Southwest Gas Holdings Inc (SWX) 2022 Q2 法說會逐字稿

Ladies and gentlemen, good day, and welcome to the Southwest Gas Holdings Second Quarter 2022 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Boyd Nelson, Vice President of Strategy and Investor Relations for Southwest Gas. Please go ahead.

Thank you, Gretchen. Hello, everyone, and welcome to the Southwest Gas Holdings Second Quarter 2022 Earnings Call. Throughout the call, we will be referencing presentation slides, which we have posted on our IR website. I am joined on today's call by Karen Haller, President and CEO of Southwest Gas Holdings; Justin Brown, President of Southwest Gas Corporation; and Greg Peterson, Senior Vice President and Chief Financial Officer.

Please note that on today's call, the company will address certain factors that may impact this coming year's earnings and provide some longer-term guidance. Further, our attorneys have asked me to remind you that 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 30 of this presentation as well as in the press release and also our SEC filings for a description of the factors that may cause actual results to 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.

With that, I will now turn the call over to Karen.

Thanks, Boyd. I'm pleased you are joining us today to discuss Southwest Gas second quarter results. Let me start by acknowledging that our quarterly results were not what we wanted to deliver to stockholders. But I want to make equally clear that our businesses are fundamentally strong and deliver long-term value to our stockholders.

Before we get to the earnings results and plans to unlock value, I want to discuss the strategic transaction process and our newest Board member. First, we have an update on our cooperation agreement with Mr. Icahn that was announced yesterday. Consistent with the agreement, we have appointed Ruby Sharma to the Board. As previously announced, Jose Cardenas has retired from the Board in coordination with this appointment. We want to thank Jose for his contributions throughout the years, and we look forward to working with Ruby.

Turning to Slide 5, I'd like to briefly cover the previously announced update on the ongoing strategic alternatives process. Earlier this year, our Board of Directors authorized review of a full range of strategic alternatives to maximize stockholder value. As we've previously shared, we are currently undergoing a thorough strategic review based on indications of interest from prospective buyers.

While we cannot comment on any of the individual indications we have received, we provided an update on the overall strategic direction of the review last week. At that time, our Board unanimously determined that the best path forward to maximize stockholder value is to focus on the execution of the strategic plan and conclude the strategic review process for Southwest Gas Holdings and Southwest Gas Corporation, continue to review strategic alternatives for Mountain West, including the potential sale of Mountain West and continue to review strategic alternatives for Centuri, including a potential sale or a spin-off of Centuri.

As our Board continues to review alternatives for Mountain West and Centuri, we will continue the disciplined execution of our strategic plan across our business units to deliver performance for our stockholders, employees, customers and the communities we serve. Now I'd like to talk about our plans to unlock value at Southwest Gas Corporation.

Moving to Slide 6, all of us at Southwest Gas are synergized by the opportunities beyond and front of us to optimize the utility. Following my election to the CEO position in May, I made a number of management changes at the utility. First, I named Justin Brown the Southwest Gas Corporation President, resulting in all 3 business units having Presidents focused on maximizing value for stockholders as their respective businesses.

This fundamental change in the utility structure provides the resources and management attention necessary to optimize the utility. We also restructured changed leadership and our reporting structures for a number of functional areas, including regulatory, financial planning and sustainability. Not only do we have a new Chief Operations Officer as of June 1 and the new Sustainability Officer, but we are in the process of hiring a new CFO, following the announcement by Greg Peterson that he will be retiring later this year.

Naturally, a new CFO will bring new ideas and additional change to utility and holding company. I want to express my gratitude to Greg for his service to the company and for his willingness to assist with the transition. Our leadership team is actively pursuing a number of key focus areas to meet the needs of our customers and improve financial and operational performance to accelerate value creation for our stockholders.

To start, ensuring our customers can safely and reliably count on receiving their claim, affordable natural gas service to provide life essentials and to fuel prosperous businesses is our top priority. We attribute our leading customer satisfaction and safety scores to the strategic investments we've made to enhance the safety and reliability of our distribution system.

As we continue to prioritize our customers, we will build on our existing relationships with our regulators to continue to make disciplined capital investments that benefit our service territories, leading to constructive regulator outcomes and attractive rate base growth. While we are near the top among our peers, spending less per customer than the average of our publicly traded peers, we are reexamining our O&M costs by doing a bottom up review for incremental improvement.

By maintaining and improving our operating discipline, we expect to further extend our cost leadership status. We are also working to optimize our capital expenditure program, which is already beginning to yield results. This quarter, we've reduced our guidance for 2022 capital expenditures by $15 million. This change is part of our strategy to optimize the timing of our capital expenditure program to improve returns for our stockholders.

With our focus on disciplined investments, we can enhance stockholder returns while still supporting customer growth and system improvements to provide the same highly rated customer service we always have. Beyond these important operational drivers, we are also operating against a great backdrop with one of the fastest-growing dynamic service territories in the country.

This gives us a strong tailwind and reinforces our confidence that by concentrating on our key focus areas outlined on this slide, we will improve our financial performance and grow our rate base, ROE, earnings and dividends, all while continuing to meet the needs of our customers. The company plays a vital role in the energy transition and continues developing innovative energy solutions like renewable natural gas and compressed natural gas, while testing hydrogen blending to establish standards and guidelines with the goal of bringing into market in the future.

We are committed to delivering clean energy modules to customers and the communities we serve to drive economy-wide emissions reduction. We are well-positioned to deliver on our strategy as we produce strong outcomes for our customers and the communities we serve and accelerate value creation for our stockholders.

Moving on to Slide 8, as you can see, our business is fundamentally strong and poised for long-term value creation as we continue to meet the energy needs of our customers. Our second quarter results were in line with our expectations, excluding certain event-driven expenses at the utility that we do not believe will continue through the remainder of the year and the impact of global supply chain and inflationary headwinds across our infrastructure services portfolio.

Southwest Gas Holdings reported a diluted EPS of $0.23 after accounting for $0.33 per share of onetime expenses. Specifically, adjustments to second quarter earnings include $28.9 million of collective nonrecurring shareholder activism/settlement, stockholder litigation and strategic review expenses as well as certain Mountain West costs expected to be nonrecurring over the longer term.

Not included in adjusted EPS is the $8.3 million or $0.13 per share impact from a decline in the cooling mark-to-market cash surrender value relative to the second quarter of 2021. The Southwest Gas Utility delivered a record 12-month operating margin of $1.1 billion, added 39,000 new utility customers in the same period and maintained a high customer satisfaction score of 95% in the second quarter of 2022.

It is important to note that our O&M expense increase this quarter was driven primarily by 2 factors. The first was due to transitory event-driven expenses, which we do not expect to continue like pipeline integrity management and maintenance, temporary or contractor services for customer and technology support and legal-related claims and approvals.

The second factor was the normalization of employee and employee-related costs to pre-pandemic levels as economic activity returned following the pandemic. Excluding these event-driven costs, our results are generally in line with our prior guidance. And as I previously indicated, we are in the process of evaluating all costs to ensure we are operating efficiently.

Mountain West with its unique structurally advantaged critical infrastructure delivered $62 million of revenue in the second quarter, achieved an adjusted EBITDA in line with expectations and remained on schedule with transition integration work. The Mountain West results this quarter were impacted by pretax nonrecurring expenses primarily associated with post-acquisition integration costs.

We expect to complete the integration of Mountain West by the first quarter of 2023, although we expect the majority of TSA services to be concluded by 2022. We expect integration expenses for the first quarter of 2023 to be lower as we complete the process. We also continue to target approximately $100 million in incremental growth investment opportunities at Mountain West over the next 3 years.

Lastly, Centuri delivered record quarterly revenue of $706 million, an increase of 34% compared to the second quarter of 2021. Centuri's performance was impacted by inflation, mix of work and increased amortization and interest related to Riggs Distler. We are confident that Centuri's business prospects are strong and unchanged by the near-term headwinds.

In fact last quarter, we contracted for a $125 million offshore wind project and have pending additional awards exceeding $300 million for multiyear performance, which we anticipate will be executed during the third and fourth quarters. We also renewed a multiyear contract with a large electric utility customer anticipated to generate more than $500 million in revenue over the next 5 years.

I'll now turn the call over to Justin to discuss our utility business and our rate case activity.

Thank you, Karen. Starting on Slide 9, we remain focused on working constructively with our stakeholders to secure positive regulatory outcomes. During the quarter, we started to see rate relief from our settlement in our Nevada rate case that was approved by the commission with rates effective April 1, 2022. The settlement resulted in an increase in revenues of just over $14 million relative to an increase in rate base of nearly $250 million for a total authorized rate base in Nevada of $1.7 billion. We were also authorized an improved ROE of 9.4% and we received approval to utilize a 50% target equity ratio.

We also have our $90 million Arizona rate case that was filed in December of 2021 that is currently pending with the Arizona Corporation Commission, and we currently expect a decision in early 2023.

This leads us to Slide 10, which provides an overview of the first round of testimony from interveners in our rate case. The revenue requirement testimony was due last Friday, August 5, and rate design testimony is due this coming Friday, August 12.

As shown on this slide, staff is proposing close to $54 million increase and RUCO is close to $43 million. An important distinction between our $90 million request and the staff's $54 million proposal is we included a $16 million property tax adjustment in our base case, and the staff is proposing to not recover that in base rates, but rather to recover that amount through an existing tracker program that we have for property taxes.

So a better comparison to the staff position would be to exclude the $60 million from our $90 million request. Both staff and RUCO are proposing an increase to our currently authorized ROE of 9.1%. Staff is proposing a 9.3% ROE and RUCO 9.24%. Staff is also supportive of our proposal to adjust rates to reflect a 12-month posttest year plan adjustment, whereas RUCO is supporting a 6-month adjustment. As I mentioned, rate design testimony is due this Friday, August 12, and hearings are currently scheduled to begin September 26.

Turning to Slide 11, as demonstrated by our recent Nevada and pending Arizona general rate cases, we continue to experience significant rate base growth as illustrated by the chart. Our investments in our system have been driven by tremendous customer growth, robust pipeline replacement efforts to help ensure a safe and reliable distribution system and capital tracker programs where we have partnered with our regulators on different investment opportunities as well as a variety of service territory expansions.

While we believe we are well-positioned to grow and meet the energy needs of our customers throughout our service territories, we are also focused more on being proactive in our planning and execution to ensure we deliver on our commitments to optimize the utility through O&M discipline, CapEx optimization and making sure we are optimizing our rate case processes to deliver enhanced financial results.

As shown on this slide, we have a strong track record of working with our stakeholders to enhance regulatory and legislative frameworks in our jurisdictions to ensure we continue to make the capital investments necessary to meet and exceed the expectations of our customers and regulators when it comes to delivering safe, reliable, sustainable and affordable service.

We remain focused and committed to continuing to work with our stakeholders to identify and execute on additional opportunities that will be presented by our attractive service territories that we serve.

I will now turn the call over to Greg to provide a summary of our second quarter operating results.

Thanks, Justin. Our second quarter earnings press release and 10-Q were filed yesterday. Please refer to these documents for a comprehensive analysis of our second quarter results. Let's start with an overview of consolidated results. Slide 13 depicts consolidated operating results for the company and line items for each of the operating segments for the 3, 6 and 12-month period.

On an adjusted basis, consolidated EPS was $0.23 per diluted share for the second quarter of 2022 versus $0.43 for the prior year quarter. I'll discuss each of the operating segments in the upcoming slides, but we'll begin with the corporate and administrative line item on this slide. Corporate and administrative expense, net of tax, increased $22.7 million between quarters, primarily due to $17.1 million associated with the overall strategic review process, proxy contest and related litigation and settlement costs.

These items are components of the $22.3 million of adjustments shown on the page. The corporate and administrative line also reflects incremental interest associated with the acquisition of Mountain West.

Next, let's move to the operating segments and some transitory costs and headwinds that affected results in the current quarter, starting with utility results on Slide 14. On a GAAP basis, utility results declined from $11 million in the second quarter of 2021 to a loss of $2 million in 2022 second quarter. Temporary changes in the cash surrender values of company-owned life insurance or COLI policies accounted for most of the decline.

Operating margin grew by $15 million primarily due to rate relief in Nevada and the addition of 39,000 customers. However, this improvement was overshadowed by higher interest expense and operations expense, including $15 million of transitory costs that I will discuss on the next slide.

Slide 15 provides a backdrop of items impacting the O&M comparison between quarters. As shown on the bottom left of this slide, O&M in 2019, pre-COVID, was $105 million for the quarter or about $51 per customer. O&M in 2020 and 2021 were temporarily reduced due to COVID-related restrictions on customer contact, training, travel and other items.

Normalizing for O&M per customer growth of 1% per year, a more comparable starting point for Q2, 2021 O&M would be about $52 per customer or $111 million for the quarter. In the second quarter of 2022, we experienced approximately $15 million of transitory expenses that are not indicative of ongoing expectations. The waterfall chart shows the components. These include $8 million of legal accruals associated with one contractual disputes and legal plans.

An incremental $2 million of our collectibles was due to a higher level of temporary disconnects associated with overall inflationary challenges being experienced by many of our residential customers. Approximately $3 million in incremental pipeline integrity management costs were incurred in reviewing and updating our Matina facilities and eliminating inactive risers and subs based on an incident in Q3 of last year.

We also incurred about $2 million of temporary and contractor services for customer and technology stabilization support for the customer information system that went live last year in Q2. Other than the transitory costs, the remaining $2 million increase in O&M between quarters is due to inflation and other items and is consistent with our target of O&M per customer growth of about 1%.

Turning to Slide 16, we can see the second quarter results of Mountain West since we acquired them on December 31, 2021. Both adjusted net income and adjusted EBITDA were in line with our internal expectations. Mountain West shown $15 million of net income in the second quarter and $19 million of adjusted net income after accounting for nonrecurring expenses associated with the consultant fees, integration costs and onetime employee benefits.

We continue to benefit from strong demand for natural gas transportation and storage services in the Rocky Mountain region. The business is highly contracted and whatever capacity is released to put out to bid, we see oversubscribed demand resulting in capacity re-contracting at attractive rates. Since the acquisition, strong operating cash flows from Mountain West have provided support for parent company interest on acquisition debt and regulated operation capital expenditures.

Now let's turn to Slide 17 to discuss Centuri results. As shown on the right side of the slide, adjusted EBITDA was $63 million this quarter versus $50 million in the second quarter of last year. The growth at Centuri includes the benefits of incremental revenues from the Riggs Distler acquisition as well as 5% revenue growth from organic operations. Despite this growth in revenue, several items impacted bottom line results.

The waterfall chart depicts the major after-tax components of the change in Centuri's results between quarters. Interest expense increased $11 million pre-tax, consisting of approximately $9 million due to the incremental acquisition debt and about $2 million of market interest rate increases. Our acquisition of Riggs Distler in August of 2021 resulted in a $5 million pre-tax increase in noncash amortization of intangibles.

Higher fuel costs continued from earlier this year and increased $11 million between the second quarters of 2021 and 2022. About $3 million is associated with Riggs Distler is included in their results, while the remaining $8 million is attributable to non-rigs operations. While fuel prices are starting to ease back toward more normal levels, we continue to work with our customers to obtain relief from this unforeseen additional cost spike.

While most of the strategic review costs were incurred at the holding company level, approximately $2 million of these costs were reflected in Centuri's operations. The Riggs Distler contribution includes the fuel impacts previously noted. We are excited about the ongoing growth prospects of Riggs Distler, but note that some work has been temporarily delayed due to customer supply chain issues and changes in customer specifications.

The benefit in the all other caption is net of the impacts of work mix and higher subcontractor cost headwinds. Over $125 million of contracted offshore wind support work has commenced and will accelerate in the second half of this year, and we are anticipating other sizable multiyear awards.

Let me now move to Slide 19 and our company guidance for 2022 and beyond. Investments in our natural gas distribution system are estimated to be $600 million to $650 million during 2022, a $50 million or 7% reduction from the top end of our previous guidance. This reflects our plan to optimize capital investments to bolster returns while continuing to support customer growth, pipe replacement programs and to see improvements.

We reiterate our 5-year CapEx spending plan of $2.5 billion to $3.5 billion through 2026 and a resulting rate base increased CAGR of 5% to 7% during that same period. Utility net income is estimated at $185 million to $195 million. The reduction from our previous guidance of $200 million to $210 million is primarily due to the transitory event-driven costs that I discussed as part of the quarterly analysis.

Higher expected interest expense is also a factor. We continue to include $3 million to $5 million of COLI income for 2022. I should note that the recovering stock market increased COLI cash surrender values by $3 million in the month of July. Our 5-year O&M per customer compound annual growth rate target continues to be less than 1%, and the return on equity of the utility for 2023 forward is expected to be 8% plus.

At Mountain West, we have increased our estimated revenue range to $250 million to $255 million from our previous range of $240 million to $245 million, primarily due to incremental re-contracting revenue and some reverse TSA revenue. Our lowered EBITDA margin range of 65% to 67% from our previous range of 68% to 72% primarily reflects incremental TSA, labor and IT expense during the 2022 transition period.

We are on track in our integration plan of Mountain West. Strong operating cash flows from this acquisition have increased Mountain West cash balance from $28 million at March 31 to $55 million at June 30. Adjusting for onetime integration and overlapping costs, we reiterate that Mountain West will be accretive to EPS in 2022 and beyond.

As previously mentioned, we have identified $100 million in incremental growth CapEx investment at Mountain West over the next 3 years. At Centuri, we reaffirm our 2022 revenue guide of $2.65 billion to $2.8 billion, driven by growth in all facets of the business, including Riggs Distler.

Due to current inflationary pressures, especially on fuel and some customer supply chain issue headwinds, we expect EBITDA margins of 10% to 11% in 2022, down from our previous guide of 11% to 12%. However, we believe these impacts are temporary and expect EBITDA margins to return to 11% to 12% in 2023. For 2023 to 2026, we are forecasting an adjusted EBITDA compound annual growth rate of 9% to 11%.

I'll now turn the call back over to Karen for some closing remarks.

Thank you, Greg. Before we open the call for questions, I want to touch on a couple of the key points we've made today. I want to emphasize that maximizing value for all the stockholders is what guides our strategic plan and the decisions we make. We are excited and confident in the future for Southwest Gas.

Our new utility leadership team is focused on optimizing processes, challenging the way we've done things in the past and finding ways to improve the value and returns to stockholders. And we're energized by all the opportunities we have in front of us and committed to improve financial and operational performance against the great backdrop of our growing service territories.

While we continue to advance the Centuri and Mountain West processes, we will remain focused on the performance of these business units and prioritize delivering growth across our rate base, ROE improvement, earnings and dividends growth while continuing to meet or exceed our customers' expectations.

We look forward to continuing our company's transformation as a leading energy enterprise delivering strong outcomes for all of our stakeholders as we forge ahead in today's evolving energy landscape. Gretchen, you can now open the call for questions.

(Operator Instructions) We'll take our first question from Julien Dumoulin-Smith from Bank of America.

If I may, I want to go back to where we started the call. What caused you to think about ending the review here? And how do you think about the time line from here for the pending items that you've already articulated here, if you could elaborate? Just with respect to timing rather than necessarily exactly what you think about bids, et cetera? I know you qualified that at the outset.

Yes, welcome. I guess with respect to the process and ending the process, we really -- the Board unanimously after carefully evaluating the indications of interest and considering Southwest Gas Corporation's strong long-term rate base growth plans for improving ROEs and favorable demographics. The Board unanimously determined that the past alternatives to maximize the value of the utility for stockholders, is to optimize the utility and execute on the strategic plan.

And we just recognized that we have a great opportunity to grow the business while also working to enhance efficiency and cost discipline across the utility. And then moving forward with the Centuri and Mountain West processes, that unlocked value there was the best option.

Got it. All right. Fair enough. And then just if I may, just pivoting back to the core operations in brief here, I mean can you talk a little bit about Centuri margins and the opportunity there. Obviously, things have been gyrating here. And obviously, in the prepared remarks, you commented on costs and some of the pressure points there, et cetera. But how do you think about the outlook on a more normalized basis here, if you will?

Yes, Julien, this is Greg. I think that, as I mentioned in my remarks, and Karen alluded to as well, we're really bullish on what Centuri has upcoming. We talk about what's going on at Riggs Distler and the offshore wind projects that we have. We know that these fuel costs really hurt us early on, right, if you kind of tax effect the fuel impact is about $0.12 in Q2 and another $0.06 in Q1. So that really hurt us from that thing.

But as I mentioned, we're seeing fuel prices moderate, and we candidly are working with our customer's to try and get some recoveries on those. So the base model for Centuri is strong, and we're really excited about it.

Got it. All right. Excellent. Sorry, and if I can make -- just coming back on Centuri, to see your pricing power and the ability to recoup that over time, like when do you get to a more normalized environment there as you think about those more discrete dynamics here?

Yes, if you're talking about the time frame to get to normalized operations, I think we're already moving in that direction. Again, we've had some success in working with our customers and recouping some of those amounts, we're also putting those into any of the reviewed master service agreements that we have to try and mitigate such items in the future. So that progress is taking place now. I'm not a good prognosticator of when fuel prices will get back to the levels they were a year ago, but they are headed in the right direction.

Our next question comes from Richard Sunderland from JPMorgan.

Maybe starting with the utility review, what is the path to staying improved in the utility operations? How does that factor in the review outcome? You just thinking about the benefit of Arizona rate next year, but then over a longer-term basis how do you sustain that performance? And maybe how did you frame then in the review versus at least that initial offer that was quoted as being significantly larger than the $82 of share Icahn how about there?

Yes, I think that we believe we have some really great opportunities for the utility. We are focused and earlier I talked about improving our ROE. We're looking at all of our O&M costs. We're doing a deep dive of all of those and looking at how we can improve on that, improve on our efficiencies, whether that's technology related or any other manner that we look at it. So we think that there's room in O&M.

We're concentrating on our capital expenditure program and how we optimize the timing of our capital expenditures with our rate cases, optimizing those rate cases and the timing of all of those to -- bring the best results to our stockholders. So when we look at all those different areas that we can execute on, we really feel bullish about how we move forward with the utility and felt that that was the best option moving forward for the company.

The initial offer or indication of offer that you mentioned, obviously, was an important part of the Board's decision to commence a review of alternatives -- and with the assistance of their financial and legal advisers the committee engaged with all the interested parties carefully evaluated all indications of interest at that time and really come to the conclusion that with our great jurisdictions that we offer grievance from a growth standpoint, favorable demographics and our opportunities to improve on the utility that, that was the right way to go.

Understood. Quickly following up on a point there around the O&M. The deep-dive on your O&M analysis said your potential incremental opportunity of 1% growth on a per customer basis, meaning you potentially either you'll be flat or declining?

Yes, I think overall -- this is Greg, Richard. We indicated the $15 million of transitory items really is out of place with what the normal trajectory is. And when you pull those numbers out, you see that from 2019 to now we're at that trajectory. And again, we still continue to expect 1.7% to 1.8% customer growth kind of it is $38,000 to $40,000 level of customer growth. So if O&M goes up 2.5% and customer growth, it's 1.7% or 1.8%, that's how we keep in that trajectory of 1% per customer on the O&M front.

Got it, got it. That's helpful. And just one last quick one from me, the updated cooperation agreement you referenced at the start with Icahn, does that impact the stakes at all our ability to increase or reduce it?

I'm sorry, I didn't catch the last part of the question.

There's an updated cooperation agreement impact his stake in anyway and ability to increase it or reduce it?

No, it does not change that portion of the cooperation agreement at all.

Our next question comes from Christopher Ellinghaus from Siebert Williams Shank.

The transitory costs that you talked about, Greg, the $15 million, $8 million of that was temporary legal stuff, the remaining $7 million, how much of that sort of continues into the second half of the year?

Yes, there's really not much again, there's $2 million of that that was uncollectibles. If you look back historically the uncollectibles for an annual period, we're in the $3 million to $4 million neighborhood. So we just really experienced this spike with the economy. We think that uncollectibles will go back down to the normal levels in Q3 and beyond. The stabilization costs for our customer information system.

Again, that's been in place for about a year now and we're really in a good place. We did have some challenges with some staffing and had to bring in some incremental folks, but that worked out really well. And then we mentioned the incremental costs associated with doing some great work on our mapping system and finding some of those stuff. And that work is also substantially concluded. So I don't really think you're going to see a continuation of these items in Q3 and Q4.

Okay. Great. Justin, the Arizona staff opinion is pretty good relative to the ask, are you denoting or have you got any color on what your thoughts are on maybe sort of the tenure in Arizona?

Yes, Chris, it's a good question. I mean, I think from our perspective, we've always really focused on maintaining good relationships with the staff and the commissioners. And I think we've always felt like when you look at the history of how we've been treated in the state, albeit a challenging jurisdiction that we've always fared better than most. I mean I think a lot of people had a lot of angst around the APS case from a year ago.

I think that was really kind of a one-off situation. And so I think kind of implied in your question, I think from our perspective, this is kind of in line with where we thought we would be with respect to kind of how we filed the case, the efforts we made to make sure that we presented a relatively clean case and then working with the staff and RUCO on their different positions through the discovery.

I think we're pleased with where they came out and look forward to working with them on potentially stipulating the issues to the extent there's that opportunity, but then also working through the remainder of the process to see if we can't make some improvement on some of the positions that they've taken.

Okay. Great. Greg, when I look at Centuri, the revenue guidance and the margin guidance, it sort of suggests Centuri will be in a similar kind of net income level, maybe a little bit higher. Can you just sort of talk about your considerably behind last year's earnings level on a year-to-date basis? Can you sort of talk about the second half, what do you see there that is fairly better than the first half?

Yes, I think one of the big things will be the ramp-up of Riggs Distler. Again, while we made that acquisition in August of last year, it was really just starting to get moving as we mentioned, right, we've got $125 million of contracted work that we're doing on the offshore wind side again. Our work is onshore for that offshore win and then multi-hundred million dollars of work that we expect to get.

So I think you're going to see the ramp up there. Certainly, Q3 and Q4, especially Q3, are potential storm month. I can't predict storm work, but -- but that's another item that is a variable in Q3. But it's really the strong performance things have kind of comeback really well on the revenue front from the COVID impact that previously were there. And so we're working with our customers, and we think that Q3 and Q4 this year will be really solid performing quarters.

Also give us a little color on customer supply chain delays?

Yes. As you're -- I think you're referring to the discussion on Centuri's customers, most of Centuri's customers, just like Southwest Gas, and we're one of Centuri's customers. We procure our own materials and then Centuri does the installation. So that Centuri's customers on the utility front had some challenges, whether it's getting transformers, whether it's getting certain pipe types, that's where the supply chain issues have been for them.

And it's necessitated Centuri either to delay some work because their customers can't provide the materials or to maybe switch and do less profitable work in the interim while the customer continues to procure those materials. So I think again, supply chain is starting to stabilize a little bit and it really is on a customer-by-customer basis. But that's some of the issues that they're incurring.

Our last question comes from Ryan Levine from Citi.

In terms of the 1% O&M cost reduction, is that due to be relative to an inflation expectation or is that purely on an absolute nominal basis?

Yes, Ryan, this is Greg. I think -- we're talking about a 1% O&M cost per customer increase over the long-term, not a reduction, but an increase to sub 1% per customer over the longer term.

A bit nominal and it's not relative to any inflation index?

No, we expect there will be inflationary costs and those will come into play in the regular on that, but we also expect customer growth. And as we manage the cost going forward, as we think that the increase will be nominal. Certainly 1% per customer growth is much lower than the current inflationary environment that we're in, but over the longer term, we expect to continue to be the inflationary impact.

Okay. And in your slides, you continue to highlight a potential spin off Centuri as part of the strategic review. Is there a time line that you have in mind post what you can do the last few months when you would have to make a decision on the spin or is this some more open-ended at this point?

It's really more open-ended the spin -- the decision to continue to spin by the Board was that they felt that keeping the spin-offshore additive to its efforts to maximize the value as the spinoff remains part of the overall strategic transaction process as we move into the next round on Centuri and Mountain West. We're very pleased with the indications of interest that we've received from both Mountain West -- for both Mountain West and Centuri. And the decision to lead the spin on the table was just simply to -- because we believe it will maximize the value as part of the process.

This concludes the Q&A portion of today's conference. I would now like to turn the call back over to Mr. Boyd Nelson for closing remarks.

Thank you, Gretchen, and thank you, everyone, for joining us today. This concludes our conference call. Thank you for your interest in Southwest Gas Holdings. Have a great day.

This concludes today's Southwest Gas Holdings' Second Quarter 2022 Earnings Call and Webcast. You may disconnect your line at this time. Have a wonderful day.