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Text: As Alexander stated, 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.
swgasholdings.com and click on the conference call link.
We have slides on the Internet, which can be accessed to accompany our discussion.
Also the Company will address certain factors that may impact this coming year's earnings and provide longer term guidance for 2022.
Turning to Slide number 4, we have an outline for today's call, I will 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, dividend of rate base growth and expectations for 2021 and beyond.
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 Pipeline.
We're very excited about this planned acquisition which is forecasted to be accretive to earnings in 2022.
Questar Pipeline 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 us new opportunities in the energy transition with a business that has a robust stream of steady contracted earnings and cash flows.
We're also very excited to have separately announced today the addition of two new Board members effective January 1.
The addition of these two new expertly qualified Directors is the culmination of a methodical thoughtful planned Board refreshment effort that began last year and as is now seen was anticipated to bolster our Board for the New Year in advance of expected Director retirements at the May Annual Meeting.
Also separately today we filed a 14D-9 response to a tender offer for Southwest Gas Holdings shares presented last month by Carl Icahn.
The tender offer seek to secure shares of Southwest Gas Holdings at a price of $75 a share which and consultation with our outside investment bankers and attorneys, our Board has concluded is an adequate.
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 saw 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% and 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 and 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 the unionized electrical contracting services 5G, offshore wind and more.
Relatedly, we are 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 increased by $52 million or 9% and we're also eager to explore the opportunities that Centuri may have to capitalize on as part of the federal government's infrastructure spending plans.
Moving to Slide 6, we present additional detail on our recently announced new Board members.
With the simultaneously announced planned retirements of Mr. Melarkey and Mr. Comer at our May Annual Meeting, year-on-year we anticipate the average tenure of Southwest Gas Holdings Directors will decrease from 10.3 years to 8.
Current Holdings Director Robert Boughner is anticipated to become Chairman of the Holdings Board upon Mike Melarkey's retirement in May.
Our Board's continuing refreshment efforts ensure shareholders are represented by our Board of Directors with excellent diversity of business experience, professional background, gender and ethnicity.
Turning to Slide 7, we recap the excellent fit and finish that are planned year end Questar Pipeline acquisition brings to Holdings shareholders.
A comprehensive Questar Pipeline's asset brings high quality contracted customers with an average relationship length of 49 years.
Questar Pipelines are unique and hard to replace suite of assets that serve strong and growing regional demands and provide strong and consistent cash flows and earnings.
Questar Pipeline is also an excellent cultural fit with Southwest Gas Holdings given our mutual and independent prioritization of safety, reliability, affordability, customer service and environmental stewardship.
For Holdings, welcoming Questar Pipeline store of family increases our regulated business mix, reduces earnings volatility and business risk increases earnings per share, provides strong incremental cash flows, allows us increased participation in the energy transition with opportunities in renewable natural gas, responsibly source natural gas, hydrogen, carbon dioxide, transportation and more.
The acquisition will be done with the flexible financing plan that enables Holdings to maximize returns for our shareholders.
On Slide 8, we provide further insight into the positive ramifications of the Riggs Distler transaction that we closed during the quarter.
This acquisition fits a need that we've communicated to shareholders over the past two years and will accelerate earnings per share and dividends for holdings shareholders.
As mentioned earlier, Riggs Distler's core competencies in unionized electric services, storm restoration, 5G and renewable energy provide Centuri an enviable expansion opportunity to grow its electric services segment, expand further into the renewable energy space and support our nation's traffic changes to reduce greenhouse gas emissions.
We're very excited that the acquisition will be accretive for 2022 likely exhibiting a similar seasonal business revenue profile to Centuri's existing business.
Turning to Slide 9, we show the exceptional growth in EBITDA that the Centuri business was cultivated over the past ten years.
Sorelle successive acquisitions including Link-Line, Newco, Linetec and now Riggs Distler along with organic growth has demonstrated this Board and management team's focus on creating tremendous shareholder value and growing the Centuri business.
2020 EBITDA is five times that experience just 10 years ago while this business could have been sold two, four or six years ago it's continued growth under the stewardship of the Holding Board has allowed continued polish of this gem of a business, while EBITDA valuation multiples for the infrastructure services sector have expanded dramatically over those same periods.
Now more than ever, Centuri is poised to increase Holdings profitability while providing a growing source of cash to fund continued capital investments and our state regulated distribution business.
Moving to Slide 10, the Holdings Board and management team believe our utility oriented businesses, state regulated distribution systems, federally regulated pipeline assets and unregulated utility infrastructure services offer a compelling and complementary investment proposition for our shareholders.
Continued strong growth is inherent in each aspect of the business from strong regional economies, from utilities refreshing aging distribution systems, from significant federal governmental spending initiatives to support new infrastructure and the ability for all of these businesses to support the energy transition that desires to increase renewable opportunities while recognizing customer demands for reliability and affordability.
The businesses exhibit great diversity from very regulatory venues, geographical calls and the symbiotic nature of state regulated segments that grow earnings through significant capital reinvestment with federally regulated and unregulated segments that produce excellent cash flows.
The comprehensive Holdings growth theme of reward shareholders, a strong earnings and dividend growth while maintaining investment grade credit ratings and serving current customer needs while aggressively pursuing opportunities in the years ahead to support increased deployment of renewable energy resources nationwide.
For today's call let's start with the 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 earnings per share of $0.32 in 2020.
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 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 three 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 cost associated with our new customer information system which we implemented in May 2021.
The timing of vacation, other time off and miscellaneous employee benefits were up $2.5 million between quarters.
I should note that last year's third quarter O&M was unusually low and reflected the impacts of COVID-19 which limited to in-person training travel, delayed the hiring of new and replacement employees, and deferred various planned projects.
Excluding the $5 million legal reserve, O&M for the third quarter of 2021 only increased 5.2% cumulatively or 2% -- 2.6% annually since the third quarter of 2019, which was pre-COVID.
The $9.7 million increase in depreciation, amortization and general taxes reflects the impact of the $574 million or 7% increase in average gas plant in service including the new customer information system.
I should note this customer information system is a 100 plus million dollar project with a 15 year depreciable life.
The $6 million decline in other income reflects no change in the cash surrender value of company-owned life insurance or COLI policies this quarter compared to net income of $4.5 million in last year's quarter.
Next, let's go to Slide 13 at Centuri's quarterly results.
Centuri our utility infrastructure services segment results for the third quarter were impacted by one-time transaction cost associated with the Riggs Distler acquisition of $13 million.
Revenues increased $52.5 million or 9% between quarters including $49.5 million from Riggs Distler following the August 27 acquisition.
The overall increase in revenues was somewhat muted by reduced activities with two significant gas utility customers due to timing and mix of work and a slightly lower level of storm restoration work.
The increase in infrastructure expenses was primarily due to the significant growth in overall revenues including Riggs Distler at results.
Profit margins were somewhat hampered by the lower level of storm restoration work, which generally generates-a higher profit margin and reduced operating efficiencies related to the timing and mix of projects with few significant customers.
The $5.8 million increase in depreciation and amortization is primarily attributable to costs added with the Riggs Distler acquisition as other equipment placed and service to support the higher volume of Centuri's businesses.
The $4.3 million increase in interest expense reflects the higher level of borrowings under Centuri's expanded credit facility utilized to acquire Riggs Distler.
Next we'll transition to review our 12-month activities beginning on Slide 14.
This slide depicts the components of the $26.1 million increase in natural gas operations, net income between 12-month periods.
The $72 million or 7% improvement at operating margin reflects $52 million combined rate relief in Arizona, Nevada, and California.
Continuing customer growth provided $13 million of the improvement in overall operating margin.
The increase in O&M reflects $7.3 million of service related pension costs and $1.1 million of higher bad debt allowances.
We continue to work with our customers to establish payment plans for those impacted by COVID-19.
The $31.9 million increase in depreciation, amortization and general taxes reflects the impacts of $579 million or 7% increase in average gas plant and service and the incremental Arizona property taxes that are ultimately recovered under our regulatory tracking mechanism.
Let's move to Slide 15 and Centuri's 12-month activity.
Slide 15 shows the components of the $9.9 million decrease in Centuri's net income between 12-month periods.
As shown, $14 million of one-time transaction costs associated with the acquisition of Riggs Distler caused the decline in earnings.
Revenues increased nearly $188 million or 10% between periods, reflecting $129.5 million of incremental electric infrastructure revenues from both Linetec, which we acquired in November 2018 and Riggs Distler, which we acquired in August 2021.
Infrastructure services expenses increased primarily due to a higher level of revenues.
Depreciation and amortization increased $10.7 million primarily attributable to incremental costs related to electric infrastructure including $4.7 million from Riggs Distler following the acquisition.
Additional equipment and computer systems to support the growing volume of work also contributed to the increase in depreciation.
The next couple of slides are focused specifically on Riggs Distler.
Slide 16 shows, the current primary operating areas Riggs Distler in darker red and the expanded areas where they have performed emergency storm restoration services, including the recent Hurricane Ida in lighter red.
We are excited about the solid Union Electric Foundation that Riggs Distler provides and the expansion into ESG and energy transition work.
About a month ago, we announced that Riggs Distler had been selected as a general contractor for the Orsted/Eversource Sunrise Wind project in New York.
We will be responsible for building and assembling wind tower foundation parts onshore for use in this offshore wind project, this is the one piece of the growth that we expect from our acquisition of Riggs Distler.
As John mentioned earlier, we anticipate $600 million of revenue growth from Riggs Distler through 2024.
It will be a building process over time such that Riggs Distler will not only be very profitable on a stand-alone basis, but it is expected to cover the interest carrying charges and acquisition intangibles, amortization and be accretive to earnings per share in 2022.
Slide 17, depicts the initial asset allocation of the Riggs Distler acquisition in August 2021.
The weighted average useful lives of the property and equipment, as well as those of the amortizable intangibles are designed to provide additional clarity and to the expected amounts of depreciation and amortization to reflect in 2021 and forward.
On the right side of the slide, are the key terms of Centuri's amended and restated credit facility at $1.145 billion Term Loan B that we utilize to finance the acquisition.
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.
A 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 at 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.
Turning to Slide 19 and consistent with prior guidance that we provided about rate case timing, we filed the Nevada rate case during the third quarter.
As previously mentioned, the Nevada Commission preferred us to file most frequent rate cases, to timely recover our investment in the recently completed customer information system.
In addition to this investment, the primary driver of the request is to reflect the ongoing investments to support customer demand from new growth, as well as continuing efforts to modernize our system to ensure safe and reliable service to our customers, including minimizing fugitive methane emissions.
The request includes the proposed increase in revenues of $30.5 million resulting from an increase in rate base of nearly $250 million and almost 20% increase.
The commission also established a COVID-19 regulatory asset early in the pandemic.
And we are requesting recovery of over $6 million of revenue related to the deferral of late payment charges, we're requesting to recover this amount over a period of two years.
We anticipate the test year ended August 2021, and we plan to request for approval of an adjustment for up to 12 months post test year plan.
Based on our proposals, we anticipate a proposed increase to rate base of about 35% to 40%.
Moving to Slide 20.
Last week, the ACC approved 100% of the requested revenue requirement associated with our COYL and VSP filings that John mentioned.
The $14 million associated with the COYL program will be recovered over a period of one year starting this month.
And the $60 million related to the VSP program will be recovered over three years, beginning March of 2022.
We're appreciative of the commission's commitment to consider these amounts and allow recovery over a reasonable period of time.
Lastly, moving to Slide 21.
This simply would not be possible without the support of our regulators through constructive rate case outcomes combined with support of regulatory mechanisms.
Slide 21 also highlights some of these key regulatory mechanisms that have contributed to our ability to deliver on the mutual goals of providing safe, reliable service and supporting growth within our service territories as well as partnering with key stakeholders to pursue initiatives to help reduce greenhouse gas emissions and support a clean energy future.
I'll start on Slide 22.
Our regulated utility customers give us high marks for customer satisfaction.
In a survey of customers conducted through a third-party research firm, our customer satisfaction scores were an impressive 95% on a 12-month rolling average.
And we are proud to rank number-one for utility customer satisfaction in three 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-one in the West for utility digital experience.
This ranking affirms 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 an even higher level of service to our customers.
These survey results are a testament to the excellent quality of service we provide our customers and a primary reason why 91% of customers surveyed in Arizona, California and Nevada indicated that they want natural gas in their homes.
Turning to Slide 23.
We provide information on our diversified and growing customer base at the utility.
Customer growth in our service territory continues to be robust.
In fact, we added 37,000 first-time meter sets over the past 12 months as people continue to move to the Desert Southwest.
In addition, we have decoupled rate designs in all three service territories that reduce volatility for both our customers and the company.
Slide 24 illustrates our strong liquidity position.
We have a $400 million revolving credit facility and a $250 million term loan.
As of the end of September, we have nearly $523 million availability of combined borrowing capacity and cash.
We highlight our capital expenditure program and funding sources for the three-year period ending December 2023 on Slide 25.
To serve new customer growth and ensure the safe and reliable natural gas service our customers expect, we anticipate capital spending of approximately $2.1 billion over the 3-year period.
We plan to fund the $2.5 billion combined capital investment and stockholder dividends with 50% from operation cash flows.
And the remaining balance was an equal mix of debt and equity.
On Slide 26, we show the five-year rate base growth expected from our ongoing capital investments in our natural gas distribution system.
We expect to grow rate base from approximately $4.5 billion at the end of 2020 to $6.5 billion at the end of 2025, which translates into a 7.5% compound annual growth rate.
Moving to Slide 27.
You can see that we have a stockholder dividend of $2.38 per share.
The dividend has increased each year for the past 15 years, and we have a compound annual growth rate for the past five years of 5.8%.
We target a payout ratio of between 55% and 65%.
Our earnings per share guidance for 2021 is shown on Slide 28.
As we approach the final quarter of 2021, we have refined our previous guidance to a range of $4 to $4.10.
The adjusted earnings per share excludes the transaction costs for the recently announced acquisition of Questar Pipelines, the partial year results in costs from the Riggs Distler acquisition and costs associated with the activism response.
On Slide 29, we provide line item support for our 2021 earnings per share guidance range.
At the natural gas operations, we expect operating margin to increase 6% to 8%, pension costs to be relatively flat, operating income to increase 4% to 6%, up from a previous range of 3% to 5%; COLI earnings to be $5 million to $7 million and capital expenditures to be $650 million to $675 million.
At the Centuri Infrastructure business, revenues, excluding Riggs Distler for 2021, are expected to be 1% to 3% greater than the record 2020 amount.
And operating income, excluding Riggs Distler, is expected to be 5% to 5.4% of revenues.
Meanwhile, Riggs Distler is expected to generate revenues of $150 million to $170 million with an operating loss of $11 million to $13 million from the date of acquisition.
Total interest expenses increased to a range of $19.5 million to $20.5 million due to the term loan and credit facility in connection with the Riggs Distler acquisition.
Net income expectations are net of noncontrolling interest and the Canadian exchange rates can influence results due to our Canadian operations.
Finally, we anticipate transaction-related expenses at the corporate and administrative level due to the Questar Pipelines acquisition and activism response of approximately $25 million to $30 million.
Turning to Slide 30.
We provide our longer-term expectations.
At the Southwest Gas Holdings level, we are announcing an earnings per share growth range for 2022 and 2023 of 5% to 8% based on adjusted 2021 earnings per share guidance.
We also expect equity issuances of $600 million to $800 million over the three years ending in 2023 and as I previously mentioned, a target dividend payout ratio of 55% to 65%.
At the regulated natural gas utility, we expect capital expenditures to be approximately $3.5 billion over the five years ending in 2025 and a 7.5% compound annual growth rate for rate base for that same period.
At the infrastructure services business, we expect revenues to increase 27% to 33% in 2022 with a full year of Riggs Distler operations.
And 2023 revenues are expected to increase 7% to 10% over 2022.
Operating income is expected to be 5.25% to 6.25% of revenues during 2022 and 2023.
And EBITDA is expected to be 11% to 12% of revenues during that same period.
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'll continue to pursue successful regulatory partnerships on the many initiatives described by Justin earlier and look for expanded opportunities and helping address national goals for greenhouse gas emission reductions.
All of this with anticipation of a strong growth trajectory or 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.
We believe this business has great opportunities in the energy transition as it expands its electrical portfolio, grows its renewable opportunities and partners with natural gas distribution utilities to expand and refresh the natural gas infrastructure critical to support the anticipated increased deployment of renewable energy assets across our country.
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.

user
q3 utility infrastructure revenues increased $52.5 million.
qtrly consolidated loss of $0.19 per diluted share.
southwest gas - adjustments for q3 consist of a $5 million legal reserve at utility and centuri's deal costs for riggs distler acquisition of $13 million.
well positioned for meaningful earnings growth in 2022.
estimated diluted earnings per share for 2021 excluding costs is $4.00 to $4.10.

assistant