Earnings Call Transcript - SWX Q3 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Southwest Gas Holdings 2021 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. I would now like to turn the conference over to Greg Peterson, Senior Vice President and Chief Financial Officer. Please go ahead.

Greg Peterson, CFO

Thank you, everyone, for joining us. And welcome to Southwest Gas Holdings third quarter 2021 earnings conference call. My name is Greg Peterson. I'm the Senior Vice President and CFO of the company. Ken Kenny, our Vice President of Finance and Treasurer, is ill today and unable to join us. Our conference call is being broadcast live over the Internet. For those of you who would like to access the webcast, please visit our website and click on the Conference Call link. We have slides on the Internet, which can be accessed to accompany our discussion. Today, we have Mr. John P. Hester, President and Chief Executive Officer; Ms. Karen S. Haller, Executive Vice President, Chief Legal and Administration Officer; and Mr. Justin L. Brown, Senior Vice President, General Counsel of Southwest Gas Corporation, along with other members of senior management to provide a brief overview of the company's operations and results for the period ended September 30, 2021, and an update to our earnings per share guidance for 2021. The company will also address certain factors that may impact this coming year's earnings and provide longer-term guidance for 2022. Further, I want to remind you that some of the information that will be discussed today contains forward-looking statements. These statements are based on management's assumptions, which may or may not come true. You should refer to the language on Slide 3 of this presentation, as well as in the press release and our SEC filings for a description of the factors that may cause actual results to differ from our forward-looking statements. All forward-looking statements are made as of today, and we assume no obligation to update any such statement. With that said, I'd like to turn the call over to John.

John Hester, CEO

Thanks, Greg. Turning to Slide number 4. We have an outline for today's call. I'll start reviewing some highlights and recapping the investment thesis for our shareholders at Southwest Gas Holdings. Greg will follow with a review of our financial results for the quarter, including breakdown detail for each business segment. Justin will review our numerous regulatory initiatives and activities. Karen will cover recent customer growth, liquidity and capital expenditures, dividends, rate base growth and expectations for 2021 and beyond. I will then wrap up our presentation, recapping the value proposition we believe Southwest Gas Holdings offers its shareholders. Moving to Slide number 5, we present a variety of highlights for our combined businesses. First, from a holdings perspective, last month, we announced the planned acquisition of Questar Pipelines. We're very excited about this planned acquisition, which is forecasted to be accretive to earnings in 2022. Questar Pipelines is a compelling, high-return suite of assets with unique strength and stability that is both commercially and geographically adjacent to our existing portfolio. The acquisition will significantly increase and diversify our regulated business mix and allow new opportunities in the energy transition with a business that has a robust stream of steady contracted earnings and cash flows. We're also excited to announce today the addition of 2 new Board members effective January 1. We’re happy to welcome E. Renae Conley and Carlos Ruisanchez to our Board at the beginning of next year as we anticipate the retirements of 2 valued Board members, Michael Melarkey and Stephen Comer at our May Annual Meeting. The addition of these 2 new expertly qualified directors is the culmination of a methodical, thoughtful planned Board refreshment effort that began last year, which was anticipated to bolster our Board for the new year in advance of expected retirements. Also separately, today, we filed a 14D9 response to a tender offer for Southwest Gas Holdings shares presented last month. The tender offer seeks to secure shares of Southwest Gas Holdings at a price of $75 a share, which, in consultation with our outside investment bankers and attorneys, our Board has concluded is inadequate. We won't be going into the numerous factors the Board considered in deciding to reject the tender offer on this call, but all that content can be found in the response to the tender offer that we filed today with the Securities and Exchange Commission. We're also focused on the promising role our company can play in the energy transition as our businesses are poised to support the delivery of reliable and affordable energy services, both now and for decades to come. Next, at our natural gas distribution company, we continue to see strong growth across our service territory, having added 37,000 net new customers over the past year. On the regulatory front, we had a very promising decision from the Arizona Corporation Commission just this past week, authorizing the recovery of $74 million in margin related to our customer-owned yard line and vintage steel pipe replacement programs. Also, third quarter operating margin increased by $18 million or 10%. We continued executing on our sustainability goals, as seen with our partnership with Pima County in Arizona supporting the harvesting of renewable natural gas at the now operational Tres Rios RNG processing facility, walking the talk on the energy transition with our announced investment as a founding partner in the Energy Capital Ventures Fund. Meanwhile, at our Centuri Infrastructure Services business, we continue our high-quality acquisition track record with the completed acquisition during the quarter of Riggs Distler, expanding Centuri's geographic footprint and service offering suite to include the provision of unionized electrical contracting services, 5G, offshore wind and more. Relatedly, we were excited to see Riggs Distler being selected as general contractor for the 880-megawatt Sunrise wind offshore wind farm. Overall, we saw Centuri's third quarter revenues increase by $52 million or 9%. And we're eager to explore the opportunities that Centuri may have to capitalize on as part of the federal government's infrastructure spending plans.

Greg Peterson, CFO

Thank you, John. As a reminder, our earnings press release and quarterly report on Form 10-Q were made available this morning, and I invite you to read those documents for additional details of our quarterly results and outlook for 2021. For today's call, let's start with a summary of total company operating results on Slide 11. For the 12 months ended September 30, 2021, net income was $234 million or $4.02 per diluted share compared to net income in the prior year period of $220 million or $3.97 per diluted share. For the third quarter of 2021, we reported a consolidated net loss of $0.19 per share compared to third quarter EPS of $0.32 in 2020. Not presented here but detailed in the earnings press release is adjusted EPS of $0.05 per share in the current quarter, which reflects the impacts of two items: one, $13 million or $0.18 per share of transaction cost for the Riggs Distler acquisition; and two, a $5 million or $0.06 per share legal reserve at the utility. The next several slides detail results by segment. Let's start with the third quarter natural gas operation results on Slide 12. This waterfall chart shows the components of the change in natural gas operations results between quarters. As a reminder, due to the seasonality of this business, utility losses during the third quarter are expected. As I previously mentioned, current quarter results reflect the impact of a $5 million legal reserve. Operating margin increased nearly $18 million, including $13 million associated with rate relief in all 3 states as well as $2 million from customer growth, reflecting 37,000 first-time meter sets over the past 12 months. The increase in O&M expenses includes $2.2 million of incremental temporary staffing, training and stabilization costs associated with our new customer information system, which we implemented in May 2021.

Justin Brown, SVP, General Counsel

Thank you, Greg. Slide 18 highlights our most recent rate case outcomes that will contribute to an increase in revenues of approximately $66 million during the course of calendar year 2021. The continuing theme throughout each of our rate cases has been the partnerships we maintain with each of our commissions to support the very attractive growth profile of the utility. As part of our most recent rate case decisions, Arizona saw a 46% increase in rate base. Nevada, a 20% increase, which was also on the heels of an over 30% increase in 2018 and a 73% increase in California. This growth in rate base would simply not be possible without strong collaborative relationships with each of our commissions.

Karen Haller, EVP, Chief Legal and Administration Officer

Thanks, Justin. I’ll start on Slide 22. Our regulated utility customers give us high marks for customer satisfaction. In a survey conducted through a third-party research firm, our customer satisfaction scores were an impressive 95% on a 12-month rolling average. We are proud to rank number 1 for utility customer satisfaction studies conducted by an independent leading national consumer insights firm. For two years running, we were ranked first among gas utilities in the West region for business customer satisfaction. Similarly, we were ranked first in the West region for residential customer satisfaction for 2020. 2021 results are yet to be published. We were also ranked number 1 in the West for utility digital experience, affirming the enhancements we made to our digital channels, including the implementation of a state-of-the-art customer information system this year. This system enables us to deliver a higher level of service to our customers. These survey results are a testament to the excellent quality of service we provide and a primary reason why 91% of customers surveyed in Arizona, California, and Nevada indicated that they want natural gas in their homes.

John Hester, CEO

Thanks, Karen. Wrapping up on Page 31, we believe that Southwest Gas Holdings offers a compelling value proposition for our investors. We are strong and growing and positioning for the future. Our natural gas operations are experiencing strong customer growth and opportunities for capital investment and rate base growth while maintaining affordability of service to customers. We will continue to pursue successful regulatory partnerships on the many initiatives described earlier and look for expanded opportunities to help address national goals for greenhouse gas emission reductions. All of this with anticipation of a strong growth trajectory for increased earnings and dividends for our shareholders. Meanwhile, at our Centuri Infrastructure Services business segment, we’ll continue to grow our business revenues, earnings, cash flows, customer base, service offerings and geographic footprint to maximize the value of this business for our shareholders.

Greg Peterson, CFO

Thanks, John. That concludes our prepared presentation. For those who have accessed our slides, we have also provided an appendix with slides that include other pertinent information about Southwest Gas Holdings and its two business segments. These slides can be reviewed at your convenience. Our operator, Alexander, will now explain the process for asking questions.

Operator, Operator

We have your first question from Richard Sunderland with JPMorgan.

Richard Sunderland, Analyst

Just wanted to start maybe with the Questar acquisition. What are your latest thoughts on timing and approach to the financing there?

John Hester, CEO

Richard, I'll start out. This is John, and then maybe Greg can add some commentary on the end of that. Our anticipation is that this is on track to close by the end of this year. As you may know from our previous discussions, we do have a 364-day loan that we have access to. And we're evaluating numerous different financing options that we've been looking at. We hope to do a fair amount of that in the first quarter. It's possible with blackout periods, etc., that some of that may get done in the second quarter. And it’s even possible that some of that gets done this calendar year. So Greg, any other color on that?

Greg Peterson, CFO

I think you've covered that, John. We are certainly looking at the equity markets as well as the debt markets. We're finding the efficient and best way to accomplish that long-term financing. We are glad that we have that flexibility of the term loan that provides us the ability to seek the best financing for this transaction.

Richard Sunderland, Analyst

Understood. And have you thought about the stake sale at Centuri in light of the new considerations that you outlined around value there as a source of funds, whether for Questar or just overall?

John Hester, CEO

Sure, Richard. This is John again. That is one of the things that we're taking a look at. It's something that our Board has looked at probably annually for the past several years. And it certainly would be one way of accomplishing some of that financing. So that definitely is an option on the table that we're looking at.

Kody Clark, Analyst

First, kind of a housekeeping item, Greg, can you add a little bit more color on the drivers for Centuri's trailing 12-month EBITDA?

Greg Peterson, CFO

Yes. Kody, this is Greg. The numbers are relatively flat between the 12-month periods. There was some additional storm work that occurred in the prior year 12-month period versus this year. Overall, Centuri is gearing up for the expansion in their various systems. We expect tremendous growth to start Q4 going forward.

Justin Brown, SVP, General Counsel

Kody, it's Justin. It's a great question. It's something we're focused on as we're putting the filing together to make sure that we emphasize the various cost savings, cost management initiatives that have been going on that contribute to managing the reasonable level of our bills because we recognize that given the capital investments that they put upward pressure. So we're very focused on the O&M side. I think we have a good story that we're in the process of putting together that will be incorporated in the filing.

Chris Ellinghaus, Analyst

Just a little clarity on the transaction costs for Riggs Distler. I think in the press release, you also mentioned $3 million of other incremental costs. Just to elaborate on what that was and why did you not exclude that as well?

Greg Peterson, CFO

Yes. Chris, this is Greg. We were really trying to focus on those one-time incremental costs. And we knew that the costs incurred on Riggs Distler and going forward for the Questar Pipelines acquisition were things that most analysts would want to pull out in making that assessment. Some of these other costs, while they were higher, do recur on an ongoing basis.

Operator, Operator

I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Greg Peterson for any closing remarks.

Greg Peterson, CFO

Thank you, Alexander, and thank you all for your time today. This concludes our conference call, and we appreciate your participation and your interest in Southwest Gas Holdings.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.