Q4 2022 Southwest Gas Holdings Inc Earnings Call
Good day and welcome to the southwest gas Holdings Investor call. All participants will be in listen only mode should you need assistance. Please signal conference specialist 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 won't be referencing presentation slides, which we have posted to our investor relations website.
I am joined on today's call by Karen Howard President and CEO of Southwest Gas Holdings, Rob Bonnie Senior Vice President and Chief Financial Officer, Justin Brown, President of Southwest Gas Corporation, and Paul Daly, President and CEO of Centuri group.
Please note that on today's call.
The company will address certain factors that may impact this years earnings and provide some longer term guidance.
Some of the information that we discuss 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.
Forward looking statements are made as of today and we assume no obligation to update.
Update any such statements.
Now I will 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 Ingersoll.
Turning to slide five I'd like to start the presentation.
I'm Jay over the last few months.
In December we announced that we were moving forward with the transaction to sell a mountain west and the spin a century.
He announced to close the mountain West Elm Williams on February 14, 2023, with a $1 1 billion in net proceeds going towards debt reduction at southwest gas holdings.
Creating more flexibility with our balance sheet and financing needs.
I'm pleased to report essentially spending is well underway, we are preparing to file an IRS private letter ruling this quarter.
The tax free nature of it.
And we're drafting regulatory approval filings, Arizona Corporation Commission approval of the transaction, we have the full project management office.
110, and audit planning has begun as well we expect to complete. This fact during the fourth quarter of 2023, where first quarter 2024.
As you can see on slide six there's been a century and he has his stockholder alignment and value creation.
Separate independent companies that have differentiated value propositions in the market.
As we announced in December we've reviewed plans engaged rating agency to be the raspberry process.
We have arrived at the 2020 to refinance.
Ralph will go through later on the call.
We plan to issue 250 million of equity in 2023.
We anticipate equity needs of less than 100 million in total in the period between 2024 and $3 2025.
Our capital markets plans will strengthen our position and maintaining and improving the credit profile for southwest Gas Holdings, Inc.
Southwest Gas Corporation.
Closing out our strategic update we had two favorable rate case outcomes in Arizona, and Nevada, which Justin will discuss further.
We are pleased to see the positive regulatory development and southwest gas holdings to its next chapter.
Turning to the next slide we're excited for southwest gas holdings future and its fully regulated natural gas utility.
Moving to a pure play utility model.
And alignment with our investors.
Business mix also creates a clear strategic focus and utility optimization and stable recurring cash flow generation that will drive value for our stockholders.
As we look to our future and the pure play southwest Gas Corporation had a strong performance track record is 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.
1001st 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. This past February our allowed rate pace increased from $4 to $4 9 million.
And 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 filings in Nevada, which we expect in the third quarter of 2023.
Sure, we are well positioned to achieve our goals of reaching five 7% rate base growth.
Over the next three years, while also maintaining strong investment grade balance sheet and delivering a competitive dividend to our stockholders.
As we show on slide nine century has a strong profile with a long tenured blue chip utility customer base across the United States and Canada.
Standalone company century's position for continued growth with a diversified platform and comprehensive capabilities across the entire utility value chain century is expected to benefit from strong tailwind to support long term growth as they continue to expand into new markets and support the energy transition, which Paul will discuss further.
It's a committed and experienced leadership team were confident in centuries 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 to discuss how our continued progress underscores our excitement about the future of southwest gas holdings.
Starting with holdings, we've 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 and ability for important.
Highlighting both southwest gas holdings wrote in the energy transition and the positive impact we have in the communities we serve.
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.
Centuries delivered record revenues of $2 8 billion this year, marking the 13th consecutive year of revenue increases and all the mountain West is no longer and yourself with gas holdings Perella company contribute.
The $80 million and adjusted net income.
Those are just a few highlights from the year, our CFO , Rob is tiffani and our Opco presidents Justin Brown in southwest Gas Corporation, and Paul Daily from century will go into more detail shortly.
With that I'd like to hand over the call Rob will be reviewing our financial performance.
Turning to slide 12, we provide an overview of our earnings per share performance. This past year, the company's consolidated GAAP and adjusted EPS for the fourth quarter and full year 2022 are shown by operating company.
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 $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 of financial results for the year. Our underperformance. This year is mainly attributed to these nonrecurring 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 onto slide 13, you'll see that year over year performance drivers for our utility southwest gas Corporation in 2022, the utilities margin came in at $55 million higher than last year. This improvement was driven by construction.
The regulatory relationships and improve 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 and rate relief from the Nevada rate case, and our continued strong customer growth contributed an additional <unk> <unk>.
$17 million of 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.
Cause heightened cost surrounding pipeline integrity reliability, and engineering services and higher reserves for uncollectible is primarily due to COVID-19 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 2020 threat.
Depreciation and amortization alone increased by nearly $10 million from the prior year due to increases in average gas plant in 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 higher financing costs.
And 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 centuries revenue growth as they experienced record revenues in 2022, increasing $602 million from the euro prior.
The past year 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 were also increased expenses, resulting from the inclusion of brakes, dantzler 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 in scheduling. The last century is continuing to take decisive action to adjust its cost structure and eliminated a significant number of salaried position, which going forward should provide $21 million in fully loaded annualized pretax cost savings.
Finally, I'll highlight that higher borrowing costs also played a considerable role in centuries performance. This year with a $30 million after tax increase year over year.
Standing borrowings associated with the revolving credit and term loan from the rigs deferred acquisition, along with higher interest rates surrounding their outstanding variable rate borrowings drove the increase as.
As we spin century, we will be looking at a variety of alternatives to Delever the company.
Turning to slide 15, as Karen noted earlier, we engaged the rating agencies three raz Raz 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.
We made considerable debt reduction through the sale of mountain West we were able to repay one point over 75 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 that transferred with the sale.
At Holdings, we plan to target an <unk> to debt ratio of approximately 14% by 2025, and our recent debt reduction and financing plan puts us on a path toward that as mentioned earlier, we plan to issue $250 million of equity and $550 million of debt at the holdings level in 2020 threat the.
This 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 Delevering boat holdings in southwest gas Corporation and 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 find gas acquisition costs.
Turning to century, which was which isn't included on this slide we plan to Delever century prior to US and included approximately $300 million and our RASM rather analysis toward that objective, we do not expect to issue equity to support that deleveraging at century, we will continue to assess different spin off structures pending capital market conditions.
<unk> 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 centuries 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 corporations 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 41001st 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 system remains safe and reliable well eventually translate into rate base growth as we work with our regulators and other stakeholders on both future rate cases, and continued utilization of existing or new tracker programs and.
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 nine 4% relative to a rate base of $1 7 billion, an increase in rate base of $250 million in <unk>.
Earlier this year, the Arizona Corporation Commission approved our most recent Arizona rate case authorized in the largest revenue increase we've ever experienced a 54 million and an improved allowed ROE of nine 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 assist.
Some remains safe and reliable two.
Two important aspects of the case included a continuation of our fully decoupled rate design and the authorization to make adjustment for a full 12 months of post test year plant, 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 of 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.
Torry to repurpose methane from waste and to help facilitate the delivery of renewable natural gas. We're also committed to continuing to help communities of 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 CIS.
That's an exciting clean fuel and emerging technology.
As Karen mentioned, we recently published our 2022 sustainability report it 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.
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 5000, new customers, who are grabbed county acquisition and for the third consecutive year. We ranked number one by J D power for gas utilities in 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 tickets statistics and emergency response times.
Turning to slide 21, we try to 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 will file a new rate case in Nevada later this year with rates effective in the first half of 'twenty 'twenty four.
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 are sir credits to help manage significant swings in the balances in fact, we recently filed an application in Arizona cause supplement are met.
Finished them to better reflect the cost 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 them.
The immediate bill impact of car customers.
Lastly, we wanted to provide an update on our utility optimization plan on slide 23, we.
We've recently hired consultants, including a top business and management consulting firm to complement the work we've 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.
This evaluation will help us identify cost savings and efficiency opportunities for us to execute over the next couple of years and that will help support the tremendous growth we have across our service territory pass on savings to our customers and improve ROE 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 century.
Thanks, Justin turning to slide 25.
We have still century into an innovative high growth utility infrastructure services later throughout the U S and Canada with more than 13000 employees working within 75 local communities spread over 43 states and provinces. We serve most of the largest blue chip investor owned utilities.
And there are 100 million customers across the U S and Canada.
As you can see on slide 26, we've establish incredibly strategic lasting relationships with our customers.
Our customer relationships date back.
Decades, and our long term contracts with them enable predictable revenues on resiliency, even in times of recession.
Oh, well no longer among our top 20 customers due to the revenue growth of some of our newer customers were still under contract with Mpls 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 stand alone company.
Moving on to slide 27, a big part of what makes our story so compelling as a recurring low risk revenue mix of our business, 82% of our revenue is from the lower risk profile Master services agreement, our 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 the 2023, we expect to electric and gas gross profit contribution to be about equal as a percent of centuries 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 delevering and investing in our continued growth.
Slide 28 highlights centuries, consistent growth and strong financial performance over the past decade.
We have a proven track record of top and bottom line growth with Tanger as a 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 a record revenues of nearly $2 8 million and as Karen previously noted 22 with 2022 was our 13th consecutive year of topline 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 and their procurement of materials and equipment led to changed work mix work sequencing difficulties and decreased productivity for our crews along with such several higher margin electrical transmission projects being pushed out into subsequent.
Eight 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 do what he loves her.
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 tailwind across utility end markets supports centuries long term growth.
And we expect this growth will accelerate as we deliver on opportunities in the electric T&D hardening and expansion.
<unk> G data filled out offshore wind and other renewable energy transition programs.
There are also opportunities for gas services within the energy transition as evidenced by our recent award of a 100 million plus dollar contract to bring natural gas to an electric vehicle batteries facility in Indiana.
During 2022.
We secured more than $24 million and have an annualized incremental revenue increases on existing customer contracts, which which has helped to offset certainly 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.
Because we let two centuries 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're making significant progress expanding our clean energy projects.
<unk> 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 revenue Revolution projects horse dead are well under way in Rhode Island, where we are at or ahead of schedule on all deliverables with revenue and cost at budgeted expectations.
Additionally, we should we anticipate soon having over a half a billion dollars of offshore wind contracts in hand with execution during the first quarter of 2023.
And another offshore wind contract for work in New York totaling approximately $170 million.
We expect these offshore wind projects will continue to drive.
And increased margins in 2023 and beyond.
Finally, we continue to enhance our already.
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.
As you can see on slide 31, southwest gas holdings remains committed to paying a competitive dividend to our stockholders.
And that's also the dividend flat in 2023.
We will revisit it in policy at the time of disinterest in for any future changes and we will continue our strategy of a payout ratio competitive with utility peers.
Moving on to our outlook and guidance coming here on slide 32.
We are optimistic about the future for clothes southwest gas Corporation, and century, and I'd like to share a few points on how we can how we plan to deliver value to our stockholders in 2023 and beyond.
Southwest Gas Corporation, we plan to continue to make considerable investments in capex.
665 to 685 million per year through at least 2025 to support infrastructure development and system improvements our growing customer base in 2023 southwest gas Corporation will advance on its utility optimization plan focusing on supporting customer growth.
Those engaging in cost discipline and optimizing rate case development we.
We expect projected net income to land in the range of $205 million to $215 million for the full year.
Long term earnings growth will be supported by healthy organic rate base growth of 5% to 7% compounded annual growth over the next three years, we will continue to work with our jurisdictions on a regulatory construct to ensure investments for the benefit of customers, while ensuring fair return to our stock.
Holders.
Century expects to 823 billion in revenue for 2023, and adjusted EBITDA margin of 9.5% to 11%.
Closing out the 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 entry to unlock significant value for our stockholders.
Southwest gas holdings, we are confident in our path forward as a premier pure play natural gas utility as we deliver healthy organic rate base growth through strong regional demand dynamics as well as earnings growth through financial discipline operational excellence.
<unk> 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 delever 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 one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question comes from.
Chris ailing house from Siebert Williams. Please go ahead.
How are you.
Hi, Chris.
Uh huh.
Can you talk about the utility in the fourth quarter, it seems particularly weak Ah.
Was that gas costs or you know can you sort of give us some details on what led to a weaker fourth quarter.
Hey, Chris its Raj defy I think.
Thinking about where we were with guidance to kind of where the utility finished the year I'd highlight several factors.
I think first just bad debt and the resulting uncollectable the system from the.
Kobe termination provisions contributed about $6 million.
Additionally, we had a legal settlement, which we outlined on our bridge work.
Took it down about another $6 million.
We took a reserve on a project associated with our gas acquisition cost, which was approximately 6 million after tax as well and then just with respect to overall interest cost at the utility I think is as we had planned the year we had.
Anticipated pushing down about 250 million from southwest holdings of southwest gas that that did not happen and so southwest gas had to incur additional debt.
Debt and corresponding interest expense, which which is reflective of the kind of the gap between where our guidance was and where we finished.
These are some of these.
I Miss type issues.
Does any of that reflected in the O&M inflation for the year.
Yeah, I think that the O&M inflation for the year I think on an on an apples to apples basis. We are in our in our guidance, we are reflecting higher forecasted bad debt are more consistent with what was experienced this year.
<unk> costs associated with kind of the reliability work and the locates work.
You know did increase.
Hum.
You know there's the one the one off items certainly the legal settlement coming in.
That that that was one off and then the funding plan with respect to the utility we don't expect to see.
As much of a deviation there are in the coming period.
Okay.
Can you give us any insights on are you planning to use ATM for the equity.
How are you going to execute that yet.
Yeah, we're not going to get into any of the execution details at this time, Chris but you know where.
We are providing you know the overall details for the plan for the year. So hopefully that's helpful. In your work.
Hum.
Yeah.
Centuries EBIT.
EBITDA margin guidance is a pretty wide range.
Can you give us any insights into what the variability might be there.
Sure.
This is Chad with 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 visits been in historical periods.
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, our storm work tends to be higher margin work for us So if storm stope material.
Our lives as we expect this year then.
That would have an impact on our EBITDA margin for the year as well.
[noise] he he drag from corporate and other for 2022 obviously has.
And it but can you give us any color.
Relative to the improvement that you expect for 2023.
What those layers might be in any kind of.
Magnitude Bruce.
What level you're expecting.
Well, Chris I'd first pointing 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 that's going to be a primary driver.
You know I think as Justin alluded to we were bringing in a consultant that's going to look at the overall cost structure just in the context of the utility but also at the holdings level. Given you know the go forward plan with respect to century.
You know the we will continue and obviously you can appreciate this.
As we embark on executing on the century spend which we're laser focused on now.
You know, we're going to incur expenses associated with that it's getting a form 10 together.
Making the filings, making the public or the private letter ruling filing and you know taking the necessary steps to get century into.
Our position to spend in the fourth quarter or first quarter of 2024.
We'll have some.
Transaction expenses.
The holdings level.
Okay. Thanks for all the details today I appreciate it.
Go ahead, Chris.
Our next question comes from Ryan Levine from Citi. Please go ahead.
Hi, everybody.
I need to start off on page 31, there was some language here about dividend policy post the separation of the century.
Can you provide some color as to what you're trying to signal. There are you, suggesting that there may be.
Sure a reduction in your dividend policy post 2024 and beyond if the deal was executed on.
Hey, Ryan it's Rob Thanks for the question.
<unk>.
First and foremost we're committed to paying a competitive dividend and I think we're.
Demonstrating that this year you know, we're holding the dividend flat.
The what we do with respect to the dividend pro forma to spin a century, you know we're gonna evaluated the closer to the timing of the spend you know I think what we're signaling here is that we are going to add.
As always moved 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.
O&M costs initially.
Initiatives are consulting 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 are hoping to bring to light through that consulting study, where did you see a real opportunity to.
To improve operations.
Okay.
Hey, Ryan its 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 we've identified I think some opportunities, but we wanted to bring in someone that had you know kind of a greater lands 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.
It's gonna be a combination I think there are some things that we've been able to identify it 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.
Hum.
In terms of the timing of the century spin it was outlined for you. This year first quarter next year. The extensive financing markets more broadly are harder to forecast how.
<unk> are attractive they'll be could you see the timeline move faster or get delayed if the in the cost of incremental capital it becomes cheaper or are less less attractive.
Hey, Ryan it's Rob.
First and foremost I'd say.
We're going to continue to evaluate you know the timing there there's you know.
A number of items just with respect to the form 10, an outcome of the private letter ruling that's going to drive timeline and what the kind of comments they come back from the S E Z or or any kind of modifications that could be required with respect to that P L or what 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 and so if capital markets are.
Create an opportunity either visa B, you know sometime of monetization option down at the century level. Then obviously, we'll consider that and I can take the form of.
Yeah. 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 will continue to look at sponsored spin I think what well.
It was revealed through our work with the agencies and the <unk> process was that you know we do have the capacity to issue debt or pop to support a delever and of century.
So we would anticipate that we just continue to mark a watch market conditions continue to assess.
Assess kind of what what that spend option may.
Maybe but we will continue to execute down the path of 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.
CLR.
Great appreciate the color.
The next question comes from David Frank from Wallach Capital. Please go ahead.
Hi, 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 Sunshine, one about $1 1 billion and that's 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.
As well can you 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 play.
On the pro forma company at the time that the pro forma century.
At the time of the spin.
Yeah, we're going to we're going to we're going to do a rating agency process down at the century level. You know later this year as we get closer to this man, that's that's going to inform the leverage there.
Did and it's it's on.
And in the 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 planned deleveraging at century at the time of the spend so.
We'll continue to assess that but.
You know that's between between centuries kind of organic deleveraging from EBITDA growth as well was the evaluation of essentially de levering up to $300 million.
That's where.
We're focused.
Okay and is the goal to get an investment grade rating or just.
But that's not as important.
Yeah, I think it I think at this point, what what we'd say is that I don't know that we're focused on the rating is as we are focused on positioning century to have balance sheet flexibility and positioning the business well like I said, we'll go through the ratings work later this year.
Okay excellent and I'm, sorry, if I could just finally for one quick question could you tell us your previously or remind us of your previously stated payout.
Target I think it's around 60% mid point.
If I'm not.
Correct, yes.
That's correct 55 to 65.
Got it okay. Thank you very much.
[noise] again as a reminder, if you have a question. Please press Star then one.
Our next question comes from Steven D. M. D. M briefly from granite Lane. Please go ahead.
Hi, everyone. Thanks, very much for for taking my question.
Okay.
Hello, I just had a quick one just about or a quick a couple just on the Holdco financings that you're planning on doing in 2023 is the drag from the $550 million of debt.
That included in the net income that's shown for southwest gas or do I have to like how does that how does that get treated.
Yeah, so that that $550 million of debt would be issued up top at the holdings level.
Okay. So we're not 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 of that century.
One of the options could be to put maybe an additional $300 million of holdco debt.
On the.
Pro forma.
Southwest gas company is that right. So you could end up with.
$50 million of parent debt.
Yeah. So so yes. We did we did include that as an off as a potential option what I. 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 holding is levered to Delever century, we could also look at spin off structures that that would monetize a portion of century, so that could take the form of a sponsored spin IPO and we could also look.
At Oh, you know our retained stake that would would that use proceeds to repay any kind of debt issued.
I know the plan there.
We'll look at we'll look at all of those structures kind of as we get as we get further along in the process. We're not we're not necessarily leaving things off the table as it relates to that deleveraging, we just acknowledged that we.
We believe that a partial deleveraging will need to occur in association with <unk>.
Okay, but and then I think your other comment was you know.
The ratings agencies would be comfortable even if you did have like if if all of those other more accretive options were not available the ratings agency would be fine with that level of debt at the holdco.
Yeah.
Yeah, well I won't speculate we did include we did include that in your analysis and we're comfortable with our plan and that you know in a even in a worst case scenario that you know based on the projections we showed the agencies.
That that bad debt level would be supported and we maintain an investment grade 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.
It is what would you say is a competitive.
The dividend payout ratio is it just the pure average or can you pay higher than that but just how do you think about that coming through.
Yeah, I would just I would just direct you to the comp universe I think the you know the.
The range that we've targeted and paid historically has been competitive with pairs on we will evaluate the dividend policy in conjunction with the spin.
Later this year.
Alright I appreciate the time, thank you guys very much. Thanks.
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 talk ask about the holding company drag a it looks like about 63 cents for 'twenty two I'm assuming most of that is is that that's going to go away, but how do we think about Oh, the holding company expense post spin.
So post spin Tammy this is Rob I would think about it in terms of it should largely.
Be driven by the interest expense associated with the holdings death that debt.
It will be issued in conjunction with the 2023 financing plan.
That'll be it.
Post separation.
Obviously, there you know obviously over the course of 2023, you know, we're going to incur transaction costs associated with PREPA and century for the spill.
But following that expect a much more normalized run rate, where the majority of the expenses interest expense associated with the financing. So you know.
Support of this this plan to push capital down in the utility and repay our existing.
That Oh top at holdings near term.
Okay. Thank you and then if you could just talk a little bit more about.
You know the consulting firm, that's going to help with with efficiency I believe prior presentations you disgusted at 8% plus Roe.
How are you guys thinking about that currently.
Yeah.
Tyson. This is Karen you know with respect to the consultant. We we have initiated that process as Justin said, we've identified a number of initiatives ourselves that we're focused on in terms of improve that will help improve that aro <unk>.
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 theres. A couple of reasons for that first of all I, you'll recall as you know we're an historical test years, we did.
Two recent rate cases in Arizona, and Nevada, but both of those cases, where test years in 2020 and 2021 right during Covid doesn't O&M that's reflected in those most recent rate cases is lower than what our normal O&M with friends. So that's putting some pressure on the Io.
As Justin indicated we have plans to go in on a new rate cases later this year, even with Nevada, which will reset that O&M and then secondly.
Secondly, I think there's been some pressure obviously following the decisions on the transactions and we went through the rent spreads process, establishing what our capital structure will be and and and the equity levels and things that.
Play into a little pressure I think on the are we 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.
Yeah.
Okay. Thank you.
Yeah.
Again, if you have a question. Please press Star then one.
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.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
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