Southwest Gas Holdings, Inc. · NYSE:SWX
Southwest Gas — Proxy Contest (April 2022)
51 slides from Southwest Gas's proxy contest presentation, Apr 12, 2022
Slide 1: Southwest Gas Holdings, Inc. New Board Plan Spring 2022
Southwest Gas Holdings, Inc. (“SWX”) New Board Plan Spring 2022
Slide 2: Table of Contents
Table of Contents • Executive Summary • How We Got Here • Management’s “New” Old Plan • New Board Plan • The Choice is Yours • Appendix
Slide 3: Executive Summary
Executive Summary WE BELIEVE OUR NEW BOARD WILL IMPLEMENT A TURNAROUND AIMED AT REVERSING SWX’S MULTI-YEAR OPERATIONAL AND SHARE PRICE UNDERPERFORMANCE BY MONETIZING ASSETS, RETIRING HOLDING COMPANY DEBT AND IMPROVING UTILITY ROE. • SWX’s share price has underperformed gas peers by 72% since Hester
Slide 4: Executive Summary
Executive Summary WE BELIEVE OUR NEW BOARD WILL IMPLEMENT A TURNAROUND AIMED AT REVERSING SWX’S MULTI-YEAR OPERATIONAL AND SHARE PRICE UNDERPERFORMANCE BY MONETIZING ASSETS, RETIRING HOLDING COMPANY DEBT AND IMPROVING UTILITY ROE. • If our slate of highly qualified and independent nominees is electe
Slide 5: How We Got Here: Long Term Share Price Underperformance
How We Got Here: Long Term Share Price Underperformance SINCE HESTER BECAME CEO, SWX’S SHARE PRICE MATERIALLY UNDERPERFORMED PEERS. Regulated Gas LDC Peers 140% 120% 100% 80% 60% 40% 20% 0% (20%) (40%) Apr 15 Jan 16 Oct 16 Jul 17 Apr 18 Jan 19 Oct 19 Jul 20 Apr 21 Jan 22 SWX ATO NI OGS Note: As of 4
Slide 6: Long-Term Share Price Underperformance vs Utility Services Peers
How We Got Here: Long-Term Share Price Underperformance EVEN MORE SHOCKING WHEN CONSIDERING PERFORMANCE OF UTILITY SERVICES PEERS! Utility Services Peers 300% 250% 200% 150% 100% 50% 0% (50%) Jan-20 Apr-20 Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 SWX PWR MYRG Note: As of 4/8/22. 6
Slide 7: Return on Equity (ROE) Underperformance
How We Got Here: Return on Equity (“ROE”) Underperformance SWX HAS THE LOWEST ROE OF UTILITIES IN ARIZONA AND NEVADA. THERE IS NO JUSTIFICATION EXCEPT FOR MANAGEMENT. (1) SWX adjusted for excess COLI income and 18% tax rate. Unadjusted ROE of 7.5% and 7.8% in 2020 and 2021 as per SWX. 7
Slide 8: Excessive General and Administrative Costs
How We Got Here: Excessive General and Administrative Costs G&A HAS GROWN 42% SINCE HESTER BECAME CEO. THIS SEEMS HIGH! Utility G&A Hester’s $50M of Added Cost 2021 not yet available. 8
Slide 9: G&A Growth Far In Excess of Peers
How We Got Here: G&A Growth Far In Excess of Peers SWX’s G&A INCREASE OF 42% IS MUCH HIGHER THAN PEER NV AND AZ UTILITIES WHO GREW AT ~10% OR LESS. SOME IS LIKELY LEGITIMATE, BUT.... 2021 not yet available. 9
Slide 10: Inappropriate Expenses
How We Got Here: Inappropriate Expenses IN 2018 & 2020, NEVADA STAFF FOUND THAT SWX WAS TRYING TO PASS ON MANICURES, GOLF MEMBERSHIPS AND A MILLION-DOLLAR HOME TO CUSTOMERS…. “Staff believes SWG needs to change its culture to be a better steward of ratepayer money, which begins by holding SWG’s Seni
Slide 11: Continuing Inappropriate Expenses
How We Got Here: Continuing Inappropriate Expenses IN 2022 THE BEHAVIOR CONTINUED. WHEN WILL SWX LISTEN TO REGULATORS AND DISCONTINUE OBJECTIONABLE BEHAVIOR? “Recommend that the Commission disallow $115,000k associated with the purchase and installation for the large screen monitor housed at the lob
Slide 12: M&A Diversification
How We Got Here: M&A Diversification WHY IS SWX BUYING & DIVERSIFYING WHEN ALL OTHER UTILITIES ARE SELLING NON-CORE ASSETS? Buyers Sellers 12
Slide 13: Credit Rating Downgrades
How We Got Here: Credit Rating Downgrades DIVERSIFICATION HAS COSTS, DEBT-HEAVY ACQUISITIONS HAVE LED TO CREDIT RATING DOWNGRADES. Moody’s “The utility’s CFO pre-W/C to debt ratio has fallen from 20% in 2017 to below 01/29/21 15% in both 2019 and 2020, and we do not expect it to recover materially i
Slide 14: Questar Pipelines Deal
How We Got Here: Questar Pipelines Deal OVER-PRICED, UNDER-DILIGENCED, NO SYNERGIES AND DILUTIVE TO GROWTH. THE QUESTAR DEAL WAS (AND REMAINS) BAD FOR SWX CUSTOMERS AND SHAREHOLDERS. • Why pay $300M more than Warren Buffet? He had so many synergies that his deal was blocked due to anti-trust. SWX is
Slide 15: SWX Overpaid for Questar
How We Got Here: SWX Overpaid for Questar WE BELIEVE SWX OVERPAID FOR QUESTAR BY AT LEAST $300 MILLION. • On October 5th, SWX paid $1,975 million to acquire Questar from Dominion • We believe SWX dramatically overpaid for the asset o In July 2020, Berkshire Hathaway agreed to buy Questar for $1,675
Slide 16: There Never Was A Strategic Rationale for Questar
How We Got Here: There Never Was A Strategic Rationale for Questar SWX BOUGHT QUESTAR BECAUSE IT GENERATES THE CASH TO FUND MORE EMPIRE BUILDING. WE SEE NO OTHER REASON. • Shortly after the Questar deal was announced, SWX management defended the deal in a meeting with Citi. Citi’s published summary
Slide 17: Questar does not enhance the E in ESG
How We Got Here: Questar does not enhance the “E” in ESG WE BELIEVE SWX’S CLAIMS THAT QUESTAR IS “E” ENHANCING IS GREENWASHING. • Management claims the Questar deal “… accelerates our energy transition strategy by strengthening our ability to provide affordable, low carbon energy to customers while
Slide 18: More Compensation For Underperformance
How We Got Here: More Compensation For Underperformance DESPITE THE UNDERPERFORMANCE SWX MANAGEMENT HAS DECIDED TO PAY THEMSELVES MORE. COMPENSATION HAS GROWN AT A 19% CAGR SINCE 2018. Hester’s compensation increased 50% from 2018 to 2021! (1) Excludes “Change in Pension Value and Non-Qualified Defe
Slide 19: More Compensation For Underperformance
How We Got Here: More Compensation For Underperformance [ ] SWX’S SHARE PRICE INCREASED BY 15% SINCE HESTER BECAME CEO(1). HESTER’S COMPENSATION INCREASED BY 132% OVER THAT TIME! (1) Measured from 04/01/15 to 10/1/21, the day prior to Questar deal leaking. 19
Slide 20: Recent Timeline
How We Got Here: Recent Timeline IEP HAS PROPOSED IDEAS, FINANCING AND OFFERS FOR SHAREHOLDERS. THE INCUMBENT BOARD GREETS WITH SILENCE AND A POISON PILL.
Slide 21: Corporate Waste
How We Got Here: Corporate Waste SWX’S SHARE SALE ON 3/28 CAUSED $70M OF VALUE DESTRUCTION OR ~$1 PER SHARE. • On the morning of 03/28, SWX rejected our tender offer price at $82.50 • Later that day, SWX launched a $400 million “public” offering that priced at $74 per share • We never received a res
Slide 22: Management's New Old Plan: Centuri Separation
Management’s “New” Old Plan: Centuri Separation MANAGEMENT’S PLAN IS FAR FROM OPTIMIZED. • After many years of perpetual “optionality,” SWX begrudgingly agreed to separate Centuri (likely only to defend against our proxy contest) • Management said they would explore various options for Centuri but i
Slide 23: Management's New Old Plan: Continue Empire Building
Management’s “New” Old Plan: Continue Empire Building CEO JOHN HESTER ADMITS HE IS ALWAYS LOOKING TO BUY ASSETS BUT ISN’T LOOKING TO SELL SWX. • On the 4Q21 Earnings Call, John Hester reveals the Board’s true thinking regarding M&A and shareholder value CEO: “So we’re not ready to pull the plug on b
Slide 24: Management's New Old Plan: Questar Already Underperforming
Management’s “New” Old Plan: Questar Already Underperforming THE INCUMBENT BOARD IS ASKING US TO TRUST THEM YET THE QUESTAR DEAL HAS SEEN EBITDA DROP BY 7% SINCE OCTOBER! • In the SWX presentation announcing the Questar deal, management highlighted that Questar was “stable” pointing to below EBITDA
Slide 25: Management's New Old Plan: No Plan to Improve ROE
Management’s “New” Old Plan: No Plan to Improve ROE SWX HAS PROVIDED NO PLAN TO REACH PEER ROE LEVELS. SWX CLAIMS IMPROVING RESULTS BUT ALL GAINS ARE UNSUSTAINABLE. • Management was only able to deliver an improved ROE in 2021 due to an unusually low tax rate of 13.6% (2019-2020 at ~18%) and higher
Slide 26: Management's New Old Plan: What is It?
Management’s “New” Old Plan: What is It? SWX’S PLAN = BUZZWORDS. • In response to one of our proposals SWX stated the below. What does this mean? “The Southwest Gas Board and management team are executing a clear and detailed strategy to create value and are committed to taking actions consistent wi
Slide 27: Management's New Old Plan: Still Not Working
Management’s “New” Old Plan: Still Not Working SWX’S SHARE PRICE HAS UNDERPERFORMED ITS NATURAL GAS UTILITY PEERS BY ~22% SINCE THE DAY BEFORE THE QUESTAR DEAL WAS LEAKED. • We believe SWX would have underperformed even more had it not been for the proxy fight and tender offer
Slide 28: New Board Plan: Experienced Director Slate
New Board Plan: Experienced Director Slate EXPERIENCED. QUALIFIED. DIVERSE. INDEPENDENT. • Ten new directors including former Chairs, CEOs, CFOs, EVPs, GMs, MDs, FERC and State Regulatory Commissioners • Multiple nominees are qualified to be an interim or permanent CEO • Majority of Board leadership
Slide 29: New Board Plan: Bios
New Board Plan: Bios EXPERIENCED. QUALIFIED. DIVERSE. INDEPENDENT. Nora Mead Brownell. Former FERC Commissioner. Former PA PUC member. President of National Association of Regulatory Utility Commissioners. Serves as Director of Sunnova Energy International Inc. (solar & energy storage) and Hennessey
Slide 30: New Board Plan: Bios
New Board Plan: Bios EXPERIENCED. QUALIFIED. DIVERSE. INDEPENDENT. Andrew Evans. Former CFO of Southern Company (electric and gas utility). At various times served as Chairman/President/CEO/COO of AGL Resources (largest publicly traded gas distribution company). Serves as a Director of private compa
Slide 31: New Board Plan: Bios
New Board Plan: Bios EXPERIENCED. QUALIFIED. DIVERSE. INDEPENDENT. Walter Higgins. Served as Chairman of South Jersey Industries (gas utility), CEO of Puerto Rico Electric Power Authority (electric utility), Chairman/President/CEO of Sierra Pacific Resources (electric and gas in NV), Chairman/Presid
Slide 32: New Board Plan: Bios
New Board Plan: Bios EXPERIENCED. QUALIFIED. DIVERSE. INDEPENDENT. Henry Linginfelter. Retired as EVP of Southern Company Gas, responsible for day-to-day operations of the largest gas utility in the US, serving approximately 4.5 million customers in seven gas companies across seven states Director Q
Slide 33: New Board Plan: Bios
New Board Plan: Bios EXPERIENCED. QUALIFIED. DIVERSE. INDEPENDENT. Jesse Lynn. General Counsel of Icahn Enterprises L.P. and Chief Operating Officer of Icahn Capital LP. Serves as a Director of FirstEnergy Corp. (electric utility), Xerox Holdings Corp. (print and digital documents) and Conduent Inc.
Slide 34: New Board Plan: Independent Directors
New Board Plan: Independent Directors EIGHT OF THE TEN DIRECTOR NOMINEES ARE INDEPENDENT OF IEP. • No prior affiliation or overlapping Boards with IEP • No compensation agreements with IEP • All ten of the directors will be fiduciaries to SWX stockholders • The New Board Plan described herein has be
Slide 35: New Board Plan: Commitment to Safety
New Board Plan: Commitment to Safety THERE IS NO HIGHER PRIORITY THAN THE SAFETY OF OUR CUSTOMERS, OUR EMPLOYEES AND THE PUBLIC. • Our directors would commit to maintaining existing safety practices (at a minimum) and would bring their combined expertise to ensure that SWG is doing all that it can t
Slide 36: New Board Plan: Work Cooperatively with Regulators
New Board Plan: Work Cooperatively with Regulators UNLIKE CURRENT MANAGEMENT, WE WILL NOT UNILATERALLY STOP SAFETY PROGRAMS. • The Nevada PUC filed a report on January 21, 2022 discussing SWX’s decision to unilaterally disobey a commission order to remove certain plastic pipe “In Summary, one to two
Slide 37: New Board Plan: Work Cooperatively with Regulators
New Board Plan: Work Cooperatively with Regulators SWX MANAGEMENT APPEARS TO THINK IT’S ENTITLED TO FAVORABLE TREATMENT BY THE PUCS, WHILE MODERN UTILITY MANAGEMENT TEAMS KNOW THAT IT MUST BE EARNED. • In February 2022, SWX lost its appeal in a Nevada Supreme Court case whereby SWX sued the Nevada P
Slide 38: New Board Plan: First Days
New Board Plan: First 100 Days HIRE ADVISORS TO EXPLORE BEST PATHS TO UNLOCK VALUE AT SERVICES AND PIPELINE. NEW OVERSIGHT TO BEGIN TURNAROUND AT UTILITY. SWX Corporate • Interim CEO selection (if needed) • Evaluation and retention of existing senior management • Add AZ director to Board • Select Bo
Slide 39: New Board Plan: Long-Term Plan
New Board Plan: Long-Term Plan THREE ENTIRELY SEPARATE COMPANIES WITH OPTIMIZED BALANCE SHEETS TO MAXIMIZE GROWTH AND FOCUS. SWX Corporate • Paydown all holdco debt • Cash buffer for renewable natural gas and green hydrogen investments Utility Services Pipeline • Install new leadership where • Likel
Slide 40: New Board Plan: Utility Improvements
New Board Plan: Utility Improvements FRESH EYES, INDUSTRY BEST PRACTICES AND CONTINUOUS IMPROVEMENT. • Why did G&A increase 42% since Hester became CEO? • With ~2% customer growth, why is OPEX per customer not declining? • How does adding holdco leverage, declining credit ratings and non-core assets
Slide 41: New Board Plan: Long-Term Cost Improvement
New Board Plan: Long-Term Cost Improvement SWX’S OPEX PER CUSTOMER IS FAR FROM INDUSTRY LEADERS. If SWX bridged half the gap to ATO, customer bills would be $28 lower per year! (1) Excludes Fuel Costs, Depreciation and Amortization and Taxes Other Than Income. 41
Slide 42: New Board Plan: Improve the Balance Sheet
New Board Plan: Improve the Balance Sheet IF SWX MONETIZED QUESTAR AND/OR CENTURI, IT COULD RETIRE ALL HOLDCO DEBT AND HAVE $2 BILLION OF CASH TO FUTURE PROOF THE BUSINESS. • We believe our Director slate would likely explore a monetization of both Questar Pipelines and Centuri • Assuming a sale of
Slide 43: New Board Plan: Potential Upside
New Board Plan: Potential Upside IF SHAREHOLDERS ACT, SIGNIFICANT SHARE PRICE APPRECIATION IS POSSIBLE. IF WE DO NOT, CONTINUED HIGH-RISK LOW-RETURN ACTIONS WILL INEVITABLY LEAD TO CALAMITY. (1) Current as of 4/8/22. See Appendix for supporting calculations. 43
Slide 44: The Choice is Yours
The Choice is Yours THE INCUMBENT BOARD WILL ENSURE THAT YOU RECEIVE MORE OF THE SAME (OR WORSE). • If allowed to stay in office, the incumbent Board and management team at SWX will continue with its highly unprofitable and value-destructive record of overspending and empire building • And, if a sha
Slide 45: The Choice is Yours
The Choice is Yours VOTING FOR OUR SLATE WILL UNLOCK SIGNIFICANT VALUE AT SWX. • You are offered two profitable options: o Vote FOR the election of our nominees and, if you are so inclined, sell your shares in the IEP tender offer at $82.50 per share; or o Vote FOR the election of our nominees, reta
Slide 46: Appendix: IEP & FirstEnergy Case Study
Appendix: IEP & FirstEnergy (“FE”) Case Study • 02/18/21: FE announced that IEP was a shareholder • 03/16/21: FE announced that two Icahn executives (the same two nominated at SWX) have joined the Board. There was no public dispute • Since our involvement, FE sold a 20% stake in a business unit at r
Slide 47: Appendix: Perpetual Optionality
Appendix: Perpetual “Optionality” • Management has been talking about “optionality” at Centuri since 2014 • 2Q14 Earnings Call: o Analyst: “are you being approached by any private equity or any other type of bankers regarding doing something creative with that business” o Prior CEO: “And we think th
Slide 48: Appendix: Valuation Supporting Materials
Appendix: Valuation Supporting Materials Questar Pipeline Purchase Price 1,975 1,975 Memo {-): Overpayment 300 300 IEP Imp lied Questar Value 1,675 {-): Assumed OpCo Debt 430 430 Buffet Deal Price 1,730 Equity 1,245 1,245 Centuri 2022 EBITOA 325 325 <= SWX 5uide $292-$336 million Enterprise Value /
Slide 49: Appendix: Valuation Supporting Materials
Appendix: Valuation Supporting Materials Low High Assuming 100% Sa le of Centuri Centuri Equity Value 1,699 2,213 Questar Equity Value 1,245 1,245 Cash Proceeds from Sale 2,944 3,458 {-): Holding Company Debt 1,21S 1,21S Excess Cash 1,730 2,243 Average of Excess cash 1,986 Assuming 20% Sale of Centu
Slide 50: Additional Information; Participants in the Solicitation
Additional Information; Participants in the Solicitation Additional Information and Where to Find It; Participants in the Solicitation and Notice to Investors THE SOLICITATION DISCUSSED HEREIN RELATES TO THE SOLICITATION OF PROXIES FOR USE AT THE 2022 ANNUAL MEETING OF STOCKHOLDERS OF SOUTHWEST GAS
Slide 51: Forward-Looking Statements; Special Note Regarding Presentation
Forward-Looking Statements; Special Note Regarding Presentation Forward-Looking Statements Certain statements contained in this presentation are forward-looking statements including, but not limited to, statements that are predications of or indicate future events, trends, plans or objectives. Undue