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

Delivering Strong Second Quarter for Utility Net Income and Centuri Revenue

Reaffirming 2023 Utility Earnings Guidance and 2023 Centuri Revenue and EBITDA Margin Guidance

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

"I am pleased with our strong financial results across the utility and Centuri, and the progress we made on our strategic priorities," said Karen S. Haller, President and Chief Executive Officer of Southwest Gas. "During the quarter, we executed on our business plan and made progress on our transformational strategy towards becoming a pure-play natural gas leader. We also achieved significant regulatory milestones, including receiving Arizona Corporation Commission approval for the Centuri separation and implementing an increase in the Gas Cost Balancing Account rate to facilitate timely recovery of purchased gas costs. At the federal level, we confidentially submitted a draft Registration Statement on Form 10 with the U.S. Securities and Exchange Commission and we anticipate a decision from the Internal Revenue Service on the tax-free nature of the separation in the fourth quarter. We're proud of these advancements, as well as delivering the highest second quarter utility net income and Centuri revenue on record."

Ms. Haller continued, "Our commitment to executing our strategic plan is as strong as ever. We continue to be there for our customers, delivering safe, reliable, and affordable energy, and investing in our communities and employees. As always, we are focused on maximizing value for our stockholders, which is reflected by our year to date performance."

Southwest Gas Holdings Financial Highlights

• Southwest Gas Corporation ("Utility") earnings up $21 million in the second quarter of 2023 over the second quarter of 2022 and Centuri Group, Inc. ("Centuri") results up approximately $14 million over the same period.
• Consolidated net earnings of $0.40 per diluted share (and adjusted consolidated net earnings of $0.47 per diluted share) for the second quarter of 2023, compared to consolidated net earnings of $(0.10) per diluted share (and adjusted consolidated earnings of $0.23 per diluted share) for the second quarter of 2022.
• Adjustments to second quarter 2023 earnings included ~$5 million of collective after-tax items, largely driven by costs incurred to facilitate the spin-off of Centuri as well as consulting fees related to Utility optimization.
• Advanced Centuri spin by confidentially submitting a draft Registration Statement on Form 10 with the U.S. Securities and Exchange Commission ("SEC") and receiving Arizona Corporation Commission ("ACC") approval of the Centuri separation.

Business Segment Highlights

Natural Gas Distribution

The natural gas distribution segment recorded net income of $19.1 million in the second quarter of 2023, compared to a net loss of $2.3 million in the second quarter of 2022.

Key operational highlights include:

• Record twelve-month operating margin of $1.2 billion;
• Approximately 42,000 new meter sets added during the last 12 months;
• Received ACC approval to implement an increase in the Gas Cost Balancing Account rate to facilitate timely recovery of ~$358 million in purchased gas costs effective August 1, 2023;
• Rate case filings on-track – expecting 3Q 2023 Nevada filing and 1Q 2024 Arizona filing; and
• The Company retired $450 million term loan associated with purchased gas cost from the first quarter of 2023.

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

• Increased operating margin of $26 million compared to the second quarter of 2022, including an increase in recoveries/return associated with regulatory account balances, system investments, and customer growth;
  • Decoupling mechanisms in our high-growth territories are designed based on per-customer margin benchmarks, and provide incremental margin in support of net customer additions;
  • Recovery of increased investments to provide safe and reliable service to our customers, including additions included as part of Arizona rate base approved in our most recently concluded rate case (effective February 2023);
• Operations and maintenance expense decreased $3.1 million between quarters, including an $8 million decrease in legal claim-related costs, partially offset by an increase in external services/contractor costs (including a consulting arrangement for business optimization efforts), leak survey and line locating costs, and bad debt expense;
• Other income increased $22.2 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 $9.1 million (includes death benefits of $1.6 million) compared to the second quarter of 2022.

Natural Gas Distribution Segment Guidance and Outlook:

• 2023 net income guidance of $205 - $215 million (assumes $3 - $5 million of COLI earnings);
• Increasing 2023 capital expenditures guidance to $700 - $720 million in support of customer growth, system improvements, and pipe replacement programs;
• 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 net income of $18.8 million in the second quarter of 2023, compared to net income of $4.7 million in the second quarter of 2022. The increase in net income over the second quarter of 2022 was driven by higher revenues, lower fuel prices, increased operating efficiencies caused by storm restoration services, and favorable weather in several operating locations.

Key operational highlights include:

• Record second quarter revenues of $806 million, an increase of 14% compared to the second quarter of 2022;
• $14 million year over year increase in second quarter net income;
• $65 million storm restoration services revenue earned in the first half of 2023, an increase of $46 million over the first half of 2022;
• ~$100 million sustainable wind energy project revenues during the first half of 2023, with a projected $250 million for the full year, which is a realization of the significant offshore wind growth opportunity sought after in the acquisition of Riggs Distler in 2021;
• Record twelve-month adjusted EBITDA of $285 million, an increase of approximately 30% compared to the second quarter of 2022; and
• Completed contracted work with customer acceptance of advanced foundation components for first offshore wind project (Southfork in Rhode Island).

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

• $54.7 million increase in electric revenues and $26 million increase in offshore wind revenues;
• $29.0 million revenue increase in higher-profit storm restoration services;
• Improved mix of work, increased operating efficiencies, lower fuel prices, and weather; and
• Increased interest expense ($11.9 million) due to higher interest rates on variable-rate borrowings.

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 noncontrolling interest, costs of strategic review, one-time acquisition costs and non-cash stock-based compensation expense).

Centuri Separation Update

In the second quarter, Southwest Gas continued to pursue its previously announced plan to simplify the Company's business portfolio and position Southwest Gas as a pure-play utility.

On June 21, 2023, the Company announced that it had received approval from the ACC to divest its financial interest in and separate from Centuri. Additionally, the Company confidentially submitted a draft Registration Statement on Form 10 with the SEC.

The Company anticipates completion of the spin-off of Centuri towards the end of the first quarter of 2024, subject to, among other things, the receipt of a favorable Internal Revenue Service private letter ruling relating to the tax-free nature of the transaction, SEC review and Form 10 effectiveness, and final approval by the Southwest Gas Board of Directors. Further details related to capital structure, board composition and other elements of the transaction will be announced at a later date.

Conference Call and Webcast

Southwest Gas will host a conference call on Wednesday, August 9, 2023 at 11:00 a.m. ET to discuss its second 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"), Southwest Gas Corporation (the "Utility" or "Southwest"), and Centuri Group, Inc. ("Centuri") and their 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 or separate 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", "Management's Discussion and Analysis of Financial Condition and Results of Operations", 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-, six- and twelve- months ended June 30, 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, consulting fees related to optimization opportunity identification, benchmarking, and assessment, 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 consulting fees related to optimization and 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.)

Management also uses the non-GAAP measure EBITDA and Adjusted EBITDA related to its utility infrastructure services operations. EBITDA and Adjusted EBITDA, when used in connection with net income attributable to utility infrastructure services, is intended to provide useful information to investors and analysts as they evaluate Centuri's performance. EBITDA is defined as earnings before interest, taxes, depreciation and amortization, and Adjusted EBITDA is defined as EBITDA adjusted for certain other items as described below. These measures should not be considered as an alternative to net income or other measures of performance that are derived in accordance with GAAP. Management believes that the exclusion of these items from net income attributable to Centuri provides an effective evaluation of Centuri's operations period over period and identifies operating trends that might not be apparent when including the excluded items. As to certain of the items in the EBITDA and Adjusted EBITDA reconciliation table below, (i) the nonrecurring write-off of deferred financing fees relates to Centuri's amended and restated credit facility, (ii) acquisition costs vary from period to period depending on the level of Centuri's acquisition activity, (iii) non-recurring strategic review costs relate to a potential sale or spin-off of Centuri, and (iv) non-cash share-based compensation varies from period to period due to amounts granted in a given year. Because EBITDA and Adjusted EBITDA, as defined, exclude some, but not all, items that affect net income attributable to Centuri, such measures may not be comparable to similarly titled measures of other companies. The most comparable GAAP financial measure, net income attributable to Centuri, and information reconciling the GAAP and non-GAAP financial measures, are included in the utility infrastructure services EBITDA and Adjusted EBITDA reconciliation chart below.

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 June 30, 2023 Form 10-Q.