Q2 2023 Southwest Gas Holdings Inc Earnings Call
Ladies and gentlemen, good day and welcome to the southwest Gas Holdings second quarter 2023 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 then one on your telephone keypad 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 am joined on today's call by Karen <unk>, President and CEO of southwest gas Holdings, Rob Kearney, Chief Financial Officer of Southwest gas Holdings.
Justin Brown President of Southwest Gas Corporation, Paul Daly, President and CEO of century group and <unk>.
That's great.
F O a century.
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 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 two and three of the presentation and the press release as well as our.
Our SEC filings for a description of the factors that may cause actual results to differ from our forward looking statements. All forward looking statements are made as of today and we assume no obligation to update any such statements I will now turn the call over to Karen.
Thanks, Todd and thank you for joining us today to discuss the southwest gas holdings second quarter results.
Turning to slide five.
We are pleased with our progress on our transformational strategy returning southwest gas with 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 utility for strength and success. While also advancing the separation of century into a standalone infrastructure services leader.
Notably we received constructive regulatory outcomes after utility during the quarter and delivered solid quarter result, as we realized benefits from our efficiency and productivity enhancement efforts.
Customer growth and demand remains 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.
Complement our strong organic rate base growth.
We are confident in our momentum we remain on track to deliver 5% to 7% CAGR and rate base growth over the next three years and maintain a strong investment grade balance sheet and competitive dividend.
Additionally century 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 six 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 refinancing plans with a 550 million term loan in the Middle of April we continue to see limited near term equity needs for 2024, and 2025 and anticipate equity needs I was less than $100 million in total through the end of 2025.
At century, the spin remains well on track we received ACC approval for a separation of the century and confidentially submitted a draft registration statement on form 10 with the SEC.
We look forward to a decision on the tax free nature of the separation from the IRS, which we anticipate in the fourth quarter to be up.
By completion of the spin in the first quarter of 2020 for.
Capital activities associated with ultimate expense structure options could occur earlier.
At the utility we continue to execute on our business plan, we received a T C approval at the PGA surcharge in Arizona and remain on track with our expected Nevada rate case filing in the third quarter.
We're also announcing today and expected the Arizona rate case filing in the first quarter of 2024.
Additionally, we are focused on the utility optimization review and we'll begin prioritizing initiatives during the remaining months of 2023 and that will cover in more detail later on this call.
We are pleased with our continued progress in our strategic plan is on track.
On slide seven we walk through our strong first quarter performance of southwest and century.
We are proud to announce that after utility we delivered the highest second quarter net income on record we experienced another quarter of strong customer growth, adding approximately 42000, new meter sets over the last 12 months, while continuing to make investments to ensure our system remains safe.
And reliable for the benefit of our customers.
As mentioned in the previous slide we also received several constructive regulatory outcomes during the quarter.
At century, we announced record setting second quarter revenue and EBITDA, which resulted in adjusted last 12 month EBITDA of $285 million.
This strong second quarter performance was driven by strong storm restoration services <unk>.
Anable energy projects and nearing the completion of a large gas pipeline contract.
As Paul will discuss century continues to win new business based on the strength of its relationships and capabilities and is well positioned to play a critical role in the continuing the energy transition.
We recently completed a comprehensive forecast opportunity assessment, where we identify the areas of opportunity for improvement and optimization.
<unk> operation and operation support information technology procurement among others.
We also made several leadership and organizational changes, including the formation of the office of continuous improvement and optimization led by senior Vice President Julie Williams.
Julie and her team will work with our outside advisors to drive initiatives and positive change throughout the entire organization.
We are now taking a deep dive into the opportunity assessment and developing specific initiatives that we believe will help us accomplish our goals of optimizing utility performance and accelerating our pursuit of operational excellence.
Identifying cost savings and efficiency opportunities for us to execute over the next couple of years.
Further these initiatives will help support the tremendous growth we have across our service territory help pass on realized savings to our customers.
Improve roe's and result in positive returns for our stockholders.
As I mentioned previously we added 42001st time meter sets during the past 12 months with approximately 20000 year to date, we expect to continue to benefit from a demographic and economic growth in the southwest.
Between 2023, and 2028 population growth is projected to be $3, 76% in Arizona and 395% Nevada.
New customer growth combined with our pipeline replacement activities associated with our safety and integrity management programs are the cornerstones of our $2 billion three year capital expenditure program.
The investments we have made to ensure safe and reliable energy service to our customers as translate into double digit rate base growth since 2017.
With our current capital investment plan, we expect to continue to grow our rate base at a compounded annual growth rate of 5% to 7% over the next three years.
We are committed to pursuing timely recovery of these investments by working collaboratively with our regulators to reflect these investments in our authorized rate base in a timely manner either through rate cases or tracker programs.
I will now turn the call over to Rob who will review our financial performance for the quarter.
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.
Karen mentioned earlier, the utility and century, each had a record setting second quarter utility recorded its highest second quarter net income on record century of our recorded its highest ever second quarter revenue and EBITDA and record on an adjusted basis. We finished the second quarter of 2023 with EPS of <unk> 42.
Seven a share a 24 cents per share improvement when compared to the same time period of the year prior which included a full three months of mountain West the utilities' performance during the quarter as a product of our disciplined O&M management regular pursuit of constructive regulatory outcomes and improvement in interest in.
Income from the Pgi and an increase in coli at century, we are encouraged to see a significant quarter over quarter improvement in GAAP and adjusted earnings signaling that we are transition past the headwinds of 2022 century continued its work on a large gas infrastructure project and saw growth in storm.
Duration work and offshore wind in the appendix, we provide a reconciliation of adjustments by operating company. The vast majority of the second quarter adjustments related to statutory spin costs and consulting fees related to utility optimization now.
Now I would like to provide a walk through 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 decreased Arizona vintage steel pipe and customer owned yard line revenue miscellaneous revenue and customers outside of the decoupling mechanism.
O&M decreased $3 million between quarters, which was largely due to an 8 million dollar decrease in legal claim related expense. This benefit was offset by an increase in external contract from professional services costs as well as increases in other costs, such as leak survey line locating and uncollectible customer accounts.
The approximate $19 million increase in depreciation and amortization between quarters was primarily due to the timing of the California climate credit program referenced in our 10-Q filing with the remaining increase resulting from a 6% increase in average gas plant in service.
Other income increased $22 million compared to last year. This was driven by increased interest income related to the carrying cost associated with regulatory account balances largely related to the purchase gas cost recovery mechanisms favorable quarter over quarter changes in non service related components of employee post retirement.
As well as improvement in investment returns underlying the company's owned life insurance policy values. Offsetting these increases include a reserve taken on a software project.
Interest expense increased by approximately $9 million from the prior year, primarily due to interest associated with the senior notes issued in 2022, and 2023 as well as the $450 million Southwest Gas Corporation PGA related term loan issued in January of this year to support gas purchases.
Moving onto centuries results. This past quarter slide 13 reviews, the drivers behind Centurys second quarter adjusted EBITDA results Centurys second quarter revenues increased by approximately $100 million compared to the prior year. This increase was driven by progress on a large gas infrastructure project delivering natural gas to a battery.
Factory in the Midwest Emergency response in offshore wind projects centuries revenues were partially offset by corresponding increases in operating expenses driven by higher volume of infrastructure services provided and increased subcontractor costs on offshore wind projects.
Additionally century saw increased interest expense, primarily due to higher interest rates on the approximately $1.2 billion of outstanding variable rate borrowings largely associated with the rigs Destler acquisition.
Century is well positioned to continue serving its long term customers, while leveraging our geographic reach and expertise to serve new customers and markets. We are excited about the opportunities and the momentum we see in 2023 and beyond for century, given the national focus on infrastructure investment.
On slide 14, we outline our 2023 financing planned for southwest gas holdings in Southwest Gas Corporation, which was completed earlier in the quarter as Karen noted, we do not anticipate meaningful equity needs in 2024 through 2025 at holdings, we reiterate that we plan to target an <unk> to debt ratio.
Approximately 14% by 2025 and are executed financing plan puts us on a path toward that.
Moving to slide 15, we take we take a look at our balance sheet strengthened our commitment to maintaining an investment grade profile on the left hand side, we walked through net debt by operating company when looking at the utility net debt levels. It is important to also consider the PGA balance which represents working capital that southwest spent for prior.
Commodity purchases, which is currently owed to southwest by its customers, we expect to timely recovery of this PGA balance and earn the cost of carry on it as is reflected in the chart in the appendix on slide 29, which provides additional detail. Our recent Arizona surcharge approval will continue to reduce the time to recover.
Right.
On the right hand side of the slide we note that we have not had any changes to our credit ratings or outlooks from any of the three rating agencies I would now like to turn the call over to Justin Brown to discuss the utility.
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 a filing by the end of this month.
We're also actively preparing for two rate cases in 2024 first in 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 based on rate case and <unk>.
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 Karan 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 filings.
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 and the Commission also review our guest 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 infrastructure and natural gas can play in a sustainable energy future by providing energy reliability resiliency.
And security to customers, while also lowering GH, Jim mentioned and helping support onsite combined heat and power and solar generation development.
The FERC recently issued a certificate of public convenience and necessity for our proposed mainline replacement project and recently granted the notice to proceed with construction, which we anticipate will start sometime this summer.
<unk> of this project will coincide with the timing of our next rate case to minimize any lag associated with the investment in the project and recovery of that investment.
Great Basin also has an application pending for proposed expansion project to meet the reliability and resiliency needs of a growing population and demand for natural gas service upon approval new rates will become effective immediately upon completion of the project since it is a fully contracted expansion. We currently anticipate approval and completion of that.
Project prior to the end of next year.
Turning to slide 19 earlier this year Governor Lombardo issued an executive order in Nevada, highlighting his energy priorities and policy objectives for the next decade.
<unk> border articulate support for in all of the above approach to energy, placing an emphasis on affordability and reliability as well as the important role energy plays in economic development and his commitment to ensure safe reliable and affordable energy remains available to all Nevada, including ensuring that Nevada have access.
And natural gas for use in their homes and businesses.
With this executive order, we've worked with various stakeholders, including the public utilities Commission of Nevada on legislation that would establish a robust and thoughtful approach to natural gas planning.
The legislation was unanimously approved by both houses and was signed into law by Governor Lombardo and Jim.
The legislation will require gas utilities to make filings every three years identifying customer demand resource plans for meeting those demands including creating pathways.
Pursuing clean fuel technologies, like hydrogen and renewable natural gas as well as expanded opportunities for energy efficiency programs for the benefit of our customers.
The legislation will also ensure alignment among all stakeholders by providing gas utilities the opportunity to seek preapproval. These investments before investments are actually may I'll now turn the call over to Paul Daly, President and CEO of century group.
Thanks, Jess and turning to slide 20, I'm proud of the performance delivered by the century team during the second quarter.
With more than 12000 employees in 43 states and provinces across the United States and Canada century 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 century is well positioned to be a standalone 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 centuries 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 centuries proven track record of strong financial performance as both Ken and Rob mentioned century had record setting second quarter revenue and EBITDA performance driven by strong continued execution and project wins as well as strong demand from the ongoing energy.
Transition, which I will discuss further shortly.
We have successfully managed through the inflationary pressures that we face at this time last year and believe we are in a much better position as evidenced by our last.
Last 12 months adjusted EBITDA of 285 million, representing a $65 million year over year growth in LTM adjusted EBITDA.
Well 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.
<unk> incremental revenue increases on existing customer contracts and implemented $21 million of annualized cost savings to offset certain of these inflationary cost increases.
We're continuing to deliver growth across our operations, both through expanding our core electric and gas operations, while realizing more project work in support of the energy transition.
Our acquisition of rigs Distler in 2021 significantly increased our electric operations help further diversify our customer base provided.
In the northeast and provides a significant opportunity in the offshore wind renewables market as.
You can see on the right hand side, we have continued to diversify our portfolio.
So you have a balance between electric and gas. We also remain diversified geographically with no one geography, representing more than 11% of revenues.
Our record financial and operational performance was driven in large part by our strong execution across our project pipeline is detailed on slide 22.
Our winning model focused on serving the full scope of customer needs enables us to deepen our customer relationships as a trusted partner to support long term capital spend programs, while also building new relationships and expanding our work expanding our work across North America.
We are nearing completion of the $125 million gas pipeline construction contract in Indiana, which will expand our existing natural gas customer system with the installation of over 18 miles of new pipeline to provide service to a new manufacturing facility for electric vehicle batteries.
This win highlights the need for additional infrastructure investment to bring innovative clean energy projects online in the coming years, our strong progress underscores our ability to deliver on very complex projects, that's hard and very fast timelines.
We were also recently awarded a three year electric utility.
The distributions surfaces contract, where it's $15 million to $20 million per year for a new customer well not an overly large contract.
It is notable as it is an opportunity which arose from our from the quality of our storm restoration work for them last year.
As you can see in the middle column, we are continuing to expand work supporting our customers.
As they execute on clean energy projects.
We completed contract work for our first offshore wind project, which is the first ever advanced foundation components assembled and installed in the United States.
We are on schedule with our second project, having completed assembly of 22 of the 65 platforms.
We recorded approximately $100 million of revenue associated with the sustainable wind energy projects.
The first half of 2023, and we remain on track to deliver approximately $250 million.
Wind energy revenues for the full year.
With a total of just over $525 million of win contracts signed to date.
We can just.
Continue to see strong demand for offshore assembly fabrication import logistics for offshore wind projects in the mid Atlantic and northeastern United States, which we expect will continue in the near term along with additional opportunities to construct the infrastructure needed to connect renewable capacity to the grid.
Finally, our scale and capabilities.
Typically the numbers and locations of our crews enables us to support our clients and their customers in times of need.
This was particularly evident in our storm response and restoration services business.
Year to date, we've deployed more than 500 employees across 22 states for this restoration work generating 64, and a half million dollars in higher margin revenue.
We look towards the second half of the year. We believe the business is very well positioned to realize response up opportunities should we see an active summer or fall hurricane season.
With our strong geographic footprint and comprehensive capabilities that span the entire utility value chain.
Century is incredibly well positioned to continue its trajectory.
As summarized on slide 23 century will continue to benefit from the strong sector tail wins across our gas and electric T&D markets as well as significant multi year opportunities in offshore wind related infrastructure.
Given the aging infrastructure and electric utility distribution.
45% of which is at or near the end of its useful life. We expect continuing strong demand from customers for significant replacements and upgrades to maintain system performance and increased grid resiliency and reliability. Similarly, aging trance infrastructure and gas utility distribution is led.
So a regulatory driven multi decade replacement cycle with nearly half of gas distribution infrastructure near or at the end of its useful life of 40 years.
In addition to the decades of work to support investments needed in the gas and electric.
N D infrastructure century is also uniquely positioned to benefit from the energy transition.
We support our utility clients across North America.
Investment in renewable energy continues continues to accelerate rapidly and we are confident that the energy transition will be a key long term growth driver for century.
Inflation reduction act and other federal infrastructure investments are driving opportunities for growth in areas, where we are well positioned to perform work.
We look forward to sharing our progress as we advance towards seventh century separation.
First quarter 2024, with that I'll turn it back to Karen.
Thanks, Paul our year to date results are a testament to our ongoing efforts and we look to finishing the year strong on slide 27, we are reaffirming our 2023 utility net income in 2023 century revenue.
And adjusted EBITDA margin guidance.
We are confident that each business has strong performance to date will drive full year results within the guidance ranges, we reaffirmed last quarter.
Based on our 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.
We are making an upward revision to 2020, Threep utility capex guidance now $700 million to $720 million, which is partially a result of better than expected customer growth and favorable new business trends across our service territory 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.
Its entry we affirm our guidance ranges based on first half 2023 performance, we would expect revenue at the higher end of the range Sentry margin will depend on the 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 base growth with 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 a century, putting the company better positioned to align with.
Stockholders and Delever, the business organically with healthy cash flow generation.
With that I'd like to open up the call for questions.
At this time.
Can I ask a question. Please press Star then one on your telephone keypad, you may remove yourself from the queue by pressing Star then two.
Our first question from Richard Sunderland of J P. Morgan. Please go ahead.
Hi, good morning, Thanks for the time today.
Good morning, Richard.
Starting with the century timeline could you walk through some of the factors with the new wave one Q 'twenty four language relative to the prior four Q 'twenty three 'twenty four 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 P. L. R N and when you're expecting some kind of answer from the IRS on our P L or in the fourth quarter and said that's largely driving our change to them you know clarify where we are in the first quarters.
And so we expect to get an answer from the IRS in the fourth quarter be able to spend in the first quarter, but we may access capital markets before that time.
Understood understood and alongside all of this you've talked in the past about other options of routes to affect the separation.
The updated thinking there or any any new analysis on that front.
No were still focused on the spend at this point, we obviously have fiduciary duty to our stockholders and you know if any other types of transactions, which would become available. Those are certainly things that support would look at but we are focused at this point on the spin and the first quarter complete.
Adding 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 there's a timeline I guess its been pushed out as well in consideration of the later century separation timeline.
No. The 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.
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.
Am I right.
Couple of 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 that storm work are you seeing any of that across your business.
Yes, we certainly this is Chad Vince Sweden. The century CFO , we certainly saw a much stronger storm activity in the first half of the year than we've historically seen.
If part of that is just whether part of that is that we have really sort of a form.
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 or what are the big drivers of that across your service territories and are there any other additional opportunities that you see so augment your capital spending program in the coming.
Quarters.
So the Capex is largely driven by new business and investments in our infrastructure and so we continue to see those opportunities and the growth as I mentioned previously it's 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 lastly on operations.
The consulting studies it 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 current plan.
Hey, Ryan, it's Justin I think as Karen outlined I guess kind of a multi phased approach right. So she described we completed the kind of the cost opportunity assessment right, which gives you a general direction on where to look and now we are embarking on phase two which is actually.
Identifying specific initiatives that we'll be able to identify and of the future. So.
Yeah. Those are those are things that are still into the future that we're evaluating as we develop those specific initiatives.
It will probably take up the third into the fourth quarter and then the hope would be as we start to look at maybe implementing some of those in 'twenty four.
Thanks for taking my questions.
Yeah.
Okay and if you have a question. Please press Star then one.
Hi.
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.
You for your interest in southwest gas holdings and have a good day.
Yeah.
This concludes today's southwest gas holdings second quarter 2023 earnings call and webcast. You may disconnect. Your lines at this time have a wonderful day.