent rate case cycle outcomes contributed to approvals of approximately $66 million for 2020 and 2021. We also received approval last quarter to recover $74 million associated with previously approved capital tracker programs in Arizona. We currently have rate cases pending in Nevada and Arizona as shown on slide 15. We're excited to announce that we work collaboratively with all stakeholders in our Nevada rate case to develop a constructive settlement that proposes to increase statewide revenues by $14 million, as well as potentially recover the COVID-19 regulatory asset amounts. Our request and certification was for approximately $28 million which included approximately $7 million reduction in operating expenses since our last rate case. Their request also included several non-traditional adjustments to our proposed revenues, which totaled under $5 million. In addition, we requested to utilize the targeted capital structure. The proposed agreement is still subject to commission review and approval, but we expect that review on our final decision later this month. With respect to our Arizona rate case, we recently finalized the procedural schedule and…

Thanks Justin. I'm going to pick up on slide 17, with some comments on how we are positioned to benefit from investment in energy transition. Our business is benefiting from societal industry trends such as gas infrastructure replacements and safety and reliability investments. That translates into tangible stockholder value. Together, MountainWest and our utility system provide extremely attractive energy transition opportunities and renewable natural gas, compressed natural, gas, responsibly sourced gas, hydrogen and CO2 transportation. We are advancing the clean energy transition and establishing the regulatory framework to advance sustainability across our business, including connecting sources to end users and investing in infrastructure to help make R&G available to the market. Developing unique partnerships to study and develop standards for hydrogen creation and blending, exploring opportunities for CO2 transportation and sequestration, continuing to work with transportation partners to reduce greenhouse gas emissions with compressed natural gas and renewable natural gas and implementing the Missions Reductions Technology at part of our operations procedures. Before I have over to Paul to take more about Centuri, I’d like to make remarks on the benefits of our natural gas business of operating as peer play fully regulated company on slide 18. From a financial perspective, we will be able to deliver the stable, low risk growth, which is characteristic to utility earnings and in our case supported by population and economic growth in our service areas. When you combine this with the geographic diversification and strong consistent cash flow protection from our pipeline asset, we will have a highly predictable financial outlook. We will be able to optimize our capital planning and in turn our return to stockholders, and looking to the future, we will have really exciting opportunities in the energy transition. With that, let me turn the call over to Paul to talk about Centuri.

Thanks Karen. Turning to slide 20, Centuri presents a compelling value proposition as a standalone company. As John mentioned earlier, we have built Centuri into an incredible utility infrastructure services leader, dedicated to delivering a diverse array of solutions to utilities across North America. We have succeeded in growing the business because we have instilled the client centric focus and a commitment to quality safety and efficiency. The business grew initially as the need for utility infrastructure repair replacement grew, and as construction outsourcing became more common, we have taken strategic opportunities to add scale through organic growth and acquisitions. During the past five years we've added three platform companies to provide strategically targeted markets and services. In 2017 we acquired NewCo for non-union gas distribution services throughout the Northeast. Linetec we acquired in late 2018 for non-union electric transmission and distribution throughout the Gulf, Southeast and Mid-Atlantic States and most recently Riggs Distler as our union platform for providing electric T&D, renewables and 5G services throughout the United States. While strategically adding significant scale though organic and M&A growth, we’ve maintained our discipline staying with our low risk recurring MSA driven utility distribution services profile. We have approximately 10,500 incredibly talented employees within our eight operating companies throughout the U.S. and Canada. It’s their hard work, dedication and support of our businesses each and every day that has help build a safety, focused high performance company culture, while serving a highly regulated blue chip customer basis. There is a table in the appendix that depicts that we have over 23 years of continuously contractual service to our top 20 customers. In fact we’ve been working for NPL’s first customer for 55 years now and there’s three clients that were in our fourth decade of service too. Most importantly, as…

Thanks Paul. Yesterday afternoon we announced our 2021 earnings and provided some additional statistical information. We also filed a 2021 annual report on form 10-K with the SEC. Please refer to these documents for a comprehensive analysis of our operations for 2021. As shown on slide 26, adjusted EPS was $4.17 per diluted share for 2021 versus $4.14 per diluted share for 2020. This tops the full year adjusted guidance that we provided in November on our previous conference call. Let me touch on some of the highlights. Record net income was posted to utility as operating margin increased $83 million or 8% between years, driven by $61 million of incremental rate relief in Arizona, Nevada and California and 37,000 new customers who provided $13 million of operating margin. During 2021 we invested over $600 million in the expansion, safety and reliability of our natural gas distribution system to better serve our customers. This included a new customer information system implemented in May 2021. As was previously mentioned, Centuri had record revenues of $2.2 billion, $2.5 billion on a pro forma basis. Included in total revenues were emergency restoration services revenues of $65 million in 2021 compared to $82 million recorded in 2020. Adjusted for the tax affected $21.5 million of acquisitions related in partial year results associated with Riggs Distler, Centuri’s net income was $61.9 million in 2021, our second best year ever versus the record $74.9 million recorded in 2020. The corporate and administrative net expense of $26.8 million in 2021 reflects the net of tax acquisition and related costs of MountainWest, which we acquired on December 31, 2021, and approximately $3.4 million of net of tax costs associated with stock holder activities and response. As a reminder, the operating results of MountainWest are not included in our…

Thanks Greg. Before we move to Q&A, I want to leave you with a few thoughts referencing slide 28. We’re really excited that the separation we have discussed today will unlock increased value for our shareholders inherent in both companies that is not currently reflected in our stock price. We’re enthusiastic about the important role these entities will play prospectively with major sector themes of infrastructure modernization and the energy transition. For Southwest Gas, including MountainWest, we will have compelling growth avenues as a pure play, fully regulated, natural gas business with promising opportunities and favorable jurisdictions from natural gas. Centuri will continue its established track record of significant revenue and EBIT growth and will be central to the construction of infrastructure across the United States and Canada that is necessary for the energy transition. As you can see, we are incredibly excited about the benefits of this planned separation and the value it will deliver for customers, employees and our shareholders. Before we open it up for questions, I'd like to note that today’s call is focused on the separation of Centuri, the outlook and fourth quarter and full year financial results. Today we do not plan on answering any questions regarding the tender offer or our engagement with [inaudible] which we have covered in prior calls. With that, I'll turn it over to the moderator to explain the process for asking questions.

[Operator Instructions] Our first question comes from Richard Sunderland with JPMorgan. Your line is open.

Hi! Good morning! Thanks for taking my questions today. Maybe starting with the separation, just curious what potential structures are under evaluation here. Is this something from – it’s actually a spin to an outright sale in terms of possibilities and when do you expect to communicate a final plan?

Thanks Richard, this is John. I think that certainly both of those options that you mentioned are things that we will be considering. There are other options as well. We're going to be evaluating that over the next month or two. One of the issues that we're going to be sensitive to is tax efficiency. So I don't think we're limiting anything from being an option to consider. We're really going to try to identify the option that serves the best interest of our shareholders and take that course of action. I think that you can expect more transparency on ultimately the route that we're going to take probably in the next 45 to 60 days.

Got it, that’s very helpful. And then turning to the credit side and thinking about your equity needs going forward, what are the FFO to debt, kind of upgrading and downgrading thresholds currently for Southwest Gas Holdings and how do you think about the potential moves or changes in those, in consideration of the separation going forward?

Yeah Richard, this is Greg. Certainly as we move forward and work with our credit rating agencies, we believe as we announced today and then talked on the call, that our financial position, our risk rating will improve at the credit rating agencies. Of course that’s ultimately up to them. But we will utilize that information as we move forward to make sure that we have a strong balance sheet and it will facilitate our ability and the timing and amount of inquiry [inaudible]. But a lot of that’s to come and depended upon the separation that we do and the timing of that with Centuri.

Understood! And maybe if I could slip in one final question. The MountainWest equity, what's your latest timing on completing that? Is that pushed out versus the May timeframe you discussed before? Maybe how is the separation factor in there?

Yeah, the separation is certainly a consideration, a key component of all the things that we’re doing at Southwest Gas Holdings and we will take the information into play with everything else that we're doing to make sure that as John mentioned that we are efficient in issuing capital to maximize shareholder value, so more to come on that.

Got it. Thank you for the time today.

Thanks Richard.

And the next question comes from [inaudible] with Hudson Bay Capital. Your line is open.

Good morning! Can you hear me?

Good morning!

I was wondering, in terms of – you alluded to the increase room on your credit metrics with the Holdings Company. Can you elaborate a little bit in terms of how much then you think would be available to you and I think the original equity number you've had was about $950 million and can apply that extra room [ph], that equity number would be able to again reduce. So is this – you talked about you know what you’re expecting is into this – has there been any – has there been discussions with the agencies? Have they kind of warned you about this and if not, at what point do you think you will engage using these [inaudible].

Yeah, this is Greg. I think the first thing is that we have engaged and talked with our credit rating agencies. We think that’s appropriate to do, especially with the significant development as it relates to the separation of Centuri. So we are working with them as we mentioned earlier, as we proceed down the path and have a more definite plan of the type of way that we will effectuate the Centuri separation. That will have important aspects in the amount and the timing of equity that we do. We will have and certainly anticipate that we will have a stronger and better risk profile due from all three of the rating agencies, and we think that that will help us on a go-forward basis to have flexibility to issue less equity going forward, while maintaining those credit rating agency metrics. However, a lot of that is yet to be determined as we get to the details of the separation.

Alright, you wouldn’t care – well, should you hear something more about what type of separation or decision is 45 to 60 days. At this point given the options you have, what do you foresee the timeline for actual execution of the course of business that you will decide on here; 45 to 60, how long will that take to fluctuate?

This is John. I think that the – in terms of executing the separation of Centuri, we expect that that will take nine to 12 months.

Okay, and again with that in mind and the, with respect to the agencies would want to see a separation prior to altering you know you're various metrics and that sort of thing. Can you then give some as to you know, about the term loan in terms of public financing, whether you intend to perhaps extend the term loan and some cash.

This is John again. As Greg mentioned, we have had some initial conversations with the rating agencies. We will continue to do that, but we are not expecting that we are going to hold-off on doing any kind of financings until we get to the end of the Centuri separation, and I think that we're going to continue to move forward and we're going to continue to have those discussions with the agencies, but I don't think that you can necessarily assume that since we have indicated it’s going to take nine to 12 months to do the separation on that, we're going to need or – in fact we’re going to desire an extension to that 364 day loan.

And in terms of the inequity [ph] financing, do you anticipate that that will be done in forward traditional fashion or are you considering you know something more along the lines of a project placement or some other factors in that curve.

This is John again. We're looking at a number of different options on that again. We’re going to make sure that we do it in the most efficient manner possible and that we do it in a manner that’s going to maximize the value for our shareholders.

Okay, thank you.

Our next question comes from Ryan Levine with Citi. Your line is open.

Hi everybody! Is this announcement or plan contingent on the valuation that Southwest Gas would receive for their stake or its stake in Centuri?

Ryan, this is John. No, we don't have any kind of contingency like that on this. We’re pretty excited about it and we're going to be moving forward with this again under a time frame, which probably is going to take nine to 12 months. So there's no contingent factor on moving forward like this, along the lines of what you referenced.

Okay. And then do you have a current estimate of any way of framing that dis-synergy is associated with Centuri for the holdings company.

This is John again. No, we don't think that there really are going to be any particular dis-synergies, because Centuri has really operated somewhat independently from Southwest Gas utility and certainly MountainWest. As we mentioned previously, we don't see any of the Southwest Gas Holdings folks moving over to Centuri. Centuri has its own management team, so we don't really think that there are going to be any notable dis-synergies.

Okay, and then last question for me that the Linetec and non-control interest, in anticipating the next, the ’22 component will be effectuated before any transaction regarding the broader Centuri platform would be enough?

Yeah, this is Greg, Ryan. We are certainly looking at that as you are aware. This is the first year that we can make the acquisition of 5% of that 20% that we have and that is certainly something we're in discussions with internally as a management group and we will let the outside world know as we move forward on that.

I appreciate the color. Thank you.

Our next question is follow-up from [inaudible] with Hudson Bay Capital. Your line is open.

Yes, I was wondering do any of the options for examining will necessitate shareholder approval.

No, we're not anticipating that any of the options that we're going to pursue will require that. This is John.

And do any – are there any regulatory approvals for – any for the options you are seeking for either for Centuri or for what’s in the utility MountainWest.

No, we don't anticipate any regulatory approvals being needed either.

Okay, thank you.

Our next question comes from Steven [inaudible]. Your line is open.

Hi guys! Congratulations on the announcement, and thanks very much for taking my question. Just on the dividend comment, can you just highlight what you think comparable with peer play utilities means, in terms of like relative to 55% to 65% of earnings and then also just do either construction peers typically pay a dividend? Thanks.

Yes Steven, this is Greg. I’ll start by saying that we are a growth utility, so I think that’s important. Even as we’ve talked about the 55% to 65%, we’ve been at the lower level of that, because we are growing much more rapidly than many of our utility peers. As we move forward, I – without putting a number next to that, I would say that number will move up as far as our pay ratio, that we have strong cash flows that will be coming from MountainWest to us and already are and so I think that will facilitate us moving up higher in that sale, but don’t want to provide an exact number at this time. But we will be much more, competitive in the upper half of that range than we have been previously. As it relates to Centuri’s construction peers and I always have to start up by saying, I don't know that they have a peer group, because they are head and shoulders above any of the companies that operate in that market. But there are some as you are aware that do pay dividends and some that don't, and as I mentioned in my remarks, each company is going to look at their respective balance sheet and their peer groups to determine the weighted lease structure capital, and the type of dividends that they issue.

Okay, that's helpful. Thanks again and congratulations guys!

Thanks Steven.

Our next question comes from Tim Winter with Gabelli. Your line is open.

Congratulations guys on the announcement! I appreciate that you know we have 45 to 60 days maybe to wait for more details, but I was wondering if you could maybe just talk a little bit or provide some color on your perspective of the pros and cons, including tax considerations of a sale versus spend versus an IPO.

Yes Tim, this is John. I think that we're going to be considering all of those. I think that the sale option is the one that potentially has the most adverse tax consequences. So if we were to pursue an option like that, it would have to be a pretty stout valuation. The spin option, is including having some kind of sponsored spin, where we might have investor that takes 19.9% of the entity. One of the option – one of the advantages with that option is that it would help provide a marker on the valuation of the business. The downside of that is first, let’s say an IPO or a spin where all the shares got issued would be that if you are bullish on this business and we are, and if you think that there is further execution, that we would like to demonstrate to the market related to rates this far, we think that certainly that would be some significant upside that would be able to be captured in terms of issuance of shares. But all those options are ones that we're going to be considering and looking at over the next couple months.

Okay, great, that's very helpful. Also, you provided a little bit of growth targets for two of the businesses. Can you talk a little bit about the growth potential of the pipeline business?

Yeah, this is Greg. Certainly we know that there is – and I assume Tim that you are talking about MountainWest?

Yes, yes.

Yeah, we’ve talked about how strong and stable that business is. I think in Karen’s remarks she talked about some of the opportunities that we are seeing now in that business that can provide some future growth. So those are things that we, we’ve done them for two months now and those things are already coming to our attention and we, as we evaluate those, we’ll probably have more information to provide in the future. But we are certainly very bullish on MountainWest, not only their strong stable cash flows, but the growth prospects that are there.

Tim, this is Karen. I guess I would just add to that, that the MountainWest saw the opportunities in things, because they are highly contracted. They are seeing possibilities or connections to the pipelines to enable coal to gas conversions. They are working with oil producers to identify opportunities to increase associated natural gas transportation. They have been fully contracted on all of our gas storage facilities and we have a high demand for increase in those storage facilities so we can evaluate additional services there. We had an expansion in December and that is fully contracted already on the over thrust and so we’re looking already at ways to do expansion there as well. So we see a number of opportunities and are continuing to identify growth opportunities in MountainWest.

Okay, great. Thank you.

Our next question comes from [inaudible]. Your line is open.

I wanted to follow-up on the dividend prescription. We’ve seen operations here probably recently that the dividend rate at the utility, [inaudible] left behind and that’s having to reduce their dividend rate that’s put forward in longer term path goals and the spend was anticipated to compensate that. Should we – are you expecting that the dividend rate going forward of Holdings would need perhaps a downward adjustment as part of its plan, while obviously gaining the positive benefit of the value from this operation.

Yes, I mentioned. This is Greg. You know our dividend rate we actually think will move upward as a regulated strategic company going forward. In our financial statements there are separate standalone financial statements of Southwest Gas Corp., and you can see that that dividend rate on the cash flows was about 59% is what the – what Southwest Gas Crop paid to its parent SWX as a relationship of its earnings. So, no reason to think that the dividend rate on earnings will go down post separation. Actually, it should go up.

Alright, thank you.

Our next question comes from Richard Sunderland with JPMorgan. Your line is open.

Hey! Just one more for me. You referenced consolidation trends. Just curious where you are seeing Southwest Gas sitting amid kind of public to private transactions, and with industry consolidation overall.

Rich, this is John. I think that we've got a really good game plan for moving forward. So I think that our expectations are that we're going to continue to exist as a publicly traded company. We've got the big capital expenditures, we’ve got significant customer growth and we’ve got great opportunities in the energy transition. So we're not, we're not ready to pull the plug on being a publicly traded company yet.

But just to be clear, do you see yourself as a consolidator in kind of transaction similar to the Questar side. Just curious on that angle.

We will continue to look at those opportunities. I think that we’ve looked at some of the properties that have come up in the past couple of years and frankly have had discussions with some of those parties. So that's something that definitely we will continue to look at. We continue to be really bullish on the natural gas business and if there is something that makes sense and can be done on an accretive basis to enhance the value for our shareholders, we would definitely take a look at that.

Appreciate the color. Thanks.

There are no further question. I’d like to turn the call back over to Boyd Nelson for any closing remarks.

Thanks Michelle and thank you all for joining us today. This concludes our conference call. Thank you for your interest in Southwest Gas Holdings and Centuri. Have a good day!

This concludes the program. You may now disconnect.