Southwest Gas Holdings, Inc. Reports Third Quarter 2022 Financial Results

Record Twelve-Month Natural Gas Distribution Margin

Strategic Alternatives Review Process for Centuri and MountainWest Continues

Focus is on Cost Management, Growth, and Value Creation for Stockholders

LAS VEGAS, Nov. 9, 2022 /PRNewswire/ -- Southwest Gas Holdings, Inc. (NYSE: SWX) ("Southwest Gas" or the "Company") today reported third quarter 2022 financial results. 

"Our third quarter results were in line with expectations for our natural gas distribution and pipeline and storage segments, and we continue to focus on additional opportunities to deliver growth with both of those segments. Revenues in our utility infrastructure segment remained strong while margins were impacted by significant inflationary pressures and mix-of-work headwinds in addition to continued customer supply chain challenges," said Karen S. Haller, President and Chief Executive Officer.  "As our Board continues the strategic alternatives review process for MountainWest and Centuri, we are executing on the utility's optimization plan and engaging on exciting projects in clean energy infrastructure. Moving forward, our priorities are focusing on safety and reliability while meeting the energy needs of our customers, investing in the communities we serve and maximizing value for our stockholders."

Southwest Gas Holdings Financial Highlights

• Consolidated net loss of $0.18 per diluted share (and adjusted consolidated net loss of $0.05 per diluted share) for the third quarter of 2022, compared to consolidated net loss of $0.19 per diluted share (and adjusted consolidated earnings of $0.05 per diluted share) for the third quarter of 2021.
• Consolidated net loss of $12.3 million (and adjusted consolidated net loss of $3.3 million) for the third quarter of 2022, compared to a consolidated net loss of $11.6 million (and adjusted consolidated net income of $3.1 million) for the third quarter of 2021.
• Company-owned Life Insurance ("COLI") policy cash surrender value net decline of $1.5 million (or $0.02 per diluted share) for the quarter, compared to no change for the third quarter of 2021.
• Adjustments to third quarter 2022 earnings include $11.9 million of collective nonrecurring strategic review expenses and certain MountainWest integration costs.

Strategic Alternatives Review Process Update
The Company's Board of Directors continues to review strategic alternatives for MountainWest and Centuri, including a sale or spin-off for Centuri. As previously announced, Southwest Gas and Carl C. Icahn entered into an Amended and Restated Cooperation Agreement on October 24, 2022.

Business Segment Highlights 

Natural Gas Distribution

The natural gas distribution segment recorded a net loss of $22.2 million in the third quarter of 2022, compared to a net loss of $27.5 million in the third quarter of 2021. This was driven by typical seasonality of the utility business. The improved third-quarter results benefited from higher operating margin.

Key operational highlights include:

• 40,000 new utility customers added during the past 12 months;
• Record twelve-month operating margin of $1.1 billion;
• $193 million capital investment during the quarter;
• Filed with the CPUC for approval of a hydrogen-blending demonstration project;
• Received approval to amend our contract with the RTC of Southern Nevada to increase the amount of RNG we supply to fuel an additional 40 buses; and
• Ranked #1 in customer satisfaction for businesses with natural gas service in the West, three years in a row by J.D. Power. Also ranked #1 in safety and reliability, corporate citizenship, billing and payment, communications, and price.*

Key drivers of the third quarter performance in 2022 as compared to third quarter performance in 2021 include:

• Increased operating margin by $11 million compared to the third quarter of 2021, including the impact of new general rates in Nevada effective April 1, 2022;
• A $2 million increase in O&M (including a $7 million increase in collective pipeline integrity/reliability, technology and customer-related costs and reserves, offset by lower legal-related claims of $5 million);
• Depreciation and amortization increased $3 million due to a higher level of gas plant in service;
• Other income increased $6 million reflecting higher interest income and lower non-service components of pension costs, offset by a $1.5 million decline in COLI results; and
• Increased interest expense of $4.5 million compared to the third quarter of 2021.

Arizona rate case update:

• Stipulated positions with Company, Staff, and RUCO on ROE of 9.3% and equity layer of 50%;
• Rate relief - parties' positions range from $54.8 - $61.7 million;
• All items subject to ACC approval; and
• Rate relief anticipated in early 2023.

Reaffirm Natural Gas Distribution Segment Guidance and Outlook:

• ROE in 2023 and beyond of 8%+;
• Five-year utility rate base compound annual growth rate of 5% – 7% (2022 – 2026);
• 5-Year O&M/per customer CAGR of less than 1% (2022 - 2026);
• 2022 net income guidance of $185 million to $195 million, which continues to include normalized COLI earnings of $3 million – $5 million;
• 2022 capital expenditures in support of customer growth, system improvements, and pipe replacement programs of $650 million to $675 million (previously was $600 million to $650 million); and
• 5-Year capital expenditures of $2.5 – $3.5 billion.

Centuri / Utility Infrastructure Services

The utility infrastructure services segment had net income of $14.3 million in the third quarter of 2022, compared to net income of $18.5 million in the third quarter 2021. While revenues increased $125.6 million over the third quarter of 2021, Centuri's performance was impacted by inflation, customer supply chain challenges affecting mix of work, reduced storm restoration work, and increased amortization and interest related to Riggs Distler. 

Key operational highlights include:

• Record revenues of $758 million, including Riggs Distler revenues, an increase of 20% compared to the third quarter of 2021;
• Awarded notice to proceed on $217 million onshore assembly contract for offshore wind project; and
• Deployed 800 employees to assist in power restoration services due to Hurricanes Fiona and Ian ($18 million of revenues in Q3 and $12 million in Q4).

Key drivers of Centuri's third quarter performance in 2022 as compared to third quarter performance in 2021 include:

• $28 million revenue reduction in higher-profit storm restoration services;
• Increases in fuel due to inflation ($9.5 million, including $1.6 million for Riggs Distler);
• Negative impact on work mix and volume due to certain customers' supply chain challenges in procuring necessary materials and equipment;
• Recognition of a $5.7 million loss on a gas infrastructure bid project that will be substantially completed in Q4 (recovery being pursued for higher costs incurred);
• Increased interest expense ($10.4 million) and increased depreciation and amortization expense ($9.8 million) primarily associated with the acquisition of Riggs Distler; and
• Prior-year quarter included $13 million of transaction-related expenses for Riggs Distler acquisition.

Centuri / Utility Infrastructure Services Segment Guidance and Outlook:

• 2022 revenues of $2.60 billion to $2.70 billion (revised from $2.65 - $2.80 billion);
• 2022 EBITDA margin of 8% to 8.5% (revised from the previous 10% to 11% due to inflationary and customer supply chain headwinds and significantly reduced storm restoration work);
• 2023 revenues of $2.8 billion to $3.0 billion;
• 2023 EBITDA margin of 9.5% - 11% (previously 11% - 12%); and
• 2023 - 2026 Adjusted EBITDA CAGR of 9% - 11% (unchanged).

MountainWest / Pipeline and Storage 

MountainWest reported $12.3 million of net income. MountainWest's results were impacted by $5.7 million of pre-tax, nonrecurring expenses, primarily associated with post-acquisition integration costs. After accounting for these nonrecurring expenses, MountainWest results were in line with Company expectations. The Company expects to complete the integration of MountainWest by the first quarter of 2023.

Key operational highlights include:

• $63.2 million in recognized revenue; and
• Contributed $12.3 million to consolidated net income and $16.6 million on an adjusted basis.

Reaffirm MountainWest / Pipeline and Storage Segment Guidance and Outlook:

• 2022 revenue of $250 million to $255 million;
• 2022 run rate EBITDA margin of 65% to 67%;
• Earnings accretion in 2022 on a run rate basis exclusive of nonrecurring integration costs; and
• Targeting over $200 million (previously $100 million) in incremental growth investment opportunities at MountainWest through 2025. The Company further expects to construct these projects at an EBITDA build multiple of less than 6x, driving meaningful value creation for stockholders.

Conference Call and Webcast

Southwest Gas will host a conference call on Wednesday, November 9, 2022 at 1:00 p.m. ET to discuss its third quarter 2022 results. The associated press releases and presentation slides are available at https://investors.swgasholdings.com/investor-overview.

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: (800) 267-6316 or international (203) 518-9814. The conference ID is SWXQ322.  The webcast will be archived on the Southwest Gas website.

Southwest Gas Holdings currently has three 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.

MountainWest operates over 2,000 miles of highly contracted, FERC-regulated interstate natural gas pipeline providing transportation and underground storage services in the Rocky Mountain region.

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 2022. 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 sell or spin Centuri and/or sell MountainWest, the timing and amount of rate relief, changes in rate design, customer growth rates, the effects of regulation/deregulation, tax reform 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 MountainWest, 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, nor can it provide assurance regarding acquisitions or their impacts, including management's plans or expectations related thereto, including with regard to Riggs Distler or MountainWest. 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 web-site 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 (loss), (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 for the three-, nine- and twelve- months ended September 30, 2022 includes adjustments to add back expenses related to the Riggs Distler acquisition, the MountainWest acquisition and integration expenses, stockholder activism and litigation, proxy contest and settlement, legal reserves, and the strategic review. Management believes that it is appropriate to adjust for expenses related to the MountainWest acquisition and integration because they are expenses that will not recur in periods following the integration. Management 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 acquisition.

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 September 30, 2022 Form 10-Q.

Amounts in thousands, except per share amounts

SOURCE Southwest Gas Holdings, Inc.