The Williams Companies, Inc. (SWX) Earnings Call Transcript & Summary

Good day and welcome to today's conference call for Southwest Gas to discuss its strategic announcement this morning. I would now like to turn the conference over to Thomas Moran, Vice President, General Counsel and Corporate Secretary for Southwest Gas Holdings. Please go ahead, sir.

Thank you, Carl. Welcome to the Southwest Gas Holdings conference call regarding key strategic announcements we made this morning. Throughout the call, we will be referencing presentation slides, which have been posted to our Investor Relations website. I am joined on today's call by Karen Haller President and CEO of Southwest Gas Holdings; and Rob Stefani, Senior Vice President and CFO of Southwest Gas Holdings. Note that on today's call, the company will address certain factors that may impact this year's earnings. 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 Slide 2 of the presentation. The press release issued this morning as well as our Form 8-K filed today and our 10-Q filed on November 9, 2022, for a description of the factors that may cause actual results to materially 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'll now turn the call over to the CEO of Southwest Gas, Karen Haller.

Thank you, Tom, and thank you, everyone, for joining us today. I'm pleased to say the Board of Directors, after a thorough review of each of our operating company strategies as well as an enterprise review, has unanimously determined to take strategic actions to simplify the company's portfolio and maximize stockholder value. We are confident that decisions announced today are the right path forward to create long-term sustainable value. Starting on Slide 4. We have reached an agreement to sell MountainWest Pipeline Holding Company to Williams for $1.5 billion in total enterprise value, subject to certain adjustments. Second, we have decided to pursue a spin-off of Century Group. At a high level, this will position both Southwest Gas and Centuri to deliver long-term stockholder value as focused independent companies. As a stand-alone company, Centuri is a world-class utility infrastructure services platform positioned as a leader in infrastructure modernization and energy transition. And following the MountainWest sell, and Centuri spin-off, Southwest Gas Holdings will become a premier fully regulated natural gas utility with a strong balance sheet and a commitment to maintain investment-grade credit ratings. I will now turn the call over to Rob to discuss more details regarding the transaction.

Thanks, Karen. Let's turn to Slide 5 now to cover the details of the MountainWest transaction. Southwest Gas Holdings will be selling 100% of MountainWest Pipeline Holding Company to Williams. The expected net proceeds from the sale are approximately $1.1 billion, which represents an estimated loss of $350 million to $425 million for Southwest Gas Holdings, net of tax. Due to the loss we estimate, we are also anticipating a cash tax benefit of approximately $100 million, which could be applied against future taxable income. We expect to close the sale in 2023 following receipt of regulatory approvals and the expiration or termination of any applicable Hart-Scott-Rodino waiting period. We have a strong counterparty in Williams, which has a long acquisition track record and we are confident in their ability to operate Mountain West moving forward. I will also note that the net proceeds from the transaction will be used to repay the approximately $1.1 billion term loan that is associated with our acquisition of MountainWest. Now turning to Slide 6. We discuss the spin-off of Centuri. The spin-off of Centuri is expected to be tax-free to Southwest Gas and its stockholders for U.S. federal income tax purposes. Upon completion of the spin-off, Southwest Gas stockholders will maintain their current shares of Southwest stock and receive a pro rata distribution of publicly traded shares of Centuri NewCo stock. We will assess the pro forma capital structure through the ratings evaluation service and ratings assessment service process. We expect to complete the spin-off in approximately 12 months. subject to, among other things, finalizing the transaction structure, approval by the Arizona Corporation Commission; the receipt of a favorable internal revenue service private letter ruling relating to the tax-free nature of the transaction; the effectiveness of a registration statement that will be filed with the U.S. Securities and Exchange Commission and final approval by Southwest Gas Board of Directors. I'll now turn it back to Karen to walk through the positioning of each company.

Thanks, Rob. Turning to Slide 7. With the completion of these transactions, we are creating two growth-oriented leaders. Southwest Gas will return to its core foundation as a fully regulated natural cash utility with an optimized balance sheet that will enable continued investment in safety, customer service and infrastructure and a stable and competitive dividend policy. Southwest Gas will be primarily focused on providing reliable, sustainable and affordable energy across Arizona, Nevada and California to its more than 2.2 million utility customers. We also have an authorized rate base of $4.2 billion with a 5% to 7% 5-year rate base compounded annual growth rate that is fully decoupled across jurisdictions, and driven by continued significant population growth and strong demand across our service territories. Following the pending Arizona rate case, we anticipate authorized rate base of nearly $4.9 billion. Ultimately, as a more focused company, we will be better positioned to deliver consistent risk-adjusted total returns and a strong commitment to maintaining investment-grade credit ratings. Furthermore, we will have improved capital allocation opportunities and strategic flexibility to lead the energy transition by developing RNG, hydrogen and sustainable solutions. Centuri will be a leading infrastructure services platform as a stand-alone company. Centuri is a leading player in its industry with a strong track record of profitable growth. increasing revenue over 70% in the last 5 years. In 2022, Centuri is expected to generate revenues of approximately $2.6 billion to $2.7 billion and has highly recurring revenue and growing cash flow. Over the years, we have built Centuri into an innovative, high-growth utility infrastructure services leader in the U.S. and Canada, and the team continues to excel. We are confident in Centuri's continued success due to an attractive long-tenured blue chip customer base and poised for additional growth in the 5G datacom build-out, offshore wind and other renewable energy transition programs. Turning to Slide 8. I want to reiterate that the Board and leadership team believe this is the optimal path forward to unlock value for our stockholders as two independent focused public companies, Southwest Gas and Centuri, will offer enhanced transparency through more direct comparability to industry peers. Ultimately, we see this as offering stronger stockholder alignment over the long term, presenting more targeted investment opportunities. Each company will also offer investors exposure to compelling financial profiles that more accurately reflect the strengths and the opportunities of each business. As a result, we expect Southwest Gas and Centuri to have more effective capital allocation programs and be able to secure efficient financing. Importantly, Centuri has already been operating using a stand-alone business model, meaning we are not anticipating material changes to our operations, cost structure or any dissynergies as a result of the separation. Turning to Slide 9. I want to take a moment to speak about Centuri's business platform and leadership. We originally acquired Centuri for $25 million. And since then, our Board management team and employees have built Centuri into the significant business that it is today. Centuri's platform is diversified across U.S. and Canada and across gas and electric service offerings with a business mix that is attractive and exposed to growing areas like electrification. In addition, Centuri has a commitment to optimizing its capital structure with multiple paths available to reach its targeted post-spin capital structure. We are confident that today Centuri has the resources, capabilities and business structure to operate independently and capture future growth opportunities. Building on that point, we think Centuri is well positioned to succeed with its experienced leadership team, scale and proven business model. A couple of key points to take away from this slide, in addition to what we've shared so far, we see strong tailwinds across utility end markets that support long-term growth. As those tailwinds take hold, Centuri will further grow by leveraging its comprehensive capabilities that span the entire utility value chain. Centuri's blue-chip customer base and recurring revenue profile is underpinned by long-term MSAs and low-risk contracts. Centuri's capital structure will provide enhanced flexibility, and we have a strong and highly engaged management team, averaging 20-plus years of experience in the utility infrastructure services market. At the end of the day, Centuri is expected to provide attractive returns to stockholders, thanks to strong cash flows and optimized capital structure and promising business prospects. On Slide 10, you can see how Southwest Gas will be resetting its business mix to transition into a fully regulated utility. 100% of our earnings, following the sale of MountainWest and [indiscernible] Centuri, will come from utility operations. In addition, Other elements of our attractive profile will include a derisked business mix and asset portfolio, fully regulated and stable cash flows and the ability to efficiently deploy capital with our investment-grade balance sheet. Of note, we believe the balance sheet will be further strengthened over time as purchase GAAP adjustment related balances unwind. Looking ahead, the Southwest Gas team has a clear strategic focus on optimizing utility operations and its capital plan. Earlier this year, we initiated a multistep utility evaluation process focused on optimizing utility performance and delivering value to all stakeholders. The process road map, budget and cost management initiatives, that will help us identify cost savings and efficiency opportunities to support the tremendous growth we have across our service territory, help pass on savings to our customers, improve ROEs and result in positive returns for our stockholders. I'm also pleased to share that I am chairing the Nevada Governor, [indiscernible] Working Committee on energy policy. One thing that does remain unchanged is our unyielding commitment to safety and reliability. To summarize on Slide 11, before we open it up for questions, we believe this path forward will optimize value for our stockholders. Southwest Gas' next chapter will be as a fully regulated natural gas utility, primed for continued success due to stable rate base growth driven by strong regional demand dynamics and our optimization plan. Centuri will be a pure-play utility infrastructure service platform positioned in attractive end markets and with the resources and scale to deliver value for stockholders. And finally, Williams will acquire MountainWest and the net proceeds from the sale will be used to repay existing debt and yield tax efficiencies, ensuring we are able to create two independent leading companies with optimized balance sheets going forward. I hope you all can see that we are enthusiastic about Southwest Gas direction and the value we'll provide to our stockholders, customers, communities and employees. With that, I want to turn it back over to the operator to open the call for questions.

[Operator Instructions] And our first question today will come from Chris Ellinghaus with Siebert Williams Shank.

Have you got any estimates for what the costs of the two transactions might be for 2023?

Thanks, Chris. We'll have guidance on the total cost of the transactions in our annual release. Right now, obviously, we're working through the plans around filing HSR on the MountainWest transaction, obviously, continuing to integrate MountainWest as we look to get off the Dominion TSA here at the end of the year, and we'll have an update in the March release.

Okay. you got any thoughts on dividend policy for the stand-alone Southwest Gas?

Sure. Thanks for that question. While we won't be setting dividend guidance on today's call, we would like to provide some reference points. First, I would highlight that the company has paid a dividend every year since 1956, and we have increased our dividend every year since 2007. Secondly, Southwest Gas is committed to paying a stable and competitive dividend. And thirdly, our focus near term will be in closing our announced strategic transactions while also optimizing our balance sheet consistent with our commitment to an investment-grade credit rating. We are not modifying our dividend policy at this time, and we'll provide further guidance in a future date.

Okay. tax, tax benefit, can you give us any kind of sense of when you expect that recapture?

Sure. Obviously, a lot will depend on the PTA, but we're expecting to be able to utilize that over the next 2 to 3 years. .

Okay. And finally, are you anticipating, for the spin, just maintaining existing Centuri management?

This is Karen. And at this point, we have not announced or plan any changes in Centuri management. We feel we have a very strong team there that's led us to this point where we're able to separate, and we believe that, that management team will lead the way.

Our next question will come from Ryan Levine with Citi.

In terms of next steps for the Centuri spin, are you planning any when issue securities or any more granularity or able to provide around the timing of the potential spend?

Ryan, this is Rob. Just with respect to next steps and timing, just first like to bifurcate the response and kind of procedural steps. In the first quarter, we'll be looking to make a filing with the Arizona Corporation Commission, which will be required under the spend just given the original holding of that business. Secondly, we'll be filing that IRS public letter rolling to get a kind of rolling on the tax premature that's been. So procedurally, we're working through that. And then we would expect early in the second quarter to be in a position with our registration statement. Just with respect to capitalization of Centuri and the pro forma newco structure, we'll be looking at a variety of options, which could take the form of a stake sale. It could take the form of Southwest Holdings equity or debt issuance in order to delever the Centuri balance sheet. But -- in all, we expect to go through a rating evaluation service writing advisory service as part of the evaluation of the new core -- the newco credit structure.

Appreciate the color. And then in terms of MountainWest, synergies or potential dis-synergies with this transaction, you highlighted the PSA expiring at the end of the year. Was there any other adjustments to the consolidated [indiscernible] outlook that we should be mindful?

No, I don't think that there's any synergies or dissynergies that you should be aware of with the MountainWest. We've really been moving to Stan's MountainWest up as a separate industry. So we do not expect any impacts from that.

Okay. And then lastly, in terms of the newco in terms of the utility, can you remind us on what the longer-term rate base that you're currently viewing the longer-term rate base growth opportunity there? And are you going to be providing pro forma EPS guidance growth rate?

Ryan, this is Rob. On today's call, we won't be providing updated guidance from what you saw in the last quarterly release, I think we continue to pursue and expect 5% to 7% rate base CAGR over the next 5 years and the 5-year capital plan in that $2.5 billion to $3.5 billion range.

And our next question will come from Richard Sunderland with JPMorgan.

Circling back to the Centuri capitalization question earlier, when do you expect to provide details on the capital structure going forward or your target capital structure?

Yes. Thanks, Richard. It's Rob. I think as we construct the registration filing, we will go to the RAS/RES process and look to work through scenarios of that pro forma capital structure to determine kind of the most efficient debt level. I think relative to the peer group, we recognize that that we need to do some work around the pro forma leverage.

SP1 So to be clear, that would be by early 2Q, you would have some public announcement on that front. Is that right in terms of timing?

Yes. From a timing perspective, obviously, we're going to initiate the process in the first quarter with the regulatory filings with Arizona and IRS and then we'll look to over the course of won't pin down an exact kind of time frame within that, but we'll look to access the agencies around the Centuri specific cap structure on the go forward.

Understood. And in terms of that review with the agencies, what are the guiding metrics that they're looking at on the construction side? And any sense on what the peer targets are?

Certainly, they're looking at the debt-to-EBITDA levels. I think we're, at Centuri, in the 4x range.

5.5x.

5.5x. And we'll expect that to come down closer to the peer median.

Understood. And then on the dividend I realize the dividend policies and changing, but do the construction peers pay a dividend? And would you expect the spin co [indiscernible] pay a dividend?

We're not going to set any kind of dividend policy at this time. We'll look at that in the context of the work around, the cap structure and registration.

Okay. Understood. And then one final one for me. The [ ACC ] review here, what are the standards of that review? Does that review touch anything on the capital structure on the [indiscernible] side? Any guardrails there would be helpful.

I'm sorry, I wish for you with that you're referring to?

The Arizona review?

Yes. No, we don't expect any major issues with the ACC approval on this and moving forward. We'll put a filing in place in the first quarter.

[Operator Instructions] Our next question will come from Tim Winter with Gabelli Funds.

Congratulations, and I want to just push a little further on the debt allocation. On the third quarter deck, you have a nice breakdown, which includes Centuri at about $1.2 billion in the holding company at about $1.3 billion. Is that -- has there been any changes -- material changes to that to the debt since the call? And is that what we should assume going forward that $1.1 billion is used to pay down the hold co, leaving roughly $200 million?

Yes. So the assumption is, obviously, upon close of the MountainWest transaction that we would take in approximately $1.1 billion of cash proceeds that would be used to take down the term loan, which sits at nearly the same amount. The only changes, I think, from the third quarter relates largely to the bond issuance that we did at -- down at Southwest Gas, we issued $300 million of 5-year notes.

Okay. Okay. And just to further clarify on your earlier comments, you guys would be considering an equity offering to recapitalize Centuri [indiscernible] the rating agencies push you in that direction?

I think we will take a look at a number of potential options to recapitalize the Centuri balance sheet, and that could take a number of [indiscernible]. So I just would like to highlight that we'll look at potential for holdco equity issuance or a holdco debt issuance. We could look at converts. We could look also at a stake sale of Centuri prior to spend, and we could also look at a sponsored spend, but we're moving forward with a spin of Centuri.

And the next question will come from Sunil Sibal with Seaport Global.

Congratulations on this announcement. So a couple of things I wanted to clarify. I realize that on the MountainWest, you we're looking at strategic options, but I was curious, do you run an auction process on this? Or how did the deal final dynamics came around?

So just with respect to the process, after carefully evaluating all available alternatives, the Board is confident in simplifying our corporate structure and selling MountainWest.

Okay. And then in terms of the remaining company SWX and gas utility [indiscernible] there had any discussions of the grading agencies on that? And how should we think about that going forward?

Yes, that's a great question. We anticipate going through a RAS/RES process for holdings in early next year, likely in the February time frame in advance of the March release, and that will help us -- obviously, we have a view on both ends of of cap structure, pro forma for the transactions. But that will be informative to our view going forward and sizing any capital markets issuance.

And this will conclude our question-and-answer portion of today's conference. I would like to turn the conference back over to Thomas Moran for any closing marks.

Thank you all for joining us today. This concludes our conference call. We appreciate your interest in Southwest Gas Holdings. Have a good day.

And ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.