Ladies and gentlemen, thank you for standing by, and welcome to the Southwest Gas Holdings' 2020 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. Ken Kenny, Vice President of Finance and Treasurer. Please go ahead.

Thank you, Jonathan. Welcome to Southwest Gas Holdings, Inc. 2020 second quarter earnings conference call. As Jonathan stated, my name is Ken Kenny, and I am the Vice President of Finance and Treasurer. Our conference call is being broadcast live over the Internet. For those of you who would like to access the webcast, please visit our website at www.swgasholdings.com and click on the conference call link. We have slides on the Internet, which can be accessed to follow our presentation. Today, we have Mr. John P. Hester, Southwest's President and Chief Executive Officer; Mr. Gregory J. Peterson, Senior Vice President and Chief Financial Officer; Mr. Justin L. Brown, Senior Vice President, General Counsel; and other members of senior management to provide a brief overview of the Company's operations and earnings ended June 30, 2020, and reaffirm our earnings per share guidance for 2020. Also, 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 in the press release, Slide 3 of our presentation 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 all that said, I would like now to turn the time over to John.

Thanks, Ken. Turning to Slide 4, taking a look at our 2020 highlights. For the second quarter of this year, Southwest Gas Holdings realized earnings per share of $0.68. Approximately $0.22 of the quarterly earnings per share result accrues from gains on company-owned life insurance totaling $12 million. For our regulated utility operations, we saw 36,000 first-time meter sets added over the past year, a $5.7 million decrease in operations and maintenance expense. We issued $450 million of new debt at a very attractive 2.2% interest rate, and we filed a settlement in our ongoing California general rate case filing. At our unregulated infrastructure services group, we realized record second quarter net income of over $26 million, a 55% increase in electric service revenues, a total revenue increase of $41 million, and our operating income increased by 30%. Moving to Slide 5. We present an outline for today's call. Greg Peterson will present details of our financial results for the period ending June 30, including segment breakout for our regulated and unregulated operations. Justin Brown will overview activity in our many regulatory proceedings, and I will close with updates on COVID-19, customer growth, capital expenditures, dividends, sustainability efforts and our expectations for 2020. With that, I will now turn the call to Greg.

Thanks, John. Let's start with a summary of total company operating results on Slide 6. For the second quarter of 2020, consolidated net income was $38 million or $0.68 per diluted share compared to $22.1 million or $0.41 per diluted share for the second quarter of 2019. In addition to solid improvements in operating income for both segments, consolidated revenues and consolidated results for the current quarter were aided by a $12 million or $0.22 per share increase in the cash surrender values of company-owned life insurance or COLI policies compared to a $3.4 million or $0.06 per share COLI increase during the last year's second quarter. For the 12 months ended June 30, 2020, net income was $208 million or $3.76 per diluted share compared to net income in the prior year period of $199 million or $3.82 per share. The COLI influence during the current 12-month period was $2.9 million or $0.05 a share, while in the prior year period, it was $6.5 million or $0.12 per share. Let me touch on some highlights by segment in the next couple of slides, starting with the quarterly comparison of natural gas operations on Slide 7. Net income for natural gas operations increased $8.5 million between quarters. The waterfall chart shows the major components. The $1.4 million overall margin increase reflects a $2.5 million contribution from customers associated with the 36,000 first-time meter sets and $400,000 of rate relief in California, somewhat muted by about $2 million in suppressed late fees to help customers during the COVID-19 challenge. The $5.7 million decline in operations and maintenance or O&M expenses reflects the reduction in travel and in-person training as well as management initiatives to contain costs, including deferral of various planned projects and delayed hiring of incremental and replacement personnel. Bad…

Thanks, Greg. Slide 12 provides an overview of our $90 million rate case in Arizona, including a summary of the various positions of the parties. Just prior to hearing, we were able to reach a stipulation with the parties to continue the COYL program and on the appropriate amount of time period for amortizing certain excess deferred income taxes, including the implementation of an adjuster mechanism for any future income tax changes. The hearing was conducted virtually, and it concluded July 10. We're now in the legal briefing stage, which will continue through September 14, after which we'd expect to see a recommended opinion and order from the ALJ within 30 to 60 days with new rates before the end of the year. Turning to our California rate case on Slide 13. We reached a settlement agreement with the Public Advocates Office, resulting in a revenue increase of $6.4 million, including an ROE of 10%. We also agreed to continue our annual attrition filings, which will allow us to adjust revenues by 2.75% annually. Two other very important components of the rate case include the approval of our proposed risk-informed decision-making programs, which will allow us to invest up to $119 million over the next five-year rate cycle on safety measures to ensure continued safe and reliable service for our customers. And we'll also be able to recover these costs annually through a surcharge. In addition, we agreed to remove a large replacement project in North Lake Tahoe from the base rate request. And instead, the parties agreed to simply recover the costs annually as segments of the project are completed. This was originally estimated as a $60 million project, and we included about $30 million of it as part of our future test period in the original filing, which…

Thanks, Justin. Moving to Slide 19. Probably the biggest top-of-mind issue in the country continues to be the coronavirus pandemic and how it is impacting families and businesses. As an essential services provider, the safety of Southwest gas customers, employees and contractors is our number one concern. Several months ago, we implemented work-from-home policies for both business segments, increased the use of personal protective equipment and are practicing social distancing. We also are mindful of the adverse economic impact being felt by many of our customers and have temporarily suspended late fees and disconnections for nonpayment and are working with customers in need to coordinate access to programs providing utility bill payment support. On Slide 20, we are also working with community leaders and have increased community financial support with additional funding from the Southwest Gas Foundation. We are closely monitoring the financial impact of Southwest Gas operations and see that utility margin under decoupled rate designs remain strong. As previously mentioned, demand by utilities for Centuri's infrastructure services also continues impressively. We will continue to monitor the impact of utility uncollectible expense, although we've generally been pretty successful offering customers deferred billing arrangements, matching customers up with state and local financial support. And also keep in mind that gas utility companies are in the low billing part of the year, where our Arizona and Southern Nevada customers are experiencing average monthly bills of around $20. Turning to Slide 21. Growth continues to be strong. As I mentioned earlier, we realized first-time meter sets of 36,000 over the past 12 months and expect to realize a similar number at the end of 2020. Residential home construction continues to be strong and existing home inventory relatively low. New customers are being added across three different states, each of which provides decoupled…

Thanks, John. That concludes our prepared presentation. For those who have accessed our slides, we have also provided an appendix with slides which includes other pertinent information about Southwest Gas Holdings, Inc. and its subsidiaries and can be reviewed at your convenience. Our operator, Jonathan, will now explain the process for asking questions.

[Operator Instructions] Our first question comes from the line of Richard Sunderland from JPMorgan. Your question please.

Good morning. Thanks for taking my question today.

Good morning.

Just looking at your 2020 guidance. Year-to-date results seem to imply a fairly low bar to the back half of the year to meet that range. Curious what puts and takes we should consider for the balance of 2020 here and maybe where you see results tracking in the range now.

This is – Richard, Greg. I think one of the big things that we have going on is there's still some of the uncertainty, Justin could certainly respond to this, about the timing and amount of rate relief. We are certainly in the middle of three general rate cases, one of which we are in the process of settlement. And we certainly still have some expectations for the rest of the year that some of our costs, especially on the O&M side of the utility, will start to go back up as we get more out of this COVID environment and people can start getting back together with some training and travel that's been delayed as well as some staffing.

Okay, fair enough. So could appreciate that on the utility side, but maybe just following up here in terms of Centuri. There were a couple of different items contributing to the strength this quarter. And it seems like some of those could persist, at least for now or maybe through the balance of the year. Do you have any insight into those recent trends in terms of work mix, and if you expect those to continue or revert at some time?

This is Greg again. I think for Centuri, they certainly have enjoyed, as we indicated in our quarterly report, a favorable mix of work due to the COVID-19 environment. It pushed a little more of the work that's generally separated into mains and services, probably a little more heavily on the mains side. Much like a lot of things, in the ultimate end, those things will need to revert back, the timing of which I don't know that we can really say. There certainly was some beneficial tailwind with the Canadian government providing some subsidies. We don't really expect those to continue in the future, but are appreciative of the ones that we received. But otherwise, it is expected to be a very strong second half of the year for Centuri. But we are watching and following along and will again expect good results. But some of those tailwinds that we received are not likely to continue or not at the level that they were in Q2.

Got it. Thanks for the color. I'll leave it there.

Thank you.

Thank you. Our next question comes from the line of Aga Zmigrodzka from UBS. Your question please.

Hello. I just wanted to follow up on kind of the Arizona rate case. So it looks like the final decision is now expected in 4Q. Is there a risk that the new rates will be delayed to 2021? And could that push you to the maybe lower end of the guidance?

Hey, Aga. It's Justin Brown. Yes, that a possibility on – again, we're basing things based on our historic experience where once it gets submitted to the ALJ, usually, we'll see something within 30 to 60 days. I also know that there's two open meetings currently scheduled in early – one in early November, one in early December. So I think based on those factors, I think it's reasonable to think that we should be on one of those. But again, it's – to a certain degree, it's out of our control in terms of the processing from the ALJ and ultimately what gets put on those agendas. But I think based on our past experience there. We anticipate that we should be able to make one of those open meetings.

Perfect. And then your utility CapEx for this year was increased modestly. What were the main drivers?

This is Greg, Aga. I think one of the drivers was the – a little higher customer growth. As John mentioned at the outset 36,000 first-time meter sets, we've seen continued strong growth, especially in the Phoenix market, but throughout our service territories, so some of it was in that. And some of it was just working on some of our regular maintenance and facilities things that we had planned to do, and the timing just seemed to be beneficial to do it this year. So we moved towards the upper end of that previous $650 million to $700 million. And we expect that for the year, it will be right around that $700 million mark.

Perfect. And what could be the potential impact on Southwest if we see a second wave of COVID-19 in the fall? Is that something that you incorporate in the guidance?

Hey, this is John. I think that we really have had very successful implementation of our business continuity plans. Right now, we actually have extended our work-from-home policies until the end of the year. Certainly, we see a lot of things on the horizon, some discussions of the potential for a vaccine, et cetera. But I think that while it's been challenging and while we have incurred some increased costs, as Greg mentioned, we have tried to control costs aggressively. So if we see that come up again, I think we're just going to have to stay vigilant to make sure that our employees stay healthy, that we're protecting our customers and that we're going to be able to continue to provide the essential gas services that our customers need, especially given the number of residential customers and the fact that a lot of those folks are spending a lot more time at home. So I would expect continued smooth operations. And hopefully, we can get through this challenge as soon as possible.

Thank you for the color, and stay safe.

Thank you.

Thank you. Our next question comes from the line of Chris Ellinghaus from Siebert Williams. Your question please.

Can you give us a little color on why Centuri's electric revenues were so strong? Was it just the Linetec acquisition? Or is there – was there some special circumstances or storm restoration for the quarter?

Chris, this is John. I'll start off and then maybe see if Greg wants to add any color onto it. But certainly, you hit it right on the head with the acquisition of the Linetec group. And remember from our previous discussions that not only did we acquire that entity and continue at the size that it was before, but we invested significantly in that business to expand those operations. So the dramatic increase in electric service work was primarily related to the acquisition and the growth of the Linetec business since we acquired it. And there will be some continued storm work. And I'm sure you've seen that the news, some of the storms that have been coming in recently, but it's primarily related to Linetec. Anything else, Greg?

I think that's a good point. We did talk about that a little bit in the Q that storm work was a partial benefit there. And in fact, as John mentioned, there are storms all up and down the East Coast and the South Coast areas. And we do have some crews deployed to the extent that we need to and are asked by our utility customers there to perform, we will certainly do that. But Linetec growth has been great. I mean, they've done well, and that was exactly what we were looking for when we made that acquisition in late 2018.

Would it be fair to say that if the projected hurricane season is significant as they say, that, that could be a tailwind?

Yes. I think we don't – we certainly don't want to count and we don't want to hope for anything bad like hurricanes coming through. But certainly, to the extent that we're asked by our customers to go help them with restoration efforts, we will go do that. And in general, some of that work is a little more profitable than the general work that we do. So yes, there could be some tailwinds there. But with or without, I think we'll have a good strong year for

Okay. Can you give us any sense of what kind of traction you're getting on cross-selling with your pre-existing customers?

Yes. As you can see, and I don't remember the exact slide that we have where we list the – out some of our major customers, you can see the gas utility, the electric utility and then those combo utilities, and that's not to say that for those combo utilities, we are doing work for both sides of that house. So we're getting a little bit of traction. I think as we mentioned at one of our previous conference calls, most of the work that is done for these utility companies is a little sticky. And so for us to get our foot in the door, it does take a little bit of time. But we have had some success, and we will continue to march down that path. But I don't think you'll see dramatic numbers that we will be talking about in the near term. But it is certainly part of the long-term growth plan.

The number that you quoted as – I think it was $3.4 million from the Canadian subsidies, were there any offsets to that? And was that a pretax number?

Yes. That's a pretax number, and that's a pretax U.S. number. Certainly, the Canadian government gave us money in Canadian dollars. But again, there were some offsets, just the normal COVID-19. I don't think we quantified that anywhere. But certainly, the extra PPE that was required and some of the social distancing did hamper our efforts. And so that was a welcome relief to have that benefit offset those costs that we incurred.

Okay. Lastly, can you just give us a little bit of sense of the current state of the surge in Vegas and how that's affecting just the city in general?

Hey Chris, this is John again. I think that while we continue to have, of course, expanded numbers of cases in both Arizona and Nevada, I think that the governors in each of those states, including California, have taken a lot of measures to try to guard against that being a larger problem than it needs to be. I think that – occasionally, I'll go on, for example, the Southern Nevada Health District website, and you can see what the hospitalization numbers have been, and they have been coming down dramatically. So I think that's consistent with some of the national demographics that you're seeing increased testing, you're going to get increased positive cases, and a lot of that seems to be moving more towards the younger folks, folks that may have limited or be absent from having symptoms. So it continues to be a priority in both the states. They continue to have protections in place to try to reduce that. And we're looking forward to continuing to get through this successfully and not have an unexpected surge, as you suggest. It's going to overwhelm the medical facility. So I think that things are going okay at the current time.

Okay. Thank you so much. Appreciate the details guys.

Thanks, Chris.

Thanks, Chris.

Thank you. Our next question comes from the line of Chris Sighinolfi from Jefferies. Your question please.

Hey, everyone. This is [Ryan] on for Chris. Most of my questions have been asked and answered. So just a quick one for me related to the D&A expense that you guys reported this quarter. There has been some significant volatility in that line item quarter-over-quarter over the last couple of years. And I'm just curious what might be going on there and maybe if our model isn't capturing some predetermined cadence that it should do.

Yes, Ryan. This is Greg. I think one of the things that is important to remember is in the depreciation line, it's pretty easy to model that as it's going up because it's a factor of the plants that we have in service and the plants that we add as we go along. But there is a sizable piece of dollars that relate to amortization of regulatory assets and amortization of regulatory liabilities and that is much more seasonal. So maybe for an example, in Q1 of this year, there was about $12 million of regulatory amortization that's included in that depreciation and amortization line where last year, there was closer to $10 million on the quarter. For this quarter, again, there's not a lot of volumes in Q2 and certainly a lot less in Q3. So this quarter, it was actually a regulatory liability net that got amortized, so about, say, $300,000 of credits that ran through that line where last year, it was about $300,000 – I think I said $300,000, so $300,000 credit this quarter and about $300,000 debit last quarter. So as you're doing your modeling, there is a significant amount of volumetric differences in that amortization line, and they'd be most pronounced in Q1 and Q4.

Okay, perfect. Yes. I don't believe that we were capturing that necessarily so. Thank you for the details there. That's it for me.

Thanks Ryan.

Thank you. This does conclude the question-and-answer session of today's program. I'd now like to hand the program back to Mr. Kenny, Ken Kenny for any further remarks.

Thank you, Jonathan. This concludes our conference call and we appreciate your participation and interest with Southwest Gas Holdings, Inc. Have a great day and stay safe. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.