# Southwest Gas Holdings, Inc. (SWX) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from Southwest Gas Holdings, Inc.'s 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/1692115/000169211524000038/swx-20231231.htm Accession: 0001692115-24-000038 Filing date: 2024-02-28 Report date: 2023-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/SWX/ All MD&A years: /company/SWX/mda/ Previous year: /company/SWX/mda/fy2022/ (FY 2022) Next year: /company/SWX/mda/fy2024/ (FY 2024) Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS About Southwest Gas Holdings, Inc. Southwest Gas Holdings, Inc. is a holding company that owns all of the shares of common stock of Southwest Gas Corporation (“Southwest” or the “natural gas distribution” segment), all of the shares of common stock of Centuri Group, Inc. (“Centuri” or the “utility infrastructure services” segment), and until February 14, 2023, all of the common stock of MountainWest Pipelines Holding Company (“MountainWest” or “pipeline and storage” segment). Southwest Gas Holdings, Inc. and its subsidiaries are collectively referred to as the “Company.” In December 2022, the Company announced that its Board of Directors (the “Board”) unanimously determined to take strategic actions to simplify the Company’s portfolio of businesses. These actions included entering into a definitive agreement to sell 100% of MountainWest in an all-cash transaction to Williams Partners Operating LLC (“Williams”) for $1.5 billion in total enterprise value, subject to certain adjustments. The MountainWest transaction closed on February 14, 2023. In December 2023, the Company announced its intent to pursue an initial public offering (the "Centuri Holdings IPO") of newly issued shares of Centuri Holdings, Inc. ("Centuri Holdings"). The Board has determined that the Centuri Holdings IPO is the optimal path to advance the separation of Centuri as an independent utility infrastructure services company to maximize value for stockholders. Centuri Holdings has confidentially submitted a draft Registration Statement on Form S-1 with the U.S. Securities and Exchange Commission (the "SEC"). The execution of the Centuri Holdings IPO is subject to market and other conditions, the completion of the SEC's review process, and final Board approval to proceed with the transaction. Following the Centuri Holdings IPO, the Company intends to reduce its ownership in Centuri Holdings in one or more disposition transactions, including by way of distributions to Company stockholders, one or more distributions in exchange for Company shares or other securities, a sell-down of its remaining owned shares of Centuri Holdings common stock or any combination thereof. As of December 31, 2023, the Company had a U.S. federal net operating loss carryforward of $1.03 billion, which could be available to offset a taxable gain incurred by the Company in connection with a taxable disposition of the Centuri stock. The Company also retains strategic flexibility to separate Centuri through a tax-free spin-off of all or a part of Centuri in the event market conditions are not conducive to an IPO or secondary sales by the Company following an IPO. On November 3, 2023, the Board authorized a dividend of one preferred stock purchase right (a “Right”) for each outstanding share of common stock, $1 par value per share, of the Company to stockholders on record at the close of business on November 17, 2023. The description and terms of the Rights are set forth in a Tax-Free Spin Protection Plan, dated as of November 5, 2023 (as may be amended from time to time, the “Plan”), between the Company and Equiniti Trust Company, LLC, as rights agent. Each right entitles the registered holder to purchase from the Company one ten-thousandth of a share of Series A Junior Participating Preferred Stock, no par value per share, of the Company, at a purchase price of $300.00 per one ten-thousandth of a share of Series A Preferred, subject to adjustment. By adopting the Plan, the Board is seeking to preserve the Company’s ability to effectuate a separation of Centuri Holdings that would be tax-free to the Company (the “Tax-Free Status”). The Board believes it is in the best interest of the Company and its stockholders to preserve the Company’s ability to effectuate a spin-off transaction with Tax-Free Status. Our business includes Southwest, which is engaged in the business of purchasing, distributing, and transporting natural gas for customers in portions of Arizona, Nevada, and California. Southwest is the largest distributor of natural gas in Arizona and Nevada, and distributes and transports natural gas for customers in portions of California. Additionally, through its subsidiaries, Southwest operates two regulated interstate pipelines serving portions of Nevada and California. Southwest makes investments in infrastructure to support customer demand associated with population growth and economic development activity and the safe and reliable operation of its system through adherence to integrity management programs. As of December 31, 2023, Southwest had 2,226,000 residential, commercial, industrial, and other natural gas customers, of which 1,192,000 customers were located in Arizona, 828,000 in Nevada, and 206,000 in California. First-time meter sets were approximately 40,000 in 2023, compared to 41,000 in 2022. Residential and commercial customers represented over 99% of the total customer base. During 2023, 55% of operating margin (gas operating revenues less the net cost of gas sold) was earned in Arizona, 33% in Nevada, and 12% in California. During this same period, Southwest earned 85% of its operating margin from residential and small commercial customers, 4% from other sales customers, and 11% from transportation customers. These general patterns are expected to remain materially consistent for the foreseeable future. Southwest recognizes operating revenues from the distribution and transportation of natural gas (and related services) to customers. Operating margin is a financial measure defined by management as Regulated operations revenues less the net cost of gas sold. However, operating margin is not specifically defined in accounting principles generally accepted in the United States (“U.S. GAAP”). Thus, operating margin is considered a non-GAAP measure. Management uses this financial measure [[GREPCENT_TABLE]] [["","26"]] [[/GREPCENT_TABLE]] because Regulated operations revenues include the net cost of gas sold, which is a tracked cost that is passed through to customers without markup under purchased gas adjustment (“PGA”) mechanisms. Fluctuations in the net cost of gas sold impact revenues on a dollar-for-dollar basis, but do not impact operating margin or operating income. Therefore, management believes operating margin provides investors and other interested parties with useful and relevant information to analyze Southwest’s financial performance in a rate-regulated environment. The principal factors affecting changes in operating margin are general rate relief (including impacts of infrastructure program recoveries) and customer growth. Commission decisions on the amount and timing of relief may impact our earnings. Refer to the Summary Operating Results table below for a reconciliation of gross margin to operating margin, and refer to Rates and Regulatory Proceedings in this Management’s Discussion and Analysis for details of various rate proceedings. The demand for natural gas is seasonal, with greater demand in the colder winter months and decreased demand in the warmer summer months. All of Southwest’s service territories have decoupled rate structures (alternative revenue programs), which are designed to eliminate the direct link between volumetric sales and revenue, thereby mitigating the impacts of weather variability and conservation on operating margin, allowing Southwest to pursue energy efficiency initiatives. Nearly all of our customers, and resulting revenue and margin, are included as part of mechanisms that reduce the impact of weather and volume variability on our earnings. Centuri is a strategic infrastructure services company that partners with regulated utilities to build and maintain the energy network that powers millions of homes and businesses across the U.S. and Canada. With a commitment to serve as long-term partners to customers and communities, Centuri’s employees enable regulated utilities to safely and reliably deliver natural gas and electricity, as well as achieve their goals for environmental sustainability. Centuri operates in 87 primary locations across 45 states and provinces in the U.S. and Canada. Centuri operates in the U.S., primarily as NPL, Neuco, Linetec, and Riggs Distler, and in Canada, primarily as NPL Canada. Utility infrastructure services activity can be impacted by changes in infrastructure replacement programs of utilities, weather, and local and federal regulation (including tax rates and incentives). Utilities continue to implement or modify system integrity management programs to enhance safety pursuant to federal and state mandates. These programs have resulted in multi-year utility system replacement programs throughout the U.S. Likewise, there has been similar attention placed on electric grid modernization through national infrastructure legislation and related initiatives. The Department of Energy estimates more than 70% of the nation’s grid transmission lines and power transformers are over 25 years old, creating vulnerability exacerbated by seasonal storm and extreme weather events. This, along with continued gas pipeline replacements expected to be necessary across North America, result in management expectations that Centuri will continue to benefit from these collective electric and gas infrastructure replacement programs for the foreseeable future. The amount that may be awarded to Centuri compared to its industry competitors is not presently known. Generally, Centuri revenues are lowest during the first quarter of the year due to less favorable winter weather working conditions. Revenues typically improve as more favorable weather conditions occur during the summer and fall months. In cases of severe weather, such as following a regional storm, Centuri may be engaged to perform restoration activities related to above-ground utility infrastructure, and related results impacts are not solely within the control of management. In addition, in certain circumstances, such as with large bid contracts (especially those of a longer duration), or unit-price contracts with revenue caps, results may be impacted by differences between costs incurred and those anticipated when the work was originally bid. Work awarded, or failing to be awarded, by individual large customers can impact operating results. All of our businesses may be impacted by economic conditions that impact businesses generally, such as inflationary impacts on goods and services consumed in the business, rising interest rates, labor markets and other costs (including in regard to contracted or professional services), and the availability of those resources. Certain of these impacts may be more predominant in certain of our operations, such as with regard to fuel costs for work equipment and skilled/trade labor costs at Centuri. [[GREPCENT_TABLE]] [["","27"]] [[/GREPCENT_TABLE]] Executive Summary The items discussed in this Executive Summary are intended to provide an overview of the results of the Company’s and Southwest’s operations and are covered in greater detail in later sections of management’s discussion and analysis. Summary Operating Results [[GREPCENT_TABLE]] [["","","Year ended December 31,"],["(In thousands, except per share amounts)","","2023","","2022","","2021"],["Contribution to net income (loss)"],["Natural gas distribution","","$","242,226","","","$","154,380","","","$","187,135"],["Utility infrastructure services","","19,652","","","2,065","","","40,420"],["Pipeline and storage","","(16,288)","","","(283,733)","","","\u2014"],["Corporate and administrative","","(94,701)","","","(76,002)","","","(26,776)"],["Net income (loss)","","$","150,889","","","$","(203,290)","","","$","200,779"],["Weighted average common shares","","70,787","","","65,558","","","59,145"],["Basic earnings (loss) per share"],["Consolidated","","$","2.13","","","$","(3.10)","","","$","3.39"],["Natural Gas Distribution"],["Reconciliation of Gross Margin to Operating Margin (Non-GAAP measure)"],["Utility Gross Margin","","$","640,955","","","$","574,534","","","$","570,325"],["Plus:"],["Operations and maintenance (excluding Admin. & General) expense","","316,246","","","308,276","","","267,160"],["Depreciation and amortization expense","","295,462","","","263,043","","","253,398"],["Operating margin","","$","1,252,663","","","$","1,145,853","","","$","1,090,883"]] [[/GREPCENT_TABLE]] Overview Southwest Gas Holdings: •Issued 4.1 million shares of common stock for net proceeds of $238.4 million •Completed the MountainWest sale and paid down the remaining balance of the term loan used to initially fund the MountainWest acquisition •Confidentially submitted a draft Registration Statement on Form S-1 to the SEC relating to the Centuri Holdings IPO •Corporate and administrative expenses include $42.8 million in interest expense related to borrowings and $11.1 million in Centuri separation costs, offset by certain tax benefits Natural gas distribution: •40,000 first-time meters sets (1.8% growth rate) added over the past 12 months •Operating margin increased $107 million, or 9%, between 2023 and 2022 •Arizona rate case finalized with annualized revenue increase of $54 million, effective February 1, 2023 •Received approval to implement an increase in the Gas Cost Balancing Account rate to facilitate timely recovery of ~$358 million in Arizona purchase gas costs effective August 1, 2023 •Filed $70 million general rate case in Nevada in September 2023, and $126 million general rate case in Arizona in February 2024 •$762 million capital investment in 2023 •COLI results increased $15.5 million compared to the prior year Utility infrastructure services: •Record revenues of $2.9 billion in 2023, an increase of $139 million, or 5%, compared to 2022 •$86 million storm restoration services revenues in 2023, an increase of $17 million over 2022 •$215 million of revenues from sustainable wind energy projects in 2023 including the first U.S. commercial-scale offshore project to deliver generated electricity to the grid •Executed a multi-year contract extension of a master services agreement with an existing gas utility customer in Ontario, Canada with anticipated revenues of ~$1 billion over the contract term [[GREPCENT_TABLE]] [["","28"]] [[/GREPCENT_TABLE]] This section of Form 10-K provides comparison of 2023, 2022, and 2021 results and pertinent components. Also provided is a discussion of 2023 and 2022 and year-to-date comparisons between those years. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Form 10-K can be found in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which incorporates by reference the Company’s annual report to stockholders filed as Exhibit 13 to that Annual Report on Form 10-K. Results of Natural Gas Distribution [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["(Thousands of dollars)","","2023","","2022","","2021"],["Regulated operations revenues","","$","2,499,564","","","$","1,935,069","","","$","1,521,790"],["Net cost of gas sold","","1,246,901","","","789,216","","","430,907"],["Operating margin","","1,252,663","","","1,145,853","","","1,090,883"],["Operations and maintenance expense","","511,646","","","491,928","","","438,550"],["Depreciation and amortization","","295,462","","","263,043","","","253,398"],["Taxes other than income taxes","","87,261","","","83,197","","","80,343"],["Operating income","","358,294","","","307,685","","","318,592"],["Other income (deductions)","","70,661","","","(6,884)","","","(4,559)"],["Net interest deductions","","149,830","","","115,880","","","97,560"],["Income before income taxes","","279,125","","","184,921","","","216,473"],["Income tax expense","","36,899","","","30,541","","","29,338"],["Contribution to consolidated results","","$","242,226","","","$","154,380","","","$","187,135"]] [[/GREPCENT_TABLE]] 2023 vs. 2022 Contribution to consolidated net income from natural gas distribution operations increased $88 million between 2023 and 2022. The increase was primarily due to increases in Operating margin and Other income, offset by increases in Operations and maintenance expense, Net interest deductions, and Depreciation and amortization. Operating margin increased $107 million between years. Customer growth provided approximately $14 million as 40,000 first-time meter sets were added in 2023, and combined rate relief (primarily in Arizona, as well as benefits of rate relief in Nevada through the first quarter of 2023 and the annual California attrition increase) provided approximately $56 million of incremental operating margin during the current year. Increases in recoveries associated with regulatory programs of $19 million also contributed to the increase; such amounts also increase amortization expense (discussed below). Additionally, an $8 million out-of-period adjusting entry was made in the first quarter of 2023, which reduced Net cost of gas sold (See Basis of Presentation in Note 1 - Background, Organization, and Summary of Significant Accounting Policies). Other increases include margin associated with customers outside the decoupling mechanisms. Operations and maintenance (“O&M”) expense increased $20 million, or 4%, between 2023 and 2022. Increases occurred throughout the business, including in direct labor ($8 million), external contractor and professional services expenses ($10 million), notably related to a consulting arrangement for the identification, benchmarking, and assessment of utility business optimization opportunities, and for leak survey and line locating activities ($4 million), along with higher incentive compensation expense ($4 million), costs for fuel used in operations ($3 million), and others. Employee benefit costs decreased between periods (approximately $5 million reflected in O&M expense), primarily due to the lower service-related component of postretirement benefit costs offset by increases in employee medical and other costs; these employee benefit costs are part of an overhead/labor loading process for which approximately 80% is included in O&M expense, with the remainder primarily becoming part of capital projects. Legal/claim-related costs were also lower between periods ($7 million). Depreciation and amortization expense increased $32 million, or 12%, between years including due to a $583 million, or 6%, increase in average gas plant in service in the current year. The increase in gas plant was attributable to pipeline capacity reinforcement work, franchise requirements, scheduled pipe replacement activities, and new infrastructure. An increase in amortization of regulatory account balances of $19 million, as discussed in regard to Operating margin above, also contributed to the increase. Taxes other than income taxes increased $4.1 million, or 5%, between 2023 and 2022 primarily due to an increase in property taxes in Arizona, and to a lesser extent, in California. Other income increased $78 million between 2023 and 2022. Interest income increased $35 million compared to the prior year, related to carrying charges associated with the elevated deferred purchased gas cost balance and interest on other regulatory [[GREPCENT_TABLE]] [["","29"]] [[/GREPCENT_TABLE]] account balances, with another nearly $2 million associated with the equity portion of the allowance for funds used during construction. Additionally, non-service-related components of employee pension and other postretirement benefit costs decreased $21 million between years, thereby positively impacting results between periods. Southwest also recognized a $16 million increase in COLI results between years. Net interest deductions increased $34 million between 2023 and 2022 primarily due to $300 million of Senior Notes issued in December 2022, $300 million of Senior Notes issued in March 2023, and in part to $600 million of Senior Notes issued in March 2022; as well as due to a term loan, entered into in January 2023 to support higher natural gas supply costs, which was repaid in April 2023. These increases were offset by the March 2023 repayment of the remaining $225 million balance associated with the March 2021 Term Loan. Results of Utility Infrastructure Services [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["(Thousands of dollars)","","2023","","2022","","2021"],["Utility infrastructure services revenues","","$","2,899,276","","","$","2,760,327","","","$","2,158,661"],["Operating expenses:"],["Utility infrastructure services expenses","","2,617,402","","","2,529,318","","","1,955,467"],["Depreciation and amortization","","145,446","","","155,353","","","117,643"],["Operating income","","136,428","","","75,656","","","85,551"],["Other income (deductions)","","64","","","(887)","","","1,067"],["Net interest deductions","","97,476","","","61,371","","","20,999"],["Income before income taxes","","39,016","","","13,398","","","65,619"],["Income tax expense","","14,736","","","5,727","","","18,776"],["Net income","","24,280","","","7,671","","","46,843"],["Net income attributable to noncontrolling interests","","4,628","","","5,606","","","6,423"],["Contribution to consolidated results","","$","19,652","","","$","2,065","","","$","40,420"]] [[/GREPCENT_TABLE]] 2023 vs. 2022 Contribution to consolidated net income from utility infrastructure services increased $17.6 million in 2023 compared to 2022. While net interest deductions increased $36.1 million due to higher interest rates, operating income increased $60.8 million due to an increase in revenue of $138.9 million and improvements in operating income overall due primarily to decreases in fuel prices and changes in mix of work. The Utility infrastructure services revenue increase of $138.9 million, or 5%, was driven primarily by a $211.7 million increase in electric infrastructure services revenue, which included a $120.4 million increase in offshore wind revenue. Offshore wind revenue stems from several multi-year contracts, whereby Centuri provides materials, subcontracts manufacturing, and self performs fabrication and assembly of secondary steel components onshore, with delivery at a port facility. Also included in electric infrastructure revenue was $86.4 million from emergency restoration services following tornado and other storm damage to customers’ above-ground utility infrastructure in and around the Gulf Coast and eastern regions of the U.S., compared to $69.7 million in storm restoration work in the prior year. Centuri’s revenues derived from storm-related services vary from period to period due to the unpredictable nature of weather-related events, and when this type of work is performed, it typically generates a higher profit margin than core infrastructure services, due to improved operating efficiencies related to equipment utilization and absorption of fixed costs. The remaining increase in electric infrastructure services revenues was due to higher volumes under certain existing customer master service agreements. Gas infrastructure services revenue decreased $81.8 million overall from the prior year, driven primarily by a net reduction in volume under master services agreements with certain existing customers, primarily in Canada. That amount reflects the mitigated impact of increased revenue from bid work of $87.3 million with a U.S. customer. Other revenues increased $9 million, primarily due to completion of a large industrial bid project during the year. Centuri revenues from contracts with Southwest totaled $116.4 million in 2023 and $134.7 million in 2022. Centuri accounts for services provided to Southwest at contractual prices. Utility infrastructure services expenses increased $88.1 million, or 3.5%, in 2023 when compared to 2022, primarily as a result of increased costs to complete a higher volume of work. Subcontractor costs increased during 2023 compared to the prior year notably due to increased revenue related to offshore wind projects. Despite continued inflationary pressures, margin on work completed in 2023 improved from the prior year due to changes in the mix of work and lower fuel prices. Also included in total Utility infrastructure services expenses were general and administrative costs, which increased approximately $1.3 million between years due to continued growth in the business. Gains on sale of equipment (reflected as an offset to Utility infrastructure services expenses) were approximately $4.5 million and $6.4 million in 2023 and 2022, respectively. [[GREPCENT_TABLE]] [["","30"]] [[/GREPCENT_TABLE]] Depreciation and amortization expense remained largely consistent as a percentage of revenue between years. Amortization of intangible assets decreased in 2023 compared to 2022 due to Riggs Distler’s backlog intangible asset becoming fully amortized in 2022. The increase in net interest deductions of $36.1 million was primarily due to higher interest rates on outstanding variable-rate borrowings, notably, the Centuri term loan and revolving credit facility, as amended. Income tax expense increased $9 million between 2023 and 2022, primarily due to increased pre-tax income in 2023. Results of Pipeline and Storage [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["(Thousands of dollars)","","2023"],["Regulated operations revenues","","$","35,132"],["Operating expenses:"],["Net cost of gas sold","","6,368"],["Operations and maintenance expense","","11,378"],["Depreciation and amortization","","\u2014"],["Taxes other than income taxes","","1,490"],["Goodwill impairment","","21,215"],["Operating loss","","(5,319)"],["Other income","","486"],["Net interest deductions","","2,200"],["Loss before income taxes","","(7,033)"],["Income tax expense","","9,255"],["Contribution to consolidated results","","$","(16,288)"]] [[/GREPCENT_TABLE]] Operating results for the pipeline and storage segment for 2023 reflects activity from January 1, 2023 through February 13, 2023 (the last full day of ownership by the Company), including residual goodwill impairment recognized during 2023. Operating expenses include $2.6 million during the first quarter related to integration/stand-up costs leading up to the sale date. Depreciation and amortization was not recorded in 2023 as MountainWest was classified as held for sale during the holding period. Income tax expense includes the impact of book versus tax basis differences related to the sale. For further impacts from the sale of MountainWest, refer to Note 15 - Acquisitions and Dispositions. Rates and Regulatory Proceedings Southwest is subject to the regulation of the Arizona Corporation Commission (the “ACC”), the Public Utilities Commission of Nevada (the “PUCN”), the California Public Utilities Commission (the “CPUC”), and two of Southwest’s subsidiaries are subject to regulation by the Federal Energy Regulatory Commission (the “FERC”). General Rate Relief and Rate Design Rates charged to customers vary according to customer class and rate jurisdiction and are set by the individual state and federal regulatory commissions that govern Southwest’s service territories. Southwest makes periodic filings for rate adjustments as the cost of providing service (including the cost of natural gas purchased) changes, and as additional investments in new or replacement pipeline and related facilities are made. Rates are intended to provide for recovery of all commission-approved costs and a reasonable return on investment. The mix of fixed and variable components in rates assigned to various customer classes (rate design) can significantly impact the operating margin actually realized by Southwest. Management has worked with its regulatory commissions in designing rate structures that support the timely recovery of our costs, including returns to investors, in providing safe, affordable, and reliable service to its customers while mitigating volatility in prices to customers and stabilizing returns to investors. Such rate structures were in place in all of Southwest’s operating areas during all periods for which results of natural gas distribution operations are disclosed above. Arizona Jurisdiction Arizona General Rate Case. Southwest filed a general rate case application in December 2021, primarily to reflect in rates the substantial capital investments that were made since the end of the test year associated with an earlier case, including investments in a customer information system implemented in May 2021. At a hearing held in September 2022, Southwest, the [[GREPCENT_TABLE]] [["","31"]] [[/GREPCENT_TABLE]] Utilities Division Staff, and the Residential Utility Consumer Office jointly stipulated to several issues, including a target capital structure consisting of 50% equity and 50% debt; a 9.30% return on equity; and foregoing a premium related to the Graham County acquisition as well as the recovery of $12 million of waived late fees on customer account balances that would have otherwise applied to delinquent accounts in the absence of a COVID-19 moratorium on such fees. Approximately $12 million in costs related to the Liquefied Natural Gas facility deferred in an authorized regulatory asset was approved to be amortized over four years. The ACC’s final order authorized a $54.3 million increase, with new rates effective February 1, 2023. Southwest filed its 2024 Arizona rate case application in early February 2024, proposing an increase in revenue of approximately $125.6 million to reflect the continued significant capital investments in the state and update rates to more closely align with Southwest’s current level of operations and maintenance expense. The request includes a return on common equity of 10.15% and a 0.81% fair value increment, relative to a 50% target equity ratio and a proposed 12-month post-test year plant adjustment for otherwise non-revenue producing plant. In addition to proposing the continuation of full revenue decoupling under the Delivery Charge Adjustment (“DCA”) mechanism, Southwest proposed the establishment of the System Improvement Benefit (“SIB”) mechanism, a capital tracker designed to support required code and regulatory-related infrastructure replacements in the state of Arizona. Southwest also proposed to set the carrying cost for the interest component of the DCA and Gas Cost Balancing Account (“GCBA”) rate adjustment mechanisms to equal the Commission-authorized Weighted Average Cost of Capital, and to establish the Unrecovered Gas Cost Expense Provision (“UGCE”), which represents gas cost-related portion of net write-offs of uncollectible customer accounts. The UGCE would allow Southwest to more timely recover the portion of such accounts that is related to purchased gas cost. Rates, following the conclusion of the rate case, are anticipated to become effective in the second quarter 2025. Delivery Charge Adjustment. The DCA, or Arizona decoupling mechanism, as described above, includes a filing each April, which along with other reporting requirements, contemplates a rate to return/recover the over- or under-collected margin tracker (decoupling mechanism) balance. The most recent filing was made in April 2023 to request a rate to address the over-collected balance of $53.5 million existing as of March 31, 2023. The requested rate to return the over-collected balance was approved and new rates became effective August 1, 2023. The next filing is anticipated to be made no later than April 30, 2024, and will address the balance at the end of the first quarter 2024. Tax Reform. A Tax Expense Adjustor Mechanism (“TEAM”) was approved in Southwest’s 2019 general rate case to timely recognize tax rate changes resulting from federal or state tax legislation following the TEAM implementation. In addition, the TEAM tracks and returns/recovers the revenue requirement impact of changes in amortization of excess accumulated deferred income taxes (“EADIT”), including that which resulted from 2017 U.S. federal tax reform, compared to the amount authorized in the most recently concluded rate case. Following the inaugural surcredit rate establishment under the TEAM mechanism in December 2022, Southwest filed subsequent TEAM rate applications, including the most recent filing, which proposes to update the TEAM surcredit to refund $5.03 million of estimated net EADIT savings. The adjusted rate is anticipated to be implemented in the second quarter 2024. Customer-Owned Yard Line (“COYL”) Program. Southwest originally received approval, in connection with its 2010 Arizona general rate case, to implement a program to conduct leak surveys, and if leaks were present, to replace and relocate service lines and meters for Arizona customers whose meters were set off from the customer’s home, representing a non-traditional configuration. The COYL program has been subject to proceedings to recover investments since that time. In February 2023, Southwest requested approval to recover the outstanding revenue requirement of approximately $4.3 million associated with 2022 COYL investments, which increased the COYL recovery rate. The new rate became effective July 1, 2023. A filing to request recovery of the outstanding revenue requirement is anticipated in early 2024. PGA Modification. On March 1, 2023, Southwest filed a request to adjust the interest rate applicable to the outstanding Purchased Gas Adjustment (“PGA”) balance to more closely match the interest expense incurred to finance the balance. In the alternative, the filing requested an expansion of the current GCBA adjustment to clear the then existing $351 million balance. In July, the ACC approved an increase to the GCBA rate (over a two-year period) effective August 1, 2023, to support the timely recovery of the approximately $358 million balance as of May 31, 2023. The increased GCBA rate will remain for up to two years or until the balance drops below $10 million, at which point the GCBA rate will be set to $0.00 per therm, where it will remain until the under- or over-collected balance exceeds $10 million. The ongoing deferred energy rates, separate from the GCBA rates, continue to be updated monthly. Nevada Jurisdiction Nevada General Rate Case. Southwest filed its most recent general rate case in September 2023 based on the test year ended May 2023. The initial request was updated with a certification filing primarily for plant placed in service and incremental annual leak survey costs through November 2023. Those updates resulted in an updated overall request of approximately $74 million, an increase over the initial request of $69.8 million. A stipulation was reached with Regulatory Operations Staff [[GREPCENT_TABLE]] [["","32"]] [[/GREPCENT_TABLE]] and the Bureau of Consumer Protection, settling certain issues and agreeing to a black box settlement with a statewide increase of $65.6 million, prior to any adjustments related to the cost of capital (assumed capital structure and return on equity), which along with class cost of service and rate design items, remains unsettled. Included in the settled issues are a continuation of full revenue decoupling; authority to continue tracking incremental annual leak survey costs; and depreciation rates that would increase modestly overall from current levels. The request includes a proposed return on common equity of 10.0% relative to a 50% target equity ratio and is expected to be resolved at the hearing scheduled for the end of February 2024. New rates are anticipated in April 2024. Southwest’s previous general rate case concluded in February 2022, with rates effective April 1, 2022. General Revenues Adjustment. The General Revenues Adjustment (“GRA”), or Nevada decoupling mechanism, was affirmed as part of Southwest’s most recently concluded general rate case with an expansion to include a large customer class (with average monthly throughput requirements greater than 15,000 therms), effective April 2022. Southwest makes Annual Rate Adjustment (“ARA”) filings to update rates to recover or return amounts associated with various regulatory mechanisms, including the GRA. Southwest made its most recent ARA filing in November 2023 related to the approximate $8.7 million over-collected balance as of September 30, 2022. Recovery of rates and adjustments thereto as part of the ARA primarily impact cash flows, but not net income overall. Updated rates for the GRA and other regulatory mechanisms included in the ARA will become effective July 1, 2024. Nevada Leak Survey. In 2019, the PUCN opened an Investigation and Rulemaking action to consider certain amendments to the Nevada Administrative Code requiring annual leak surveys of distribution pipelines transporting natural gas or liquid petroleum. The increased survey activity was to focus on business districts and to be conducted generally on an annual basis (not exceeding 15-month survey intervals). The proposed regulations were permanently adopted with a January 1, 2023 effective date. Regulatory asset treatment was approved for the purpose of tracking incremental costs associated with implementing the increased leak surveys, recovery of which is requested in Southwest’s pending general rate case. California Jurisdiction California General Rate Case. Southwest’s most recent general rate case concluded following an agreement in principle with the Public Advocate’s Office, unanimously approved by the CPUC on March 25, 2021, including a $6.4 million total combined revenue increase with a 10% return on common equity, relative to a 52% equity ratio. The rate case decision maintained Southwest’s existing 2.75% annual attrition adjustments and the continuation of the pension balancing account. It also included cumulative expenditures totaling $119 million over the five-year rate cycle to implement risk-informed proposals, consisting of a school COYL replacement, meter protection, and pipe replacement programs. New rates resulting from the rate case were implemented in April 2021. Attrition Filing. Following the 2021 implementation of rates approved as part of the recently concluded general rate case, the continuation of annual Post Test Year (“PTY”) margin attrition increases of 2.75% began in January 2022. The most recent annual margin attrition increase was also inclusive of adjustments related to the amortization of EADIT and the authorized rate base to adjust the rate of return consistent with the Automatic Trigger Mechanism. The cumulative adjustments resulted in an increase of $6.9 million effective January 2024 for Southwest’s southern California, northern California, and South Lake Tahoe rate jurisdictions. FERC Jurisdiction General Rate Case. Great Basin Gas Transmission Company (“Great Basin”), a wholly owned subsidiary of Southwest, reached an agreement in principle with the FERC Staff as part of its last rate case providing a 9.90% pre-tax rate of return. Rates were made effective February 2020. Great Basin plans to file its next general rate case no later than the first week of March 2024, proposing an increase of approximately $16 million and a return on equity of 13.05% relative to a 56% equity layer. A primary driver of the proposed increase is approximately $99 million of capital investments anticipated to be placed in service by the end of the August 31, 2024 test year. Motion rates, subject to refund, are anticipated to become effective in September 2024 with an initial decision during the second quarter of 2025. MountainWest Overthrust Pipeline. On September 22, 2022, during the period of Southwest Gas Holdings’ ownership of the MountainWest entities, the FERC issued an order initiating an investigation, pursuant to section 5 of the Natural Gas Act, to determine whether rates charged by MountainWest Overthrust Pipeline, LLC, a subsidiary of MountainWest, were just and reasonable and setting the matter for hearing. A settlement was reached and the Company, in association with its agreement for the sale of MountainWest to Williams, and terms related to the resolution of this rate case matter, recorded a charge of $28.4 million in the first quarter of 2023, included in Goodwill impairment and loss on sale on the Company’s Consolidated Statements of Income. The rate case settlement was approved and the $28.4 million was paid in the third quarter of 2023. [[GREPCENT_TABLE]] [["","33"]] [[/GREPCENT_TABLE]] PGA Filings The rate schedules in all of Southwest’s service territories contain provisions that permit adjustments to rates as the cost of purchased gas changes. These deferred energy provisions and purchased gas adjustment clauses are collectively referred to as “PGA” clauses. Differences between gas costs recovered from customers and amounts paid for gas by Southwest result in over- or under-collections. Balances are recovered from or refunded to customers on an ongoing basis with interest. As of December 31, 2023, under-collections in each of Southwest’s service territories resulted in an asset of approximately $552.9 million on the Company’s and Southwest’s Consolidated Balance Sheets. In the latter part of 2022 and continuing into January 2023, the market price of natural gas spiked due to numerous market forces including historically low storage levels, unexpected upstream pipeline maintenance events, and cold weather conditions across the western region, increasing the balance further during that time as a result. See also Deferred Purchased Gas Costs in Note 1 - Background, Organization, and Summary of Significant Accounting Policies in Item 8. Filings to change rates in accordance with PGA clauses are subject to audit by state regulatory commission staffs. PGA changes impact cash flows, but have no direct impact on operating margin. However, gas cost deferrals and recoveries can impact comparisons between periods of individual consolidated income statement components. These include Regulated operations revenues, Net cost of gas sold, Net interest deductions, and Other income (deductions). The following table presents Southwest’s outstanding PGA balances receivable at the end of its two most recent fiscal years: [[GREPCENT_TABLE]] [["","","December 31,"],["(Thousands of dollars)","","2023","","2022"],["Arizona","","$","251,416","","","$","292,472"],["Northern Nevada","","45,757","","","27,384"],["Southern Nevada","","218,761","","","122,959"],["California","","36,951","","","7,305"],["","","$","552,885","","","$","450,120"]] [[/GREPCENT_TABLE]] Arizona PGA Filings. In Arizona, Southwest calculates the change in the gas cost component of customer rates monthly (to allow for timely refunds to/recoveries from customers), utilizing a rolling twelve-month average. During 2023, the GCBA continued with a surcharge in order to recover the under-collected balance, including an increased rate mechanism that could continue for up to two years, as described above. California Gas Cost Filings. In California, a monthly gas cost adjustment based on forecasted monthly prices is utilized. Monthly adjustments modeled in this fashion provide the timeliest recovery of gas costs in any Southwest jurisdiction. Nevada Gas Cost Filings. In November 2023, Southwest filed to adjust its quarterly Deferred Energy Account Adjustment rate, which is based upon a twelve-month rolling average, in addition to requesting adjusted Base Tariff Energy rates, both of which were most recently approved effective October 2023. New rates associated with the November 2023 filing became effective January 2024. These new rates are intended to address the outstanding balances over a twelve-month period. Gas Price Volatility and Mitigation To mitigate price volatility to its customers, Southwest periodically enters into fixed-price term contracts under its volatility mitigation programs for up to 25% of the California jurisdictions’ annual normal weather supply needs and to a limited extent, in the Arizona jurisdiction. For the 2023/2024 heating season, contracts contained in the fixed-price portion of the supply portfolio ranged from approximately $5.60 to approximately $7.50 per dekatherm. In consultation with its regulators, Southwest does not currently plan to make any fixed-price term purchases in other than California, nor to enter into swap agreements. Southwest’s natural gas purchases, not covered by fixed-price contracts, are under variable-price contracts with firm quantities, or on the spot market. The contract price for these contracts is either determined at the beginning of each month to reflect the published first-of-month index price, or at market prices based on a published daily price index. In each case, the index price is not published or known until the purchase period begins. Plans with regard to fixed-price portfolios or other hedging programs could change as Southwest monitors conditions and collaborates with regulatory commissions over time. Pipeline Safety Regulation Effective January 1, 2023, the PUCN issued an order revising its regulations to require annual leak surveys (previously every three years) of all distribution pipelines transporting natural gas and/or liquefied petroleum. In conjunction with this change, the PUCN authorized the establishment of a regulatory asset account to track the incremental cost of compliance related to the new regulation, for consideration in a future general rate case filing. [[GREPCENT_TABLE]] [["","34"]] [[/GREPCENT_TABLE]] Effective October 2022, the Pipeline and Hazardous Materials Safety Administration (“PHMSA”) issued final rules that amended the federal pipeline safety regulations applicable to the valve installation and minimum rupture detection standards for gas transmission pipelines. Southwest has integrated the requirements of this new rule into its operating procedures. In addition, in August 2022, PHMSA issued final rules that amended the federal pipeline safety regulations applicable to the integrity management of gas transmission pipelines, effective May 2023. Southwest also integrated the requirements of this new rule into its operating procedures related to repair criteria, integrity management improvements, cathodic protection, management of change, and other related gas transmission integrity related amendments. PHMSA published two significant notices of proposed rulemaking (“NPRMs”) in 2023. The first is the Pipeline Leak Detection and Repair NPRM, which aims to mandate methane emissions reductions through the revision of natural gas operator operations and maintenance procedures, the promulgation of Advanced Leak Detection equipment, and accelerated leak repair criteria. The proposed rulemaking is expected to be published in mid-2024. Southwest is evaluating potential impacts from this NPRM. The second item, the Safety of Gas Distribution NPRM, resulted from congressional mandates and National Transportation Safety Board safety recommendations from a 2018 incident in the Merrimack Valley, in Massachusetts. This NPRM is expected to be finalized in late 2024 and includes provisions that are primarily aimed at mitigating overpressurization incidents, particularly on utilization pressure systems. Southwest does not own or operate any utilization pressure systems and is monitoring the progress and potential impacts, if any, of this NPRM. Southwest continues to monitor changing pipeline safety legislation and participates, to the extent possible, in providing public comments and works with industry associations, such as the American Gas Association, in shaping regulatory language associated with these new mandates and reporting requirements. Additionally, management works with state and federal commissions to which Southwest, including its subsidiaries, are subject, to develop customer rates that are responsive to incremental costs of compliance. However, due to the timing of when rates are implemented in response to new requirements, and as additional rules are developed, compliance requirements could impact expenses and the timing and amount of capital expenditures for Southwest. Capital Resources and Liquidity Historically, cash on hand and cash flows from operations have provided a substantial portion of cash used in investing activities (primarily construction expenditures and property additions). In recent years, Southwest has undertaken substantial pipe replacement activities to fortify system integrity and reliability, including on an accelerated basis in association with certain gas infrastructure replacement programs. This activity has necessitated the issuance of both debt and equity securities to supplement cash flows from operations. Southwest Gas Holdings, Inc. and Southwest’s capitalization strategy is to maintain an appropriate balance of equity and debt to preserve investment-grade credit ratings, which helps minimize interest costs. Investment-grade credit ratings have been maintained by Southwest Gas Holdings, Inc. and Southwest. Cash Flows Southwest Gas Holdings, Inc.: Operating Cash Flows. Cash flows provided by consolidated operating activities increased $102 million between 2023 and 2022. Customarily, fluctuations in purchased gas cost, including amounts incurred and accrued or deferred, as well as impacts related to when amounts are incorporated into customer bills to recover or return deferred balances, have a significant influence on operating cash flows. Other changes in components of working capital also influenced operating cash flows, including the timing and amount of accounts payable and other current asset and liability balances, such as regulatory balances. While earnings were substantially higher in 2023, that change was notably influenced by noncash changes from a recognized goodwill impairment and loss on sale associated with MountainWest, primarily recognized in 2022, prior to the sale closing that took place in early 2023. The corporate and administrative expenses/outflows for Southwest Gas Holdings, Inc. in 2023 include costs associated with the Centuri separation, and in 2022 include shareholder activism and strategic review costs, with the most significant individual amount being the interest/financing costs associated with the earlier MountainWest acquisition, collectively net of tax impacts. Investing Cash Flows. Cash provided by consolidated investing activities increased $990 million in 2023 as compared to 2022. The overall increase was driven by $1.02 billion in proceeds received in connection with the MountainWest sale (which is net of cash sold), partially offset by an increase in capital expenditures in the natural gas distribution segment. Financing Cash Flows. Net cash used in consolidated financing activities increased $1.1 billion in 2023 as compared to 2022. The overall increase was primarily due to the first quarter 2023 repayment ($1.1 billion) of the term loan originally entered into by Southwest Gas Holdings, Inc. in November 2021 in connection with the acquisition of MountainWest. Other impacts included proceeds from the issuance of common stock in underwritten public offerings in each period ($200 million lower in [[GREPCENT_TABLE]] [["","35"]] [[/GREPCENT_TABLE]] the 2023 period than in the 2022 period), and a $550 million Term Loan Credit Agreement entered into by the Company in April 2023. A substantial portion of the term loan proceeds ($530 million) was contributed to Southwest as equity, which in turn was primarily used by Southwest to repay term loan indebtedness entered into to finance an escalation in purchased gas costs. Southwest also repaid the remaining balance ($225 million) associated with the March 2021 Term Loan. Other financing cash flows include borrowings and repayment under the companies’ credit facilities. The capital requirements and resources of the Company generally are determined independently for the individual business segments. Each business segment is generally responsible for securing its own financing sources. However, the holding company may raise funds through stock issuances or other external financing sources in support of each business segment. Southwest Gas Corporation: Operating Cash Flows. Cash flows provided by operating activities increased $107 million between 2023 and 2022 primarily attributable to an increase in net income and changes in working capital, including the impacts related to purchased gas costs (amounts incurred and accrued or deferred, as well as recovered from customers through the billing process). Investing Cash Flows. Cash used in investing activities increased $116 million in 2023 as compared to 2022, primarily due to an increase in capital expenditures, as well as a decrease in customer advances. See also 2023 Construction Expenditures below. Financing Cash Flows. Net cash provided by financing activities increased $15 million in 2023 as compared to 2022. The modest increase included a number of mostly offsetting impacts, including $530 million in parent capital contributions during the second quarter of 2023, offset by the repayment of the $450 million term loan that was executed in January 2023 to finance the escalation in purchased gas costs. The $225 million March 2021 Term Loan was also repaid. Issuance of long-term debt during 2022 was approximately $900 million (including 4.05% notes due 2032 and 5.8% notes due 2027), while there was one new issuance in 2023 of $300 million in 5.45% notes due 2028. The prior year included the paydown/redemption of $275 million in maturing notes. Dividends paid and borrowing and repayment activity under the credit facility comprise the remaining activity between periods. 2023 Construction Expenditures During the three-year period ended December 31, 2023, total gas plant in service increased from $8.4 billion to $10.1 billion, or at an average annual rate of 7%. Replacement, new business, and reinforcement work was a substantial portion of the plant increase during the three-year period. Customer growth also impacted expenditures as Southwest set approximately 119,000 meters during this time, which is reflected in new business. During 2023, construction expenditures (through cash outlays) for Southwest were $762 million. The majority of these expenditures represented costs associated with replacement of existing transmission and distribution plant to fortify system integrity and reliability, as well as general plant additions. Cash flows from operating activities of Southwest were $392 million, providing approximately 43% of construction expenditures and dividend requirements of the natural gas operations segment. Other funding was provided by cash on hand, external financing activities, and funds from the existing credit facility. 2023 Financing Activity In March 2023, the Company sold, through a prospectus supplement under its Prior Shelf Registration (as defined in Note 7 - Common Stock), an aggregate of 4.1 million shares of common stock, at an underwritten public offering price of $60.12 per share, resulting in proceeds to the Company of $238.4 million, net of the underwriters’ discount of $8.3 million. These net proceeds were used to repay a portion of the outstanding borrowings under the 364-day term loan credit agreement to earlier fund the MountainWest acquisition. Net proceeds received under the Dividend Reinvestment and Stock Purchase Plan during 2023 were approximately $15.2 million, from the issuance of approximately 264,000 shares of Southwest Gas Holdings, Inc. common stock. Natural Gas Distribution Segment Construction Expenditures, Debt Maturities, and Financing Management estimates natural gas distribution segment construction expenditures during the three-year period ending December 31, 2026 will be approximately $2.4 billion. Of this amount, approximately $830 million is expected to be incurred in 2024. Southwest plans to continue to request regulatory support to undertake projects, or to accelerate projects as necessary, for the improvement of system flexibility and reliability, or to expand, where relevant, to unserved or underserved areas. Southwest may expand existing, or initiate new, programs. Significant replacement activities are expected to continue well beyond the next few years. During the three-year period ending December 31, 2026, cash flows from operating activities of Southwest are expected to provide approximately 78% of the funding for gas operations of Southwest and total construction expenditures and dividend requirements. Any additional cash requirements, including construction-related, and any paydown or [[GREPCENT_TABLE]] [["","36"]] [[/GREPCENT_TABLE]] refinancing of debt, are expected to be provided by credit facilities, equity contributions from the Company, and/or other external financing sources. During the three-year period, Southwest will be required to renew or otherwise address its credit facility, but will otherwise only have $75 million of long-term debt maturing. The timing, types, and amounts of any additional external financings will be dependent on a number of factors, including the cost of gas purchases, conditions in the capital markets, timing and amounts of rate relief, timing and amounts of surcharge collections from or amounts returned to customers related to other regulatory mechanisms, as well as growth levels in Southwest’s service areas and earnings. External financings could include the issuance of debt securities, bank and other short-term borrowings, and other forms of financing. Liquidity Several factors (some of which are out of the control of the Company) that could significantly affect liquidity in future years include: activities from the planned separation of Centuri, variability of natural gas prices, changes in ratemaking policies of regulatory commissions, regulatory lag, customer growth in the natural gas distribution segment, the ability to access and obtain capital from external sources, the level of interest rates, changes in income tax laws, pension funding requirements, inflation, and the level of earnings. Natural gas prices and related gas cost recovery rates, as well as plant investment, have historically had the most significant impact on liquidity, aside from the Company’s recent strategic undertakings, including acquisition and disposition activity. On an interim basis, Southwest defers over- or under-collections of gas costs to PGA balancing accounts. In addition, Southwest uses this mechanism to either refund amounts over-collected or recoup amounts under-collected as compared to the price paid for natural gas during the period since the last PGA rate change went into effect. At December 31, 2023, the combined balance in the PGA accounts totaled an under-collection of $552.9 million. The market price of natural gas spiked most recently as a result of numerous market forces including historically low storage levels, unexpected upstream pipeline maintenance events, and cold weather conditions across the western region in the latter part of 2022 and continuing into January 2023. We may be required to incur additional indebtedness in connection with future spikes in natural gas prices as a result of extreme weather events or otherwise. See PGA Filings for more information. In March 2023, Southwest issued $300 million aggregate principal amount of 5.45% Senior Notes. The notes will mature in March 2028. Southwest used the net proceeds to repay amounts outstanding under Southwest’s credit facility and the remainder for general corporate purposes. In April 2023, Southwest Gas Holdings, Inc. entered into a $550 million Term Loan Credit Agreement that matures in October 2024. Southwest Gas Holdings, Inc. utilized a majority of the proceeds to make an equity contribution to Southwest. On April 17, 2023, Southwest utilized the equity contribution to repay, in full, amounts outstanding under its $450 million 364-day term loan entered into in January 2023, with the remainder of the equity contribution used for working capital and general corporate purposes. The Company intends to refinance the Term Loan Credit Agreement at or prior to its maturity. Southwest Gas Holdings, Inc. has a credit facility with a borrowing capacity of $300 million that expires in December 2026. This facility is intended for short-term financing needs. At December 31, 2023, $78.5 million was outstanding under this facility. The maximum amount outstanding during 2023 occurred during the first quarter and was $181 million. Southwest has a credit facility with a borrowing capacity of $400 million, which expires in April 2025. Southwest designates $150 million of the facility for long-term borrowing needs and the remaining $250 million for working capital purposes. The maximum amount outstanding during 2023 occurred during the first quarter and was $225 million ($150 million outstanding on the long-term portion of the credit facility, none under the commercial paper program, and $75 million outstanding on the short-term portion). As of December 31, 2023, no borrowings were outstanding on the long-term portion of the credit facility (no borrowings were outstanding under the commercial paper program), and no borrowings were outstanding on the short-term portion. The credit facility has been used as necessary to meet liquidity requirements, including temporarily financing under-collected PGA balances, meeting the refund needs of over-collected balances, or temporarily funding capital expenditures. The credit facility has generally been adequate for Southwest’s working capital needs outside of funds raised through operations and other types of external financing. Southwest has a $50 million commercial paper program. Any issuance under the commercial paper program is supported by the revolving credit facility and, therefore, does not represent additional borrowing capacity. Any borrowing under the commercial paper program is designated as long-term debt. Interest rates for the commercial paper program are calculated at the then current commercial paper rate. At December 31, 2023, there were no borrowings outstanding under this program. Centuri has a $1.545 billion secured revolving credit and term loan multi-currency facility. The capacity of the line of credit is $400 million with related amounts borrowed and repaid available to be re-borrowed; the term loan portion of the facility has a limit of $1.145 billion. The term loan facility expires on August 27, 2028 and the revolving credit facility expires on August 27, 2026. This multi-currency facility allows the borrower to request loan advances in either Canadian dollars or U.S. dollars. The obligations under the credit agreement are secured by present and future ownership interests in substantially all direct and [[GREPCENT_TABLE]] [["","37"]] [[/GREPCENT_TABLE]] indirect subsidiaries of Centuri, substantially all of the tangible and intangible personal property of each borrower, certain of their direct and indirect subsidiaries, and all products, profits, and proceeds of the foregoing. Centuri assets securing the facility at December 31, 2023 totaled $2.5 billion. The maximum amount outstanding on the combined facility during 2023 was $1.184 billion, which occurred in the second quarter, at which point $1 billion was outstanding on the term loan facility. As of December 31, 2023, $77 million was outstanding on the revolving credit facility, in addition to $994.2 million outstanding on the term loan portion of the facility. Also at December 31, 2023, there was approximately $246 million, net of letters of credit, available for borrowing under the line of credit. In November 2023, Centuri amended the financial covenants of the revolving credit facility (the “Centuri Credit Facility Amendment”) to decrease the minimum interest coverage ratio during the fiscal quarters ending March 31, 2024 through December 31, 2024 to a ratio of 2.00 to 1.00. The Credit Facility Amendment also increases the maximum net leverage ratio financial covenant for the fiscal quarters ending March 31, 2024 through September 30, 2024 to a ratio of 5.50 to 1.00 and for the fiscal quarter ending December 31, 2024 to a ratio of 5.00 to 1.00. In addition, in the event that a “Qualified IPO” is consummated prior to March 31, 2025, the maximum net leverage ratio financial covenant will be reduced based on the amount of net proceeds received from such Qualified IPO. The Centuri Credit Facility Amendment did not modify any terms of the term loan facility. Under these restrictions and the financial covenants of the amended revolving credit facility, Centuri’s ability to pay dividends to Southwest Gas Holdings, Inc. is limited. However, such dividends are not customarily relied upon in order for Southwest Gas Holdings, Inc. to satisfy dividends declared for its stockholders. In the first quarter of 2023, the Company paid off (primarily with proceeds from the MountainWest sale) the remaining balance on the $1.6 billion term loan entered into in November 2021 in connection with the acquisition of MountainWest. Credit Ratings Credit ratings apply to debt securities such as bonds, notes, and other debt instruments and do not apply to equity securities such as common stock. Borrowing costs and the ability to raise funds are directly impacted by the credit ratings of the Company. Credit ratings issued by nationally recognized ratings agencies (Moody’s Investors Service, Inc. (“Moody’s”), Standard & Poor’s Ratings Services (“Standard & Poor’s”), and Fitch Ratings (“Fitch”)) provide a method for determining the creditworthiness of an issuer. Credit ratings are important because long-term debt constitutes a significant portion of total capitalization. These credit ratings are a factor considered by lenders when determining the cost of current and future debt for each debt obligor (i.e., generally the better the rating, the lower the cost to borrow funds). The current unsecured long-term debt ratings of the Company and Southwest are considered investment grade, and Centuri’s ratings are considered non-investment grade. [[GREPCENT_TABLE]] [["","","Moody's (1)","","Standard & Poor's (2)","","Fitch (3)"],["Southwest Gas Holdings, Inc.:"],["Issuer rating","","Baa2","","BBB-","","BBB"],["Outlook","","Stable","","Positive Outlook","","Rating Watch Negative"],["Last reaffirmed","","December 2023","","December 2023","","September 2023"],["Southwest Gas Corporation:"],["Senior unsecured long-term debt","","Baa1","","BBB","","A-"],["Outlook","","Stable","","Positive Outlook","","Stable"],["Last reaffirmed","","December 2023","","October 2023","","September 2023"],["Centuri Group, Inc.:"],["Issuer rating","","Ba3","","B+","","N/A"],["Outlook","","Negative","","CreditWatch Developing","","N/A"],["Last reaffirmed","","December 2023","","October 2023","","N/A"]] [[/GREPCENT_TABLE]] (1)Moody’s debt ratings range from Aaa (highest rating possible) to C (lowest quality, usually in default). A numerical modifier of 1 (high end of the category) through 3 (low end of the category) is included with the rating to indicate the approximate rank of a company within the range. (2)Standard & Poor’s (“S&P”) debt ratings range from AAA (highest rating possible) to D (obligation is in default). The ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus “+” or minus “-” sign to show relative standing within the major rating categories. (3)Fitch debt ratings range from AAA (highest credit quality) to D (defaulted debt obligation). The modifiers “+” or “-” may be appended to a rating to denote relative status within major rating categories. [[GREPCENT_TABLE]] [["","38"]] [[/GREPCENT_TABLE]] A credit rating, including the foregoing, is not a recommendation to buy, sell, or hold a debt security, but is intended to provide an estimation of the relative level of credit risk of debt securities, and is subject to change or withdrawal at any time by the rating agency. Numerous factors, including many that are not within management’s control, are considered by the ratings agencies in connection with the assigning of credit ratings. None of Southwest’s debt instruments have credit triggers or other clauses that result in default if these bond ratings are lowered by rating agencies. Interest and fees on certain debt instruments are subject to adjustment depending on Southwest’s bond ratings. Certain debt instruments are subject to a leverage ratio cap, and the 6.1% Notes due 2041 are also subject to a minimum net worth requirement. At December 31, 2023, Southwest was in compliance with all of its covenants. Under the most restrictive of the financial covenants, approximately $3.9 billion in additional debt could be issued and the leverage ratio requirement would still be met. At least $2.6 billion of cushion in equity relating to the minimum net worth requirement exists at December 31, 2023. No specific limitations as to dividends exist under the collective covenants. None of the debt instruments contain material adverse change clauses. At December 31, 2023, Southwest Gas Holdings, Inc. was also in compliance with all of the covenants of its credit facility and Term Loan Credit Agreement. Interest and fees on its credit facility and 364-day Term Loan are subject to adjustment depending on its senior debt ratings. The credit facility and 364-day Term Loan are subject to a leverage ratio cap. Under the most restrictive of the financial covenants, approximately $2.7 billion in additional debt could be issued while still meeting the leverage ratio requirement. No specific limitations as to dividends exist under the collective covenants. The credit facility and 364-day Term Loan do not contain material adverse change clauses. Certain Centuri debt instruments have leverage ratio caps and interest coverage ratio requirements. At December 31, 2023, Centuri was in compliance with all of its covenants. Under the most restrictive of the covenants, Centuri could issue approximately $108 million in additional debt and meet the leverage ratio requirement. Centuri has approximately $15 million of cushion relating to the minimum interest coverage ratio requirement. Centuri’s revolving credit and term loan facility is secured by underlying assets of the utility infrastructure services segment. Centuri also has restrictions on how much it could give to the Company in cash dividends, which is limited to a calculated available amount, generally defined as 50% of its rolling twelve-month consolidated net income adjusted for certain items, such as parent contributions inflows, Linetec redeemable noncontrolling interest payments, or dividend payments, among other adjustments, as applicable. Under these restrictions and the financial covenants of the amended revolving credit facility, Centuri’s ability to pay dividends to Southwest Gas Holdings, Inc. is limited. However, such dividends are not customarily relied upon in order for Southwest Gas Holdings, Inc. to satisfy dividends declared for its stockholders. Inflation Inflation can impact results of operations for each of the Company’s business segments, and while the level of increase has waned over the past year, the level of improvement is only in relation to the multi-decade high inflation in 2022. Labor, employee benefits, fuel, natural gas, professional services, and construction costs are the categories most significantly impacted by inflation. Changes to the cost of gas are generally recovered through PGA mechanisms and do not directly impact earnings overall, and indirectly, primarily from interest carrying charges on accumulated balances. Labor, employee benefits, and professional services are components of the cost of service, and gas infrastructure costs are the primary component of utility rate base. In order to recover increased costs, and earn a fair return on rate base, general rate cases or other procedural filings are made by our regulated operations, when deemed necessary, for review and approval by regulatory authorities. Regulatory lag, that is, the time between the date increased costs are incurred and the time such increases are recovered through the ratemaking process, can negatively impact earnings. See Rates and Regulatory Proceedings for a discussion of recent rate case proceedings. Contractual Obligations Our largest contractual obligations as of December 31, 2023 consisted of: •Debt-related obligations for scheduled principal payments, other borrowings, and interest payments over the life of the debt. Debt obligations are included in our consolidated balance sheets. See Note 8 - Debt for additional information. •Centuri operating and finance leases are included in our consolidated balance sheets and represent multi-year obligations for buildings, land, equipment, and vehicles. See Note 2 - Regulated Operations Plant and Leases for additional information. •Southwest has gas purchase obligations that include fixed-price and variable-rate gas purchase contracts. Variable-rate contracts reflect minimum contractual obligations with estimation in pricing based on market information. Actual future variable-rate purchase commitments may vary depending on market prices at the time of delivery and values may change significantly from their estimated amounts. Certain other variable-rate contracts allow for variability in quantities for which associated demand charges are included in the gas purchase obligations based on the maximum daily quantities available under the contracts. Renewable natural gas purchase obligations, in which the [[GREPCENT_TABLE]] [["","39"]] [[/GREPCENT_TABLE]] commencement dates are not specifically determinable and the volumes and contract prices are inestimable until certain contract provisions are met, are excluded from gas purchase obligations. As of December 31, 2023, gas purchase obligations of $137 million are payable within the next 12 months. •Southwest has pipeline capacity and storage contracts for firm transportation service, both on a short- and long-term basis with several companies in all of its service territories, some with terms extending to 2044. Southwest also has interruptible contracts in place that allow additional capacity to be acquired should an unforeseen need arise. Costs associated with these pipeline capacity contracts, similar to gas purchase/supply arrangements, are a component of the cost of gas sold and are recovered from customers primarily through the PGA mechanisms. As of December 31, 2023 pipeline capacity and storage obligations of $72.8 million are payable within 12 months. •Other commitments associated with noncancellable obligations consist primarily of software licensing, equipment, outsourced processing subscriptions, and operating and/or maintenance agreements, as applicable. •Estimated funding for pension and other postretirement benefits during calendar year 2024 is $23 million. Funding amounts for years beyond 2024 are not currently known. Recently Issued Accounting Standards Updates The Financial Accounting Standards Board routinely issues Accounting Standards Updates. See Note 1 - Background, Organization, and Summary of Significant Accounting Policies for more information regarding these Accounting Standards Updates and their potential impact on the Company’s and Southwest’s financial position, results of operations, and disclosures. Application of Critical Accounting Policies and Estimates A critical accounting policy is one that is very important to the portrayal of the financial condition and results of a company, and requires the most difficult, subjective, or complex judgments of management. The need to make estimates about the effect of items that are uncertain is what makes these judgments difficult, subjective, and/or complex. Management makes subjective judgments about the accounting and regulatory treatment of many items and bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments. These estimates may change as new events occur, as more experience is acquired, as additional information is obtained, and as the operating environment changes. While management may make many estimates and judgments, many would not be materially altered, or provide a material impact to the financial statements taken as a whole, if different estimates, or means of estimation were employed. The following are accounting policies that are deemed critical to the financial statements. For more information regarding significant accounting policies, see notes to the consolidated financial statements. Regulatory Accounting Natural gas distribution operations are subject to the specific regulation of the ACC, PUCN, CPUC, or the FERC, as applicable. The accounting policies of the Company and Southwest conform to U.S. GAAP applicable to rate-regulated entities and reflect the effects of the ratemaking process. As such, the Company and Southwest are allowed to defer, as regulatory assets, costs that otherwise would be expensed, if it is probable that future recovery from customers (subject to our rate-regulated operations) will occur. Companies are also permitted to recognize, as regulatory assets, amounts associated with various revenue decoupling mechanisms, as long as the requirements of alternative revenue programs permitted under U.S. GAAP continue to be met. Management reviews the regulatory assets to assess their ultimate recoverability within the approved regulatory guidelines. If rate recovery is no longer probable, due to competition or the actions of regulators, write-off of the related regulatory asset (which would be recognized as current-period expense) is required. Regulatory liabilities are recorded if it is probable that revenues will be reduced for amounts that will be refunded to customers through the ratemaking process. The timing and inclusion of costs in rates is often delayed (regulatory lag) and results in a reduction of current-period earnings. Discontinuing the application of this method of accounting for regulatory assets and liabilities or changes in the accounting for our various regulatory mechanisms could significantly increase our operating expenses as fewer costs would likely be capitalized or deferred on the balance sheet, which could reduce our net income. Factors influencing application of this policy include decisions of regulatory authorities, implementation of new regulations or regulatory mechanisms, assessing the probability of the recoverability of deferred costs, and continuing to meet the criteria of a rate regulated entity for accounting purposes. Refer also to Note 5 - Regulatory Assets and Liabilities. Revenue Recognition - Utility Infrastructure Services Centuri generally has two types of agreements with its customers: MSAs and bid contracts. Our MSAs and bid contracts are characterized as either fixed-price, unit-price, or time-and-materials (“T&M”) based for revenue recognition purposes. Most of our contracts are considered to have a single performance obligation. Performance obligations related to fixed-price contracts are satisfied over time because our performance typically creates or enhances an asset that the customer controls. For fixed-price contracts, we recognize revenue as performance obligations are satisfied and control of the promised good and/or service is transferred to the customer by measuring the progress toward complete satisfaction of the performance obligation(s) using an input method. Input methods result in the recognition of revenue based on the entity’s effort to satisfy the performance [[GREPCENT_TABLE]] [["","40"]] [[/GREPCENT_TABLE]] obligation relative to the total expected effort to satisfy the performance obligation. Under the cost-to-cost method, costs incurred to-date are generally the best depiction of the transfer of control. For unit-price and T&M contracts, an output method is used to measure progress towards satisfaction of a performance obligation. Actual revenue and project costs can vary, sometimes substantially, from previous estimates due to changes in a variety of factors, including unforeseen circumstances not originally contemplated. These factors, along with other risks inherent in performing fixed-price contracts, may cause actual revenue and gross profit for a project to differ from previous estimates and could result in reduced profitability or losses on projects. Changes in these factors may result in revisions to estimates of costs and earnings. Revisions to estimates of costs and earnings during the course of work are reflected in the accounting period in which the facts requiring revision become known. At the time a loss on a contract becomes known or is anticipated, the entire amount of the estimated ultimate loss is recognized in the financial statements. Once identified, these types of conditions continue to be evaluated for each project throughout the project term and ongoing revisions in management’s estimates of contract value, contract cost and contract profit are recognized as necessary in the period determined. Accrued Utility Revenues Revenues related to the sale and/or delivery of natural gas are generally recorded when natural gas is delivered to customers. However, the determination of natural gas sales to individual customers is based on the reading of their meters, which is performed on a systematic basis throughout the month. At the end of each month, operating margin associated with natural gas service that has been provided but not yet billed is accrued. This accrued utility revenue is estimated each month based primarily on applicable rates, number of customers, rate structure, analyses reflecting significant historical trends, seasonality, and experience. The interplay of these assumptions can impact the variability of the accrued utility revenue estimates. Additionally, all Southwest rate jurisdictions have decoupled rate structures, limiting variability due to extreme weather conditions. Accounting for Income Taxes The Company is subject to income taxes in the U.S. and Canada. Income tax calculations require estimates due to known future tax rate changes, book to tax differences, and uncertainty with respect to regulatory treatment of certain property items. The asset and liability method of accounting is utilized for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Regulatory tax assets and liabilities are recorded to the extent management believes they will be recoverable from, or refunded to, customers in future rates. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Management regularly assesses financial statement tax provisions to identify any change in the regulatory treatment or tax-related estimates, assumptions, or enacted tax rates that could have a material impact on cash flows, financial position, and/or results of operations. Accounting for Pensions and Other Postretirement Benefits Southwest has a noncontributory qualified retirement plan with defined benefits covering substantially all employees hired on or before December 31, 2021. In addition, there is a separate unfunded supplemental retirement plan which is limited to officers hired on or before December 31, 2021. Pension obligations and costs for these plans are affected by the amount and timing of cash contributions to the plans, the return on plan assets, discount rates, and by employee demographics, including age, compensation, and length of service. Changes made to the provisions of the plans may also impact current and future pension costs. Actuarial formulas are used in the determination of pension obligations and costs and are affected by actual plan experience and assumptions about future experience. Key actuarial assumptions include the expected return on plan assets, the discount rate used in determining the projected benefit obligation and pension costs, and the assumed rate of increase in employee compensation. Relatively small changes in these assumptions (particularly the discount rate) may significantly affect pension obligations and costs for these plans. For example, a change of 0.25% in the discount rate assumption would change the pension plan projected benefit obligation by approximately $34 million, with no impact on future pension expense. A change of 0.25% in the employee compensation assumption would change the pension obligation by approximately $10 million and expense by $2 million. A 0.25% change in the expected asset return assumption would change pension expense by approximately $3 million (but would have no impact on the pension obligation). Beginning in 2024, a treasury futures overlay associated with interest rates is being implemented, intended to be responsive to changing discount rates over time and to retain at least a 90% funded ratio; however, there is no guarantee that the mechanism implemented will achieve these intentions. Given the recent interest rate environment, and despite escalations that took place earlier in the year, the discount rate applicable to the pension plan decreased from 5.25% (at the end of 2022) to 5.00% as of December 31, 2023. The methodology utilized to determine the discount rate was consistent with prior years. A decrease in the discount rate increases the pension obligation in the current year and expense in the year ahead. During the fourth quarter of 2023, the asset mix was adapted to a balanced portfolio between debt and equity securities. Southwest maintained the return on assets of 6.75% expected over the [[GREPCENT_TABLE]] [["","41"]] [[/GREPCENT_TABLE]] long term supported by available data. The salary escalation assumption was modestly increased from 3.25% to 3.50% given recent and expected salary changes and market conditions over a longer-term horizon. Southwest plans to substantially decrease its funding in 2024 compared to historical funding levels, which were intended to fund along the trajectory of benefits paid out of the plan. However, Southwest monitors conditions overall, and no less frequently than annually, assesses funding to ensure a funded ratio overall exists for retirees currently receiving benefits and for eligible employees hired before 2022. The pension is approximately 94% funded as of December 31, 2023, and due to the foregoing updated conditions, pension expense is expected to be higher in 2024 (approximately $7 million in total). That amount is higher than in 2023, but substantially lower than in recent earlier years when the discount rate reflected a very low-rate environment. Future years’ expense level movements (up or down) will continue to be greatly influenced by long-term interest rates (and starting in 2024, the related functioning of the treasury interest futures overlay), asset returns, and funding levels. Goodwill Goodwill is assessed for impairment annually each October, or more frequently, if events or changes in circumstances indicate an impairment may have occurred before that time. As permitted under accounting guidance on testing goodwill for impairment, we perform either a qualitative assessment or a quantitative assessment of each of our reporting units based on management’s judgment. Adjustment of values would only occur if conditions of impairment were deemed to be permanent. With respect to our qualitative assessments, we consider events and circumstances specific to us, such as macroeconomic conditions, industry and market considerations, cost factors, and overall financial performance, when evaluating whether it is more likely than not that the fair values of our reporting units are less than their respective carrying amounts. For any required quantitative assessments of goodwill, we generally determine the fair value of our reporting units using a weighted combination of the income approach (discounted cash flow model) and market multiple valuation techniques (market guideline transaction and market guideline public company method). Under the discounted cash flow method, we determine fair value based on the estimated future cash flows for each reporting unit, discounted to present value using a risk-adjusted industry weighted average cost of capital, which reflects the overall level of inherent risk for each reporting unit and the rate of return an outside investor would expect to earn. Under the market guideline transaction and market guideline public company methods, we determine the estimated fair value for each reporting unit by applying transaction multiples and public company multiples, respectively, to each reporting unit’s historical and projected results. The transaction multiples are based on observed purchase transactions for similar businesses adjusted for size, volatility, and risk. The public company multiples are based on peer group multiples adjusted for size, volatility, and risk. The assumptions we use in our quantitative assessments of goodwill (if required), including discount rates, market multiples, and estimates of terminal value, among others, are subject to uncertainty, and declines in the future performance of our reporting units and changing business conditions could result in the recognition of impairment charges, which could be significant. In our quantitative assessments, we generally perform a sensitivity analysis for discount rates and other factors, as applicable. The Company’s reporting units are the same as its segments for purposes of impairment evaluation. In December 2022, the Company announced the planned sale of MountainWest. The Board determined to sell MountainWest in order to simplify the business. As the consideration to be received for the sale was below the equity interests in MountainWest, the Company recorded held for sale losses, including a pre-tax goodwill impairment loss of $449.6 million in the fourth quarter of 2022. During the first quarter of 2023, the Company identified an approximately $21 million misstatement related to its initial estimation of the loss recorded upon reclassifying MountainWest as an asset held for sale during the year ended December 31, 2022. Consequently, the impairment loss for the year ended December 31, 2022 was understated by that amount, which was corrected in the first quarter of 2023. See Note 15 - Acquisitions and Dispositions for additional information. In connection with the annual goodwill assessment for 2023, we performed a qualitative impairment assessment of our reporting units, which indicated that the fair value of each reporting unit was greater than its carrying value, including goodwill. Accordingly, a quantitative goodwill impairment test was not required, and no goodwill impairment was recognized in 2023, other than the $21 million for the MountainWest sale, as noted above. Held for Sale The Company and Southwest recognize the assets and liabilities of a disposal group as held for sale in the period (i) they have approved and committed to a plan to sell the disposal group, (ii) the disposal group is available for immediate sale in its present condition, (iii) an active program to locate a buyer and other actions to sell the disposal group have been initiated, (iv) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. The disposal group that is classified as held for sale is initially measured at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held for sale criteria are met. Upon designation as held for sale, the Company stops recording depreciation expense and assesses the fair value of the disposal group less any costs to sell at each reporting period and until it is no longer classified as held for sale. [[GREPCENT_TABLE]] [["","42"]] [[/GREPCENT_TABLE]] In December 2022, the Company entered into a definitive agreement to sell 100% of MountainWest in an all-cash transaction to Williams for $1.5 billion in total enterprise value, subject to certain adjustments, which closed on February 14, 2023. The Company determined that MountainWest met the criteria to be characterized as held for sale as of December 31, 2022. See Note 15 - Acquisitions and Dispositions for additional information. In the first quarter of 2023, the Company and Southwest concluded that certain assets associated with its previous corporate headquarters met the criteria to be classified as held for sale. As a result, the Company and Southwest reclassified approximately $27 million from Other property and investments to Current assets held for sale on their respective Consolidated Balance Sheets at that time. During 2023, the Company and Southwest recorded total estimated losses of $5.2 million related to the former headquarters based upon an updated fair value less costs to sell, which is recorded in Other income (deductions). The sale was completed in January 2024. Business Combinations In accordance with U.S. GAAP, the assets acquired and liabilities assumed in an acquired business are recorded at their estimated fair values on the date of acquisition. The amount of goodwill initially recognized in a business combination is based on the excess of the purchase price of the acquired company over the fair value of the other assets acquired and liabilities assumed. The determination of these fair values requires management to make significant estimates and assumptions. For example, assumptions with respect to the timing and amount of future revenues and expenses associated with an asset are used to determine its fair value, but the actual timing and amount may differ materially, resulting in impairment of the asset’s recorded value. In some cases, the Company engages independent third-party valuation firms to assist in determining the fair values of acquired assets and liabilities assumed. Critical assumptions used to value the trade name and customer relationship intangibles include, but are not limited to, future expected cash flows of the acquired business, trademarks, trade names, customer relationships, technology obsolescence, attrition rates, royalty rates, and discount rates. In addition, uncertain tax positions and tax-related valuation allowances assumed in connection with a business combination are initially estimated at the acquisition date. These items are reevaluated quarterly, based upon facts and circumstances that existed at the acquisition date with any adjustments to the preliminary estimates being recorded to goodwill, provided that the Company is within the twelve-month measurement period allowed by authoritative guidance. Subsequent to the measurement period or the final determination of the estimated value of the tax allowance or contingency, changes to these uncertain tax positions and tax-related valuation allowances will affect the provision for income taxes in the Consolidated Statements of Income, and could have a material impact on the Company’s results of operations and financial position. Refer also to Note 15 - Acquisitions and Dispositions. Certifications The SEC requires the filing of certifications of the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of registrants regarding reporting accuracy, disclosure controls and procedures, and internal control over financial reporting as exhibits to periodic filings. The CEO and CFO certifications for the period ended December 31, 2023 are included as exhibits to this Annual Report on Form 10-K filed with the SEC. Forward-Looking Statements This annual report contains statements which constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (“Reform Act”). All statements other than statements of historical fact included or incorporated by reference in this annual report are forward-looking statements, including, without limitation, statements regarding the Company’s plans, objectives, goals, intentions, projections, strategies, future events or performance, negotiations, and underlying assumptions. The words “may,” “if,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “continue,” “forecast,” “intend,” “endeavor,” “promote,” “seek,” “pursue,” and similar words and expressions are generally used and intended to identify forward-looking statements. For example, statements regarding plans to refinance near-term maturities or renew credit facilities, to separate from Centuri by means of an IPO or a spin-off from the Company, by sell-down or other means or at all, those regarding operating margin patterns, customer growth, the composition of our customer base, price volatility, seasonal patterns, the ability to pay debt, the Company’s COLI strategy, the magnitude of future acquisition or divestiture purchase price true-ups or post-closing payments and related impairments or losses related thereto, replacement market and new construction market, including opportunities believed to be available to Centuri in the utility infrastructure replacement market, the purpose and intentions regarding investment in replacement gas plant infrastructure by Southwest, expectation that customers will continue service once established, the frequency of filing rate cases, impacts from pandemics, including on our employees, customers, business, financial position, earnings, bad debt expense, work deployment and related uncertainties, expected impacts of valuation adjustments associated with any redeemable noncontrolling interests, the profitability of storm work, mix of work, or absorption of fixed costs by larger infrastructure services customers including Southwest, the impacts of U.S. tax reform including disposition in any regulatory proceeding and bonus depreciation tax deductions, expectations of a tax-free nature of a separation of Centuri to the Company or its stockholders, the impact of recent Pipeline and Hazardous Materials Safety Administration rulemaking or proposed rulemaking, [[GREPCENT_TABLE]] [["","43"]] [[/GREPCENT_TABLE]] the amounts and timing for completion of estimated future construction expenditures, plans to pursue infrastructure programs and tracking mechanisms or programs under SB 151 legislation, forecasted operating cash flows and results of operations, net earnings impacts or recovery of costs from gas infrastructure replacements, mechanisms, or other mechanisms and surcharges, funding sources of cash requirements, amounts generally expected to be reflected in future period revenues from regulatory rate proceedings including amounts requested, stipulated or settled from recent and ongoing general rate cases or other regulatory proceedings, rates and surcharges, PGA administration, recovery and timing, and other rate adjustments, sufficiency of working capital and current credit facilities or the ability to cure negative working capital balances, bank lending practices, the Company’s views regarding its liquidity position, ability to raise funds and receive external financing capacity and the intent and ability to issue various financing instruments and stock under an at-the-market equity program or otherwise, future dividends or increases and the Board’s current payout strategy, pension and postretirement benefits, assumptions used and the expectations regarding the treasury futures overlay, certain impacts of tax acts, the effect of any other rate changes or regulatory proceedings, contract or construction change order negotiations, impacts of accounting standard updates, statements regarding future gas prices, gas purchase contracts and pipeline imbalance charges or claims related thereto, recoverability of regulatory assets, the impact of certain legal proceedings or claims, and the timing and results of future rate hearings, including any ongoing or future general rate cases and other proceedings, and statements regarding pending approvals are forward-looking statements. All forward-looking statements are intended to be subject to the safe harbor protection provided by the Reform Act. A number of important factors affecting the business and financial results of the Company could cause actual results to differ materially from those stated in the forward-looking statements. These factors include, but are not limited to, customer growth rates, conditions in the housing market, inflation, interest rates and related government actions, sufficiency of labor markets and ability to timely hire qualified employees or similar resources, acquisition and divestiture decisions including prices paid or received, adjustments, indemnifications, or commitments related thereto, and their impacts to impairments, write-downs, or losses or expenses generally, the impacts of pandemics including that which may result from a restriction by government officials or otherwise, including impacts on employment in our territories, the health impacts to our customers and employees, the ability to collect on customer accounts due to the suspension or lifted moratorium on late fees or service disconnection or escalation in customer rates or otherwise in any or all jurisdictions, the ability to obtain regulatory recovery of related costs, the ability of the infrastructure services business to conduct work and the impact of a delay or termination of work, and decisions of Centuri customers (including Southwest) as to whether to pursue capital projects due to economic impacts resulting from a pandemic or otherwise, or to engage Centuri or its competitors for new or replacement work, the ability to recover and timing thereof related to costs associated with the PGA mechanisms or other regulatory assets or programs, the effects of regulation/deregulation, governmental or regulatory policy regarding pipeline safety, greenhouse gas emissions, natural gas, including potential prohibitions on the use of natural gas by customers or potential customers, including related to electric generation or natural gas appliances, or regarding alternative energy, the regulatory support for ongoing infrastructure programs or expansions, the timing and amount of rate relief, the impact of other regulatory proceedings, the timing and methods determined by regulators to refund amounts to customers resulting from U.S. tax reform, changes in rate design, impacts of other tax regulations, including impacts to rate base or otherwise from IRS gas industry guidelines and the safe harbor method related to tax repairs, variability in volume of gas or transportation service sold to customers, changes in gas procurement practices, changes in capital requirements and funding, the impact of credit rating actions and conditions in the capital markets on financing costs, changes in construction expenditures and financing, levels of or changes in operations and maintenance expenses, or other costs, including fuel costs and other costs impacted by inflation or otherwise, geopolitical influences on the business or its costs, effects of pension or other postretirement benefit expense forecasts, including related to the treasury futures overlay mechanism, plan modifications, or other conditions, accounting changes and regulatory treatment related thereto, currently unresolved and future liability claims and disputes, changes in pipeline capacity for the transportation of gas and related costs, results of Centuri bid work, the impact of weather on Centuri’s operations, projections about acquired business’ earnings, or those that may be planned, future acquisition-related costs, differences between the actual experience and projections in costs to integrate or stand-up portions of newly acquired business operations, impacts of changes in the value of any redeemable noncontrolling interests if at other than fair value, Centuri utility infrastructure expenses, differences between actual and originally expected outcomes of Centuri bid or other fixed-price construction agreements, outcomes from contract and change order negotiations, ability to successfully procure new work and impacts from work awarded or failing to be awarded from significant customers (collectively, including from Southwest) or related to significant projects, the mix of work awarded, the result of productivity inefficiencies from regulatory requirements, customer supply chain challenges, or otherwise, delays or challenges in commissioning individual projects, acquisitions and management’s plans related thereto, the ability of management to successfully finance, close, and assimilate any acquired businesses, the timing, form, and ability of management to successfully consummate the Centuri separation, the impact on our stock price or our credit ratings due to undertaking or failing to undertake acquisition or divestiture activities or other strategic endeavors, the impact on our stock price, costs, actions or disruptions or continuation thereof related to significant stockholders and their activism, competition, our ability to raise capital in external financings, our ability to continue to remain within the ratios and other limits subject to our debt covenants, and ongoing evaluations in regard to goodwill, including any impacts from separation deployment or partial separation or any [[GREPCENT_TABLE]] [["","44"]] [[/GREPCENT_TABLE]] other change impacting aggregation of reporting units in assessing goodwill for impairment, evaluations of other intangible assets, and of optimization initiatives or deployments or uncompleted deployments thereof. In addition, the Company can provide no assurance that its discussions regarding certain trends or plans relating to its financing and operating expenses will continue, proceed as planned, or cease to continue, or fail to be alleviated, in future periods. For additional information on the risks associated with the Company’s business, see Item 1A. Risk Factors and Item 7A. Quantitative and Qualitative Disclosures About Market Risk in this Annual Report on Form 10-K for the year ended December 31, 2023. All forward-looking statements in this annual report are made as of the date hereof, based on information available to the Company and Southwest as of the date hereof, and the Company and Southwest assume no obligation to update or revise any of their forward-looking statements even if experience or future changes show that the indicated results or events will not be realized. We caution you to not rely unduly on any forward-looking statement(s).