Southwest Gas Holdings, Inc. (SWX) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Southwest Gas 2016 First 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 follow at that time. [Operator Instructions] As a reminder, the conference is being recorded. I would now like to introduce your host for today’s conference Mr. Ken Kenny, Vice President of Finance and Treasurer. You may begin.

Thank you, Vicky. Welcome to Southwest Gas Corporation’s 2016 first quarter earnings conference call. As Vicky stated, my name is Ken Kenny, and I’m Vice President, Finance and Treasurer. Our conference call is being broadcast live over the Internet. For those of you who would like to access our webcast, please visit our website 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; 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 operation and earnings ended March 31, 2016 and a full-year outlook for 2016. Our general practice is not to provide earnings projections. Therefore, no attempt will be made to project earnings for 2016. Rather, the company will address those factors that may impact this coming year’s earnings. Further, our lawyers have asked me to remind you that some of the information that will be discussed contains forward-looking statements. These statements are based on management’s assumptions, which may or may not come true, and you should refer to the language on Slide 2 in the press release and also our SEC filings for a description of factors that may cause actual results to differ or to differ from our forward-looking statements. All forward-looking statements are made as of today, and we assume no obligation to update any such statement. With that said, I’d like to turn the time over to John.

Thanks, Ken. Turning to Slide 3, while we’re still early in 2016, some of our highlights include the Board’s authorization in February to increase our annual dividend to $1.80 per share. The approval represented an increase of approximately 11% and was the 10th straight year, the board has increased our dividend. In addition, with the Arizona Corporation Commission’s approval just this past week, we’ve now received authorizations from each of our state commissions move forward with implementing our proposed holding company reorganization. International Gas segment, we added 26,000 net new customers in the past 12 months. We placed in service our 35-mile – $35 million Paiute Adobe Lateral in January. We continued to replace aging facilities, both Arizona and Nevada under the infrastructure replacement mechanisms we have in those states. And just this past week, we filed a general rate case application in Arizona, first such filing for us in over five years. On the construction services side, we saw first quarter revenues increased by $25 million, or 14% over a year ago. We completed the rebranding of our Canadian Link-Line operations NPL Canada. And just this past month, we hired Paul Daily as our new Centuri CEO. Paul has 35 years of construction services experience and we’re very excited to have him joining our team. Moving to Slide 4, for today’s call, Roy Centrella will be providing earnings summary for both our Natural Gas and Construction Services segments. Justin Brown will follow with a regulatory review, and I will close with an update on customer growth capital expenditures and our outlook for the rest of 2016. With that, I will turn the call to Roy.

Thank you, John. Let me spend a few minutes reviewing our first quarter and rolling 12 months operating results. Slide 5 provides a summary by segment of operating results for the three and 12-month periods ended March 2016 and 2015. Net income for the first quarter improved by 5% between periods from $72 million and $75 million, while basic earnings per share increasing $1.54 to $1.59. An improvement in operating results of the Construction segment was partially offset by slightly lower results at the Natural Gas segment. For the 12-month period, consolidated net income of $142 million was within about 500,000 of the prior period income amount. However, basic EPS declined from $3.06 to $3 per share, due to an increase in the number of shares outstanding. On a segment basis, the significant improvement and the contribution to net income by the construction services business was offset by lower results from gas segment operations and lower returns on company-owned life insurance or COLI policies. Let’s now go through each segment beginning with gas operations on Slide 6. Net income was $77.6 million during the first quarter of 2016 versus $78.9 million during last year’s first quarter. This modest decline resulted from higher operating costs more than offset solid growth and operating margins. Additionally, other income came in little lower than last year. Slide 7 breaks down the $12 million change in operating margin between the quarters. The primary drivers of the increase were $3 million of increased margin from the addition of 26,000 net new customers since March 2015. $3 million of rate relief in California at our pipeline subsidiary and $2 million of other margins principally from our gas infrastructure mechanisms. We also received about $4 million in energy efficiency revenue surcharges, which are directly offset in amortizations. Slide 8. O&M expense increased $5.3 million or about 6% between periods. This cost increase was a function of both timing and scope as the company performed a greater amount of system maintenance and integrity work in this year’s first quarter relative to last year. System integrity involves surveying our lines to search for leaks, locating gas lines at construction sites and the like. For the full-year, we expect any increase any increase in O&M to be fairly modest. Depreciation expense and property taxes combined increased $8.1 million, or 12% between quarters. About half of that increase was due to amortizations of energy efficiency deferred costs noted earlier. The other half reflects impacts of the 6% increase in gas plant service. On Slide 9, we’ll move to the 12-month results. Gas segment net income for the current 12 months period of $110 million was about $13 million lower than the prior period. The decrease was primarily due to higher operating expenses and a decrease of other income, partially offset by improved operating margin and lower net interest reductions. Let’s move to Slide 10, for additional details. Operating income declined $15.4 million between the period. Operating margin grew by $22 million due to rate relief in California, Paiute and from infrastructure mechanisms coupled with customer growth. We also received $6 million from energy efficiency programs with an offset in amortizations. O&M expenses increased $21.7 million, or 6%, due principally to general cost increases, $5 million of higher pension costs, and higher legal claims and expenses. In addition, the costs associated with pipeline integrity management and damage prevention programs collectively increased $4.7 million. Depreciation and amortization expense increased $14.2 million, or 7% between period, as a result of capital expenditures and the energy efficiency amortizations, which are recovered through operating margin. Finally on this slide, net interest deductions decreased $2.9 million, primarily due to redemptions of industrial development revenue costs. Next we will move to Slide 11, and Centuri results. During the three months ended March 2016, Centuri experienced a loss of $2.1 million compared to a loss of $6.9 million in the prior year quarter. The first quarter is traditionally Centuri’s weakest due to the number of sizable customers we have in the East and Midwest regions of the country and Canada where construction work is largely dictated by weather. The improvement between periods was due to a pre-tax loss reserve of $5.6 million recorded last year on an industrial project in Canada. Along with favorable winter weather conditions, which provided a good environment for construction activity in this quarter. Slide 12, revenue increased $25 million, or nearly 14% in the first quarter of 2016, compared to the first quarter of 2015. The majority of the increase was from existing customers and their expanded pipe replacement programs. Construction expenses increased $18.5 million, or 11% between periods. Included in the prior year cost was the $5.6 million loss reserve I discussed previously, which mitigated the change in cost between periods. Next slide shows the most recent 12-month periods during which Centuri’s net income dramatically increased $19.1 million to $31.5 million. The improvement was top line driven as we benefited from a number of factors more fully detailed on the next slide. Overall, though, we think the most recent 12-month run rate is indicative of where Centuri’s operations are at right now. Turning to Slide 14, you’ll see that operating revenues jumped $235 million, or 29% between the 12-month period. $73 million of the increase resulted from having a full-year revenue from the companies acquired late 2014 versus six months in a prior period. Legacy NPL experienced strong growth, pipe replacement work and weather in both the fourth quarter of 2015 and first quarter 2016 was quite favorable including in Canada. Construction expenses increased $208 million or $0.29, consistent with the growth in revenue. In the prior period construction expenses did include $5.6 million loss reserve, experienced on Canadian Industrial project. Lastly, on this Slide, depreciation expense increased $6.2 million, related to the amortization of finite-lived intangible assets recognized in conjunction with the acquisition, and higher depreciation related to equipment purchases to support the growth in volume of work. Let me now turn the time over to Justin Brown, to provide regulatory update.

Thank Roy. Slide 15 summarizes four areas to highlight our progress on several important regulatory initiatives. I will discuss each of these areas starting with an update on our recent Arizona rate case filing and other rate release activity in California. Infrastructure recovery mechanisms, expansion project – progress we’ve made on our holding company application in each for three states. Turning to Slide 16, April 30, marks the last day of our five year rig moratorium, it was great, because 2010 general rate case. As a result, we filed an application or rate release in Arizona, last Monday, May 2. Our rate application consistent several key components. First, the request update rates to reflect our current level of revenues and operating expenses and capture the various capital investment that have been since our last general rate case. This request results in a proposed increase in Annual Revenues of $32 million. The increase in revenues at net of corresponding cost decrease in depreciation expense of $42 million, which will have a favorable impact of operating income. The $32 million proposed increase in annual revenues is based upon our proposed rate base of $1.3 billion, which is 25% increase over our currently authorized rate base of $1.07 billion. We are also proposing to increase our authorized cost of common equity capital to 10.25% relative to capital structure consisting of approximately 52% equity. In addition to requesting the update rates to reflect our current cost of service, we’re also proposing several key regulatory initiatives. First we are proposing to continue to decoupling to continue our decoupled rate design with the continuation of our margin per customer to coupling mechanism referred to EEP or the Energy Efficiency Enabling Provision. Second, we are proposing to rebrand our infrastructure cost recovery mechanism as the Gas Infrastructure Modernization Mechanism, or GIM mechanism. The idea to rebrand recovery mechanism was driven in large part by our proposals to both continue and expand our existing customer in the Yard Line Program to accelerate the replacement of the COYLs in our system that also to implement a new replacement program, targeting the replacement of nearly 6,000 miles or pre 1970 vantage is so high. Third, we are proposing to implement a property tax tracker, whereby we would tracking the changes for the property cash extents, back to the amount that is embedded in base rates following this rate case. And implement a surcharge, the ball just annually to reflect any changes in this extent. Based up on the terms and conditions of our settlement agreement, new raise from this filing are non-expected to be place prior to May 2017. Based up on the proposed increase in our application, the average residential customer will experience in increase of approximately $14 per month or $28%. As indicate on Slide 17, the proposed average bill of 42 to 47 compares favorably to the authorized average bill from our previous three rate cases. Indeed, it’s a low price of natural gas as well as our ability to effectively manage our operating is prove beneficial to our customers by providing consistent annual pricing. Turning to Slide 18, you may recall that are not recent California general rate case authorized post-test year attrition increases of 2.75% per year, for calendar 2015 to 2018. We made a filing in November of 2015 requesting an annual increase in operating margin of $2.5 million and this request was proved in December and rates became affective January of this year. Also in California part of the pipeline safety implementation plan docket, where gas utilities were directed to modernize their transmission systems. We received approval to replace 7.1 miles of transmission pipeline and install a remote control shut off valve. As part of that same docket, we also received approval to track those capital expenditures and include the revenue requirements associated with that work in a future filing. The work was completed in 2015, we made a filing in November requesting to recover approximately $1.7 million of incremental operating margin. That filing was approved in December and new rates became effective January 2016. Turning to Slide 19 and an update on our infrastructure recovery mechanisms, one of our key regulatory initiatives has been to establish these mechanisms in each of our jurisdictions in order to timely recover capital expenditures associated with commission approved projects that enhance safety, service and reliability for our customers. In Arizona, we recently received approval from the Arizona Corporation Commission to increase our surcharge revenue associated with the customer-owned yard line or COYL program to $3.7 million, up from the previously approved $2.5 million. The program was approved as part of our last Arizona rate case decision and began in 2012. In 2014, the Commission granted its authority to expand the program to include a Phase 2 for the replacement of certain non-leaking customer loans. The recently approved $3.7 million currently being collected in rate is based upon cumulative capital expenditures of $23.1 million, of which approximately $7.1 million was incurred during 2015 for both Phase 1 and Phase 2. The new rates will become effective next month. As mentioned during the Arizona rate case overview, as part of our pending rate case application, we’re requesting to expand the COYL program to allow for more of a targeted approach, whereby we would identify areas of higher concentration of COYL, engage customers to sign up for replacement and then mobilize crews to replace the COYL. We anticipate this evolution of the program will enhance our ability to replace a greater number of COYL each year. In Nevada, we received approval in December of 2015 to update our GIR surcharge revenue from $2.2 million to $3.8 million. We proposed to develop an infrastructure recovery mechanism as part of our 2012 general rate case and in turn the Commission opened a rulemaking to develop regulations for gas infrastructure replacement recovery. These regulations were finalized in January of 2014, and since that time we’ve received approval to replace approximately $58 million of qualifying replacement projects. $14.4 million was approved in 2014 for replacement of early vintage plastic pipe during calendar year 2015. And in October 2015, we received approval to replace up to $43.5 million of replacement work during calendar year 2016. In 2016, work will consist of the replacement of both early vintage plastic pipe and vintage steel pipe. We are currently working on our 2016 advanced application identifying projects that we will propose to replace during 2017. We anticipate filing that application by June 1. The Nevada GIR regulations also permit us to make a separate annual filing to implement a surcharge to recover the deferred revenue requirement associated with the previously approved projects. We have made filings in both 2014 and 2015, and as I mentioned previously, we are currently collecting annualized operating margins of approximately $4 million as a result of the rate application that was approved late last year. These new rates became effective in January of this year. Turning to Slide 20, and turning our focus to expansion and reliability projects, we continue to make progress on the development and construction of our $55 million of liquefied natural gas storage facility that was approved by the Arizona Corporation Commission. We recently completed the front-end engineering design work and we’re currently working on finalizing the construction requirement bid package for potential contractors and we expect to receive bids on the projects later this summer and hopefully have a construction contract in place in the second-half of this year. We still anticipate construction taking up to two to three years to complete. In Nevada, the construction of the Elko expansion project is complete and that lateral has been placed into service earlier this year in January. The placement of this project into service with a combination of a multi-year effort began in the summer of 2013 when our Paiute Pipeline subsidiary conducted an open season soliciting interest from potential shippers of incremental capacity in the Elko areas. Paiute Pipeline made a formal application with the Federal Energy Regulatory Commission in June 2014 requesting approval to build the 35-mile $35 million lateral to interconnect Paiute with Ruby Pipeline and increased the gas supply deliverability to the Elko area. In May 2015, FERC issued an order authorizing a certificate of public convenience and necessity to Paiute to construct and operate projects and subsequently provided a formal notice to proceed. Following the receipt of that notice to proceed, construction began on the project. New rates that went into effect earlier this year with the placement of the project into service are estimated to yield annualized incremental operating margin of approximately $6 million during 2016. During last year’s Nevada legislative session, SB 151 was introduced and passed unanimously by both houses and signed into law by the Governor in May 2015. SB 151 directs the Public Utilities Commission of Nevada to implement regulations authorizing natural gas utilities to expand their infrastructure consistent with the program of economic development. This can include providing natural gas service to unserved and underserved areas in Nevada, as well as attracting and retaining residential and business utility customers and accommodating the expansion of existing business customers. Regulations have been developed and were approved by the Public Utilities Commission of Nevada in January. The proposed regulations were then approved by the legislative commission April 4. We’re currently working with various stakeholders and reviewing potential qualifying projects. Lastly, Slide 21 highlights the progress we’ve made on a regulatory application seeking approval to reorganize into a holding company structure. I’m pleased to report we have received approvals from all three of our state regulatory commissions. You may recall, we made filings in October 2015 with each of our three state commissions requesting approval of a plan to reorganize into a holding company structure. The proposed reorganization is designed to provide further legal and financial separation between the regulated and unregulated business. The proposed reorganization was subject to approval of each of our state commissions, consents from various third parties and final Board approval. We originally anticipated that the regulatory approvals could take up to 12 months to complete, and we were able to successfully receive all three approvals in about half that time. With that, I’ll turn it back to John.

Thanks, Justin. Turning to Slide 22, last year, we had 26,000 net new customers across our system. Prospectively, we expect continued annual customer growth of approximately 1.5%. On Slide 23, we present some regional economic statistics, as you can see from the data, unemployment rates have declined across our service territory, while job creation continues at positive rate. Moving to Slide 24, the pie chart shows the breakout of our planned capital expenditures for this year. In 2015, we invested $438 million in capital and we expect to increase that to $460 million in 2016. For the coming three-year period, we expect capital expenditures to range between $1.4 billion and $1.6 billion. On Slide 25, we overview our 2016 expectations for the Natural Gas segment. We expect operating margin to increase by nearly 3% through a combination of customer growth, infrastructure recovery mechanisms, expansion projects, and California attrition. O&M expense is expected to increase modestly due to general and pipeline integrity management costs, largely offset by declining pension expense. Depreciation and general taxes should increase consistent with our growth in gas plant plus the previously referenced Nevada conservation program costs. Operating income should increase by 4% to 5%. We project normal company-owned life insurance returns of $3 million to $5 million and net interest deductions should increase by $5 million to $7 million to fund our ongoing capital program. Turning to Slide 26, on the construction services side, revenues are expected to grow 3% to 7% above 2015 level. Operating income should approximate 5.5% to 6% of revenues. Net interest deductions should range between $6.5 million to $7.5 million. Collective expectations exclude consideration of earnings attributable to noncontrolling interest and due to our Canadian operations, please remember that foreign exchange rates can impact our results. 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 an appendix with slides that include other pertinent information about Southwest Gas and can be reviewed at your convenience. Our operator Vicky will now explain the process for asking questions.

Thank you. [Operator Instructions] And our first question comes from the line of Matt Tucker with KeyBanc Capital Market. Your line is now open.

Hi, gentlemen, good afternoon.

Okay.

Congrats on the long-awaited Arizona rate case filing. I know you’ve discussed this in the past. I think maybe it’s been a few quarters though, since you’ve talked about it on the call. So could you remind us of the background on depreciation study? And then also have you had any discussions with the Commission or are there any precedents or anything else you could point to that would suggest they will be receptive to this request?

Matt, this is John. The background on the depreciation request that as part of our last rate case settlement that was approved by the Commission in December 2011. We had not submitted a depreciation study. In that case and as part of the settlement, we agreed to include one in the current case. So that’s the basis for including in this case basis for having that as an important component of our request. In terms of the Commission receptivity to the case, I think that – I think that generally speaking, they are pretty receptive to it. I think that when we had agreed to have a five year rate case moratorium, it shouldn’t come us too much of a surprise that we would need to come in and true up our rates at the end of that moratorium. So we haven’t gotten any particular negative feedback at all from Commission submitting this request.

Okay, great. And shifting gears to Centuri, I think Mr. Daily clearly looks qualified to lead the business. But could you just discuss what made you feel it was the right time for a leadership change there?

Well, the impetus for the leadership change there – Matt, this is John again. It was the affect that our prior CEO, Jim Kane had retired at the end of 2015. So upon that retirement, we engaged in executive search and we wanted to make sure that we took the time to find the right person for the job. As you indicate, I couldn’t agree more that Paul Daily is extremely well qualified to be the organization of the future. I think he is also going to be a very good cultural fit with that group as well as Southwest Gas’s Senior Management and we’re really enthusiastic about him overseeing very bright future that we think that the century construction group has.

Makes sense, thanks. And then keeping with Centuri, did the favorable first-quarter weather pull forward some expected activity or would it be fair to say that you are tracking toward the upper end of your revenue growth guidance for the year or potentially above the high-end if things continue to go well there?

Matt, this is Roy. I do think that there was a little bit of work that was pulled forward, one customer in particular that we worked with, where we had some sort of peak or requirements in the past or in the summer time or able to shift of $6 million of work into the first quarter, so that was really helpful. Beyond that, I think the – one thing you have to bear in mind for the fully year of 2016, when we comparing 2015. And so last year’s fourth quarter was really favorable weather and so we have a – sort of a difficult comparison there, when this year rose around. So for that reason, we haven’t at this point change the full year range of revenues. I would tell you, we’ll have a much better clear picture, I think after the second quarter, get through one of our peak earnings quarters for them.

Makes sense, thanks for the color guys. I’ll jump back in the queue.

Thank you.

[Operator Instructions] And our next question comes from the line of Chris Sighinolfi with Jefferies. Your line is now open.

Hey John, how are you?

Hey, Chris. Good.

A question for you, just when you talk – and this is consistent with the language you guys had before, but when you have the slide or maybe it was just some slides on the reorg, you had mentioned just that in addition to the regulatory approvals there was consent that you were going to seek from various third-parties. Can you just describe maybe a little bit who those parties are and what sort of sway they might have on the Board’s decision?

Yes, hi this is Roy. I think those are mainly – when you look through our debt instrument and some of our legal contracts, I think they’re fairly typical thing. I don’t think there’s anything in there that would influence the Board’s decision making for instance. These are more administrative in nature, now that we are – if we’re going to shift stock up to the holding company or if we’re just not all the eyes across the cheese and what all that means, set up bank accounts things of that nature. Most what we have to do is administrate in the nature?

Yes, I’ll agree with that Chris. There’s nothing in there in terms of referencing the need to get any consents that would lead us to indicate that we’re not continued to be fully on track of our proposal to go towards that direction.

Okay, so more of a formality and a prudency around exactly what we’re doing, because we are formally changing the structure of the company, not anything that causes areas of concern?

Correct, I would agree with the characterization.

We’re excited and we’ve already changed the – our credit facility, we’ve already changed language in there to make sure that’s the holding company structure is acceptable to our bank lending group.

Okay. And I guess more of a scope question in regards to replacement across your jurisdictions. Clearly you guys have had an effort at trying to get ahead of some replacement needs in many of the service territories as Justin mentioned as being scaled up. That effort is being scaled up formally as part of the Arizona rate filing. But I’m just curious as we think we talked to a number of utility companies John in the Northeast that you just look at it it’s aged cast-iron infrastructure in areas where there’s significant temperature gradient winter to summer just speaks to a fact that they’re going to have replacement needs that extend for years. As we think about your system being newer and maybe in a more mild climate, although I don’t want to call it a Southwest mild, what is sort of the depth if we were think about replacement opportunities in Arizona? Have you guys offered that out in sort of a bucket fashion? If you were to think about all the bare steel, early vintage, plastic piping in that jurisdiction did all of it, what would that cost?

Well, Chris, we haven’t put a price tag on what the amount of pipe replacement activity prospectively would be. But I think that, while we do have a different type of system as you indicate from the Northeast and we don’t have any cast iron pipe. I think that the changing nature of pipeline safety regulations and our continued effort to make sure we’re evaluating the risks of all the pipe in ours system mean that for our company. This is going to be an effort for that’s going to last or 20 years or more, including we don’t know what kind of changes in pipeline safety regulation might come in the future. So even though we have a newer system for example replacing early vintage plastic pipe right now and some of that there are still that something that we want to continue to be aggressive on. So I think it’s going to be along long-term effort for us. And I think it’s an effort just going to continue to improve the safety and reliability of our system something that all of our regulators are supportive of and hence I think that’s the reason that they then support some of these mechanism gotten approved in a regulatory venues.

Got it. Okay, great. One final – just final question for me I don’t if you said, you gave capital guide and capital expenditure guidance for the utility operations. Have you provided that in all for Centuri and if you have that has it changed?

No, I don’t think we provided that historically. I think one of the issues there they have a lot or lesser capital requirements.

Yes, Chris generally speaking if you look –if you’re looking at Q, look at our rolling 12 months, there’s somewhere in a $50 million, $60 million on year and that’s most of that is just replacing their equipment on a cycle basis, you have the five or six years or so. And then there’s what the incremental needs that relate to growth so at least for the time being, I think that $50 million to $60 million pretty good range.

Okay, yes, I had done exactly that, Roy and it looked like you had just filed a 10-Q, so I was going through it during the call here. And it looked like there was a step-up over the last 12 and particularly in the first quarter. So I was just curious, but you think if we assume somewhere around $60 million, that’s a pretty good level?

Yes.

Okay.

Yes, because they do sometimes their seasonal buying, they have some work like for instance this year, but with the warmer first quarter may have been able to buy some equipment earlier in the year that they won’t need later on.

Okay. Great, thanks a lot guys. Appreciate the time.

Okay.

[Operator Instructions] And we do have a follow-up question from Matt Tucker with KeyBanc Capital Markets. Your line is now open.

Hey, guys kind of following up on the – either pipeline integrity theme, in the 10-Q, I noticed there was a $1.6 million increase and I think O&M related to pipeline integrity programs. Is that sort of a one-off thing in the quarter or that be in ongoing thing that’s being driven by perhaps new regulations?

There are several – there’s a couple of factors there, when it comes to pipeline integrity. You do some of the things that are external to like safety rule changes or in this case I think there was a fair number of line location request, which arguably is sort of a favorable thing that means people were out there looking perhaps to do some construction work. So some of that could be just timing related to when they were building this year versus last year. And then internally we do analysis all the time, which may dictate an increase like patrolling of our lines for instance to ensure system integrity. So I think when we looked at the year as a whole we look – we had said earlier in the year that we thought O&M expenses will be fairly flat between one year, 2015 and 2016 and now we say up modestly. So I think there’s maybe some piece of that in assets probably going to be there permanently this year.

Got it, thank you. And I noticed your PGA over collected liability balance has ballooned a bit over the past couple of quarters. Is that something you need to address in the near-term?

We make – we do make filings each quarter to change our gas cost rates. This year the reason it got into a big liability gas prices have been so cheap relative to what we were charging customer so it’s been a positive thing in that regard we filed to reduce our rates and give that money back. But now you’re heading into our lower usage time of year. So you’ll probably see that will take through the rest of this year maybe even John next year’s first quarter before we can return that money to the customers. So in the meantime it was very good for our cash flow this year.

Okay, thanks. And then so one last one at Centuri, could you comment on the competitive environment, and if you see any changes, in particular, I’m curious if you’re seeing new competition from contractors who may and they have been doing more upstream and midstream type work that are now going after more utility work as those other end markets have been slowing down?

Hey, Matt, this is John. No, no I don’t think that we’ve seen any particular ramp up in competition. I think that really the dynamics that probably is more impressive as the amount works it’s going to be out there in the future as utilities continue to ramp up the pipe replacement efforts. So we’ll continue to monitor that, but we don’t see that there has been any particular ramp up in competition as midstream players have reposition their assets.

Good to hear. Thanks John. That’s all from me.

Thanks Matt.

And I’m not showing any further questions at this time. I would now like to turn the call back over to Mr. Ken Kinney for closing remark.

Thank you, Vicki. This concludes our conference call, and we appreciate your participation and interest Southwest Gas Corporation. Thank you and have a good rest of the day.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect. Everyone have a great day.