Southwest Gas Holdings Inc (SWX) 2021 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Southwest Gas Holdings 2021 Year-End Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the call over to Boyd Nelson, Vice President of Strategy and Investor Relations. You may begin.

Thank you, Michelle, and welcome, everyone, to the Southwest Gas Holdings year-end 2021 earnings call. My name is Boyd Nelson, and I'm the Vice President of Strategy and Investor Relations. I am assuming responsibilities for Investor Relations from Ken Kenny, our Vice President of Finance and Treasurer, who after a period of transition, will focus full time on finance matters for the company. We have posted today's presentation on our IR website.

On today's call, we have John Hester, President and CEO of Southwest Gas Holdings; Paul Daily, President and CEO of Centuri; Karen Haller, Executive Vice President, Chief Legal and Administrative Officer; Greg Peterson, Senior Vice President and CFO; and Justin Brown, Senior Vice President and General Counsel.

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 Slides 2 and 3 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'd like to turn the call over to John.

Thanks, Boyd. On Slide 6, we present an agenda for today's call. We've got a lot of exciting content for today's call, so let's dive right in. Really big news today is the announcement yesterday that Holdings will be pursuing an exciting separation of its Centuri business unit in an effort to continue facilitating its growth trajectory and create enhanced value for shareholders. For our call today, I'll kick things off with an overview of yesterday's announcement regarding our Board of Directors' decision to pursue a separation of Centuri Infrastructure Services business unit holdings. Karen will overview the value proposition, our ongoing regulated natural gas operations continue to offer our shareholders, Justin will provide an update on major rate case activity and our continuing collaboration with regulators to safely and reliably serve our customers' energy needs, Paul will overview the value proposition that our infrastructure services unit offers our shareholders, especially with the newly announced separation, and Greg will then review our recent operating results and outlook for 2022.

Turning to Slide 8. We provide some more perspective around the Centuri separation areas and why we are confident and enthusiastic that this is an optimal time to pursue the strategic course of action. Many of you are aware that we acquired Centuri's predecessor entity in 1996 to fulfill a need for high-quality utility infrastructure services for our own distribution systems. After our acquisition, we quickly saw a similar infrastructure contracting need by many other peer regulated utilities. The Centuri brand and organization was established in its current form in 2014. As a Board and management team, we regularly strategically review this business in conjunction with outside advisers to ensure our family of businesses is maximizing value for our shareholders. We've always been open-minded about the possibility that separation in some form could be the best way to unlock its value, while at the same time, guarding against any premature separation that would shortchange the tremendous value this business has created for our shareholders. After continued organic growth, along with major acquisitions like Link-Line, Neuco, Linetec and most recently, Riggs Distler, we are now confident that Centuri has the scale, the capabilities and the geographic diversity to stand on its own. We originally acquired Centuri for $25 million. And since then, our Board and management team has built Centuri into the significant business that it is today, a business that generated record revenues of $2.5 billion on a pro forma basis in 2021 with years of planning, growth and investment.

The successful acquisitions I referenced have now positioned Centuri as a strong independent company with notable opportunities in many aspects of the energy transition, among others. Our attractive investment-grade regulated utility customer base and our track record of significant EBITDA growth position Centuri as a very attractive stand-alone entity expected to achieve a premium valuation among its industry peer set. As Paul will review a little later, Centuri is now well placed to capitalize on the energy transition.

Moving to Slide 9, we show a snapshot of our regulated and unregulated businesses following the separation. Our regulated business will be a fully regulated natural gas leader with continued focus on providing reliable, affordable, clean energy across Arizona, California, Nevada and the Rocky Mountain region. It will continue to benefit from the significant population growth and strong regional economies we are experiencing across our service territory footprint and offer strong consistent risk-adjusted total returns with a competitive dividend. There's no expected impact of the separation on utility operations, customers or customer rates. Between Southwest Gas and MountainWest, we have more than 2,500 employees with the utilities serving 2.1 million customers. Financially, Southwest Gas Holdings delivered $1.52 billion in pro forma regulated operations revenue in 2021. Meanwhile, Centuri as a stand-alone company has a legacy of more than 100 years of operational experience and is well positioned for continued profitable growth at the forefront of the utility infrastructure modernization and the energy transition. The business now has significant scale with approximately 10,500 employees, serving clients in 45 states and provinces in the U.S. and Canada.

Centuri will continue to be led by CEO Paul Daily and the current Centuri management team. Southwest Holdings management, including the participants in this call, are expected to stay with the holdings entity.

Moving to Slide 10. I want to highlight a few points in particular on the benefits of the separation. Fundamentally, this transaction is about unlocking value for stockholders to encourage the market valuations of both Southwest Gas and Centuri in line with peers. In addition, we anticipate the flexibility to meaningfully reduce future equity financing needs, including with respect to MountainWest. Subject to ongoing discussions with our rating agencies, this expectation results from the revised consolidated risk position of our business segments post separation. Separation will result in both Southwest Gas and Centuri having compelling financial profiles that more accurately reflect the strengths and opportunities of each business. As a result, the separation will provide more targeted investment opportunities for shareholders and enhance transparency through more direct comparability to pure-play industry peers. We're also very confident that both companies will benefit from improved capital allocation efficiency and strategic flexibility, which will encourage continued pursuit of value-accretive opportunities that are in line with their distinct markets, customer bases and business initiatives. This is especially notable given the consolidation trends in our industries.

As you can tell, we're really extremely proud of the businesses we've built and the value they've created for shareholders. I do want to take a moment in the call to thank all of our employees who have worked so hard to help grow our respective business segments and help us reach this important milestone. This is an exciting time for all of us, and we look forward to the next chapter of growth for both Southwest Gas Holdings and Centuri as we seek to maximize value for our shareholders, deliver excellent service to our customers and create new opportunities for employees.

With that, I'll now turn the call over to Karen to talk a little bit about Southwest Gas post separation. Karen?

Thank you, John. Let me open with Slide 12. Under the Southwest Gas Holdings umbrella, we have built a premier gas delivery network in the Western United States. Post separation will be a pure-play fully regulated natural gas business with strong collaborative relationships with our state regulatory commission and the Federal Energy Regulatory Commission. Our collaborative approach to regulatory relationships contributed to near record growth in revenues and rate base in 2021 and we expect to continue to grow Southwest Gas' customers, rate base, EBITDA and net income.

Further, our recent acquisition of MountainWest provides a complementary and compelling suite of high-return assets to drive value and earnings accretion. With unique strength and stability, MountainWest is both commercially and geographically adjacent to our regulated utility operations. With long-term customer relationships, more than 90% of MountainWest revenue is contracted and over 70% of revenues are backed by investment-grade customers. So our strategy is clear. We look forward to advancing our growth and delivering significant value for our stockholders as we continue to deliver reliable, affordable and clean energy across our service territories.

Turning the page. I'm going to discuss some of the drivers we see for continued value creation in our regulated business. Our regulated natural gas operations provide stable and predictable cash flows and strong returns and are the types of assets that will be the backbone of the energy transition. And this is reflected in a rate base that has nearly doubled in the last 5 years, driven by capital investment, achieving good outcomes in our rate cases through our strong relationships with our regulators, and of course, the MountainWest acquisition. Rate base growth has and will continue to support earnings growth. That said, rate base growth does impact ROE in rate jurisdictions with historical test years, but we expect ROEs to continue to improve. And of course, MountainWest will also further bolster firm's ROE. As you know, part of the rationale for the MountainWest acquisition was the improved rate base and regulatory diversification that came with it. Equally as important, we are confident that we can enhance the value of the MountainWest assets as we are a focused owner in a way that is different from the past for these assets. In this regard, while it is early days, we are already identifying opportunities beyond our investment case because we already own FERC regulated pipeline assets, we know what it takes to manage these businesses successfully. And on the financial side, MountainWest balances out our portfolio by providing stable cash flows, which reduce our reliance on capital markets for the significant capital investment our utility requires that isn't covered by internal cash flow from operations.

On Slide 14, we lay out some of the dynamics we benefit from with our broader geographic footprint. We continue to grow Southwest Gas, and customers at close to 2% annually, increasing the rate base as well as EBITDA and net income. This is in part driven by the significant population and economic growth in our utility service territories. Our regulatory jurisdictions are in some of the fastest-growing states in the country, resulting in us adding 37,000 new customers in both 2020 and 2021. Further, MountainWest-attracted neighboring geographies, Utah, Colorado and Wyoming are states which are favorable jurisdictions for natural gas. They are also seeing significant economic growth driving high demand. As we grow, we will remain laser-focused on safety, our O&M per customer and our strong customer satisfaction metrics.

And let me ask Justin to take you through some of our recent rate case activity. Justin?

Thanks, Karen. We continue to see strong demand for natural gas service in our service territories. This demand translates into investment opportunities to support both customer growth and pipe replacement activity to ensure we continue to meet regulator and customer expectations when it comes to providing safe and reliable service. These investment opportunities underpin our expectations to deliver compound annual rate base growth of 7% over the next 5 years. A critical part to sustaining this growth is our focus on maintaining strong collaborative relationships with our state regulatory commissions. We are steadfast in our approach to ensuring we have continuous open, transparent and collaborative dialog with all stakeholders to help ensure we work together on outcomes that are in everyone's best interest.

Our most recent rate case cycle outcomes contributed to approvals of approximately $66 million for 2000 -- in 2021. We also received approval last quarter to recover $74 million associated with previously approved capital tracker programs in Arizona. We currently have rate cases pending in Nevada and Arizona, as shown on Slide 15. We're excited to announce that we work collaboratively with all stakeholders in our Nevada rate case to develop a constructive settlement that proposes to increase statewide revenues by $14 million as well as potentially recover the COVID-19 regulatory asset amounts. Our requested certification was for approximately $28 million, which included approximately $7 million reduction in operating expenses since our last rate case. The request also included several nontraditional adjustments to our proposed revenues, which totaled just under $5 million. In addition, we requested to utilize the target capital structure. The proposed agreement is still subject to commission review and approval, but we expect that review on a final decision later this month.

With respect to our Arizona rate case, we recently finalized the procedural schedule and anticipate receiving staff and intervenor testimony this summer and to conduct hearings in late September, early October. This keeps us on track for a final decision by possibly year-end, if not early part of 2023.

Turning to Slide 16. The primary driver for our recent increases in revenues has been changes in authorized rate base in each of our jurisdictions. Each of those rate case decisions saw record or near record increases in commission authorized rate base. This rate base growth is driven by the targeted investments we've made, constructive rate case outcomes and supportive regulatory mechanisms, which together have delivered growth of $1.6 billion or a 69% increase in rate base between 2017 and 2021. Depending on the ultimate outcome of our $0.02 rate cases, we can see our rate base potentially increase to nearly $5 billion. On the right-hand side of the slide, we've called out some of the key regulatory mechanisms that have positively contributed to our ability to deliver on the mutual goals we share with our regulators of making investments to provide safe, reliable service and responding to the strong demand for natural gas service that we continue to see across our service territories. We also continue to work on developing constructive frameworks in each jurisdiction to support future investments and sustainability initiatives as well as developing solutions to ensure our customers have tools and options to help them achieve their environmental goals.

Now I'll turn it back to Karen to close out our discussion of our regulated business.

Thanks, Justin. I'm going to pick up on Slide 17 with some comments on how we're positioned to benefit from investment in the energy transition. Our business is benefiting from societal and industry trends such as gas infrastructure replacement and safety and reliability investments. That translates into tangible stockholder value. Together, MountainWest and our utility system provide extremely attractive energy transition opportunities in renewable natural gas, compressed natural gas, responsibly sourced gas, hydrogen and CO2 transportation. We are advancing the clean energy transition and establishing the regulatory framework to advance sustainability across our business, including connecting sources to end users and investing in infrastructure to help make RNG available to the market, developing unique partnerships to study and develop standards for hydrogen creation and blending, exploring opportunities for CO2 transportation and sequestration, continuing to work with transportation partners to reduce greenhouse gas emissions with compressed natural gas and renewable natural gas and implementing emissions reduction technology as part of our operations procedures.

Before I hand over to Paul to talk more about Centuri, I'd like to make some remarks on the benefits for our natural gas business of operating as a pure-play fully regulated company on Slide 18. From a financial perspective, we will be able to deliver the stable low-risk growth, which is characteristic to utility earnings, and in our case, is supported by population and economic growth in our service areas. When you combine this with the geographic diversification and strong consistent cash flow production from our pipeline assets, we will have a highly predictable financial outlook. We will be able to optimize our capital planning and in turn, our returns to stockholders. And looking to the future, we will have really exciting opportunities in the energy transition.

With that, let me turn the call over to Paul to talk about Centuri.

Thanks, Karen. Turning to Slide 20, Centuri presents a compelling value proposition as a stand-alone company. As John mentioned earlier, we have built Centuri into an incredible utility infrastructure services leader dedicated to delivering a diverse array of solutions to utilities across North America. We have succeeded in growing the business because we have instilled a client-centric focus and a commitment to quality, safety and efficiency. The business grew initially as the need for utility infrastructure repair replacement crew. And as construction outsourcing became more common, we have taken strategic opportunities to add scale through organic growth and acquisitions. During the past 5 years, we've added 3 platform companies to provide strategically targeted markets and services. In 2017, we acquired Neuco for non-union gas distribution services throughout the Northeast. Linetec we acquired in late 2018 for nonunion electric transmission and distribution throughout the Gulf, Southeast and Mid-Atlantic states. And most recently, Riggs Distler as our union platform for providing electric T&D renewables and 5G services throughout the United States.

While strategically adding significant scale through organic and M&A growth, we've maintained our discipline staying within our low-risk recurring and predictable MSA-driven utility distribution services profile. We have approximately 10,500 incredibly talented employees within our 8 operating companies throughout the U.S. and Canada. It's their hard work, dedication and support of our businesses each and every day that has helped build a safety-focused, high-performance company culture while serving a highly regulated blue-chip customer bases. There is a table in the appendix that depicts that we have over 23 years of continuous contractual service to our top 20 customers. In fact, we've been working for NPL's first customer for 55 years now, and there's 4 -- 3 clients that were in our fourth decade of service, too.

Most importantly, as a stand-alone company, Centuri has decades of outsized growth prospects given the continued significant investment in utility infrastructure with opportunities as diverse, gas pipeline replacement, hardening of electric distribution assets and supporting onshore infrastructure for offshore wind development.

Moving to Slide 21. As you can see on the left side, Centuri delivered $2.5 billion at pro forma revenues in 2021, and we have significantly grown adjusted EBITDA from $65 million in 2012 to $252 million in 2021 on a pro forma basis, representing a compound annual growth rate of 14.1%, serving both gas and electric utilities. During the last 4 years, we've transformed Centuri from a low-growth infrastructure services company focused primarily on the gas utility customers to a high-growth utility services company providing services to both gas and electric customers. With the addition of Linetec and the recent transformational acquisition of Riggs Distler, we accelerated Centuri's expansion into Union Electric services and added 5G build-out and renewables infrastructure capabilities, and we put the combined Centuri business on a trajectory to generate revenues of nearly $2.7 billion to $2.8 billion in 2022, all without exposure to high-risk cross-country pipeline or electric transmission projects. As a stand-alone company, we are targeting normalized EBITDA margin of 11% to 12%, excluding nonrecurring separation costs, centered all around low-risk recurring and predictable MSA revenue utility projects.

Turning to Slide 22. With the continued national focus on infrastructure investment and our long-term multi-decade relationships with blue-chip utility customers, we are very well positioned to deliver strong earnings and cash flow. Over time, we have continued to diversify our revenues and enhance our service offerings. As you can see on the right side, we are also highly diversified across geographies, with the largest percentage of sales from one state at 15%. Along the bottom, you can see that we have an attractive and low-risk contract mix. Approximately 64% of our contracts are unit price and 24% are by time and materials. Just 12% of our contracts are fixed price and many of those are bid to our existing utility MSA customers. With our highly recurring predictable revenue underpinned by long-term master services agreements and stable contracts, Centuri generates strong cash flows that we can allocate towards investing in our continued growth and returning capital to stockholders.

The revenues and gross profit by segments depicted in the top left for 2021 include Riggs Distler for the period owned last year. For the full year 2022, the gas and electric segments are anticipated to be more balanced.

Moving to Slide 23. As this slide makes clear, there are decades of long-term growth opportunities on our electric and gas distribution, 5G datacom and energy transition markets. Our geographic breadth across United States and Canada, integrated offerings as well as our union and nonunion workforce gives us the scale and optionality to meet these evolving needs of utilities and utility holding companies. We are poised for continued decades long growth in electric utility distribution. Aging infrastructure will demand significant replacements and upgrades to maintain system performance as well as upgrades to increase grid resiliency and reliability. Of note on the top left, you'll see that 45% of electric utility distribution is at or near its end of useful life. That represents a very sizable opportunity for Centuri. Likewise, gas utility distribution, aging infrastructure has led to a regulatory-driven multi-decade replacement cycle. Similar to electric, 45% of gas distribution infrastructure is near or at the end of its useful life. And we see continued strong growth in that construction spend. As I mentioned earlier, the acquisition of Riggs Distler has positioned us to support the rollout of 5G datacom, small cell where wireless density requires significant build-out and existing utility infrastructure will be a key component to densification providing a major growth opportunity for Centuri across our footprint. We are already cross-selling this service to Linetec customers in the Southeast.

Finally, as I noted earlier, we are incredibly well positioned to benefit from the energy transition as we support our utility clients across North America. We expect investment in renewable energy will continue to accelerate rapidly. Renewable energy accounts for approximately 18% of U.S. energy mix and is projected to reach 31% by 2050 as utilities move towards renewables. Regarding renewable energy and specifically offshore wind, Riggs Distler has already signed a supply agreement for advance foundations components with the Orsted Eversource joint venture with word beginning -- expected to begin later this year. The energy transition is a very strong tailwind that will drive our growth for years to come.

Before I turn the call over to Greg, I'd like to briefly summarize on Slide 24, what I've covered today. Centuri is strategically focused with high-quality businesses throughout North America, and we are positioned for continued growth across our industry as we expand into new high-growth markets, particularly those associated with the energy transition. We have a long tenured blue-chip utility customer base with highly recurring revenue underpinned by long-term master services agreements and long low-risk contracts. With our strong relationships, differentiated capabilities and a world-class management team, nearly all of whom have served in similar management roles in private or publicly held stand-alone companies, we are well positioned to deliver strong growth in earnings and cash flow as an independent company. Together with this management team, I am very excited to be able to lead Centuri into its bright future as a high-growth independent company that will be playing an important role in meeting the energy and infrastructure needs of tomorrow.

Looking ahead, we will continue pursuing exciting new electric and gas infrastructure opportunities, focusing on operational excellence, cross-selling our growing service offerings to combination utility customers and increasing profitability and growth while maintaining our lower risk business profile. We hope you share our excitement for the future of Centuri.

With that, I'll turn the call over to Greg Peterson.

Thanks, Paul. Yesterday afternoon, we announced our 2021 earnings and provided some additional statistical information. We also filed our 2021 annual report on Form 10-K with the SEC. Please refer to these documents for a comprehensive analysis of our operations for 2021. As shown on Slide 26, adjusted EPS was $4.17 per diluted share for 2021 versus $4.14 per diluted share for 2020. This tops the full year adjusted guidance that we provided in November on our previous conference call.

Let me touch on some of the highlights. Record net income was posted at the utility as operating margin increased $83 million or 8% between years, driven by $61 million of incremental rate relief in Arizona, Nevada and California, and 37,000 new customers who provided $13 million of operating margins.

During 2021, we invested over $600 million in the expansion, safety and reliability of our natural gas distribution system to better serve our customers. This included a new customer information system implemented in May 2021. As was previously mentioned, Centuri had record revenues of $2.2 billion, $2.5 billion on a pro forma basis. Included in total revenues were emergency restoration services revenues of $65 million in 2021 compared to $82 million recorded in 2020. Adjusted for the tax effected $21.5 million of acquisition related and partial year results associated with Riggs Distler, Centuri's net income was $61.9 million in 2021, our second best year ever versus the record $74.9 million recorded in 2020.

The corporate and administrative net expense of $26.8 million in 2021 reflects the net of tax acquisition and related costs of MountainWest, which we acquired on December 31, 2021, and approximately $3.4 million of net of tax costs associated with stockholder activism response. As a reminder, the operating results of MountainWest are not included in our 2021 results but will be reflected in our 2022 operations.

With that, let's move to the next slide and talk about our outlook for 2022. Slide 27 depicts important metrics of our 2022 guidance. With the announced planned separation of Centuri, we are replacing previous EPS and other guidance with component company guidance to assist investors and analysts and seeing our vision for 2022 and beyond. At Centuri, we expect 2022 revenues to be USD 2.65 billion to USD 2.8 billion, driven by growth in all facets of the business and especially at recently acquired Riggs Distler. While we expect some incremental costs during this separation transition period, normalized EBITDA margins are expected to be 11% to 12%.

For our utility operations at Southwest Gas, we estimate net income will be USD 200 million to USD 210 million. Operating margin will continue to benefit from ongoing customer growth, recoveries of previously deferred amounts in Arizona and refreshed rates in Nevada. We continue to estimate COLI income of USD 3 million to USD 5 million in 2022. Investments in our natural gas distribution system will be USD 650 million to USD 700 million during 2022 and are expected to continue through 2026, resulting in rate base increasing at a compound annual growth rate of about 7%.

At our newest subsidiary, MountainWest, we anticipate revenues will be USD 240 million to USD 245 million in 2022 with a run rate EBITDA margin of 68% to 72%. We are on track in our integration plan of MountainWest and are already benefiting from strong operating cash flows from this acquisition. Adjusting for onetime integration costs, we reiterate that MountainWest will be accretive to EPS in 2022 and beyond.

At the holding company, we will strengthen our balance sheet as we refinanced the $1.6 billion term loan associated with the MountainWest acquisition. As we move through the Centuri separation process, the remaining regulated natural gas business focused at SWX is designed to improve our business risk profile with the credit rating agencies and provide flexibility in the timing and amount of future equity issuances. With the recent announcement of an annualized dividend increase of $0.10 per share, we continue our targeted dividend payout range of 55% to 65% of consolidated earnings. After the Centuri separation, we plan to increase the payout ratio to levels competitive with pure-play utilities. As separate companies, Southwest Gas Holdings and Centuri will have capital structures and financial policies appropriate for each business.

I'll now turn the call back over to John for some concluding remarks.

Thanks, Greg. Before we move to Q&A, I want to leave you with a few thoughts referencing Slide 28. We're really excited that the separation we've discussed today will unlock increased value for our shareholders inherent in both companies that is not currently reflected in our stock price. We're enthusiastic about the important role these entities will play prospectively with major sector themes of infrastructure modernization and the energy transition. For Southwest Gas, including MountainWest, we will have compelling growth avenues as a pure-play fully regulated natural gas business with promising opportunities in favorable jurisdictions for natural gas. Centuri will continue its established track record of significant revenue and EBITDA growth and will be central to the construction of infrastructure across the United States and Canada that is necessary for the energy transition.

As you can see, we're incredibly excited about the benefits of this planned separation and the value it will deliver for customers, employees and our shareholders.

Before we open it up for questions, I'd like to note that today's call is focused on the separation of Centuri, our outlook and fourth quarter and full year financial results. Today, we do not plan on answering any questions regarding the tender offer or our engagement with Mr. Icahn, which we have covered in prior calls.

With that, I'll turn it over to the moderator to explain the process for asking questions.

(Operator Instructions) Our first question comes from Richard Sunderland with JPMorgan.

Maybe starting with the separation, just curious what potential structures are under evaluation here? Is this something from a tax respin to an outright sale in terms of possibilities? And when do you expect to communicate a final plan?

Thanks, Richard. This is John. I think that certainly, both of those options that you mentioned are things that we will be considering. There are other options as well. We're going to be evaluating that over the next month or 2. One of the issues that we're going to be sensitive to is tax efficiency. So I don't think we're limiting anything from being an option to consider. We're really going to try to identify the option that serves the best interest of our shareholders and take that course of action. I think that you can expect more transparency ultimately the route that we're going to take probably in the next 45 to 60 days.

Got it. That's very helpful. And then turning to the credit side and thinking about your equity needs going forward, what are the FFO to debt kind of upgrade and downgrade thresholds currently for Southwest Gas Holdings. And how do you think about the potential moves or changes in those in consideration of the separation going forward?

Yes. Richard, this is Greg. Certainly, as we move forward and work with our credit rating agencies, we believe, as we announced today and talked on the call, that our financial position, our risk rating will improve at the credit rating agencies. Of course, that's ultimately up to them. But we will utilize that information as we move forward to make sure that we have a strong balance sheet, and it will facilitate our ability in the timing and amount of equity that's issued. But a lot of that is to come and dependent upon the separation that we do and the timing of that with Centuri.

Understood. And maybe if I can slip in one final question. The MountainWest equity, what's your latest timing on completing that? Is that pushed out versus the May time frame you've discussed before? Maybe how does the separation factor in there?

Yes. The separation is certainly a consideration. A key component of all the things that we're doing at Southwest Gas Holdings, and we will take that information into play with everything else that we're doing to make sure that, as John mentioned, that we are efficient in issuing capital to maximize shareholder value. So more to come on that.

Our next question comes from Vedula Murti with Hudson Bay Capital.

Do you hear me? I'm wondering in terms of -- you alluded to the increased room on your credit metrics with the holding company -- can you elaborate a little bit in terms of how much room you think would be available to you? And I think the original equity number you've had was about $950 million and it's implied that (inaudible) that equity number would be able to be reduced. So is this -- you talked about what you expect from the agencies. Has there been any discussions with the agencies? Have they kind of warned you about this? And if not, at what point do you think you will engage agencies to firm this up?

Yes. This is Greg. I think the first thing is that we have engaged and talked with our credit rating agencies. We think that's appropriate to do, especially with the significant development as it relates to the separation of Centuri. So we are working with them as we mentioned earlier, as we proceed down the path and have a more definite plan of the type of way that we will effectuate the Centuri separation. That will have important aspects in the amount and timing of equity that we do. We will have and certainly anticipate that we will have a stronger and better risk profile view from all 3 of the rating agencies. And we think that, that will help us on a go-forward basis to have flexibility to issue less equity going forward while maintaining those credit rating agency metrics. However, a lot of that is yet to be determined as we get to the details of the separation.

You indicated you should hear something more about what type of separation or decision in 45 to 60 days. At this point, given the options you have, where do you see the time line for actual execution of the course of business that you will decide on here in 45 to 60 days, how long will that take to effectuate?

This is John. I think that in terms of executing the separation of Centuri, we expect that, that will take 9 to 12 months.

Okay. And again, with that in mind and the -- I would suspect the agencies would want to see a separation prior to altering your various metrics and that type of thing. Can you guide and put sense as to about the term loan in terms of private financing or whether you intend to perhaps extend the term loan in some fashion?

This is John again. As Greg mentioned, we have had some initial conversations with the rating agencies. We will continue to do that, but we are not expecting that we are going to hold off on doing any kind of financings until we get to the end of the Centuri separation. And I think that we're going to continue to move forward, and we're going to continue to have those discussions with the agencies. But I don't think that you can necessarily assume that since we have indicated it's going to take 9 to 12 months to do the separation that we're going to need or that, in fact, we're going to desire an extension to that 364-day loan.

And in terms of the equity financing, do you expect that, that will be done in a what would be considered (inaudible) fashion, or are you considering something more normalized of a private placement or some other factor like...

This is John again. We're looking at a number of different options on that. Again, we want to make sure that we do it in the most efficient manner possible and that we do it in a manner that's going to maximize the value for our shareholders.

Our next question comes from Ryan Levine with Citi.

Is this announcement or plan contingent on the valuation that Southwest Gas would receive for their stake in Centuri?

Ryan, this is John. No, we don't have any kind of contingency like that on this, we're pretty excited about it, and we're going to be moving forward with this again under a time frame that probably is going to take 9 to 12 months. So there's no contingent factor on moving forward like this along the lines of what you referenced.

Okay. And then do you have a current estimate of -- or any way of framing the dis-synergy associated with Centuri for the holding company?

This is John again. No, we don't think that there really are going to be any particular dis-synergies because Centuri has really operated somewhat independently from Southwest Gas utility and certainly MountainWest, as we mentioned previously, we don't see any of the Southwest Gas Holdings folks moving over to Centuri. Centuri has its own management team. So we don't really think that there are going to be any notable dis-synergies.

Okay. And then last question for me. The Linetec noncontrol interest, you're anticipating the next -- the 2022 component will be effectuated before any transaction regarding the broader Centuri platform would be in?

Yes. This is Greg, Ryan. We are certainly looking at that. As you are aware, this is the first year that we can make the acquisition of 5% of that 20% that we have, and that is certainly something that we're in discussions with internally as the management group, and we will let the outside world now as we move forward on that.

Our next question is a follow-up from Vedula Murti with Hudson Bay Capital.

Just wondering, do any of the options you're examining necessitate shareholder approval?

No, we're not anticipating that any of the options that we're going to pursue will require that. This is john.

And are there any regulatory approvals for the options you're seeking for either for Centuri or for within the utility MountainWest?

No. We don't anticipate any regulatory approvals being needed either.

Our next question comes from Stephen D'Ambrisi with Granite Lane.

Congratulations on the announcement. Just on the dividend comment, can you just highlight what you think comparable with pure-play utilities means in terms of like relative to 55% to 65% of earnings? And then also just do the construction peers typically pay a dividend?

Yes, Stephen, this is Greg. I'll start by saying that we are a growth utility. So I think that that's important, even as we've talked about the 55% to 65%, we've been at the lower level of that because we are growing much more rapidly than many of our utility peers. As we move forward, without putting a number next to that, I would say that, that number will move up as far as our payout ratio. We have strong cash flows that will be coming from MountainWest to us and already are. And so I think that will facilitate us moving up higher in that scale, but don't want to provide an exact number at this time, but we will be much more competitive in the upper half of that range than we had run previously. As it relates to Centuri's construction peers, and I always have to start off by saying, I don't know that they have a peer group because they are head and shoulders above the companies that operate in that market. But there are some, as you're aware, that do pay dividends and some that don't. And as I mentioned in my remarks, each company is going to look at their respective balance sheets and their peer groups to determine the way that they structure capital and the type of dividends that they issue.

Our next question comes from Tim Winter with Gabelli.

Congratulations, guys, on the announcement. I appreciate that we got 45 to 60 days, maybe to wait for more details. But I was wondering if you could maybe just talk a little bit or provide some color on your perspective of the pros and cons and including tax considerations of a sale versus spin versus an IPO.

Yes, Tim, this is John. I think that we're going to be considering all of those. I think that the sale option is the one that potentially has the most adverse tax consequences. So if we were to pursue an option like that, it would have to be a pretty stout valuation. The spin options, including having some kind of sponsored spin where we might have an investor that takes 19.9% of the entity, one of the advantages of that option is that it would help provide a marker on the valuation of the business. The downside of that is versus, let's say, an IPO or a spin where all the shares got issued would be that if you are bullish on this business, and we are and if you think that there is further execution that we would like to demonstrate to the market related to Riggs Distler, we think that certainly, that would be some significant upside that would be able to be captured in terms of issuance of shares. But all those options are ones that we're going to be considering and looking at over the next couple of months.

Okay. Great. That's very helpful. Also, you provided a little bit of growth targets for 2 of the businesses. Can you talk a little bit about the growth potential of the pipeline business?

Yes, this is Greg. Certainly, we know that there's -- and I assume, Tim, that you're talking about MountainWest.

Yes.

Yes. We've talked about how strong and stable that business is. I think in Karen's remarks, she talked about some of the opportunities that we are seeing now in that business that can provide to future growth. So those are things that we are -- we've grown them for 2 months now, and those things are already coming to our attention and we -- as we evaluate those, we'll probably have more information to provide in the future, but we are certainly very bullish on MountainWest, not only their strong stable cash flows, but the growth prospects that are there.

Tim, this is Karen. I guess I would just add to that, that the MountainWest some of the opportunities and things because they're highly contracted, they're seeing possibilities for connection to the pipelines to enable colder gas conversions. They're working with oil producers to identify opportunities to increase associated natural gas transportation. They've been -- they're fully contracted on all of our gas storage facilities, and we have a high demand for increase those storage facilities. So we can evaluate additional services there. We had an expansion in December, and that is fully contracted already on the Overthrust and so we're looking already at ways to do expansions there as well. So we see a number of opportunities and are continuing to identify growth opportunities in MountainWest.

Our next question comes from Vedula Murti with Hudson Bay Capital.

I wanted to follow up on the dividend discussion. And we've seen separations here probably recently where the dividend rate at the utility company that was left behind ended up having to reduce their dividend rate, it's quick to fall within their long-term payout goals and the spend was tended to compensate that. Should we -- are you expecting that the dividend rate of going forward of holdings would need it perhaps a downward adjustment as part of its plan while obviously gaining the positive benefit of the value from the separation?

Yes, as I mentioned -- this is Greg. Our dividend rate, we actually think will move upward as a regulated strategic company going forward. In our financial statements, there are separate stand-alone financial statements of Southwest Gas Corp. And you can see that, that dividend rate on the cash flows was about 59% is what the -- what Southwest Gas Corp. paid to its parent SWX as a relationship of its earnings. So no reason to think that the dividend rate on earnings will go down post separation. Actually, it should go up.

Our next question comes from Richard Sunderland with JPMorgan.

Maybe just one more for me. You referenced consolidation trends. Just curious where you see Southwest Gas sitting amid kind of public or private transactions and with industry consolidation overall?

Richard, this is John. I think that we've got a really good game plan for moving forward. So I think that our expectations are that we're going to continue to exist as a publicly traded company. We've got big capital expenditures. We've got significant customer growth, and we've got great opportunities in the energy transition. So we're not ready to pull the plug on being a publicly traded company yet.

But just to be clear, do you see yourself as a consolidator in this kind of transactions similar to the Questar side? Just curious on that angle.

We will continue to look at those opportunities. I think that we've looked at some of the properties that have come up in the past couple of years and frankly, we have had discussions with some of those parties. So that's something that definitely we will continue to look at. We continue to be really bullish on the natural gas business. And if there's something that makes sense and can be done on an accretive basis to enhance the value for our shareholders, we would definitely take a look at that.

There are no further questions. I'd like to turn the call back over to Boyd Nelson for any closing remarks.

Thank you, Michelle, and thank you all for joining us today. This concludes our conference call. Thank you for your interest in Southwest Gas Holdings and Centuri. Have a good day.

This concludes the program. So you may now disconnect.