Earnings Call Transcript - SWX Q1 2021

Operator, Operator

Thank you for joining us for the Southwest Gas Holdings 2021 First Quarter Earnings Conference Call. I will now hand it over to Mr. Ken Kenny, Vice President of Finance and Treasurer, to begin the conference.

Ken Kenny, Vice President of Finance and Treasurer

Thank you, John. Welcome to Southwest Gas Holdings, Inc.'s 2021 First Quarter Earnings Conference Call. As John stated, my name is Ken Kenny, and I am the Vice President, Finance and Treasurer. 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 at www.swgasholdings.com and click on the conference call link. We have slides on the Internet, which can be accessed to follow our presentation. Today, we have Mr. John P. Hester, President and Chief Executive Officer; Mr. Gregory J. Peterson, Senior Vice President, Chief Financial Officer; and Mr. Justin L. Brown, Senior Vice President, General Counsel of Southwest Gas Corporation; and other members of senior management to provide a brief overview of the company's operations and earnings ended March 31, 2021, and an update to earnings per share guidance for 2021. Also, the company will address certain factors that may impact this coming year’s earnings. Further, our lawyers have asked me to remind you that some of the information that will be discussed contains forward-looking statements. These statements are based on management's assumptions, which may or may not come true, and you should refer to the language on Slide 3 in the press release and also our SEC filings for a description of the factors that may cause actual results to differ from our forward-looking statements. All forward-looking statements are made as of today, and we assume no obligation to update any such statement. With that said, I'd like to turn the time over to John.

John Hester, President and Chief Executive Officer

Thanks, Ken. Turning to Slide 4. We outlined some highlights from the first quarter of this year. From a Holdings perspective, we had record earnings per share for the first quarter of $2.04. We also increased our dividend for the 15th consecutive year, and we slightly narrowed our earnings guidance range to $4 to $4.20 in observation of our first quarter results. In our regulated natural gas utility operations, we continue to experience strong growth, adding 37,000 new customers over the past year. Our operating margin increased by $24 million. We established a $250 million 364-day loan to fund an incremental gas cost associated with extreme Texas weather in February. And the settlement we had previously reached in our California rate case was approved by the CPUC. And our utility infrastructure services group, revenues increased by $30 million or 9.1%, some of which derived from support to some of our utility customers who experience impacts from the February Texas freeze. We also saw EBITDA for the quarter doubling to $26.7 million. Moving to Slide number 5, we provide an outline for today's call. Greg Peterson will provide a detailed update on our financial results for the period ended March 31 with segment breakdown for our regulated and unregulated operations, along with expectations for our liquidity, planned capital expenditures, and dividend and rate base growth. Justin Brown will provide a regulatory update, and I will provide an update on our growing customer base, our continued focus on sustainability, and our expectations for 2021 and beyond. With that, I'll turn the call over to Greg.

Gregory Peterson, Senior Vice President, Chief Financial Officer

Thanks, John. Let's begin with a summary of total company operating results on Slide 6. For the first quarter of 2021, consolidated net income was $117 million or $2.03 per diluted share compared to $72.5 million or $1.31 per share for the first quarter of 2020. Temporary changes in the cash surrender values of company-owned life insurance or COLI policies reflected income of $2.7 million or $0.05 per share in the current quarter versus a loss of $15.5 million or $0.28 per share in the prior year quarter. For the 12 months ended March 31, 2021, net income was $277 million or $4.89 per diluted share compared to net income in the prior year period of $192 million or $3.50 per share. The current 12-month period included $27.4 million or $0.48 per share in COLI income, while the prior year period experienced a COLI-related loss of $5.7 million or $0.10 per share. Next, we'll take a detailed look into each segment, starting with the quarterly comparison of natural gas operations on Slide 7. Net income for the natural gas operations segment was $118.7 million for the first quarter of 2021, an increase of $35.1 million compared to last year's first quarter. A couple of items stand out in this waterfall chart, and I'll touch on them first. The $23.9 million increase in operating margin was driven by $18 million in rate relief associated with recently completed rate cases in our 3-state service territory. Continuing strong customer growth contributed $6 million of operating margin as we experienced 37,000 first-time meter sets over the past 12 months, a 1.8% growth rate. The other income increased by $21.1 million primarily due to changes in the cash surrender values of COLI policies between quarters that I mentioned. As you may remember, COVID-19 influenced a 20% decline in the S&P 500 during the first quarter of 2020, resulting in a $15.5 million COLI loss for Q1 2020 for us. At that time, the investments underlying the cash surrender values of the policies were weighted over 50% towards equities. After the recovery of the market and our COLI values later in 2020, the company rebalanced the underlying investments to approximately 25% in equities, which is designed to reduce the volatility in COLI income. In the current quarter, COLI income was $2.7 million. The $8.3 million increase in depreciation, amortization, and general taxes includes $4 million from depreciation and $4.3 million from general taxes. The general tax increase is due to the resetting of the Arizona property tax tracker and quarterly year-over-year comparisons are anticipated to reflect a somewhat similar level of expense increase for each quarter in 2021. In addition to the normal increase in depreciation due to our current level of capital expenditures, the implementation of the new customer service system placed in service in May and an anticipated implementation later in the year of a new gas transaction system is expected to increase full year 2021 amortization expense by $5 million to $6 million. Operations and maintenance, or O&M, expense increased $3 million, or 3% compared to the prior year quarter and includes about $400,000 of incremental bad debt expense. Late payment fee moratoriums are beginning to be lifted as the economies in our service territories return to more normal operations. Let's go to Slide 8, which depicts Centuri's comparative changes for the first quarter. Results for Centuri, our utility infrastructure services segment, improved $9.3 million in the first quarter of 2021 versus the first quarter of the prior year. Due to business seasonality, losses during the first quarter are typical due to the impacts of winter weather on operations. As shown on this slide, the current quarter reflects a revenue increase of $30.5 million or 9%, primarily due to $21.6 million of incremental electric infrastructure work, which includes approximately $9 million from emergency storm restoration services performed by Linetec following tornadoes and ice storms in Texas and surrounding areas. The remaining revenue increase includes the benefits of favorable weather working conditions in several areas, accelerating some work previously planned for later in the year. Infrastructure services expenses increased $16.3 million or 5%, primarily due to costs associated with the increase in work performed. Operating efficiencies improved due to favorable weather conditions and reduced COVID-19 restrictions from the prior year. Let's look at total company 12-month results on Slide 9. This slide depicts the relative contributions by our 2 business segments during the 12 months ended March 31, 2021. As you can see, natural gas operations provided 70% of our consolidated net income, while Centuri utility infrastructure services group provided 30%. This is consistent with our near-term expectations.

Justin Brown, Senior Vice President, General Counsel

Thanks, Greg. During the first quarter, we received final approval of our proposed settlement in our California general rate case. With this approval, we'll see increased revenues of approximately $66 million year-over-year due to refresh rates across each of our state regulatory jurisdictions. As shown on Slide 20, the final decision on our California general rate case settlement was approved in March. The decision provides a revenue increase of approximately $6.5 million and an ROE of 10%, relative to an equity layer of 52%. The approval allows the company to continue our annual attrition filings, which will allow us to adjust revenues by 2.75% annually over the next 5-year rate cycle. Rates became effective April 1 but the company was previously authorized to track the impact of the change in margin beginning January 1 in a memorandum account until rates became effective. As such, we plan to make a filing later this year to adjust rates to reflect those amounts that have been tracked since January 1. Two other very important components of the rate case include approval of our proposed risk-informed decision-making programs, which will allow us to invest up to $119 million over the next 5 years, to ensure continued safe and reliable service to our California customers, and we'll also be allowed to recover these costs annually through a surcharge.

John Hester, President and Chief Executive Officer

Thanks, Justin. Turning to Slide 25. As I mentioned at the outset of the call, we continue to experience strong customer growth as our local economies rebound from COVID-related commerce restrictions and people and businesses continue to find our service territories desirable places to relocate to and grow. Slide 25 not only shows that we added over 37,000 customers over the past year, but the year-on-year trailing 12-month gains in each month were stronger than the year before. Moving to Slide 26. Part of the continued strong demand for natural gas in our service territories is attributable to the excellent customer service our employees provide our customers. We earned a 96% satisfaction rating for our customers, and 91% of our customers consider natural gas service to be their preferred energy provider. We've also won recent J.D. Power Best in the West service awards in both the residential and business categories.

Ken Kenny, Vice President of Finance and Treasurer

Well, 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 2 business segments. These slides can be reviewed at your convenience. Our operator, John, will now explain the process for asking questions.

Operator, Operator

The first question is coming from Richard Sunderland at JPMorgan.

Richard Sunderland, Analyst

Maybe starting on Centuri. Just curious on Centuri's results this quarter. Do you see these contributions sustainable and potentially leading to additional growth on the electric side?

John Hester, President and Chief Executive Officer

Richard, this is John. I think that definitely we expect to see continued growth at Centuri on the electric side. We think that there are opportunities to expand the work that we're doing with our current customers. We also are looking at opportunities to cross-sell services. So in other words, if we have a long-standing relationship with the combination utility that we're currently doing a lot of gas work for, we're going to make sure that we know that they know that we can offer them electric services with the same level of high quality and safety. And then, of course, if there are any opportunistic bolt-on M&A options in the future, the electric sector is certainly something that we would look towards possibly expanding further in that manner as well.

Richard Sunderland, Analyst

Got it. Appreciate the color there. And then maybe turning to the upcoming COYL and VSP filing. What are your expectations for the recovery process following the design on the electric rider in the state recently? Just curious if there's opposition to these types of mechanisms right now? Or maybe how it fits within the larger post-press discussion other than the state?

Justin Brown, Senior Vice President, General Counsel

Yes, Richard, it's Justin. I think this situation is somewhat different from previous discussions. Those earlier talks were more focused on prospective evaluations related to UPS's rate case and similar topics. The surcharges in question were previously approved, and we've noted before that when they were initially frozen and suspended, we incorporated the 2019 request of $12 million into the rate case as part of our amendment that received final approval. From our viewpoint, we expect this process to proceed similarly, and we anticipate a thorough evaluation.

Richard Sunderland, Analyst

Got it. So maybe in terms of the guardrails on the process here. Do you see the debate centering more around, I guess, the timing or cadence of the recovery? Or do you see other issues cropping up here?

John Hester, President and Chief Executive Officer

Yes. I mean, I think that's a fairer way to look at it. I know, like in our rate case example, as I mentioned, the 12 we had included kind of that over a 3-year period, so about $4 million a year. I would expect that consistent with your comment that some of the discussion is going to be more on the cadence and timing of it rather than the actual merits. I think from our perspective, we went through the rate case process. There were absolutely zero findings about the plant that was invested, the performance of the mechanisms. They continued the COYL program. They decided not to continue the VSP. But when you look at kind of that record, combined with the experience that we saw with moving the 2019 surcharge amount to the rate case, it's hard to imagine there are going to be other issues that crop up. But in these regulatory proceedings, if something comes up, someone makes an argument that we'll plan on addressing. But as we stand here today, I think we have a pretty good case in terms of what was previously approved, the mechanisms, our performance, and adherence to those mechanisms. And now it's a just kind of trueing that up and figuring on the time frame for which that will occur.

Operator, Operator

Next question is from Kody Clark at Bank of America.

Kody Clark, Analyst

So just on recovering the gas purchase costs, I'm wondering how you're thinking about rate inflation considerations while also trying to get recovery on the riders that you just talked about?

Justin Brown, Senior Vice President, General Counsel

Kody, it's Justin again. When we first noticed the price spike, one of our first actions was to assess the expected impact and determine if we needed to file for an extension on the recovery period due to sensitivity concerns. As John mentioned earlier, we are highly focused on ensuring our bills remain affordable and competitive. Our analysis shows that the anticipated costs from this spike will not surpass the levels customers experienced just a few years ago. Therefore, we do not foresee any issues with gas cost recovery at this point, and we believe our mechanisms will enable us to recover those costs within the designated timeframes. This aligns with the tracker as well. The commission had established annual surcharges and decided to review certain aspects due to concerns raised by intervenors regarding the surcharge filings. We went through this review process, and there were no findings of misconduct. From our standpoint, we will collaborate with them on a timeline for recovery to ensure that there is no unreasonable impact on customers' bills, as this is a priority for us.

Kody Clark, Analyst

Okay. Got it. That's super helpful. And is there any initial thoughts around time? I mean, on when we might get some more details on that?

Justin Brown, Senior Vice President, General Counsel

Yes, we're going to make that filing this month. So that's something you should be able to see as part of our filing before the end of the month.

Kody Clark, Analyst

Got you. Okay. And then just on RNG, if I can, quickly. Can you provide a little bit more color on how you're thinking about this opportunity in terms of your longer-term growth? You operate in some of the more constructive jurisdictions in the country for these kinds of projects. So it seems like there could be some upside.

John Hester, President and Chief Executive Officer

Yes, Kody, this is John. I agree with you. I think there is upside for that. I think it's an exciting new opportunity. We have already, as I mentioned earlier, started a lot of projects. We've been working with our legislatures and our regulators. And for the most part, it's kind of all good. We're also seeing a higher interest from our customers in this kind of product. For example, here in Southern Nevada, the municipal bus fleet operator was previously operating their buses on compressed natural gas. And they wanted to reduce their carbon footprint even more, so they were considering the possibility of electric buses, but they are significantly more expensive and operationally inferior. So we worked with them to get a supply for them of RNG that will essentially let them transition from compressed natural gas that's conventional to compressed natural gas that's RNG and be able to address their interest in reducing greenhouse gases. So I think you're going to see a lot of opportunities on that road ahead, and we're excited about it.

Operator, Operator

The next question is coming from the line of Chris Ellinghaus from Siebert Williams.

Chris Ellinghaus, Analyst

The $0.05 increase at the lower end of the guidance range suggests that we might be seeing the unusual level of Centuri restoration work in the first quarter.

Gregory Peterson, Senior Vice President, Chief Financial Officer

Chris, this is Greg. I don't know that I would classify this as something to do with the level of storm work that they did in Q1, more that they had solid performance in Q1. As you're aware, the first quarter is always a down quarter for Centuri. That’s the worst winter time weather that they work in that kind of slows the gas work. We were very pleased with the level of work that they were able to get done in the first quarter. And it took a little bit of the uncertainty out of the rest of the year by doing that. So that was the impetus and the basis for raising that bottom part of the guidance up $0.05.

Chris Ellinghaus, Analyst

Does that sort of accelerated work level give them greater opportunities for the rest of the year?

Gregory Peterson, Senior Vice President, Chief Financial Officer

Yes, this is Greg again. I think they've always had really good opportunities. As I mentioned in my remarks, some of the work that they did get because there was some favorable weather in Q1 was some work that they had planned to do a little later in the year, but they are certainly open and doing well with their customers. As we're all aware, the infrastructure area throughout the U.S. is looking to harden their assets, both on the electric and gas side, to make them safer and more reliable. So I think the future is very bright for Centuri, and maybe Q1 is just a small indication of what lies ahead for them.

Chris Ellinghaus, Analyst

Obviously, you've had some pretty strong Centuri revenues from the electric side. Can you give us some color about how much of that is just some of the hurricane restoration and the winter restoration as opposed to how much traction you're getting in the cross-selling opportunity that you had at the time?

John Hester, President and Chief Executive Officer

Chris, this is John. I think really, it's both. I think that when we made the Linetec acquisition, and we're able to grow that. It really provided great opportunities to provide more electric services as part of their platform. And I think that strategically, that's the direction we want to continue to grow. When we added the Linetec business, we were able to add what we would classify as a non-union electric provider, and we think that there are a lot of opportunities in the unionized electric space as well. So not only, as you pointed out, are we going to want to make sure that we're there to help our regulated electric utility customers rebound from events that mother nature imposes on them. But we also want to see if there are opportunities to continue to expand the percentage of revenues that, that business generates from the electric sector.

Chris Ellinghaus, Analyst

Okay. I think Justin mentioned this about good interest on the RNG side. The casinos in Vegas have been pretty aggressive on sustainability issues. You talked about interest coming from your customers. I assume that the casinos are pretty well aligned to the effort?

John Hester, President and Chief Executive Officer

Absolutely, Chris. This is John again. They're very interested in that. In fact, we were recently working with one of the larger properties to see if there was an opportunity to convert their supply entirely over to hydrogen. So that's another option because, as you know, Chris, from spending a regular amount of time in our service territory, that is a differentiator that a lot of those properties look towards to encourage customers to visit their property vis-à-vis other properties. So I think that definitely there will be opportunities with the resorts, but there will also be opportunities with a lot of other businesses that I'm sure you could name that are very sensitive about their carbon footprint, looking for opportunities to reduce it. And I think RNG is one of the ways they can do that in a fairly seamless way at a fairly low cost. So we're going to want to continue to pursue those opportunities, not only because we think that it helps us project a sustainable image for the future, but frankly, because our customers are demanding it.

Chris Ellinghaus, Analyst

Okay. Lastly, the small acquisition in Arizona, are you guys seeing other co-op opportunities out there?

John Hester, President and Chief Executive Officer

Chris, this is John again. I think that there could be other opportunities. We have talked with a number of other parties. We don't have anything else on the board right now. But as I'm sure you will appreciate, the operational requirements of running a natural gas distribution system with safety, with upgrading your distribution network, et cetera. I think that there are other folks that are looking at whether that is a responsibility that they would just assume turn over to another party like us. So certainly, we're going to be very interested in that. And as we see those opportunities come up, we'll want to capitalize on them. And I think that the regulators are, frankly, supportive of that because if you can move from a relatively small operator and get that in the family of a relatively big operator like us, it makes safety-oriented regulation and potential rate impacts from aging infrastructure a lot more palatable to those communities.

Operator, Operator

We don't have any questions at this time. I'll be turning it back to the presenters.

Ken Kenny, Vice President of Finance and Treasurer

Well, that concludes our prepared presentation. Thank you, John, for doing your work as the operator, and we appreciate the participation and interest in Southwest Gas Holdings, Inc. Everyone, have a great weekend. Thank you.

Operator, Operator

This concludes today's conference call. Thank you all for participating. You may now disconnect.