Ladies and gentlemen, good day and welcome to the Southwest Gas Holdings Second Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] As a reminder, today’s conference is being 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.

Thank you, Kate. Hello, everyone, and welcome to the Southwest Gas Holdings second quarter 2023 earnings call. Throughout the call, we will be referencing presentation slides, which we have posted on our Investor Relations website. I'm joined on today's call by Karen Haller, President and CEO of Southwest Gas Holdings; Rob Stefani, Senior Chief Financial Officer of Southwest Gas Holdings; Justin Brown, President of Southwest Gas Corporation; Paul Daily, President and CEO of Centuri Group; and Chad Van Sweden, the CFO of Centuri Group. Please note that on today's call, the company will address certain factors that may impact this year's earnings and provide some longer-term guidance. Some of the information that will be discussed today contains forward-looking statements. These statements are based on management's assumptions, which may or may not come true, and you should refer to the language on Slides 2 and 3 of this presentation and in the press release as well as our SEC filings for a description of the factors that may cause actual results to differ from our forward-looking statements. All forward-looking statements are made as of today and we assume no obligation to update any such statements. I'll now turn the call over to Karen.

Thanks, Tom. Thank you for joining us today to discuss the Southwest Gas Holdings' second quarter results. Turning to slide 5, we are pleased with our progress on our transformational strategy of returning Southwest Gas to its core foundation as a premier, fully-regulated natural gas utility. We achieved significant milestones 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 Centuri into stand-alone infrastructure services leader. 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 remain 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-based growth. We are confident in our momentum. We remain on track to deliver 5% to 7% CAGR and rate-based growth over the next three years and maintain a strong investment-grade balance sheet and competitive dividend. Additionally, Centuri has performed outstanding during the first half of the year as they execute on their project pipeline and overcome the headwinds faced during 2022. As you can see on slide 6, we are making excellent progress on our 2023 strategic priorities, completing several key strategic milestones during the second quarter. At Holdings, we completed our 2023 financing plan with a $550 million term loan in the middle of April. We continue to see limited near-term equity needs for 2024 and…

Thanks, Karen. On slide 11, we outline our earnings per share performance for the second quarter. The company's consolidated GAAP and adjusted EPS are shown by each operating company. As Karen mentioned earlier, the utility and Centuri each had a record-setting second quarter. The utility recorded its highest second quarter net income on record. Centuri recorded its highest ever second quarter revenue and EBITDA on record. On an adjusted basis, we finished the second quarter 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 three months of MountainWest. The utility's performance during the quarter is a product of our disciplined O&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. In the appendix, we provide a reconciliation of adjustments by operating company. The vast majority of the second quarter adjustments relate to Centuri spin costs and consulting fees related to utility optimization. Now I would like to provide a walkthrough on the performance of each operating company. Moving on to slide 12, you will see the year-over-year performance drivers for our utility, Southwest Gas Corporation. In the second quarter of 2023, utility gross margin increased by approximately $26 million 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…

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 third quarter and we're currently targeting filing by the end of this month. We're also actively preparing for two rate cases in 2024. First, an Arizona rate case in the first quarter and then given our existing five-year rate case schedule in California, we plan to file our next California rate case in the third quarter of next year. Lastly, we're also evaluating the timing of our next Great Basin rate case and due to a prior settlement commitment, we know that that filing will occur prior to June of 2025. Turning to slide 18, we highlight other recent regulatory filings and constructive outcomes. First, we received approval for two different filings in Arizona. As Karen mentioned previously, the Arizona Corporation Commission approved our request to modify our existing gas cost balancing account rate to facilitate the timely recovery of the gas cost balancing account. We anticipate this approval will provide approximately $130 million in incremental annual revenues. We also received approval of our annual customer-owned yard line or coil surcharge filing where we were authorized an increase of $4.3 million to recover previous coil investments. 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 reviewed our gas purchases during the test period and found them to be reasonable and prudent. As we mentioned on the last call, we have two 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…

Thanks, Justin. Turning to slide 20, I'm proud of the performance delivered by the Centuri team during the second quarter. With more than 12,000 employees in 43 states and provinces across the United States and Canada, Centuri has a very broad geographic reach and works with most of the largest blue-chip investor-owned utilities, and there are 100-plus million customers across the U.S. and Canada. These strengths mean Centuri is well-positioned to be a stand-alone 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. As both Karen and Rob mentioned, Centuri had record-setting second-quarter revenue and EBITDA performance driven by strong continued execution and project wins, as well as strong demand from the on-going 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 million, representing a $65 million year-over-year growth in LTM adjusted EBITDA. While certain of our costs remain at or above the elevated levels experienced during 2022, we took proactive measures last year to negotiate more than $24 million of annualized incremental revenue increases on existing customer contracts and implemented $21 million of annualized cost savings to offset certain of these inflationary cost increases. We are continuing to deliver growth across…

Thanks, Paul. Our year-to-date results are a testament to our on-going efforts, and we look to finishing the year strong. On slide 27, we are reaffirming our 2023 utility net income and 2023 Centuri 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. Additionally, we are making an upward revision to 2023 utility CapEx guidance, now $700 million to $720 million, which is largely a result of better-than-expected customer growth and favorable new business trends across our service territories and the associated investment in our infrastructure 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 Centuri, we affirm our guidance ranges. Based on first-half 2023 performance, we would expect revenue at the higher end of the range. Centuri margin will depend on level of storm activity for the year. The third quarter is historically the most active quarter for major storms. Before we open the call-up to Q&A, I want to emphasize that our teams are focused on executing our 2023 strategic priorities, delivering strong financial results, and providing exceptional service to our customers. At Southwest Gas Holdings, we are confident in our path forward as a premier pure-play natural gas utility. We will continue delivering steady organic rate-based growth through strong regional demand dynamics, as well as earnings growth through financial discipline, operational excellence, and constructive regulatory relationships. We're advancing toward the planned tax-free spin of Centuri, 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 up the call for questions.

[Operator Instructions] We'll take our first question from Richard Sunderland of JPMorgan. Please go ahead.

Hi. Good morning. Thank you for the time today.

Good morning.

Starting with the Centuri 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?

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 fourth quarter. And so that's largely driving our change to clarify where we are in the first quarter spend. So we expect to get an answer from the IRS in the fourth quarter, be able to spin in the first quarter, but we may access capital markets before that time.

Understood. 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?

No. We're still focused on the spend at this point. We obviously have fiduciary duty to our stockholders. 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 spin and the first quarter completing that as announced.

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

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.

Is competitive meaning in terms of payout ratio?

Correct.

Okay. Got it. Very helpful. Thank you for the time today.

Thank you.

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

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

Yes, we certainly this is Chad Van Sweden the Centuri CFO. We certainly saw much stronger storm activity in the first half of the year than we've historically seen. If 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 historically been able to capture. As Karen mentioned, the third quarter tends to be the strongest quarter for storm activity and we are expecting a particularly active hurricane season this year.

Okay. And then on CapEx, do you raise your utility CapEx numbers. Where -- what are the big drivers of 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?

So the CapEx is largely driven by new business and if that's 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.

Okay and then last on operations. The consulting study seems to have been completed by now, are any recommendations or any opportunities identified through third-party advisors been implemented or could those be incremental opportunities to cut costs beyond what's in your term plan?

Hey Ryan, it's Justin. I think as Karen outlined, I think it's kind of a multi-phase 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 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 third and end of the fourth quarter and then the hope would be as we start to look at maybe implementing some of those in 2024.

Thanks for taking my questions.

[Operator Instructions] 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 for closing remarks.

Thank you Kate. And thank you all for joining us today. This concludes our conference call. Thank you for your interest in Southwest Gas Holdings and have a good day.

This concludes today's Southwest Gas Holdings Second Quarter 2023 Earnings Call and Webcast. You may disconnect your line at this time. Have a wonderful day.