Southwest Gas Holdings, Inc. (SWX) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and thank you for your patience, you have joined the Southwest Gas 2015 Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference maybe recorded. I would like to turn the call over to your host, the Vice President of Finance and Treasurer, Mr. Ken Kenny. Sir, you may begin.

Thank you, operator. Welcome to Southwest Gas Corporation’s 2015 third quarter conference call. As the operator 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 Web site at www.swgas.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, Southwest President and Chief Executive Officer; Mr. Roy R. Centrella, Senior Vice President and Chief Financial Officer; and Mr. Justin L. Brown, 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, 2015, and an outlook of the remainder of 2015 and a preliminary outlook for 2016. 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, Page 2 of our presentation today, 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 would like to turn the time over to John.

Thanks, Ken. For today's call, I would first like to briefly touch on some highlights from the third quarter, and then turn to our outline for the rest of the call. Starting on slide 3, our natural gas operations, we had 26,000 net new customers for the 12 month period ended September 30 of this year. Construction progress on our $35 million Paiute Pipeline Elko Lateral is proceeding nicely and we expect the new lateral to be operational next month. And we received approval last month from the Public Utilities Commission of Nevada to proceed with $43.5 million of accelerated pipe replacement for 2016. On the construction services side of the house we realized record quarterly revenues and earnings contributions. We continue to pursue negotiations related to the Canadian industrial project for which we had previously provided loss reserve and we remain very enthusiastic about the future prospects for the construction services group as gas utilities across the nation continue to ramp up their safety oriented pipe replacement efforts. Turning to slide 4. This past month we filed applications in each of our state regulatory jurisdictions for approval to reorganize as a holding company. We believe such a reorganization will help provide additional separation between our regulated and unregulated businesses as well as provide additional future financial flexibility. Reorganization is subject to securing the previously mentioned state regulatory approvals, along with consent from third-parties and the final approval of our Board. Based in part on the requisite regulatory time [course] [ph] we believe that the reorganization could become effective in the second half of 2016. Moving to Slide 5, our outline for the rest of the call would be as follows. First, Roy Centrella will provide an overview on our consolidated results ended September 30, along with breakdowns for both natural gas operations and construction services segments. Justin Brown will provide a report on the regulatory activities and I will close with updates on customer growth, capital expenditures, dividend growth and our outlook for the rest of 2015 and on into 2016. With that, I will now turn the call over to Roy.

Thank you, John. Let me also welcome those of you joining us today. I’ll provide a comparative summary of third quarter and rolling 12 month operating results for both operating segments and identify the factors which we expect will impact full-year 2015 results. Starting on Slide 6. During the third quarter 2015 we reported a net loss of $0.10 per share versus net income of $0.04 per share during the third quarter of 2014. Small losses are not uncommon in the third quarter which is typically the worst for the Gas segment and the best for the construction segment. So last year's positive earnings was more the anomaly. The Gas segment experienced a loss of 18.9 million the quarter, a decline from last year's third quarter loss of $11.5 million. Centuri experienced record net income of 14.2 million versus 13.4 million previously. For the 12 month period, we earned $131 million or $2.80 per basic share versus $140 million or $3.01 per basic share during the prior period. Next, we’ll look at results by segment, starting with Gas Operations on slide 7. The Gas segment operating loss during the quarter widened to 9.3 million this year from $2.7 million last year. Operating margin grew by 2.1 million but was more than offset by higher operating expenses. We also experienced a loss of $3.5 million on the other income line versus $442,000 of income last year as company owned life insurance or COLI returns were negatively impacted by poor stock market returns. Now the market has rebounded nicely since the end of September but it is difficult to predict where COLI will end up for the full year. Interest expense was a bright spot, declining $900,000, due to debt redemptions earlier this year and late last year. I'm going to skip Slide 8, showing margin growth and move on to slide 9, and operating expenses. You will see that operating expenses overall increased $8.7 million or 5.6% between quarterly periods, including a $6.7 million increase in O&M, and a $2 million uptick in depreciation and amortization. O&M change reflected higher pension, medical and labor cost, but also was affected by timing relative to last year. By comparison on a year-to-date basis operating cost are up to a more modest 2.3% and for the full-year we now expect about 3% growth rate at the low end of our published range of 3% to 4%. Moving to Slide 10 we break down the other income and deductions which declined by $4 million between quarterly periods. Investments underlying the COLI policies declined by 3.9 million in the most recent quarter whereas they decreased $300,000 to last year. Slide 11, we will review the 12 month period on slide 11. The gas segment contribution to net income decreased to $113 million from $118 million. However there was a $3 million improvement in operating income as growth in operating margin exceeded operating cost increases. In addition, interest cost decreased $3.7 million between periods, due to the debt redemption mentioned previously. So the driver of the income reduction therefore was other income and more specifically COLI returns, which were extraordinarily high in the prior period. Slide 12, provide the breakdown of the $11 million growth in operating margins between 12 months periods. We recognized $8 million of new margin from customer growth, as the company added 26,000 net new customers, a growth rate of 1.4%. Rate relief in California and at our Paiute Pipeline subsidiary contributed about $5 million. Moving to Slide 13, operating cost between periods increased just $8.2 million, or 1.3% as increases in depreciation and property taxes were largely offset by O&M costs which declined $5.1 million between periods. The O&M change was mainly caused by a $5 million legal accrual from 2014 which did not recur and lower rent expense at our headquarters complex. Slide 14 provides a summary of other income and deductions which decreased from $9 million to $1.7 million between 12 month periods. Of note here is that both periods reflected COLI income outside of our expected range of $3 million to $5 million, with the 2014 period reflecting a much higher level and 2015 period much lower. Now let's turn our attention to Centuri. Slide 15 provides the summary income statement for the quarterly and 12 month periods for Centuri. The third quarter is traditionally Centuri’s strongest earning period of the year as construction activities are at their pick level in most of their operating areas. As noted earlier, Centuri achieved record net income of $14.2 million during the most recent quarter, exceeding the prior period then record of $13.4 million. For the 12 month period, revenue increased 40% reflecting organic growth and a full year of revenue from the Link-Line acquisition. However operating income only improved to 21% and net income declined from $21.9 million to $17.7 million. Several significant items are responsible for the results but I will review in a minute. With the acquisition one year passed, we will get better comparative data beginning with fourth quarter. Both our U.S. and Canadian operations are operating at high capacity level into the fourth quarter. For the full year, in part due to foreign currency translation, we expect revenues of approximately $950 million at the low end of our projected range. Slide 16, third quarter revenue of $286 million was $80 million or 39% greater than last year at this time with nearly half of the increase coming from organic growth and the remainder due to the acquisition. Construction expenses increased $73 million or 42% between period with $39 million attributed to the acquisition and the remainder from organic growth. Depreciation and net interest deduction were both increased between periods principally as a result of the acquisition. Overall we experienced the solid bottom line improvement from $13.4 million to $14.2 million. And slide 17 summarizes the 12 month results and highlights the unusual items which affected both periods. There were three noteworthy items, construction expenses included $7.7 million of the last reserve on industrial project in Canada as previously disclosed. So no additional revenue was recorded this period, remediation is now scheduled later this month and we remain hopeful for resolution by year end. G&A expenses in the current period include $5 million of acquisition cost recorded in the fourth quarter of 2014 and the prior period included $4 million associated with legal settlements recorded in the fourth quarter of 2013. I think when you remove the [indiscernible] from these unusual items, you get a better picture of the operating result essential for Centuri and the most recent trends. Let me now turn the time over to Justin Brown to provide a regulatory update.

Thanks, Roy. This is on slide 18, our 6Q regulator topics, most of which we have been reporting on over the course of the year and my comments today will focus primarily on update each of these items. Starting with California attrition, you may recall we have received approval at the beginning of this year that increased margin by $2.5 million as part of the annual attrition increase as they were approved as part of the last general rate case. The rate case decision authorize us to make annual margin increases of 2.75% per year for calendar years 2015 to 2018. We are currently preparing and are on schedule to make this year’s annual attrition filing by the end of this month and this increase will become effective January 2016. As we have discussed in previous calls, one of our key regulatory initiatives has been to establish infrastructure replacement mechanism in each of our jurisdictions in order to timely recover capital expenditures associated with project that enhance safety, service and reliability for our customers. As John mentioned earlier, in Nevada the commission recently issued a decision approving our proposal to replace $43.5 million of COLI fine projects. These projects were proposed as part of our advanced application was filed in June of this year. This year's proposal included $16.1 million of early vintage plastic pipe and $27.4 million of vintage steel pipe for total of $43.5 million. Work on these projects will be performed over the next 12 months. The Nevada infrastructure recovering mechanism regulations also permit us to make a separate annual filing to implement a surcharge to recover the deferred revenue requirement associated with previously approved and completed projects. We are currently collecting in rates $2.2 million annually as a result of last year's rate application that was approved and became effective at the beginning of this calendar year. Similar to 2014, we made a filing last month proposing to update the surcharge to collect $4.5 million of additional deferred revenue requirement associated with previously approved and completed work. The regulation provide a surcharge s to become effective January 1, 2016. In Arizona we are currently collection $2.5 million associated with the customers in the yard line of COLI program. The program was approved as part of our last Arizona rate case decision and was most recently expanded in 2014 to include a phase II for the replacement of certain non-leaking customer lines. The $2.5 million is currently being collected in rates is based upon total capital expenditures of $16 million of which $6.3 million was incurred during 2014 for both phase I and phase II. Our next filing update these amount is scheduled for February 2016. Lastly, in California the California Public Utilities Commission approved our proposed infrastructure reliability and placement adjustment mechanism or IRPAM in June 2014 as part of our most recent rate case. Initially, the commission limited their approval to COLI inspection and leak survey program for schools. We have been working to contact COLI fine schools and we will perform leaks surveys on the facilities of those schools that chose to take advantage of the program. The IRPAM will facilitate the recovery of any incremental cost associated with this program. Turning our focus to expansion and reliability projects, we continue to make progress on the construction of our liquefied natural gas storage facility that was approved by the Arizona commission. You may recall late last year we received a pre-approval from Arizona corporation commission to construct $55 million liquefied natural gas storage facility in Southern Arizona. We recently completed the purchase of this site for the L&G facility and we are preparing to construction requirements fit package for potential contractors. We anticipate having a construction contract in place near the end of the first quarter of 2016 and we anticipate construction taking up to three years to complete. In Nevada construction of the Elko expansion project is getting close to completion. In June of 2014, our Paiute Pipeline subsidiary made a formal application with the Federal Energy Regulatory Commission requesting approval to build the 35 mile, $35 million lateral to interconnect Paiute with Ruby pipeline and increase gas supply deliverability to Elko and Nevada. In May, work issued and order authorize in a certificate and public convenience necessity to Paiute to construct and operate the project and subsequently provided a formal notice to proceed. Following receipt of the notice to proceed, construction being on 35 mile pipeline project, nearly four months later construction is nearing completion and we are on target to complete the project and have it in service for our customers before year end. During this year’s Nevada Legislative Session SP151 was introduced and passed unanimously by both Houses and signed in the law by the governor in May of 2015. SP151 requires the Public Utilities Commission of Nevada to implement regulation authorizing natural gas utilities to expand their infrastructure consistent with the program of economic development. This can include providing natural gas service to un-served and underserved areas in Nevada as well as attracting and retaining residential and business utility customers and accommodating the expansion of existing business customers. We have been working with various stakeholders over the past several months developing proposed regulations for the Commission’s consideration. The proposed regulations have been submitted to the Legislative Council Bureau for review and we expect them to be return the Commission for a vote by the end of the year. Lastly, we are still on target for filing an Arizona rate case next year. You may recall that some of the conditions of our last rate case settlement precludes the filing in any sooner than April 30th, 2016 and prohibits new rates from becoming effective any sooner than May 2017. You may recall that another condition from the last rate case settlement was to include to depreciation study with our filing. On average, our existing depreciation rates runs close to 4.5% and have been in place for nearly 30 years whereas current industry average s closer to between 2% and 2.5%. As such we agreed to include with our rate application a depreciation study proposing to adjust our existing depreciation rates to more closely reflect current market conditions. And with that I will turn it back to John.

Thanks Justin. Moving to slide number 19, we continue to experience growth in our customer base of 12 months ended September 30, we added 26,000 customers. Turning to slide 20 we continue to see unemployment rates decline across the service territories along with positive overall employment growth and slide 21, we review our previously disclosed capital expenditure expectations. We expect to invest $445 million for 2015 and $1.3 billion for the three year period ended 2017. Moving to slide 22, continued reinvestment at utility result year-on-year increase in our net utility plans over the past four years, we have seen this metric growth on an annualized basis 25.8%. Turning to slide 23, we illustrate the increases in our dividend that we have been able to make over the past several years. The compounded average, rate of increase and the dividend has been over 10% since 2010 the dividend policy is to continue to make progress towards the industry average payout ratios understanding that the unregulated construction services segment contribute a lower share of earnings than the regulatory utility segment. On slide 24, we begin a review of our expectations for the rest of the 2015. We anticipate operating margin to increase by nearly 2%. Net new customer growth margin should be similar to 2014. In addition we expect incremental margin from regulatory decisions that will approximate the amount generated by new customer growth. Operating cost for 2015 are expected to increase by 3% over 2014.The operating expense expectation include the negative impacts of higher pension cost and other employee related expenses increases in the depreciation and general tax, this should increase consistent with our growth in gas plant service. As a result operating income for 2015 is expected to be about 1% to 2% lower than $241.6 million recognized in 2014. Moving to slide 25, we observed the $2.6 million decrease in the surrender value of our company owned life insurance policies through September 30 that said as Roy mentioned the October rebound in the equity market should provide some increased evaluation for the policies. Since we don't know where the equity margins will be at year end, we can't predict the year end change in value to folio policies but overtime we expect $3 million to $5 million of income on an annual basis. The net interest deductions for 2015 are expected to be approximately $4 million lower than the $68 million recorded in 2014 and as I mentioned earlier capital expenditure should total about $445 million for the year. Turing to our construction services outlook for 2015 on slide 26, our integration of the Link-Line group of companies is now largely complete. Year end revenues of Centuri are expected to approximately $950 million which is at the low end of our previously disclosed range. Again as Roy mentioned and part due to the strength of the U.S. dollar viz-a-vie the Canadian dollar. Constructions services segment operating income should approximate 6% of revenue excluding the $18 million revenue and $7.7 million loss reserve associated with industrial construction project in Canada. The interest deduction are estimated $8 million collective expectation or the full consideration of non-controlling interest, based on these forecast values contribution to net income assuming no resolution of Canadian project loss reserve before year end should range between $22 million and $25 million. Finally for our 2016 outlook on slide 27 our natural gas operations we expect to grow margins to customer growth. Infrastructure tracking mechanism expansion projects in California attrition, we further anticipate that operating expenses and interest expense will likely offset the anticipated improvement margin and as Justin mentioned, we also look through the aspiration of our Arizona rate case moratorium affected April 2016. And for our construction services segment, we think the theme of utility infrastructure investment across the country both well for this business. Looking forward we expect 2016 revenues to grow by 7% to 10% and for operating income to approximately 5.5% to 6% of revenues. With that I will return the call to Ken.

Thanks, John. That concludes our prepared presentation. For those of you who have access to our slides, we have also provided in the appendix with slides which includes other pertinent information about Southwest Gas and can be reviewed at your convenience. Our operator, Latif, will now explain the process for asking questions.

Thank you, sir. [Operator Instructions] And with that our first question comes from the line of Matt Tucker of KeyBanc Capital Markets. Your question please.

Hey guys, how are you doing? First question I guess on the 2016 outlook in natural gas, I guess to me it sounds like you are saying interest expense is likely to be up next year. So, (a) is that the correct way to read it and (b) maybe you could discuss a little bit of your financing or refinancing plans?

We try to look out at 2016 on the gas segment, we could certainly see margin growth coming from the customer additions like we have been saying the Elko expansion, the infrastructure mechanism, and California attrition et cetera, and our operating cost we see those moving up driven mostly by CapEx and the resulting impact and depreciation property taxes but I think as we mentioned in our Q, we are covering about 75% of our CapEx with operating cash flows. So we are going to need to cover the remaining 25% with some accommodation of the debt and equity. At this point, we have no specific plans that have been announced, so I can't really offer that up; we do have some capacity left on our equity shelf program but clearly that still would leave some shortfall that would be covered by some form of debts. So I think your assumption is valid and hopefully by year end we’ll have more clarity around the specific financing that would be required.

Got it, thanks. And then additionally on natural gas and looking ahead to the rate case filing in Arizona, is there anything you can talk about in terms of tracking type mechanisms that you will be asking for in that filing to help avoid some of the regulatory lag that you may be seeing during the extended rate freeze?

Hi, Matt, this is John. Yes definitely that’s going to be one of the key things we are going to be looking at including the filing. As Justin mentioned little earlier on the call today, we have had a lot of success with the customer on yard line program. I think that the regulators have been very supportive of that. Of course ultimately that mechanism is designed to provide cost recovery for what otherwise would be non revenue producing infrastructure and I think that when we put together our Arizona filing we probably will look to put together a broader mechanism that would be something more similar to what you have seen in the Nevada for example.

Okay, great. Shifting gears to Centuri. I guess first question on the Link-Line companies, have been surprised the way the revenues have been trending this year and I realize that the foreign exchange has been a headwind but we know they did about 250 million in revenue in 2013 and based on the run rate this year I think even with the foreign currency headwind it seems like they coming in well below that. So I guess I mean maybe if you can comment on whether you think that’s accurate and if so if there’s anything special about 2013 or about this year that can help us understand why the revenues may be lower.

Sure, this is Roy. Couple of things to note there. Certainly, the exchange rate was a factor, from 2013 we were getting about $0.89 to the dollar. The Canadian dollar was getting about $0.89 U.S. at current rate it’s more in the $0.75 range. So there’s a sort of an immediate haircut that will take place for that. I can tell you the replacement work with our two major customers up there is beating expectations. I think where the shortfalls are occurring - one more thing on the exchange rate, even though that’s affecting the top line we have our cost structures also being paid in Canadian dollars and we have pushed a lot of the debt for the acquisition up into Canada so as to not strand cash up there and so we are not seeing significant impact on the bottom lines despite the exchange rate. Now returning to the other factors, the fabrication work that we acquired with the Nicholls company it tends to be more project oriented and while we have actually won recently some bids of those we are still negotiating the contracts for them and so some of that work is going to be pushed out into 2016. So that’s been a factor. And probably the last piece of it is our midstream work in Pennsylvania has been very slow due the low oil and gas prices there. So while our expectations weren’t high maybe 20 to 30 million of revenue in that area, we are probably looking at something less than 10 this year. At the same time we are looking at maybe other opportunities for the workforce there in the future such as replacement work. So hopefully that helps give you a picture.

Thanks for that. That was very helpful and if I can just ask one more and then I will jump back in the queue. On a more positive note the organic growth or the kind of legacy MPL growth has been really strong this year. So I guess (a) maybe if you can just talk about what’s been going on there and then looking at your guidance 7% to 10% growth for next year, how should we think about that, it’s a deceleration it seems from the growth you have been seeing at like legacy MPL, maybe stronger than what Link-Lines been doing, if you can just help us understand how you got to that 7% to 10%.

Yes, I think that, some of what you have seen so far from MPL, the MPL U.S. operation has been, there has been certainly timing that comes into play, I think when you look year over year to the full year - we have some work in Mid West part of the country that was done this year in the second quarter or third quarter that was done more in the fourth quarter. So there is some of those kind of timing issues but on a full year basis for looking out we don’t have as much visibility this early in the process as we are going to have let’s say by the time we roll around to early next year February-March time frame. So from what we can see right now we projected that 7% to 10%. I think we can refine that early next year, I don’t know John, if you have any other observations.

Thank you. [Operator Instructions] Our next question comes from the line of Tim Winter of Gabelli & Company. Your question please.

On the Arizona impending or upcoming rate filing, you guys haven’t earned ROE for the Arizona jurisdiction as of say the trailing 12 months.

Good afternoon Tim, this John. We don’t provide that. I think there’s a slide in the appendix maybe that shows what’s the difference between our overall authorized rate of return is and what our actual earned rate across jurisdictions is. I think if you take into mind that we have had the California rate case with the attrition, we have had our recent Paiute rate case and we have the ability to go in for a better rate case but we are not doing that just yet. It wouldn’t be unreasonable to assume that a lot of the shortfall between those two numbers probably is attributable to Arizona but no we don’t issue or publish an actual earned rate of return for each jurisdiction.

Okay, okay and then just to, moving over to Centuri, just better feel of what normalized earnings would be this year. If we just sort of add at some point $7 million reserve loss to the $22 million to $25 million of net income, would that be more of a normalized number and then if I just finish the math equation for you which you have provided for ’16. I get about $33 million in net income, would that be sort of what you are walking us towards?

Well, I think we tried to provide a range on 2016 rather than a specific number showing the 7% to 10% revenue line 5.5% to 6%, operating income, so that wasn't meant to be a single number.

So why do you struck the midpoint, are there any other items other than, say the tax rate and the interest expense that we should consider as we --

Really it's just the interest expense would be the other item that's not delineated there and this year we're projecting $8 million, I think it's a fair starting point off where we pay down some debt over the course of the full year. But it's variable rate there, then so with the Fed and others looking they're essentially raised rates. I think 8 million is not a bad proxy for interest. It's ` answer the first part of your question which will alter the current year.

Yes, I just wanted to -- if there is any other item which to consider, that we're trying to normalize the number.

Yes, if that you're working out the year-to-date number then you're right. If you are working out 12 month number then I believe we'd also mentioned that there is the cost of the acquisition by [indiscernible] acquisition parsed in there. So if that wouldn’t be an year-to-date number, but it is in the rolling 12 month number.

[Operator Instructions] Our next question comes from the line of Dan Fidel of US Capital Advisors, your question please.

Just a couple of questions on my side, can you just maybe give us a little bit more color kind of what you are trying to let us know on the potential for recovery of the construction contract, i.e., and future periods rather than a few months into early next year, your expectations for a reversal in that reserve.

Hey Dan, this is John; for the resolution of that we're going to be having a mediation session in the near future and what we are trying to say is that we don’t know if that mediation is going to be conclusive of results in this calendar year. So it could happen in this calendar year or if the mediation doesn’t go successful or for some other reason it drag itself that will be on into 2016.

So, it's not --

So there's just some uncertainty certainly with respect to the result but also with respect to the timing.

Is it your -- I just want your sense that your expectation that you still do expect to recover some of that, just the amount and timing is what's kind of in question, may not fall into this year, but you'd expect that we've some of it and at some point maybe fall in future periods.

I think that's a fair characterization Dan.

And then just as that applies to the Arizona rate case coming up, you'd mentioned an expectation about going in for depreciation study or rather did not reset on the depreciation, can you give us a little bit more color in terms of what that could mean, I guess potentially we've seen reset depreciation rates from other companies and can often be a kind of large kind of lumpy number when that adjustment is made. Can you give us a little bit of guidance in terms of how you see that playing out with the rate case?

This is John again. I think Justin talked a little earlier in the call, and what we have currently in Arizona, and with easy more commonly across utilities space, so the depreciation rates we had in place in Arizona, have been in place for a long time, and it's part of the last rate case settlement we agreed to put in a new depreciation study which we haven't done in Arizona in a long time. However, in each of our other jurisdiction we do that on somewhat of a regular basis. So to the extent that where we use the term lumpy, I think that that's what we are anticipating is that when they do that study and realize the depreciation rates that would be an offset to the otherwise revenue requirement that we would receive as part of that case. Does that answer your question?

Yes, it does, that's good, okay great. And then just last question from me and I will hop back. I think the past you talked about interest in a gas reserve program or somewhere kind of filing in Arizona, or at least looking at it. Can you just give us an update on where you're out with that?

Sure Dan, we're still looking at that. We still have been talking to a number of counterparties. What we're trying to do is make sure that we find the right asset and the right partner to move forward with that. We think that that's something that the regulators would at least be open-minded to. And we haven’t come forward with the proposal yet, because we haven’t nailed down an exact property and partner that we would like to proceed forward with that. We want to have that kind of tentative agreement before we go into any of the commission and just ask for some kind of blanket authority to proceed with something like that. We want to have more of the details now then, but the regulators understand what we're proposing to do. How that is likely to benefit our customers and when we get to that point then you'll probably see us consider moving forward with the application.

From a timing standpoint would you expect something in the next year, likely.

I think that's a definite possibility.

[Operator Instructions] The next question comes from the line of Chris signoffee of Jeffries; your question please.

Thanks for the details, and I appreciate the slide presentation you provided and the color on the call. I guess a couple of follow up questions to some of the earlier questions. Roy, Tim had asked about the Centuri operations and sort of comparability, I just want to confirm, there's no expectation of recovery on the loss reserve in either the '15 or '16 forecasts, correct?

That's correct.

Okay, second do you do you have an official U.S. dollar -- Canadian dollar exchange rate that you're using when you talk about '16, or should we just think about where rates are kind of right now?

Yes, I think the current visibility we and it's around $0.75 to a dollar.

And then to two others if I could, thoughts on with regard to the [indiscernible] evaluation that you had announced a little while ago. I know in the past, you guys and Jeff had talked about certain threshold disperse in Centuri and that which would make sense for perhaps a reevaluation based on your projections, you're kind of add those thresholds now. But I'm curious if there was anything else that prompted the decision now by the board to look at this or any other sort of thoughts or words of guidance with regard to that?

Chris, this is John, I think that certainly to have some optionality for the construction business would be one of the benefits of having the COLI structure in place, but I think that when you look at our utility peers we're kind of in a small group of companies that don't have that flexibility. And we think that if we get that in place that not only would we have more optionality associated with the construction business but there might be other things that we want to do things that we're not even thinking about right now; that we don't want to get to a position where we have an opportunity and we say, well jeez if we had a holding company structure we could do this but we're not really able to do it now. So I think it's a pretty common structure for utilities. We've had initial discussions with each of our state regulators. We haven't really had any pushback. Most of our peers have that structure so it just gives us the increased latitude to do things in the future including think that we don't envision at the current time.

And John, I mean it makes perfect sense to us. But is there and it really involving the evaluation other than to just make sure that regulators are fine with you moving forward or is there anything more detail than that, and any time frame you could speak to in terms of Asia point of trigger on the reorganization?

Yes, sure, I think that when you look at the time clock that we have we are probably thinking that in 6 to 12 months we would get the approval and as it suggests Chris, the regulators are going to want to do a review, ask us questions etc, but I don't anticipate that there really is anything particularly controversial that's going to come out of that review and evaluation.

Okay, perfect, and final one, John, if I could; it's just with regard to the guidance for the natural gas business since '16, some of the costing items that you're expecting to rise next year? Given the timing of the rate case filing and the historical test here at the Arizona employees, just can you remind us when is the test here going to be for the Arizona filing and how much if any of the costing items are you envisioning might get included in that?

Sure, Chris, the earliest test that we can use his November 30, the 12 months end at November 30 of this year. And then if we have to additional items that we want to propose adjustments to the test period cost, we are able to do that and then that the regulator will consider whether they want to accommodate those in the rate structure.

We have a follow-up question from Matt Tucker of KeyBanc Capital Markets; your line is opened.

Just a few follow-up from me, on the Centuri side, I guess first I was wondering if you are seeing any change in competition, any pressure on pricing just as some of the shale work, maybe some of the other pipeline contractors are more focused on a slow down, have you seen any of those types starting to encroach on your utility type work?

Matt, this is John. No, we haven't seen any particular change in pricing pressure. There are certain of those dynamics out there that are going on, but MTL and Link-Line have really strong established relationships with a lot of their existing customers. They try to pursue and align this type of relationship where items can be identified that can both partner on strategically going forward. That's something that's reality out there. But how easy those types of entities that you refer and convert over from midstream markets, the type of work we do which is primarily with regulated utilities, we haven't seen that represent any kind of pricing pressure for us.

Okay, thanks and then just looking at your 2015 outlook for Centuri, when I look at what that implies four fourth quarter revenues and in earnings with just a quarter left, it would seem like you would -- you're expecting to have much stronger margins in the fourth quarter then you had maybe the past couple of years, is that a fair assessment and is there anything you can tell us as to where that might be the case this year?

I think, for one thing, as the Link-Line group, the pricing well it does, but their contracts go deep into the year, so the two strongest quarters are third in the fourth quarter whereas the MTL tends to be the second and third quarter. So hopefully because of that and the other factor that there is, as I mentioned earlier, both companies are really going strong early to the fourth quarter and that we would see a good healthy return in that as long as last three months.

And then just last one, kind of follow up on the Holco reorganization and the optionality that could give you with respect to Centuri and he discussed how there are certain thresholds of which you may consider strategic options for Centuri and those are quite or we be reaching -- do you expect the board to be considering this as a strategic options next year ahead of the reorganization terms are been approved so that you could essentially do something pretty quickly or does that conversation maybe only begin once the reorganization is approved, I mean can maybe talk just a little bit more about the timeline there?

Sure Matt, this is John. I think that what we said in the past, we have given some minimum thresholds for the size of the business that we thought made sense in terms of pursuing optionality, but the other thing that we are mindful of is that the business mix between the unregulated and the regulated segments. So when we look at our unregulated segment with see a lot of potential for growth as we talked about on this call, the dynamics of regulated natural gas utilities doing the pipe replacement, and be compare that to what we see at the utility, we have not stagnant on the utility. When you look at the type of capital budget coming through years of 1.3 billion and $2.5 billion or so of rate base, I think we're going to be looking at two things. First of all we are going to be looking to see the scale of the construction business and is that at a threshold where you could actually look at some of those option so to seek. Then secondly you are going to be looking at the relative rate of growth over the utility in the non-utility segments, and if they call that into consideration and make a decision as you see those growth rates going forward. But I don't think that I certainly wouldn't suggest that we are waiting for the holding company application to get approved and then we're going to start the construction business. That's not our plan.

At this time I would like to turn the call back over to Mr. Kenny for any closing remarks.

Thank you, operator. This concludes our conference call. And we appreciate your participation and interest in Southwest Gas. Everyone have a great day. Thank you.