Q2 2022 Southwest Gas Holdings Inc Earnings Call
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Ladies and gentlemen, good day and welcome to the Southwest Gas Holdings second quarter 2022 earnings conference call. At this time all participants are in a listen-only mode. A question and answer session will follow the prepared remarks. If you would like to ask a question at that time, please press star 1 on your telephone keypad. As a reminder, today's conference is being recorded.
I would now like to turn the call over to Boyd Nelson, Vice President of Strategy and Investor Relations for Southwest Gas. Please go ahead.
Thank you, Gretchen. Hello everyone and welcome to the Southwest Gas Holding second quarter 2022 earnings call. Throughout the call we will be referencing presentation slides which we have posted on our IR website.
I am joined on today's call by Karen Haller, President and CEO of Southwest Gas Holdings, Justin Brown, President of Southwest Gas Corporation, and Greg Peterson, Senior Vice President and Chief Financial Officer.
Please note that on today's call the company will address certain factors that may impact his 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 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 slide 30 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 will now turn the call over to Karen.
Thanks, Boyd. I'm pleased you're joining us today to discuss Southwest Gas second quarter results.
Let me start by acknowledging that our quarterly results were not what we wanted to deliver to stockholders.
But I want to make equally clear that our businesses are fundamentally strong and will deliver long-term value to our stockholders.
Before we get to the earnings results and plans to unlock value, I want to discuss the strategic transaction process and our newest board member.
First, we have an update on our cooperation agreement with Mr. Icons that was announced yesterday. Consistent with the agreement, we have appointed Ruby Sharma to the Board. As previously announced, Jose Cardenas has retired from the Board in coordination with this appointment.
We want to thank Jose for his contributions throughout the years, and we look forward to working with Ruby.
Turning to slide 5, I'd like to briefly cover the previously announced update on the ongoing Strategic Alternatives process.
Earlier this year, our Board of Directors authorized review of a full range of strategic alternatives to maximize stockholder value. As we've previously shared, we are currently undergoing a thorough strategic review based on indications of interest from prospective buyers.
While we cannot comment on any of the individual indications we have received, we will now
We provided an update on the overall strategic direction of the review last week.
At that time, our board unanimously determined that the best path forward to maximize stockholder value
is to focus on the execution of the strategic plan and conclude the strategic review process for Southwest Gas Holdings and Southwest Gas Corporation.
Continue to review strategic alternatives for Mountain West, including a potential sale of Mountain West, and continue to review strategic alternatives for Century, including a potential sale or a spinoff of Century.
As our board continues to review alternatives for Mountain West and Century, we will continue the disciplined execution of our strategic plan across our business units to deliver performance for our stockholders, employees, customers, and the communities we serve.
Now I'd like to talk about our plans to unlock value at Southwest Gas Corporation.
Moving to slide six.
All of us at Southwest Gas are energized by the opportunities we have in front of us to optimize the utility.
Following my election to the CEO position in May, I made a number of management changes at the utility.
First, I name Justin Brown, the Southwest Gas Corporation President.
resulting in all three business units having presidents focused on maximizing value for stockholders and their respective businesses.
This fundamental change in the utility structure provides the resources and management attention necessary to optimize the utility.
We also restructured changed leadership and reporting structures for a number of functional areas including regulatory, financial planning, and sustainability.
Not only do we have a new Chief Operations Officer as of June 1st and a new Sustainability Officer, but we are in the process of hiring a new CFO following the announcement by Greg Peterson that he will be retiring later this year.
Naturally, a new CFO will bring new ideas and additional change to the utility and holding company.
I want to express my gratitude to Greg for his service to the company and for his willingness to assist with the transition.
Our leadership team is actively pursuing a number of key focus areas to meet the needs of our customers and improve financial and operational performance to accelerate value creation for our stockholders.
To start, ensuring our customers can safely and reliably count on receiving their clean, affordable natural gas service.
to provide life's essentials, and to fuel prosperous businesses is our top priority.
We attribute our leading customer satisfaction and safety scores to the strategic investments we've made to enhance the safety and reliability of our distribution system.
as we continue to prioritize our customers.
we will build on our existing relationships with our regulators to continue to make disciplined capital investments that benefit our service territories.
leading to constructive regulator outcomes and attractive rate-based growth.
While we are near the top among our peers, spending less per customer than the average of our publicly traded peers.
We are re-examining our O&M costs by doing a bottom-up review for incremental improvement.
By maintaining and improving our operating disciplines, we expect to further extend our cost leadership status.
We are also working to optimize our capital expenditure program, which is already beginning to yield results. This quarter we've reduced our guidance for 2022 capital expenditures by $50 million.
This change is part of our strategy to optimize the timing of our capital expenditure program to improve returns for our stockholders.
With our focus on disciplined investments, we can enhance stockholder returns while still supporting customer growth and system improvements to provide the same, highly rated customer service we always have.
Beyond these important operational drivers, we are also operating against a great backdrop with one of the fastest growing dynamic service territories in the country.
This gives us a strong tailwind and reinforces our confidence that by concentrating on our key focus areas outlined on this slide, we will improve our financial performance and grow our rate base.
borrow-ee, earnings and dividends.
all while continuing to meet the needs of our customers.
The company plays a vital role in the energy transition and continues developing innovative energy solutions like renewable natural gas.
and compress natural gas while testing hydrogen blending to establish standards and guidelines with the goal of bringing it to market in the future.
We are committed to delivering clean energy molecules to customers and the communities we serve to drive economy-wide emissions reduction.
We are well positioned to deliver on our strategy as we produce strong outcomes for our customers and the communities we serve and accelerate value creation for our stockholders.
Moving on to slide 8.
As you can see, our business is fundamentally strong and poised for long-term value creation as we continue to meet the energy needs of our customers.
Our second quarter results were in line with our expectations, excluding certain event-driven expenses of the utility that we do not believe will continue through the remainder of the year and the impact of global supply chain and inflationary headwinds across our Infrastructure Services portfolio.
Southwest Gas Holdings reported a diluted EPS of 23 cents after accounting for 33 cents per share of one-time expenses.
Specifically, adjustments to second quarter earnings include $28.9 million of collective, non-recurring shareholder activism, settlement, stockholder litigation, and strategic review expenses.
as well as certain Mountain West costs expected to be non-recurring over the longer term.
Not included in adjusted EPS is the $8.3 million, or $0.13 per share, impact from a decline in the Coley Mark-to-Market Cash Surrender value relative to the second quarter of 2021.
The Southwest Gas utility delivered a record 12-month operating margin of $1.1 billion, added 39,000 new utility customers in the same period, and maintained a high customer satisfaction score of 95% in the second quarter of 2022.
It is important to note that our O&M expense increase this quarter was driven primarily by two factors. For more information, please visit www.usda.gov.
The first was due to transitory, event-driven expenses which we do not expect to continue, like pipeline integrity management and maintenance.
temporary or contractor services for customer and technology support, and legal related claims and approvals.
The second factor was the normalization of employee and employee-related costs to pre-pandemic levels as economic activity returned following the pandemic.
Excluding these event-driven costs, our results are generally in line with our prior guidance. And as I previously indicated, we are in the process of evaluating all costs.
to ensure we are operating efficiently.
with its unique, structurally advantaged critical infrastructure, delivered $62 million of revenue in the second quarter.
achieved an adjusted EBITDA in line with expectations and remained on schedule with transition integration work.
The Mountain West results this quarter were impacted by pre-tax, non-recurring expenses primarily associated with post-acquisition integration costs.
We expect to complete the integration of Mountain West by the first quarter of 2023, although we expect the majority of TSA services to be concluded by 2022.
We expect integration expenses for the first quarter of 2023 to be lower as we complete the process.
We also continue to target approximately $100 million in incremental growth investment opportunities at Mountain West over the next three years.
Lastly, Century delivered record quarterly revenue of $706 million, an increase of 34% compared to the second quarter of 2021.
Century's performance was impacted by inflation, mix of work, and increased amortization and interest related to mix differ.
We are confident that Century's business prospects are strong and unchanged by the near-term headwinds.
In fact, last quarter we contracted for a $125 million offshore wind project and have pending additional awards exceeding $300 million for multi-year performance.
which we anticipate will be executed during the third and fourth quarters.
We also renewed a multi-year contract with a large electric utility customer anticipated to generate more than $500 million in revenue over the next five years.
I'll now turn the call over to Justin to discuss our utility business and our rate case activity.
Thank you, Karen. Starting on slide 9, we remain focused on working constructively with our stakeholders to secure positive regulatory outcomes.
During the quarter, we started to see rate relief from our settlement in our Nevada rate case that was approved by the Commission with rates effective April 1, 2022.
The settlement resulted in an increase in revenues of just over $14 million, relative to an increase in rate base of nearly $250 million for a total authorized rate base in Nevada of $1.7 billion.
We were also authorized an improved ROE of 9.4% and we received approval to utilize a 50% target equity ratio.
We also have our $90 million Arizona rate case that was filed in December of 2021 that is currently pending with the Arizona Corporation Commission and we currently expect a decision in early 2023.
This leads us to slide 10, which provides an overview of the first round of testimony from interveners in our rape case.
The revenue requirement testimony was due last Friday, August 5th, and rate design testimony is due this coming Friday, August 12th.
As shown on this slide, staff is proposing close to $54 million increase and RUCO is close to $43 million.
An important distinction between our $90 million request and the staff's $54 million proposal is we included a $16 million property tax adjustment in our base case and the staff is proposing to not recover that in base rates, but rather to recover that amount through an existing tracker program that we have for property taxes.
So, a better comparison to the staff position would be to exclude the $16 million from our $90 million request.
Both staff and RUCO are proposing an increase to our currently authorized ROE of 9.1%. Staff is proposing a 9.3% ROE and RUCO 9.24%.
Staff is also supportive of our proposal to adjust rates to reflect a 12-month post-test-year plan adjustment, whereas RUCO is supporting a 6-month adjustment.
As I mentioned, rate design testimony is due this Friday, August 12th, and hearings are currently scheduled to begin September 26th.
Turning to slide 11.
As demonstrated by our recent Nevada and pending Arizona general rate cases, we continue to experience significant rate-based growth as illustrated by the chart.
Our investments in our system have been driven by tremendous customer growth, robust pipeline replacement efforts to help ensure a safe and reliable distribution system, and capital tracker programs where we have partnered with our regulators on different investment opportunities as well as a variety of service territory expansions.
While we believe we are well positioned to grow and meet the energy needs of our customers throughout our service territories,
We are also focused more on being proactive in our planning and execution to ensure we deliver on our commitments to optimize the utility through O&M discipline, CapEx optimization, and making sure we are optimizing our rate case processes to deliver enhanced financial results.
As shown on this slide, we have a strong track record of working with our stakeholders to enhance regulatory and legislative frameworks in our jurisdictions to ensure we continue to make the capital investments necessary to meet and exceed the expectations of our customers and regulators when it comes to delivering safe, reliable, sustainable, and affordable service. For more information, visit www.fema.gov
We remain focused and committed to continue to work with our stakeholders to identify and execute on additional opportunities that will be presented by our attractive service territories that we serve.
I will now turn the call over to Greg to provide a summary of our second quarter operating results.
Thanks Justin. Our second quarter earnings press release in 10Q were filed yesterday.
Please refer to these documents for a comprehensive analysis of our second quarter results.
Let's start with an overview of consolidated results.
Slide 13 depicts consolidated operating results for the company and line items for each of the operating segments for the 3, 6, and 12 month periods.
On an adjusted basis, consolidated EPS was 23 cents per diluted share for the second quarter of 2022.
versus 43 cents for the prior year quarter.
I'll discuss each of the operating segments in the upcoming slides, but we'll begin with the corporate and administrative line item on this slide.
Corporate and administrative expense net of tax increased $22.7 million between quarters, primarily due to $17.1 million associated with the overall strategic review process, proxy contests, and related litigation and settlement costs.
These items are components of the $22.3 million of adjustment shown on the page.
The corporate and administrative line also reflects incremental interest associated with the acquisition of Mountain West.
Next, let's move to the operating segments and some transitory costs and headwinds that affected results in the current quarter starting with utility results on slide 14.
On a GAAP basis, utility results declined from $11 million in the second quarter of 2021 to a loss of $2 million in 2022's second quarter.
Temporary changes in the cash surrender values of company-owned life insurance, or COLE policies, accounted for most of the decline.
Operating margin grew by $15 million primarily due to rate relief in Nevada and the addition of 39,000 customers.
However, this improvement was overshadowed by higher interest expense and operations expense including $15 million of transitory costs that I will discuss on the next slide.
Slide 15 provides a backdrop of items impacting the O&M comparison between quarters.
As shown on the bottom left of the slide, O&M in 2019 pre-COVID.
with $105 million for their quarter or about $51 per customer.
O&M in 2020 and 2021 were temporarily reduced due to COVID-related restrictions on customer contact, trading travel and other items.
Normalizing for O&M per customer growth of 1% per year, a more comparable starting point for Q2 2021 O&M would be about $52 per customer or $111 million per quarter.
In the second quarter of 2022, we experienced approximately $15 million of transitory expenses.
that are not indicative of ongoing expectations.
The waterfall chart shows the components.
These include $8 million of legal accruals associated with contractual disputes and legal claims. An incremental $2 million of uncollectibles was due to a higher level of temporary disconnects associated with overall inflationary challenges being experienced by many of our residential customers.
Approximately $3 million in incremental pipeline integrity management costs were incurred in reviewing and updating our mapping of facilities and eliminating inactive risers and stubs based on an incident in Q3 of last year.
We also incurred about $2 million of temporary and contractor services for customer and technology stabilization support for the customer information system that went live last year in Q2.
Other than the transitory cost, the remaining $2 million increase in O&M between quarters is due to inflation and other items and is consistent with our target of O&M per customer growth of about 1%.
Turning to slide 16, we can see the second quarter results of Mountain West since we acquired them on December 31st of 2021.
Both adjusted Ted income and adjusted EBITDA were in line with our internal expectations.
Mountain West earned $15 million of net income in the second quarter and $19 million of adjusted net income after accounting for non-recurring expenses associated with consultant fees, integration costs, and one-time employee benefits.
We continue to benefit from strong demand for natural gas transportation and storage services in the Rocky Mountain region.
The business is highly contracted and whenever capacity is released and put out to bid, we see oversubscribed demand resulting in capacity recontracting at attractive rates.
Since the acquisition, strong operating cash flows from Mountain West have provided support for parent company interest on acquisition debt and regulated operation capital expenditures.
Now let's turn to slide 17 and discuss century results.
As shown on the right side of the slide, adjusted EBITDA was 63 million this quarter versus 50 million in the second quarter of last year.
The growth at Century includes the benefits of incremental revenues from the rig distiller acquisition.
as well as 5% revenue growth from organic operations.
Despite its growth in revenue, several items impacted bottom line results.
The waterfall chart depicts the major after-tax components of the change in century's results between quarters.
Interest expense increased $11 million dollars pre-tax, consisting of approximately $9 million due to the incremental acquisition debt and about $2 million of market interest rate increases.
Our acquisition of Riggs-Dissler in August of 2021 resulted in a $5 million pre-tax increase in non-cash amortization of intangibles.
Higher fuel costs continued from earlier this year and increased $11 million between the second quarters of 2021 and 2022.
About 3 million is associated with Riggs-Dissler and is included in their results.
while the remaining 8 million is attributable to non-regs operations.
While fuel prices are starting to ease back toward more normal levels, we continue to work with our customers to obtain relief from this unforeseen additional cost spike.
While most of the strategic review costs were incurred at the holding company level, approximately $2 million of these costs were reflected in Century's operations.
The RIGS-DISTLER contribution includes the fuel impacts previously noted.
We are excited about the ongoing growth prospects of Riggs-Dissler, but note that some work has been temporarily delayed due to customer supply chain issues and changes in customer specifications.
The benefit in the all other caption is net of the impacts of work mix and higher subcontractor cost headwinds.
Over $125 million of contracted offshore wind support work has commenced and will accelerate in the second half of this year, and we are anticipating other sizable multi-year awards.
Let me now move to slide 19 in our company guidance for 2022 and beyond.
Investments in our natural gas distribution system are estimated to be $600 to $650 million during 2022.
a 50 million or 7% reduction from the top end of our previous guidance.
This reflects our plan to optimize capital investments to bolster returns.
while continuing to support customer growth, pipe replacement programs, and system improvements.
We reiterate our five-year CAPEX spending plan of $2.5 to $3.5 billion through 2026, and the resulting rate base increase CAGR of 5 to 7% during that same period.
Utility head income is estimated at $185 to $195 million.
The reduction from our previous guidance of 200 to 210 is primarily due to the transitory, event driven costs that I discussed as part of the quarterly analysis.
Higher expected interest expense is also a factor.
We continue to include $3 to $5 million of COLE income for 2022.
I should note that the recovering stock market increased COLE cash surrender values by $3 million in the month of July .
Our five-year O&M per customer compound annual growth rate target continues to be less than 1%.
the return on equity of the utility for 2023 forward is expected to be 8% plus.
At Mountain West, we've increased our estimated revenue range to 250 to 255 million from our previous range of 240 to 245 million.
primarily due to incremental recontracting revenue and some reverse PSA revenue.
Our lower EBITDA margin range of 65 to 67 percent from our previous range of 68 to 72.
primarily reflects incremental PSA, labor, and IT expense during the 2022 transition period.
We are on track in our integration plan of Mountain West. Strong operating cash flows from this acquisition have increased Mountain West cash balance from $28 million at March 31st to $55 million at June 30th.
Adjusting for one-time integration and overlapping costs, we reiterate that Mountain West will be accretive to EPS in 2022 and beyond.
As previously mentioned, we have identified $100 million in incremental growth capex investment at Mountain West over the next three years.
At Century, we reaffirm our 2022 revenue guide of $2.65 billion to $2.8 billion, driven by growth in all facets of the business, including Rick's Dizzler.
Due to current inflationary pressures, especially on fuel, and some customer supply chain issue headwinds,
We expect EBITDA margins of 10% to 11% in 2022 down from our previous guide of 11 to 12%.
However, we believe these impacts are temporary and expect even the margins to return to 11-12% in 2023.
For 2023 to 2026, we are forecasting an adjusted EBITDA compound annual growth rate of 9% to 11%.
I'll now turn the call back over to Karen for some closing remarks.
Thank you, Greg. Before we open the call for questions, I want to touch on a couple of the key points we've made today. I want to emphasize that maximizing value for all stockholders is what guides our strategic plan and the decisions we make.
We are excited and confident in the future for Southwest GAS. Our new utility leadership team is focused on optimizing optimizing processes.
challenging the way we've done things in the past, and finding ways to improve the value and returns to stockholders.
And we're energized by all the opportunities we have in front of us and committed to improved financial and operational performance against the great backdrop of our growing service territories. Yes, after this space has just Gaye will hear us talk about Nikkita.
While we continue to advance the century and Mountain West processes...
we will remain focused on the performance of these business units and prioritize delivering growth across our rate phase,
RLE Improvement.
earnings and dividends growth, all while continuing to meet or exceed our customers' expectations.
We look forward to continuing our company's transformation as a leading energy enterprise.
delivering strong outcomes for all of our stakeholders as we forge ahead in today's evolving energy landscape.
Gretchen, you can now open the call for
At this time, if you wish to ask a question, please press star 1 on your telephone keypad. You may remove yourself from the queue by pressing star 2. We'll take our first question from Julian Doman Smith from Bank of America.
Good afternoon. Thanks for the time. Appreciate it. Listen, if I may, I want to go back to where we started the call. What caused you to think about ending the review here, and how do you think about the timeline from here for the pending items that you've already articulated here, if you could elaborate, just with respect to timing rather than necessarily exactly what you think about, you know, bids, etc. I know you qualified that at the outset.
Hi, yes, welcome and thanks for the question. I guess with respect to the process and ending the process, we really, the Board, unanimously after carefully evaluating the indications of interest and considering Southwest Gas Corporation's strong long-term rate-based growth, plans for improving ROEs and favorable demographics, the Board unanimously determined that the best alternative to maximize the value of the utility for stockholders.
is to optimize the utility and execute on the strategic plan. And we just recognize that we have a great opportunity to grow the business while also working to enhance efficiency and cost discipline across the utility.
And then moving forward with the Century and Mountain West processes to unlock value there was the best option.
Got it. All right, fair enough. And then just, if I may, just pivoting back to the core operations in brief here, I mean, can you talk a little bit about the century margins and the opportunity there? Obviously, things have been gyrating here. And obviously, in the prepared remarks, you commented on costs and some of the pressure points there, et cetera. How do you think about the outlook on a more normalized basis here, if you will?
Yeah, Julie, this is Greg. I think that, as I mentioned in my remarks, and Karen alluded to as well, we're really bullish on what Century has upcoming. We talk about what's going on at Riggs-Distler and the offshore wind projects that we have. We know that these fuel costs really hurt us early on, right? If you kind of, uh, tax effect, the fuel impact is about twelve cents.
Q2 and another 6 cents in Q1. So that really hurt us from that thing, but as I mentioned we're seeing fuel prices moderate and we're candidly are working with our customers to try and get some recoveries on those. So the base model for Century is strong and and we're really excited about it.
Got it. All right, excellent. Sorry. And if I can, May, just coming back on Centuria, just your pricing power and the ability to recoup that over time, like when do you get to a more normalized environment there as you think about those more discrete dynamics here?
Yeah, if you're talking about the timeframe to get to normalized operations, I think we're already moving in that direction.
Again, we've had some success in working with our customers and recouping some of those amounts. We're also putting those into any of the renewed master service agreements that we have to try and mitigate such items in the future. So that progress is taking place now. I'm not a good prognosticator of when fuel prices will get back to the levels they were a year ago, but they are headed in the right direction. So that's our thanks for having us.
Alright, excellent. Thank you guys.
Thanks. Our next question comes from Richard Southerton from JP Morgan.
Bye, thank you for the time today.
Maybe starting with the utility and the review, what is the path to sustained improvement in the utility operations? How does that factor into the review outcome? Just thinking about the benefit of Arizona rates next year.
But then over a longer term basis, how do you sustain that performance? And maybe how did you frame that in the review versus at least that initial offer that was quoted as being significantly larger than the $82 a share icon out there?
Yes, I think that we believe we have some really great opportunities for the utility. We are focused and earlier had talked about improving our ROE. We're looking at all of our O&M costs. We're doing a deep dive of all of those and looking at how we can improve on that, improve on our efficiencies, whether that's technology related or any other manner that we look at it. I think that there's...
room in O&M, we're concentrating on our capital expenditure program and how we optimize the timing of our capital expenditures with our rate cases, optimizing those rate cases and the timing of all of those to bring the best results to our stockholders. So when we look at all those different areas that we can execute on, we really feel bullish about how we move forward with the utility.
and felt that that was the best option moving forward for the company. The initial offer or indication of offer that you mentioned obviously was an important part of the board's decision to commence a review of alternatives and with the assistance of their financial and legal advisors, the committee engaged with all the interested parties, carefully evaluated all indications of interest at that time.
and really come to the conclusion that with our great jurisdictions that we offer radiant from a growth standpoint favorable demographics and our opportunities to improve on the utility that that was the right way to go.
Understood. Quickly following up on a point there around the O&M, the deep dive on your O&M analysis, is that potential incremental opportunity of the 1% growth on a per customer basis, meaning you're potentially either even flat or declining?
Yeah, I think overall, and this is Greg, Richard, we indicated that this $15 million of transitory items really is out of place with what the normal trajectory is. And when you pull those numbers out, you see that from 2019 to now we're at that trajectory. And again, we still can continue to expect, you know, 1.7, 1.8% customer growth, kind of just.
you know, $38,000 to $40,000 level of customer growth. So if O&M goes up, you know, 2.5% and customer growth is 1.7 or 1.8, that's how we keep in that trajectory of 1% per customer on the O&M front.
Got it. Got it. That's helpful. And just one last quick one for me. The updated cooperation agreement you referenced at the start with ICON, does that impact the stake at all or ability to increase or reduce it?
I'm sorry, I didn't catch the last part of the question.
Does the updated cooperation agreement impact his stake in any way and ability to increase it or reduce it?
No, it does not change that portion of the cooperation agreement at all.
Great, thank you for the time.
Our next question comes from Chris Elenhas from Seibert William Shank.
Hey everybody, how are you?
Thanks.
The transitory costs that you talked about Greg the 15 million, eight of that was temporary legal stuff. That remaining seven million, you know, how much of that sort of continues into the second half of the year?
Yeah, there's really not much. Again, there's $2 million of that that was uncollectibles. If you look back historically, uncollectibles for an annual period were in the $3 to $4 million neighborhood. So we just really experienced this spike with the economy. We think that uncollectibles will go back down to their normal levels in Q3 and beyond. The stabilization costs for our customer information system.
Again, that's been in place for about a year now and we're really in a good place. We did have some challenges with some staffing and had to bring in some incremental folks, but that worked out really well. And then we mentioned the incremental costs associated with, you know, doing some work on our mapping system and finding some of those stubs.
And that work is also substantially concluded. So I don't really think you're going to see a continuation of these items in Q3 and 4.
Okay, great.
Justin, the Arizona staff opinion is...
Pretty good relative to the ask. Are you denoting or have you got any color on what your thoughts are on maybe sort of like Tanner and Arizona?
Yeah, Chris.
It's a good question. I mean, I think from our perspective, you know, we've always really focused on maintaining, you know, good relationships with the staff and the commissioners and I think we've always felt like.
You know when you look at the history of how we've been treated in the state I'll be at a challenging jurisdiction that we've always fared better than most I mean I think a lot of people had a lot of angst around the APS case from a year ago I think that was really kind of a one-off situation and so I think kind of implied in your question. You know I think from our perspective. This is kind of in line with with where We thought we would be with respect to kind of
how we filed the case, the efforts we made to make sure that we presented a relatively clean case, and then working with the staff and RUCO on their different positions through the discovery. I think we're pleased with where they came out and look forward to working with them on potentially stipulating the issues to the extent there's that opportunity, but then also working through the remainder of the process to see if we can't make some improvement on some of the positions that they've taken. Okay, great. Greg?
When I look at Century, the revenue guidance and the margin guidance, it sort of suggests
century will be in a similar kind of net income level maybe a little bit higher. Can you just sort of talk about your you know considerably behind last year's earnings level on a year-to-date basis you know can you sort of talk about the second half you know what do you see there that
you know, is really better than the first half.
Yeah, I think one of the big things will be the ramp up of Briggs-Distler. Again, while we made that acquisition in August of last year, it was really just starting to get moving. As we've mentioned, right, we've got $125 million of contracted work that we're doing on the offshore wind side. Again, our work is onshore for that offshore wind. And then multi-hundred million dollars of work that we expect.
impacts that previously were there. And so we're working with our customers and we think that Q3 and Q4 this year will be really solid performing quarters.
Can you also give us a little color on customer supply chain delays? Yeah, I think you're referring to the discussion on Sentry's customers. Most of Sentry's customers, just like Southwest Gatsby, we're one of Sentry's customers. We procure our own materials and then Sentry does the installation.
So the centuries customers on the utility front have had some challenges, whether it's getting transformers, whether it's getting certain pipe types, that's where the supply chain issues have been for them. And it's necessitated century either to delay some work because their customers can't provide the materials, or to maybe switch and do less profitable work in the interim while the customer continues to procure those materials. So,
I think again supply chain is starting to stabilize a little bit and it really is on a customer by customer basis. But that's some of the issues that they're incurring.
Thanks a lot for the call. I appreciate it. Thank you.
Our last question comes from Ryan Levine from Citi.
Good afternoon.
window you
Hi everybody. In terms of the 1% O&M cost reduction, is that viewed to be relative to an inflation expectation, or is that purely on an absolute nominal basis?
Yeah, Ryan, this is Greg. I think it's, you know, we're talking about a 1% O&M cost per customer increase over the long term. Not a reduction, but an increase that's sub 1% per customer over the longer term.
It's phenomenal and it's not relative to any inflation index.
No, we expect that there will be inflationary costs and those will come into play in the regular O&M, but we also expect customer growth. And as we manage the cost going forward, we expect that there will be inflationary costs and those will come into play in the regular O&M, but we also expect customer growth.
We think that the increase will be nominal. Certainly, 1% per customer growth is much lower than the current inflationary environment that we're in, but over the longer term we expect to continue to beat the inflationary impact.
In your slides you continue to highlight a potential spin of Century as part of the strategic review. Is there a
timeline that you have in mind, you know, post what you've been through the last few months, and when you would have to make a decision on the spend, or is this more open-ended at this point? It's really more open-ended. The decision to continue the spend by the Board was that they felt that keeping the spend option was additive to its efforts to maximize the value.
the spend option remains part of the overall strategic transaction process as we move into the next round on Century and Mountain West. You know, we're very pleased with the indications of interest that we've received from both Mountain West and Century and the decision to leave the spend on the table was just simply because we believe it will maximize the value.
as part of the process. OK, appreciate the call. Thank you.
This concludes the Q&A portion of today's conference. I would now like to turn the call back over to Mr. Boyd Nelson for closing remarks.
Thank you Gretchen and thank you everyone for joining us today. This concludes our conference call. Thank you for your interest in Southwest Gas Holdings. Have a great day.
This concludes today's Southwest Gas Holding second quarter 2022 earnings call and webcast. You may disconnect your line at this time. Have a wonderful day.
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