Q2 2019 Earnings Call
At this time, all participants are in listen only mode.
They will conduct a question answer session and instructions will follow at that time.
If anyone should require assistance during the conference. Please press Star then zero on you'd have to tone telephone.
As a reminder, this call maybe recorded.
I would now turn the call somebody else Mr., Ken Kenny Vice President Finance and Treasury, Sir you may begin.
Thank you Valerie welcome to the southwest gas Holdings, Inc. 2019 midyear conference call.
As we already stated my name is Ken Kenny and I'm, the Vice President of 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 Dot that's w. cash holdings Dot com.
And click on the conference call when we have slides on the internet, which can be accessed to follow our presentation. Today, we have mr., John P. Hester southwest President and Chief Executive Officer, Mr., Gregory Jay Peterson, Senior Vice President Chief Financial Officer, and Mr., Justin L. Brown Senior Vice President General Counsel and other members members of senior management to provide a brief overview of the Companys operation and earnings ended June Thirtyth 2019, and reaffirmed earnings per share guidance for 2019.
Also the company will address those factors that may impact this coming years 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 in the press release.
Slide three of our presentation today.
Also our FCC filing.
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 thing.
With that said I'd like to turn the time over to John .
Thanks Scott.
Turning to slide four we provide some highlights for todays call from a consolidated results perspective diluted earnings per share for the second quarter.
41 cents, we experienced record annual revenue of $3 billion and we are reaffirming our 2019 diluted earnings per share guidance range from $3.75 to $4.
The natural gas segment, we added 34000 net new customers, we submitted a $57 million rate request for the Arizona Corporation Commission in May.
And we're also submitting a request to the public utilities Commission of Nevada to expand our service territory to include the town Spring Creek about.
At our century utility infrastructure services segment.
We saw a quarterly revenues increased by 59.1 million.
55.7 million of which was attributable to our life Tech services acquisition. We received a 3.1 million dollar contribution to quarterly earnings from life Tech and our net income for the past year for the central segment totaled $47.6 million.
Moving to slide five we provide an outline for todays call. Greg Peterson will provide an overview of consolidated earnings for the period ending June 32019, including segment breakout for the natural gas and utility infrastructure services operations, Justin Brown will provide an update on our various regulatory proceedings and I will close with an overview of regional economic conditions and customer growth our planned capital expenditures.
A reaffirmation of our 2019 earnings guidance and long term value drivers for our shareholders, but that I will now turn the call over to Greg.
Thanks, John let's begin with the summary of total company operating results on slide six.
For the second quarter of 2019 consolidated net income was $22.1 million versus $21.6 million for the prior year's quarter.
However, EPS declined from 44 cents to 41 cents due to differences in average shares outstanding between the quarters.
For the 12 months ended June Thirtyth 2019, net income was 198 and a half million dollars.
Or $3 on 82 cents per share compared to the net income in the prior year period of 207.3 million or 428 per diluted share that period included a one time tax reform benefit of approximately $20 million or 41 cents per share.
I'll provide some highlights of results by segment.
Beginning with quarterly natural gas operations on slide seven.
This waterfall chart shows the components of the natural gas operations net income increased between quarters of about $750000.
The net $1.3 million increase in operating margin includes 2 million from customer growth as 34000 net new customers were added over the past 12 months.
And a combined $2 million from California attrition in Nevada rate relief.
These were partially offset by lower regulatory surcharges and tax reform benefit recorded in the second quarter 2018.
On M. expenses declined slightly as employee pension and medical cost decreases more than offset general cost increases.
The 2.1 million or 3% increase in depreciation amortization and general taxes.
Reflects the impact of a 579 million or 9% increasing gas plant in service, partially offset by lower regulatory surcharge amortization.
The 3.7 million dollar increase in other income reflects favorable market fluctuations on cash surrender values of company owned life insurance or coli policies.
About half of the approximate 125 million and accumulated cash surrender coli values on the balance sheet are influenced by stock market changes.
Coli values declined 3.4 million this quarter, including 500000 of incremental policy death benefits.
Versus a 2 million dollar increase in the prior year quarter.
In addition, a 1.5 million dollar reduction in non service pension related costs is reflected in this category.
Lastly, the $3.2 million uptick in interest expense reflects higher debt outstanding.
Including 300 million of senior notes issued in May 2019 to facilitate southwest robust capital expenditures program.
Higher interest on regulatory liabilities included an $88 million PG payable in Arizona also impacted interest expense.
Turning to slide eight we see the quarterly changes for century, our utility infrastructure services segment.
As we disclosed in the second quarter 10-Q, the increases in revenues expenses depreciation and amortization were primarily due to the operations of line Tech, which we acquired in November 2018.
This southeast based electric utility infrastructure services company contributed approximately $3.1 million towards centuries $18.9 million net income for the quarter.
Despite this contribution and growth from our other utility customers net income between quarters declined about $300000.
Due to 9 million of incremental revenue recognized in the second quarter of 2018 associated with a negotiated settlement on the water pipe replacement contract dispute.
Slide nine depicts the relative contributions by our two business segments for the 12 months ended June Thirtyth 2019.
As you can see natural gas operations provided about three fourths of our consolidated net income while centuries utility infrastructure services group provided about one four.
Let's move to slide 10, and looked at each segment's impact to the consolidated change between 12 month periods.
Slide 10 depicts the components of an $8.8 million decline in consolidated earnings between 12 month periods.
Contribution from the natural gas segment declined $10.7 million, while the contribution from utility infrastructure services increased 2.4 million.
I'll provide additional details on each segment's performance in the next couple of slides.
Slide 11 depicts the components of the changes in the natural gas operations results between 12 month periods. The 17.6 million dollar improvement in operating margins.
Includes $11 million from continuing customer growth and 7 million and combined rate relief and Nevada and California.
The negative impacts of reserve and related regulatory adjustments associated with tax reform were substantially offset by changes in miscellaneous revenues and recoveries of regulatory assets.
The 10.7 million or 3% increase and no. One m. reflects a general cost increases as well as $3.1 million of incremental damage prevention or call. It before you did costs associated with utility in general construction activities throughout our service territories.
The $11.8 million or 5% increase in depreciation amortization and general taxes reflects the impacts of $520 million or 8% an increase in average gas plant service, partially offset by reductions in regulatory amortization.
The 6 million dollar increase in other income includes 2.2 million in additional interest income.
And 3.2 million and a $3.2 million increase in equity component of the FTC our allowance for funds used during construction.
Coli cash surrender value increases were relatively flat between periods.
The $13.8 million increase in interest expense is due to higher outstanding balances on southwest credit facility as well as debt issuances $300 million in March 2018, and 300 million in May 2019, as we continue to finance capital expenditures to expand and fortify our distribution system.
Next I'll discuss the components of the quarterly change in our utility infrastructure services segments, beginning on slide 12.
Slide 12 shows the components of the $2.4 million increase in century net income between 12 month period.
Our recent acquisitions of line Tech in November 2018, and new co in November 2017 provided significant benefits to century's results.
Overall revenues increased $225 million, including the $118 million of new revenues from mine Tech 90 million of incremental revenues from newco.
Utility infrastructure services revenues also benefited from some non routine projects, including customer requested support during strike related and emergency response situations, primarily in the second half of 2018.
Infrastructure services expenses were $182 million higher than the prior year period, primarily due to incremental amounts for line Tech a new co operations.
Depreciation and amortization increased $20 million due to depreciation on the incremental equipment purchases, an incremental amortization of intangible assets associated with the line Tech acquisition.
The other category includes a 3 million dollar increase in interest expense due to due to higher debt outstanding including amounts associated with these recent acquisitions.
The $16 million increase in income taxes between periods, primarily reflects the impact of a one time $12 million benefit recognized in December 2017, due to the remeasurement of deferred tax liabilities associated with tax reform.
In addition, pre tax income in the current period was $20 million higher than the prior year period.
For the 12 months ended June Thirtyth 2019 century operations contributed $47.6 million net income toward our consolidated results.
Based on the quarterly results for both segments, we reaffirm our full year 2019, EPS guidance of 375 to $4 per share.
I'll now turn the call over to Justin Brown to provide an update on regulatory items.
Thanks, Greg.
As shown on slide 13, I'll be providing an update on several key regulatory matters from this past quarter.
Namely rate case activity and an update on several other regulatory initiatives.
Let's start on page 14, with our Arizona General rate case filing.
As John mentioned, our application requesting an increase in revenues of $57 million.
Our two primary drivers for this case first to fully reflect the impact of tax reform and base rates and to to update rate base to reflect the nearly $700 million has been invested in Arizona since our last rate case.
With respect to tax reform the proposed $57 million increase in revenues is net of any offset from tax reform, including our proposed amortization of approximately $21 million associated with excess deferred income taxes.
Part of the proposed revenue increase is also attributed.
Two a proposal to increase our authorized return on common equity from 9.5% to 10.3%.
We are also requesting approval of a new infrastructure recovery mechanism to help monitor assessment potentially replace certain plastic pipe.
Merger with hearings in February and hopefully a decision in the early part of the second quarter of 2020.
Moving to page 15. In addition to our Arizona rate case, our FERC regulated pipeline company also filed a rate case in Maine requesting to increase their revenues by 7.1 million, which includes a proposal to increase depreciation rates by $1.8 million similar to ours on a case. The increase is net of any adjustment for changes in tax reform, including a proposal to start amortizing approximately $15 million of excess accumulated deferred income taxes by approximately $340000. A year. We're also requesting an ROI, we have 14.8% relative to a hypothetical capital structure of 56% equity and proposed rate base of $137 million.
We are also proposing to continue the use of our term differentiated rate structure, whereby customers with contract terms with less than five years with pay a higher ROI, we than those with contract terms greater than five years.
The FERC the FERC issued an order in July accepting of suspending the rates for five months as such we expect rates to become effective in December of this year with hearings likely in the first half of 2020 and a final decision by the end of the third quarter of 2020.
Turning to page 16, we are currently working on finalizing our next California General rate case that will be filed by the end of this month. The rate case will use a calendar year 2021 test period with new rates become effective in January of 2021.
In the meantime, we will continue to make annual adjustments to margin through 2020 as part of our annual 2.75% attrition filing and in fact in 2019, we were authorized to increase revenue by $2.8 million beginning January of this year.
Moving onto an update on some of our other regulatory initiatives from this past quarter. We've officially started to commence work on our $174 million customer data modernization initiative, we are still working our way through the regulatory process in each state in an attempt to get constructed mechanisms in place to help facilitate the timeline complete cost recovery of the project. In fact, we have a hearing in Nevada. Later this month on our pending request for regulatory asset and we anticipate a final decision by October we also hope to receive final decisions in Arizona, California, either later this year or in the first part of 2020.
Turning to slide 17.
In June we made our second SB 151 application with the PCN requesting approval to extend our facilities to Spring Creek, Nevada, located just south of Alco Spring Creek has about 5000 potential customers and we requested approval to invest approximately $62 million to construct an approach man and distribution system in the community. We currently anticipate a final decision on this proposal in early 2020.
We continue to make progress on our two other projects our $80 million LNG facility in southern Arizona is wrapping up and is on schedule to be completed and in service by September as a reminder, we have also included the cost of this builds facility in our current rate case as part of our post test year plan adjustment.
In Nevada, we continue to make progress on building out our approved distribution system in mesquite and hooking up new customers, including our work on bringing the permanent gas supply kaminski with the approach main which is expected to be in service by the first quarter 2021.
Meanwhile, we will continue to serve.
New customers with a temporary virtual pipeline in compressed natural gas and with that I'll turn it back to John .
Thanks, Justin.
Turning to slide 18.
We illustrate the robust economic conditions throughout our service territory population growth rates in the states in which we operate are expected to significantly exceeds the national average over the coming five year period. In addition, unemployment rates continue to stay low with continued strong job growth in each of our operating divisions.
Moving to slide 19.
We took the strong growth in customers that are expected to continue in the years to come we expect to add 35000 net new customers. This year, and then 37000 customers in each of the following two years for an average customer growth rate of 1.7%.
On slide 20, we show our expectations for our capital expenditures through 2021, as we continue to serve regional growth and reinvest in the safety and reliability of our gas delivery systems for the three year period, ending 2021, we expect to invest $2.1 billion across our system. A significant portion of that investment is associated with growth and supportive cost recovery mechanisms that Justin referenced earlier in his comments approximately 45% to 50% of the investment funds will be provided by internal cash flow with the remaining funds provided through balance of debt and equity issuances.
Turning to slide 21 continued investment in our gas delivery systems is expected to fuel significant growth in our rate base. As a result, we anticipate rate base growing from $3.5 billion at the end of last year to $4.8 billion at the end of 2021. This growth represents an 11% compounded annual growth rate over the three year period.
Moving to slide 22.
We are reaffirming the earnings guidance, we provided earlier this year, we are on track to earn between $3.75 and $4 per diluted share by the end of this year.
Net.
On slide 23, we provide some additional color supporting our earnings guidance affirmation and the natural gas segment, we expect operating margin to increase by 45% operating income should increase modestly and as indicated on the prior slide 2019 capital expenditures should total $710 million in utility infrastructure services segment, we anticipate revenue growth of 10% to 15% operating income to approximate 6% to 6.5% of revenues and we'd point out that net income expectations are net of non controlling interests and the fluctuations in Canadian exchange rates can influence segment results.
Finally on slide 24, we recap our expected long term value drivers for our shareholders.
In our natural gas operations, we anticipate strong customer growth capital reinvestment and rate base growth over the coming three year period. These expectations are supported in partnership with our regulators through regular rate case filings in established cost recovery mechanisms. In addition at our utility infrastructure services segment, we will continue to capitalize on our position as one of the largest specialty utility contractors in North America now operating in 28 different markets across the us and Canada with established quality utility relationships in excess of 20 years. We anticipate continued growth from this segment as it partners with regulated utilities across the us and Canada to serve significant utility infrastructure replacement needs for many years to come.
With that I'll return the call to Ken.
Thanks, John .
That concludes our prepared presentation for those of who have access to our slides. We have also provided an appendix with slides, which includes other prudent information about southwest gas holdings Inc. and its subsidiaries and can be reviewed at your convenience operator, Valerie will now explain the process for asking questions.
Thank you.
Ladies and gentlemen, I'd like to ask a question. Please press Star then one when you touch tone telephone again, if you would like to ask a question. Please press Star then one.
One moment for our first question.
Our first question comes from Adam Mcgrath Scott.
Yes. Your line is open.
Thank you good morning.
Good morning.
So with gas amounted to file for an expansion of service into Spring Creek, Nevada, how many more opportunities do you see around your system for similar expansion.
Hi, I give this is justin.
You know I think Theres theres, probably a couple there's there's when we originally had the legislation passed I think there were kind of probably four maybe five.
Areas that were on our radar and so.
We havent Husky and we have spring Creek, So I'd say, there's probably a couple left that we would look at and we'll just kind of look at them on a case by case basis, and we'll always keep our eye open to whether there is more beyond that as well.
Thank you for that color and CEO from 2019, EPS guidance, but lower expected revenue growth from utility infrastructure services.
Please provide more color on the drivers of the change and at the same time could you. Please maybe discuss the offsetting factors that allow you to maintain that EPS range intact.
Sure sure I can this is Greg.
As we look out to the future for a century in their operations.
Now, there's probably two or three main factors that have kind of changed our outlook for the year. One as we mentioned earlier, we had a weather impact in first and second quarters actually the kind of slowed our progress in the work that we can get done and early in the year. We were more hopeful that we can catch up in that but.
Again that will have a short term impact, but nothing in the medium to long term, but it has slowed down will work, we will be able to get done in COVID-19.
And we've also had a few of our larger customers.
Who've had some changes.
Either some regular Tory constraints or otherwise in how much work that they can put out there.
Some areas where.
Due to the regulatory constraints professional engineer standards required on drawings and Thats just slowing the amount of work that we can get in house to get done again, the same sort of thing it's more of a short term 2019 item versus anything medium or long term.
As we mentioned in the call and in our quarterly report, we did have water contract.
Last year, we had a settlement of $9 million that contract completed this year in June and we opted not to.
Two weeks standards seek an extension of that contract renewal and so thats, having a little bit of impact on what the future may hold for US we are certainly.
Optimistic that other things.
And we will have a beneficial impact or it should for our companies on both segments.
With lower interest expense.
And then as you can see in the second quarter of this year versus last year on the utility side owning them expenses were relatively flat.
And while we don't expect them to be flat year over year, we are as a management team focused on.
Cost containment issues to keep that own them gross down. So those are some of the positive factors that have allowed us to keep that guidance in the 375 to four neighborhood.
Thank you for that additional information last question from in the past two years, the announced acquisitions in the second half of the year should we expect similar M&A activity.
Just a couple of 19.
Hi, This is John .
We don't have anything planned immediately that we think would be completed in 2019 that.
We're always looking at a variety of potential acquisitions to help continue to grow and diversify both geographically and service offer as offering perspective for century. So it is possible, but we don't have anything in mind at the current time, but we'll continue to look for opportunities to grow that business, where we think it will increase earnings and ultimately valuation for the shareholder.
Thank you for taking my questions.
Thank you.
Thank you.
Our next question comes from Chris Ellinghaus I Williams capital Your line is open.
Hey.
Gentlemen, how are you.
Good Chris.
Greg you were talking about weather impact for century, you know you've had a pretty stellar year over year said, a result, right I kind of like it if you'd have these kind of weather impacts more often.
Oh.
[laughter].
Given the change in the guidance for revenues and sort of the results that I see for the year to date.
Looks pretty good so far were there any timing impacts that werent weather related and in terms of maybe getting some accelerated work done for other reasons in the second quarter or was this pretty much which you were kind of expecting.
I think the second quarter is that Chris. This is Greg was what we were expecting on a relative basis, there's always changes within our customer base as to when they give us work, we're very dependent on the timing of when they provide us with the work and opportunities.
As I mentioned earlier in my comments that PE staff requirement has just slowed I'll use the term backlog the backlog of work that we could have for some of our larger clients and so.
I think again Q2 was kind of what we expected, but that's what's kind of slowing the growth.
For the second half of the year.
Okay.
Can you give us any color on what you're seeing post line tick acquisition in cross selling efforts.
Yes. This is Greg again I. Thank you know, it's still pretty early in the process as we can show or as we depict in.
The slides later in the appendix.
We have quite a long history with our customers and.
The cross selling opportunities that we've talked about and expect to come to fruition in the future take a little bit of time to do these utilities have often have long term entrenched relationships with their contractors and so we're breaking into that opportunities and so we expect to see something in the future, but probably not in the next few months.
Sure.
Can you you know theres a lot going on in Las Vegas, right Now Convention Center the stadium resorts World circa when there's so there's a lot of projects right now.
Have you got any thoughts on what you're seeing beyond this current batch of Vegas expansion.
Chris This is John we think that we're going to continue to see more of the same thing.
Just pointed out a number of really big projects.
Driven economic growth here in southern Nevada, and there continues to be a favorable business climate all the other cities accounting. The state are very interested in continuing to facilitate that economic development and so we expect that type of trend to continue as Las Vegas, and the region continued to be a desirable place to do business.
Okay.
Lastly in the Arizona docket is the new pipe replacement program can you give us any kind of color on what you've been seeing just in terms of discovery or discussions with.
Interveners or whatnot about that program.
Yeah, Chris we really haven't seen a lot on that I mean, we have kind of our typical ongoing discussions with the parties, but its still pretty early in the process with the procedural schedule an unusually the intervenors take a little time to get consultants on board and stuff. So still pretty early I expect to see something along those lines over the next couple of months.
Okay, great. Thanks, a lot guys I appreciate it.
Thank you Chris. Thank you. Our next question comes from Ryan Levine of Citi. Your line is open.
Hey, what was the amount of the pension and medical cost reduction during the quarter and is any of that are likely to continue to benefit financials over the next several quarters.
[noise].
[noise].
One moment please.
Yes.
<unk> <unk>.
[noise].
Ladies and gentlemen, one moment of speakers will be with you momentarily.
Okay.
Hello.
Hello.
Hello, Bowery, Yes, you are connected.
Yeah, sorry, you are somehow or some sort of just connection. So unfortunately, we've gone back to a little bit of a old style a speaker phone on my cell phone. So we'll finish it that way.
So we're willing to take any other questions. Thank you Ryan is still connected.
Yes, Yeah, Hi, I don't know, if you're able to hear before but I was asking what the magnitude of the pension and medical cost reduction was in the.
In the utility segment during the quarter and if any of that was.
Likely to continue into the next several quarters.
Yes, Hi, Ryan. This is this is Greg you know the the medical benefits was probably just a little more than a million dollars of reduction we are self insured for our employee medical and so there is some fluctuation there oh, we have experienced or had good experience. Thus far this year and would expect that to continue into the future, but I I don't have any guarantees, but the second half of 2019.
Beyond the pension and medical costs reductions well what are the other cost reduction initiatives that are that you're working on are confidential keep going and cost inflation under control.
Yeah, I think it's Jeff. This is Greg again, I think it's just a general overall view of keeping costs from rising quickly I always want to caveat that we're not trying to do cost reduction measures, but cost containment measures. We've done a good job. Thus far this year in some of our leak survey and and line breaks we're monitoring what's going on there. So it's just an overall general whether it's employee head count or some or other administrative functions that were trying to focus on and keep those costs down.
Okay.
That's all from me thank you.
Thank you.
Thank you I'm showing no further questions at this time, let's turn the call back over to Ken Kenny for any closing remarks.
Hi, Thank you Valerie.
This concludes our conference call and we appreciate your participation and interest in southwest Gas Holdings, Inc.
I have a great day thanks.
Thank you.
Ladies and gentlemen, this does conclude today's conference you may all disconnect have a great day.