Southwest Gas Holdings, Inc. Price & Performance (SWX)

Please note that on today's call, will address certain factors that may impact 2025 earnings and discuss 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 and what the future holds but are subject to several risks and uncertainties including uncertainties surrounding the impacts of future economic conditions and regulatory approvals. This cautionary note as well as a note regarding non GAAP measures is included on Slides two and three of this presentation in today's press release and in our filings with the Securities and Exchange Commission, which we encourage you to review. These risks and uncertainties may cause actual results to differ materially from statements made today. We caution against placing undue reliance on any forward looking statements and we assume no obligation to update any such statement. As shown on Slide four, on today's call, we have Karen Haller, President and CEO of Southwest Gas Holdings. And Rob Stefone, Chief Financial Officer of Southwest Gas Holdings. Well as Justin Brown, President of Southwest Gas Corporation and other members of the management team available to answer your questions during the Q and A portion [indiscernible] I'll now turn the call over to Karen.

Thanks, Justin. Thank you for joining us today to discuss the Southwest Gas Holdings results and outlook. Starting with Slide five, Southwest Gas Holdings continues to press forward on our transformational strategy of becoming a premier fully regulated natural gas utility. Following the successful Century IPO last April, and recent onboarding of Chris Brown as the new Century CEO, we continue to monitor market conditions with respect to our separation strategy option Sentry in a manner that is beneficial to shareholders. I'm extremely proud of team's dedication and commitment throughout 2024. As we made significant progress positioning the utility for long term success and growth.

We advanced our regulatory strategy are seeing positive impacts as we recover investments in enhancing safety, reliability, and our ability to meet the needs of our growing customer base. Strategy The utility finished the year with record annual operating margin performance and the second straight year of a return on equity over 8%. Customer growth and demand remains strong.

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 our customers' demand for safe, reliable and affordable energy solutions. Southwest Gas has strong momentum heading into 2025. And we expect utility net income to land within the range of $265,000,000 to $275,000,000 for the full year. We expect net income growth will be driven by margin and as well as our continued cost management efforts. Looking further out, we are planning for robust capital spending driven by economic activity in our service territories.

Which we expect to drive strong rate base growth You can see our refreshed guidance metrics on the slide and I'll discuss our short and long term guidance expectations in more detail later on the call.

I also want to reiterate our commitment to further improving our earned utility return on equity maintaining investment grade balance sheet and paying competitive dividends to our shareholders. As you can see on Slide six, we achieved all our twenty twenty four strategic priorities. We strengthened our balance sheets across the enterprise. Increasing liquidity and preserving financial flexibility. While meaningfully advancing our regulatory strategy. As it relates to plans for Century's full separation, we onboarded a CEO at Century and continue to gauge market conditions for executing disposition transactions. [indiscernible] As a reminder of the remaining separation options, we may ultimately separate the business through a series of taxable sell downs or share exchanges, which exit past could include some combination thereof. The successful execution of a sell down or share exchange is contingent on favorable market conditions. So we have currently preserved the alternatives of a tax re spin. We expect our significant $1,500,000,000 net operating loss balance could serve as an offset to any taxable transactions. As a reminder, if we do execute a taxable transaction, the ability to execute a tax re spin will no longer be possible.

However, regardless of the form of an initial taxable transaction, whether it be sell down or share exchange, both of those options would remain on the table for further separation. As we further downsize our ownership beyond the initial transaction. We remain committed to separating Century and we will provide further updates on timing and structure [indiscernible] On the right hand side of the slide, you can see another in 2025 is our financing plan, which potentially includes the need to extend either all or a portion of the existing $550,000,000 term loan facility at the HoldCo.

And expected issuances of less than $100,000,000 of new equity under our existing ATM program Both of these items are contingent on successful execution of Century separation plans and some or all of these capital markets needs could be avoided pending the form of the Century separation. Justin Brown will discuss our regulatory progress and strategy in more detail in a moment. But I will note that while we have much ahead of us in 2025, we feel we are on track to achieve our regulatory and operational priority. As noted on Slide seven, our strong balance sheet provides us with flexibility to be thoughtful in our approach to capital investments and our efforts to deliver shareholder value. I'll highlight a few of our team's achievements on Slide seven.

At the utility, we continue to see strong growth as a result of strong economic activity that continues to drive significant In migration, with about 41,000 new meter sets added during the last twelve months. At the end of twenty twenty four, we had more than $360,000,000 of cash on hand across the enterprise. Enabling us to honor our commitments and We remain excited about the future of the company. Now to Justin. Thanks, Karen.

On Slide nine, you'll see an overview of the progress we made on our regulatory strategy. In early twenty twenty four, we completed our general rate case in Nevada with a positive outcome receiving approval to start recovering on the nearly $300,000,000 of investments have made to ensure safe and reliable service to our customers, which resulted in a revenue increase of approximately $59,000,000 which represents 98% of our request after consideration to proposals on depreciation rates and cost of capital. At Great Basin, refresh rates went into effect in in September subject to refund and were later adjusted in November to reflect settlement rates. And we anticipate a final decision being issued by April.

Our $50,000,000 California case is progressing on schedule and as expected. We are scheduled to receive intervener testimony in April with a hearing this summer and new rates effective in January of twenty twenty six. I'll discuss Arizona in more detail on the next slide, but I'm pleased with the progress we've made on refreshing rates, and minimizing regulatory lag in each of our jurisdictions as we remain steadfast in our commitment to working collaboratively with our regulators on constructive outcomes. Turning to Slide 10, our Arizona rate case continues to progress on schedule with the ALJ issuing a recommended opinion and order last week. We intend to continue with the we contend excuse me, we intend to continue to work with the commission staff and file comments reiterating the fair and balanced nature of the stipulated issues that were agreed upon at the time of hearing.

Including a $96,000,000 revenue increase and an ROE of 965% and a fair value increment of 0.73%. The commission is scheduled to vote on our case March 27. You may recall our application included proposal or SIMP. The proposal, if accepted, will allow us to implement surcharge each year to recover the non revenue producing investments we made in the prior year. These are investments primarily related to the safety and reliability of our system, which represents approximately 40% of the company's annual capital investments in Arizona here.

Given the circumstances of the inability of a staff witness to testify last November, we are appreciative of the parties the administrative law judges' decision to hold a separate hearing on the SIEM rather than to further postpone our entire case. You'll see on the slide that the commission staff has been supportive of our proposal on this mechanism and a final separate hearing on the SIEM is scheduled for May. Given the intent of the mechanism and mechanically how it is designed to work, we do not believe a May hearing will impact our desire utilize the mechanism to reduce regulatory lag beginning in 2026. If the mechanism is ultimately approved by the commission. Consistent with the Arizona Corporation Commission's expressed desires reduce regulatory lag, the Commission released a constructive policy statement that would allow utilities to file formula rate plans in future rate cases as an option to reduce regulatory lag.

I refer you to the Commission's statement that was issued last December for full details. But we believe this is another constructive positive step that the commission has taken to address timelier cost recovery, reduce regulatory burden and enhance administrative efficiency in Arizona. Turning to Slide 11. As Karen noted, Economic activity and demand for natural gas service remain strong throughout our service territory and we continue to invest in the communities in which we operate. I've highlighted for you on previous calls the activity in Arizona and the advanced manufacturing space as well as the potential throughout our service territories for additional data center growth. The growth in Arizona in these sectors has driven the Arizona Commission earlier this month to open a docket to address resource adequacy of natural gas infrastructure and storage in the state. These as well as continued growth in the entertainment, hospitality, manufacturing, warehouse and logistics and mining sectors continue to drive significant in migration throughout our service territories. The economic activity and development associated with these projects is expected to drive further upside to our already strong customer growth that Karen noted during our opening remarks today. You'll see on Slide 11, the population growth projections for Arizona and Nevada from S and P Global are expected to continue to outpace the national average over the next five years.

For Southwest Gas, we believe this economic development activity and resulting population growth will translate to more meter sets for residential and small commercial customers which currently represents 85% of our existing customer mix. We continue to see greater than 90% of all new construction built in our service territories becoming Southwest Gas customers. With With that growth comes the need for increased infrastructure investment in order to support both new and existing customers as we respond to Southwest for new gas service and work to ensure the safety and reliability of our entire system. Based on our recently refreshed capital expenditures and rate based growth models, now expect to invest about $4,300,000,000 over the next five years to support safety, reliability and economic development across our service territory. We currently expect these investments to translate to a compound annual growth rate and rate base of 6% to 8% from twenty twenty twenty five to 2029. About 50% of this planned spending is needed for safety and reliability and approximately 30% of the projected plan relates to economic development and new business growth. And with that, I'll turn the call over to Rob, who will review our financial performance for the year.

Thanks, Justin. On Slide 13, we provide consolidated earnings walk on an adjusted basis.

During 2024, the utility benefited from rate relief continued customer growth, This improvement was partially offset by higher interest expense and lower other income both of which are primarily related to changes in regulatory balances associated with the PGA mechanism as well as modest increases in O and M and depreciation and amortization all of which are discussed in detail on the next slide. Century's consolidated results were lower for 2024 as 2023 had benefited from higher offshore wind work and above average natural gas bid work that did not recur in 2024. 2024 also saw unforeseen reduction Partially offsetting these decreases, Century saw lower interest expense over the period due to IPO related debt reduction, as well as the benefits from a securitization transaction during the second half of twenty twenty four. In addition to the impacts from the removal of Mountain West in 2023, The holding company had lower overall operating expenses, partially offset by higher interest primarily associated with higher variable interest rate impacts associated with the term loan and the amounts outstanding on the holding company revolving credit facility. In the appendix, we provide a reconciliation of adjustments by op The vast majority of the 2024 adjustments relate to the amortization of intangible assets and receivable securitization related costs at Century, and separation related transaction adjustments while in 2023 adjustments also include the impacts from the loss on the sale previous integration of Mountain Southwest, as well as consulting fees related to utility optimization.

Moving on to Slide 14, you will see the year over year performance drivers for our utility, Southwest Gas Corporation.

In 2024, utility operating margin increased by $72,500,000 compared to 2023. This improvement was driven primarily by $66,000,000 of increased rate relief resulting from prior investments in Nevada and California. In addition, we saw $12,000,000 of improved margin as a result of customer growth throughout our service areas. The remaining increase largely relates to the combined impacts of certain infrastructure and similar tracking mechanism surcharge components, which combined with the variable interest expense adjustment mechanism in Nevada resulted in $9,000,000 higher operating margin this quarter.

These increases were partially offset by about $7,000,000 of lower regulatory amortization of which a comparable decrease is reflected in amortization expense.

We also were impacted by about $11,000,000 of out of period adjusting entry that relate to net cost of gas sold in prior years. The largest of which relates to a previously disclosed in 2023 $8,000,000 benefit that did not recur in 2024. O and M was relatively flat on a per customer basis year over year. Modest net increase of $9,200,000 or roughly 2% is less than inflation observed in the broader macroeconomic measures over the same period.

Overall increase in O and M primarily related to compensation These modest increases were partially offset by a reduction in primarily related to cost optimization fees that occurred in 2023 and were adjusted out of net income in our present We remain confident that we will be able to achieve our goal of keeping O and M costs nearly flat on a per customer basis through the forecast period though we expect these results could be non linear.

The $9,300,000 increase in depreciation amortization and general taxes was largely associated with with 8% increase in average gas plant service compared to 2023. Partially offset by the decreased amortization related to regulatory account balances noted earlier in the discussion of margin changes.

Other income decreased approximately 16,000,000 primarily driven by a $17,200,000 decrease in interest income related to less carrying charges associated with lower regulatory account balances notably the deferred purchase gas cost balances which flipped from a receivable balance from customers of nearly $550,000,000 December 2023 to a net liability balance of about $230,000,000 million dollars at this year's end. Interest expense at the utility increased by $12,400,000 the PGA as well as regulatory treatment timing related to the utilities and dust development revenue bonds and a lower level of debt related to AFUDC. Partially offsetting these impacts was a decrease in interest related to the payoff of $50,000,000 term loan in April of twenty twenty three.

Moving on to Slide 15, we provide our 2025 financing plan for both Southwest Gas Holdings and Southwest Gas Corporation. Which for simplicity assumes consolidation of Century Rate for the entirety of the year. To the extent Century ceases to be consolidated in 2025, we plan to adjust this as needed depending on the timing and successful Southwest Gas Holdings finished 2024 with more than $360,000,000 of cash on hand and more than $1,000,000,000 of liquidity on a consolidated basis following the full collection from utility customers of previously deferred natural gas costs as well as Century's pay down of debt using proceeds from the IPO. We highlight that the holding company balance sheet could improve further if divestiture of Century shares resulted in increased cash at Southwest Gas Holdings, which will depend on the form of separation, and market conditions among other things.

We expect cash flow from operations to more than fund the entire capital expenditure program forecasted in 2025. In addition, based on the strength of our balance sheet and successful recent refinancing efforts, the only capital market needs over the next twelve months depending on remaining Century separation execution form relate to less than $100,000,000 of equity needs in 2025 we would expect to be covered through the ATM. We also expect a potential extension of a portion or all of the term loan facility at the holding company to beyond the July 31 maturity date. We also plan to amend and extend the holding company revolving credit debt capital markets new issuance activity at the utility until the spring of twenty twenty six. As Karen noted earlier, Southwest Gas Holdings remains committed to paying a competitive dividend to our stockholders. We plan to pay the same dividend in 2025, which we expect would result in a competitive payout ratio. We will continue to balance factors such as projected capital requirements, impacts to credit ratings, the competitiveness of the dividend yield economic conditions and other factors, and we'll review the dividend policy for any changes post further separation execution and deconsolidation of Century.

At Holdings, we reiterate our plan to target a solid investment grade balance Moving to Slide 16, we take a look at our balance sheet strength and our commitment to maintaining an investment grade profile. On the left hand side, we walk through net debt by operating company. We finished 2024 with more than $360,000,000 of cash, largely due to the full collection of the previous deferred purchase gas costs from the winter of twenty twenty two to 2023. As a result, at the utility, the PGA balance is now flipped to a liability balance about $230,000,000 as of 12/31/2024. This is compared to the asset balance nearly $550,000,000 that I mentioned a moment ago in 2023. In the appendix on Slide 24, additional details are provided on PGA balance. We continue to expect the large utility cash balance to significantly obviate the need to pursue additional financing in the near term.

Our 2024 results illustrate the progress we continue to make executing our strategy and we are committed to building on that momentum throughout 2025 and beyond. On Slide 18, we show our utility guidance for 2025. Along with our refreshed forward looking guidance at the utility we currently expect 2025 utility net income to be in the range of $65,000,000 to $275,000,000 We believe that our regulatory efforts and strong regional economic outlook in our service territories will drive 2025 results above that which we saw in 2024.

When 2024 earnings are normalized for the benefits we receive from the impacts of elevated cash and PGA balances, one time costs and COLI, our forecasted earnings for 2025 result in an 8% to 9% growth rate above 2024.

In addition, we expect significantly higher margin growth through regulatory proceedings as a result of the investments we've made for the benefit of our customers, to be partially offset by the impacts of costs from inflation, higher depreciation and amortization expenses. Higher expected interest expense related to variable rate bonds and forecasted year over year tax impacts.

Partially due to anticipated economic activity we are expecting 2025 utility CapEx to be approximately $880,000,000 which would be a modest increase above 2024 CapEx percent to 8% from 2025 to 2029, While we continue to expect that the regulatory cycle will result in non linear net income growth over the forecast period our regulatory strategy and our plan to achieve a flat O and M per customer trend over the same period are expected to be important components of our growth story going forward. You can find additional long term drivers in the appendix of our presentation on Slide 26.

We have also provided our forward looking CapEx spending plans now showing a five year forecast of about $4,300,000,000 We expect our rate base compounded annual growth rate to be in the range of 6% to 8% over that five year period. Each of our forward looking forecasts compounded annual growth rates are calculated off of a 2025 base As Rob mentioned, we will continue to pay the same dividend while we work to affect the further separation of 19 and emphasize that our teams are focused on executing our 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 plan to continue delivering steady, organic rate base growth through strong regional demand dynamics. As well as earnings growth through financial discipline, operational excellence and constructive regulatory relationships. We'll continue to execute the next steps to fully separate SENTRI to create a more attractive value proposition for stockholders.

With that, I'd like to open the call for questions. Your first question Hey, everybody. How are you?

Good morning, Chris.

Good morning. Karen, you talked about the nonlinear [indiscernible] With the formula rates per prospectively in Arizona, do you see some convergence towards a more linear kind of relation I think what I speak to the nonlinear certainly under our current regulatory structure, it's nonlinear. And I think if if we're able to give more of a formula rate in place, absolutely that would it would be more of a linear growth, I would expect.

Okay. And Karen, you also mentioned I can't remember what language you used, but market conditions, I presume that means price for Century Is that what you meant? And The stocks somewhat depressed at the moment. Does that factor into your your timing thinking right now? You want to see how the new CEO does, I guess, would be the way to put it.

Well, certainly, positively since we last, we do have have onboarded Chris Brown and he has been with the company for just about three months now and we think that is a real positive and one of the first steps that was important towards moving towards our next steps on separation. But I would just indicate that we're watching and looking at all of the market conditions that would impact and assessing our different options would not limit it to just a price consideration.

Okay.

Given that you're in an evaluation mode. Does that suggest that the process could extend into next year?

We'll continue to watch the market conditions As I've indicated before, we'll update you as soon as we have more. That we can share with shareholders, but I will emphasize that we are very focused on moving forward with our separation. [indiscernible] talked about gas adequacy Do you have an opinion at this point And given sort of prospectively the load growth in your region you certainly can expect a lot of new gas generation So does that represent an side in your view to sort of what your longer term CapEx looks like today?

Hey, Chris. Yes, I mean, I think it can. A lot of times, some of the generation is cited closer to the interstate facilities, so less of us. But I think it's that continued migration of across our service territory through that economic development that trickles down into our core business. And I think just the general sentiment of moving into a direction where a natural gas is a good thing for our economy. It's a clean burning fuel. I think just that general sentiment is also helpful.

Does your sort of your perspective on the growth and how it will affect residential and small commercial sort of factor into what ACC is getting were they more thinking about the large load customers?

I think it's an all of the above, Chris.

Okay.

I think it's just the need the need for affordable, reliable, sustainable energy and fueling natural gas is a key component of that across the board. Okay.

Thank you. Your next question comes from the line of Steven Diambresi from Ladenburg. Please go ahead.

Hi. Thanks very much for taking my question.

Good morning. Good morning. Good morning.

I just Hi, everyone. I just had two quick ones. The first one is just does the updated utility net income CAGR assume any impact from from the pending SIIM mechanism or a future filing like subsequent GRC filing under the ACC formula rate policy statement This is Rob Stefani. Yes, the range doesn't include the formula and and we don't have the SIM tracker in the in that range as well. Okay. I guess the follow-up there would be just I understand, Sim, like that's obviously still outstanding. But on the formula rate, is that just are you looking to see I guess how do you see that moving forward? Are you looking for one of the electrics to file under the plan or is that going to be tested somehow or will there be a rule making or what's the next steps there to get you comfortable with that?

Structure?

Hey, Stephen, it's Justin. Yes, I mean, I think we're comfortable now. It's just the timing issue, right? We're in the last inning of our rate case. And so it's something we would look to as part of our next case. I know UNS Gas who just filed the end of the year last year amended their rate case as a result of the policy statement.

Know APS is looking to file, I think, a rate case later this year, I believe. So I'm sure they would include a proposal. So I think it's just the timing thing from our perspective. Kind of given where we were in flight with our pending case and kind of the timing of when that policy statement came out. But I think directionally, it's very positive. And obviously, we'll be monitoring those dockets to see if there's anything we can learn for how this is actually implemented on a go forward so that we get to the point of our next case and an opportunity to include a proposal, we'll have the benefit of of kind of seeing how this is shaking out over time.

Okay. And then I guess just from a high level, 6% to 8% utility net income CAGR is in line with the rate base CAGR. So just the highest level that would kind of imply that earned ROEs are flat across the projection period? And I know you've talked about focus on improving earned ROEs. So like am I right to think that to the extent some of these mechanisms kind of move forward or you see a future filing under a formula rate plan, we should see earned or that would be a driver of earned ROE improvement in the future? Yes. I mean, I think obviously if we get a tracker, the and take it step by step, if we take a get a tracker in Arizona in the near term, It would start to take effect beginning in 2026. Just given the timing of the tracker mechanic. But yes, as as we receive kind of regulatory outcomes that are favorable, whether it a tracker or formula, we would expect the ROE to improve. And and move move more toward a higher ROE and higher implied growth rate. Was there a second part to your question?

No, that was it. Thank you. I appreciate it. Thanks very much for the time. That was all I had.

This concludes the question and answer portion of today's conference. I would now like to turn the call back over to Justin Forsberg for closing remarks.

Everybody for joining the call today and for your interest in Southwest Gas. We look forward to seeing many of you soon.

This concludes today's Southwest Gas Holdings fourth quarter and full year 2024 earnings call and webcast. You may disconnect your line at this time. A wonderful day.