Southwest Gas Holdings, Inc. Reports First Quarter 2023 Financial Results

Highest Quarterly Utility Net Income on Record; Highest First Quarter Revenues at Centuri

Reaffirming 2023 Guidance

LAS VEGAS, May 9, 2023 /PRNewswire/ -- Southwest Gas Holdings, Inc. (NYSE: SWX) ("Southwest Gas" or the "Company") today reported first quarter 2023 financial results. 

"We delivered strong financial results at both the utility and Centuri during the quarter, with constructive new rates in place for Arizona utility customers and exciting new offshore wind and natural gas contracts at Centuri," said Karen S. Haller, President and Chief Executive Officer of Southwest Gas. "We have now completed our 2023 financing plan and going forward, we expect to maintain an investment grade profile and enhance balance sheet flexibility. We are making significant progress on our transformation strategy through the recent close of the sale of MountainWest and advancing the Centuri spin with IRS and Arizona Corporation Commission filings, and we are excited about Southwest Gas' future as a pure-play natural gas leader as we focus on delivering continued earnings growth. We remain committed to executing our strategic plan as we address the needs of our customers, deliver safe and affordable energy, and invest in the communities we serve and our employees, while maximizing value for our stockholders."

Southwest Gas Holdings Financial Highlights

• Utility earnings up $23 million Q1 2023 over Q1 2022 and Centuri results up approximately $12 million over same period.
• Consolidated net earnings of $0.67 per diluted share (and adjusted consolidated net earnings of $1.69 per diluted share) for the first quarter of 2023, compared to consolidated net earnings of $1.58 per diluted share (and adjusted consolidated earnings of $1.74 per diluted share) for the first quarter of 2022.
• Adjustments to first quarter 2023 earnings included $70 million of collective nonrecurring after-tax items, largely driven by incremental loss on sale of MountainWest ($66.5 million after-tax), other costs associated with the sale, residual MountainWest stand-up/integration costs leading up to the sale date, as well as costs incurred to facilitate a spin-off of Centuri.
• Completed sale of MountainWest and proceeds used to pay off $1.1 billion of total debt.
• Advanced Centuri spin with Internal Revenue Service ("IRS") private letter ruling ("PLR") and Arizona Corporation Commission ("ACC") filings.
• Completed $247 million equity raise on March 10, 2023 and $550 million term loan issuance on April 17, 2023.

Business Segment Highlights 

Natural Gas Distribution

The natural gas distribution segment recorded net income of $134.7 million in the first quarter of 2023, compared to net income of $111.8 million in the first quarter of 2022.

Key operational highlights include:

• Record twelve-month operating margin of $1.2 billion;
• Net income increase driven by new base rates effective February 1, 2023 in Arizona, as well as the impact of a full first quarter of rates in Nevada which went into effect April 1, 2022;
• Arizona general rate case finalized with annual revenue increase of $54.3 million (the largest revenue increase in company history);
• 42,000 new utility customers added during the last 12 months;
• Submitted regulatory filing requesting authority to modify purchased gas cost recovery mechanism in Arizona to facilitate either a faster recovery of the gas acquisition costs or receive improved cost of carry on the regulatory account balance;
• Preparing third quarter 2023 Nevada rate case filing; and
• Issued $300 million Senior Notes with proceeds used to repay amounts outstanding under credit facility and for general corporate purposes.

Key drivers of the first quarter performance in 2023 as compared to first quarter performance in 2022 include:

• Increased operating margin by $34 million compared to the first quarter of 2022, including two months of Arizona rate relief and three months of Nevada rate relief;
• Operations and maintenance expense increased $11.6 million between quarters, including approximately $4 million in fuel-related costs ($3 million of which is customer-provided fuel for pipeline operations and offset in revenues), $1.7 million in combined leak survey and line locating costs, $2.6 million primarily related to outside services/contractor costs in various areas of the business, as well as increases in insurance related claims ($1 million);
• Other income increased $17 million reflecting higher interest income related primarily to an increase in deferred purchased gas cost balances, and lower non-service components of pension costs; and
• Company-owned Life Insurance ("COLI") policy cash surrender value results (included in Other income) increased $4.4 million compared to the first quarter of 2022.

Reaffirm Natural Gas Distribution Segment Guidance and Outlook:

• 2023 net income guidance of $205 - $215 million (assumes $3 - $5 million of COLI earnings);
• 2023 capital expenditures in support of customer growth, system improvements, and pipe replacement programs of $665 - $685 million;
• 3 - Year capital expenditures of approximately $2.0 billion; and
• 3 - Year utility rate base compound annual growth rate of 5% - 7%.

Centuri / Utility Infrastructure Services

The utility infrastructure services segment had a net loss of $11.9 million in the first quarter of 2023, compared to a net loss of $23.5 million in the first quarter of 2022. Infrastructure services results are typically seasonally lower in the first quarter. Revenues increased $129.4 million over the first quarter of 2022, driven by the start of a large gas infrastructure project, increased offshore wind and storm restoration work, and milder weather in the central and eastern United States. 

Key operational highlights include:

• Record revenues of $653 million, an increase of 25% compared to the first quarter of 2022;
• $11.6 million year over year increase in first quarter results;
• Signed $172 million in new offshore wind business to support a project in New York, bringing Centuri to over $525 million in total wind projects under contract;
• Signed $125 million gas pipeline construction contract in Indiana – $30 million of revenue recognized in first quarter; and
• $31 million storm restoration services revenue – represents approximately two times the 2022 revenue generated in the first quarter for storm restoration services.

Key drivers of Centuri's first quarter performance in 2023 as compared to first quarter performance in 2022 include:

• $51.7 million increase in electric revenues and $43.3 million increase in offshore wind revenues;
• $16.5 million revenue increase in higher-profit storm restoration services;
• Improved mix of work, operating efficiencies, and weather;
• Growth from new and existing electric customers and new gas bid contract; and
• Increased interest expense ($11.2 million) due to higher interest rates on variable-rate borrowings.

Reaffirm Centuri / Utility Infrastructure Services Segment Guidance and Outlook:

• 2023 revenues of $2.8 billion to $3.0 billion;
• 2023 adjusted EBITDA margin of 9.5% - 11.0%; and
• 2023 - 2026 adjusted EBITDA CAGR 9% - 11% (adjusted EBITDA excludes costs of strategic review, one-time acquisition costs and non-cash stock-based compensation expense).

Strategic Alternatives Review Process Update

Southwest Gas is actively executing on its plans to simplify the Company's business portfolio in the first quarter of 2023 and position Southwest Gas as a pure-play utility. On February 14, 2023, Southwest Gas completed the sale of MountainWest to Williams for $1.5 billion in total enterprise value.

Additionally, the Company is actively pursuing a spin-off of its wholly owned subsidiary, Centuri, to form a new, independent and publicly traded utility infrastructure services company. Southwest Gas submitted its IRS PLR request during the first quarter of 2023 and a notice of intent was filed with the ACC in April. An SEC Form 10 submission is expected late in the second quarter or early in the third quarter of 2023. The Company anticipates completion of its planned spin of Centuri during the fourth quarter of 2023 or first quarter of 2024. The spin is expected to be completed as planned and be tax-free to Southwest Gas and its stockholders for U.S. federal income tax purposes, subject to ACC approval, SEC registration, and IRS PLR to confirm tax-free nature of spin structure. 

Conference Call and Webcast

Southwest Gas will host a conference call on Tuesday, May 9, 2023 at 11:00 a.m. ET to discuss its first quarter 2023 results. The associated press releases and presentation slides are available at https://investors.swgasholdings.com.

The call will be webcast live on the Company's website at www.swgasholdings.com. The telephone dial-in numbers in the U.S. and Canada are toll free: (844) 481-2868 or international (412) 317-1860. The webcast will be archived on the Southwest Gas website.

Southwest Gas Holdings currently has two business segments:

Southwest Gas Corporation is a dynamic energy company committed to exceeding the expectations of over 2 million customers throughout Arizona, Nevada, and California by providing safe and reliable service while innovating sustainable energy solutions to fuel the growth in its communities. 

Centuri Group, Inc. is a strategic infrastructure services company that partners with regulated utilities to build and maintain the energy network that powers millions of homes and businesses across the United States and Canada.

Forward-Looking Statements: This press release contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements include, without limitation, statements regarding Southwest Gas Holdings, Inc. (the "Company") and the Company's expectations or intentions regarding the future. These forward-looking statements can often be identified by the use of words such as "will", "predict", "continue", "forecast", "expect", "believe", "anticipate", "outlook", "could", "target", "project", "intend", "plan", "seek", "estimate", "should", "may" and "assume", as well as variations of such words and similar expressions referring to the future, and include (without limitation) statements regarding expectations of continuing growth in 2023. In addition, the statements under headings pertaining to "Guidance and Outlook" that are not historic, constitute forward-looking statements. A number of important factors affecting the business and financial results of the Company could cause actual results to differ materially from those stated in the forward-looking statements. These factors include, but are not limited to, the timing and impact of executing (or not executing) on various strategic alternatives, including whether we will spin Centuri, the timing and amount of rate relief, changes in rate design, customer growth rates, the effects of regulation/deregulation, tax reform and similar changes and related regulatory decisions, the impacts of construction activity at Centuri, the potential for, and the impact of, a credit rating downgrade, the costs to integrate new businesses, future earnings trends, inflation, sufficiency of labor markets and similar resources, seasonal patterns, current and future litigation, and the impacts of stock market volatility. In addition, the Company can provide no assurance that its discussions about future operating margin, operating income, COLI earnings, interest expense, and capital expenditures of the natural gas distribution segment will occur. Likewise, the Company can provide no assurance regarding segment revenues, EBITDA, EBITDA margin or growth rates, that projects expected to be undertaken with results as stated will occur, nor that interest expense patterns will transpire as expected, that increases in costs will be timely incorporated in contracts and revenues, that customer materials will be available timely to efficiently complete projects, or that inefficiencies in the mix of work will not result, nor can it provide assurance regarding acquisitions or their impacts, including management's plans or expectations related thereto. Factors that could cause actual results to differ also include (without limitation) those discussed under the heading "Risk Factors" and "Quantitative and Qualitative Disclosure about Market Risk" in Southwest Gas Holdings, Inc.'s most recent Annual Report on Form 10-K and in the Company's and Southwest Gas Corporation's current and periodic reports, including our Quarterly Reports on Form 10-Q, filed from time to time with the SEC. The statements in this press release are made as of the date of this press release, even if subsequently made available by the Company on its website or otherwise. The Company does not assume any obligation to update the forward-looking statements, whether written or oral, that may be made from time to time, whether as a result of new information, future developments, or otherwise.

Non-GAAP Measures.  This earnings release contains financial measures that have not been calculated in accordance with accounting principles generally accepted in the U.S. ("GAAP"). These non-GAAP measures include (i) adjusted consolidated earnings per diluted share, (ii) adjusted consolidated net income, (iii) natural gas distribution segment adjusted net income, (iv) pipeline and storage segment adjusted net income, (v) utility infrastructure services segment adjusted net income (loss), and (vi) adjusted corporate and administrative net loss. Management uses these non-GAAP measures internally to evaluate performance and in making financial and operational decisions. Management believes that its presentation of these measures provides investors greater transparency with respect to its results of operations and that these measures are useful for a period-to-period comparison of results. Management also believes that providing these non-GAAP financial measures helps investors evaluate the Company's operating performance, profitability, and business trends in a way that is consistent with how management evaluates such performance. Adjusted consolidated net income (loss) for the three- and twelve- months ended March 31, 2023 and 2022 includes adjustments to add back expenses related to the MountainWest acquisition and integration expenses, stockholder activism and litigation, proxy contest and settlement, legal reserves, and the strategic review, along with losses on disposal groups held for sale, including goodwill impairment impacts and estimated selling costs, other costs associated with the sale, and costs incurred to facilitate a spin-off of Centuri. Management believes that it is appropriate to adjust for expenses related to the MountainWest acquisition and integration, for losses on held for sale businesses and for related costs, along with costs to facilitate a spin-off of Centuri, because they are expenses and charges that will not recur following these events. Management also believes it is appropriate to adjust for expenses related to stockholder activism, proxy contest settlement, and stockholder litigation, as well as the strategic review, because these matters are unique and outside of the ordinary course of business for the Company. In addition, utility infrastructure services adjusted net income, adjusted loss for corporate and administrative, and adjusted consolidated net income include adjustments associated with acquisition-related costs related to the Riggs Distler and MountainWest acquisitions.

Management also uses the non-GAAP measure operating margin related to its natural gas distribution operations. Southwest recognizes operating revenues from the distribution and transportation of natural gas (and related services) to customers. Gas cost is a tracked cost, which is passed through to customers without markup under purchased gas adjustment ("PGA") mechanisms, impacting revenues and net cost of gas sold on a dollar-for-dollar basis, thereby having no impact on Southwest's profitability. Therefore, management routinely uses operating margin, defined by management as regulated operations revenues less the net cost of gas sold, in its analysis of Southwest's financial performance. Operating margin also forms a basis for Southwest's various regulatory decoupling mechanisms. Management believes supplying information regarding operating margin provides investors and other interested parties with useful and relevant information to analyze Southwest's financial performance in a rate-regulated environment. (The Southwest Gas Holdings, Inc. Consolidated Earnings Digest included herein provides reconciliations for these non-GAAP measures.)

We do not provide a reconciliation of forward-looking Non-GAAP Measures to the corresponding forward-looking GAAP measure due to our inability to project special charges and certain expenses.

Reconciliation of non-GAAP financial measures of Adjusted net income (loss) and Adjusted diluted earnings per share and their comparable GAAP measures of Net income (loss) and Diluted earnings (loss) per share. Note that the comparable GAAP measures are also included in Note 7 - Segment Information in the Company's March 31, 2023 Form 10-Q.

SOURCE Southwest Gas Holdings, Inc.

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