SWX
#Thank you, Jonathan.
Welcome to Southwest Gas Holdings, Inc.
2017 Third Quarter Earnings Conference Call.
As Jonathan stated, my name is Ken <UNK>, and I'm 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.
<UNK> <UNK>
<UNK>, Southwest President and Chief Executive Officer; Mr.
<UNK> <UNK>
<UNK>, Senior Vice President and Chief Financial Officer; and Mr.
<UNK> <UNK>
<UNK>, Vice President, Regulation and Public Affairs; and other members of senior management to provide a brief overview of the company's operations and earnings ended September 30, 2017, and an outlook for the remainder of 2017.
Our general practice is not to provide earnings projections.
Therefore, no attempt will be made to project earnings for 2017.
Rather, the company will address those 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 statements.
With that said, I'd like to turn the time over to <UNK>.
Thanks, Ken.
Turning to Slide 4, looking at the third quarter, some of the highlights from a consolidated results perspective include recorded net income of $10.2 million for the quarter or $0.21 earnings per share, the elimination of cumulative voting at a special shareholder meeting we convened on October 17, an acquisition of the 3.4% noncontrolling interest in the Centuri Construction Group previously held by the prior owners of Link-Line.
In the natural gas segment, highlights included an operating income increase of $15 million over last year's third quarter, with the addition of 32,000 customers for the year ended September 30.
And as of earlier this week, we now serve over 2 million customers across Arizona, California and Nevada.
Also, last week, we submitted an application to the Public Utility Commission of Nevada to expand our service territory to serve Mesquite, Nevada.
And at our Centuri Construction Group this past quarter, we experienced solid third quarter financial results.
We increased the capacity of our credit and term loan facility to $450 million.
And again, just earlier this week, we completed our acquisition of utility infrastructure company called Neuco that does its business in New England.
Moving to Slide 5.
For today's call <UNK> <UNK> will provide an overview of third quarter consolidated earnings as well as segment details for our natural gas operations and construction services groups.
<UNK> <UNK> will provide an overview of our various regulatory activities, and I will close with a report on regional economic conditions, our capital expenditure plans and our 2017 expectations.
I will now turn the call over to <UNK>.
Thank you, <UNK>.
Today, I plan to cover our third quarter financial results and provide a little background on the Neuco acquisition, which was just completed.
Let's start things on Slide 6 with a look at consolidated operating results.
During the third quarter of 2017, we had consolidated net income of $10.2 million or $0.21 per basic share compared to $2.5 million or $0.05 per share earned in the third quarter last year.
During the 12-month periods, our earnings improved from $153 million or $3.22 per basic share to $163 million or $3.42 per share.
Next, we'll look at the relative contributions of each segment to change in earnings starting on Slide 7.
The natural gas operations segment experienced a loss of $4 million this quarter, a marked improvement from the last year's third quarter loss of $12.4 million, principally as a result of impacts from our Arizona general rate case order, which became effective this past April.
Construction services had strong quarterly results but experienced a slight decline in net income to $14.3 million from $14.9 million.
The next slide breaks down the change in earnings between 12-month periods.
Gas segment net income increased $14.5 million, while construction services experienced a net decrease of $4.1 million.
We will now look at each segment starting with natural gas operations on Slide 9.
This waterfall chart provides breakdown of the major components of the improved results.
Operating margin increased $6.4 million, as a result of customer growth and rate relief in Arizona and California.
We added 32,000 net new customers over the last 12 months, a growth rate of 1.6%.
Depreciation and property tax expense declined $8.7 million between periods, primarily due to lower depreciation rates in Arizona.
And O&M cost were flat between periods as decreases in employee-related benefit costs offset general cost increases.
Moving to Slide 10.
We summarize the gas operations segment change between 12-month periods.
There were 2 principal reasons for the improvement.
Operating margin increased $26 million primarily due to rate relief and customer growth.
And depreciation and property taxes decreased $11.5 million, as lower depreciation expense in Arizona offset increases related to growth in gas plant service.
These favorable items offset O&M cost increases which totaled $12.9 million or 3%.
Let me also draw your attention to company-owned life insurance or COLI.
The current period reflected income of $8.8 million and the prior period income of $7.5 million.
We view both of these as very high, thanks to the strong stock market returns.
Our expected range is generally between $3 million to $5 million.
We will now review Centuri's third quarter operations starting at Slide 11.
Revenue increased $40.3 million or 12% between quarterly periods, as pipe replacement work with existing customers picked up momentum, including bid jobs that are expected to be substantially complete by year-end.
Construction expenses and depreciation on the other hand increased net $40.9 million or 13% between periods due to the greater workload as well as higher construction costs for a water pipe replacement project, for which Centuri has requested additional cost recovery.
No new work orders are being accepted on this project until cost recovery issues are resolved, which we hope will be during the fourth quarter.
The temporary work stoppage that occurred earlier in this year was not a factor during the third quarter as we had a full quarter of normal operations, albeit at a lower annual run rate than historically.
Slide 12 rolls forward the contribution of net income for the 12-month period.
Construction revenues grew by $45 million or 4%, due primarily to additional pipe replacement work across our service territories.
However, construction expenses and depreciation increased to net $53 million or 5% between periods.
Factors which influenced the disproportionate expense increase were mix of work, startup and construction costs associated with water pipe replacement project and logistics surrounding the timing and length of the temporary work stoppage from earlier this year.
But overall Centuri continues to perform well in nearly all of their operating areas, and we expect another solid contribution from them for the full year.
And let me next provide some additional information on Neuco starting at Slide 13.
Neuco was acquired for $95 million just yesterday.
They are headquartered in Lawrence, Massachusetts, and they have been in operations since 1972.
Neuco specializes in underground utility construction and maintenance services for LDCs and municipalities.
So it's really a natural fit with our existing operations.
They have operations in Massachusetts, New Hampshire, Vermont and Maine, providing us with a bigger footprint in the Northeast United States.
Turning to Slide 14, you'll see that Neuco employs over 300 nonunion personnel, who, in 2016, installed over 115 miles of gas distribution mains and thousands of services.
Revenue for 2016 totaled $95 million and generated $11 million of operating income.
Finally, their principal customers include National Grid, Unitil Electric & Gas and Liberty Gas Utilities.
I'm very pleased to add this complementary seasoned business and workforce to our construction services segment.
With that, I will now turn the time over to <UNK> <UNK> for regulatory update.
Thanks, <UNK>.
Turning to Slide 20.
As I mentioned at the outset of the call, in the most recent 12-month period, we added 32,000 net new customers and just earlier this week reached the 2 million customer mark.
Moving to Slide 21.
Regional economic picture for our service territories continues to be strong.
Unemployment rates declined across the board year-on-year, and we continue to see new job creation in our service territories.
On slide 22.
We continue to deploy a robust capital expenditure plan for the 3-year period.
End of 2019, we expect to invest upwards of $1.8 billion to serve new growth and replace aging infrastructure.
An important part of our capital expenditure plan is to support a regulatory climate we've seen in each of our states, as regulators look for us to continue investing in safety and reliability as well as fostering economic growth.
Turning to Slide 23.
Ultimately, the capital we invest in our gas transmission and distribution systems translates into new rate base through a variety of regulatory activities.
With our planned capital expenditures, we project a compounded annual growth rate in rate phase for Southwest Gas of 9% over the next 3 years.
Moving to Slide 24.
We provide an update on our 2017 expectations for our natural gas operations.
We expect operating margin to increase by nearly 3%.
Operating income is expected to increase by 12% to 14%.
Interest expense is expected to increase by $2 million to $3 million over 2016 levels, and our previously communicated expectations are reaffirmed.
Finally, on Slide 25, refined expectations for Centuri Construction Group include an anticipated increase in revenues of 3% to 5%.
Operating income equal to nearly 5% of revenues, net interest deductions of $7.5 million and note that our expectations generally exclude 2017 impacts from the Neuco acquisition, as fourth quarter earnings would be offset by acquisition costs.
I will now return the call to Ken.
Thanks, <UNK>.
That concludes our prepared presentation.
For those who have accessed our slides, we have also provided an appendix with slides that includes other pertinent information about Southwest Gas Holdings, Inc.
and its subsidiaries and can be reviewed at your convenience.
Our operator, Jonathan, will now explain the process for asking questions.
Sure, Jeff.
This is <UNK> <UNK>.
As you know, the proposed bill keeps changing.
So ---+ but based on the one that's floating around today, one of the things on the utility side is there is somewhat of a favorable carve out for our industry where we would be allowed to continue deducting interest expense provided that we use the more customary tax depreciation rates for capital expenditures.
And so we think that's a pretty favorably outcome for the industry that would allow rate base to be at a little bit higher level than it would otherwise and have a positive impact on our earnings going forward.
The lower tax rate would result in some excess deferred taxes, which we would flow back to customer ---+ we expect to flow back to customers over a lengthy period of time.
So basically I view it on the utility side is neutral short run, positive long run.
On the Centuri side of the business, we would be able to put the lower rates would result in a reduction in our deferred tax balance, which currently sits at about $30 million.
It's sort of a onetime reset there, that would be favorable.
And then going forward, well, it would have maybe a short run positive impact for contracts that are currently in existence.
We would expect that, that would influence our pricing going forward, and we would, in a competitive environment, have to give most of that benefit to customers.
Just for Neuco.
The Neuco property in New England that we work ---+ customers that we work with there have a very strong growth opportunity, very similar to what we've seen in some of our other large service territories.
Certainly, we would expect that, that business can grow similarly to what we've seen at Centuri, probably in the 8% to 10% range, if I had to put a number out there.
At Centuri, because it's an nonregulated entity, they would get to reset their deferred tax balance.
Currently, we have about $30 million of deferred taxes at Centuri.
Those would reset to the new rates.
So we would have sort of a onetime pay-per-gain, if you will, for that reset.
And then going forward, the contracts that are currently in existence might have a bit of a short-term favorable impact until those have to be renegotiated.
At which time, we would think, given the competitive environment we are in, most of those benefits would be at least shared with the customers, if not provided directly to them.
Thank you, Jonathan.
This concludes our conference call, and we appreciate your participation and interest in Southwest Gas Holdings, Inc.
Thank you.
Have a good day now.
