Ladies and gentlemen, thank you for standing by, and welcome to the Southwest Gas Holdings 2021 First Quarter Earnings Conference Call. [Operator Instructions] I'd like to turn it over to Mr. Ken Kenny, Vice President of Finance and Treasurer. You may begin the conference, sir.

Thank you, John. Welcome to Southwest Gas Holdings, Inc.'s. 2021 First Quarter Earnings Conference Call. As John 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 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, President and Chief Executive Officer; Mr. Gregory J. Peterson, Senior Vice President, Chief Financial Officer; and Mr. Justin L. Brown, Senior Vice President, General Counsel of Southwest Gas Corporation; and other members of senior management to provide a brief overview of the company's operations and earnings ended March 31, 2021, and an update to earnings per share guidance for 2021. Also, the company will address certain factors that may impact this coming year 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 3 in the press release 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 statement. With that said, I'd like to turn the time over to John.

Thanks, Ken. Turning to Slide 4. We outlined some highlights from the first quarter of this year. From a Holdings perspective, we had record earnings per share for the first quarter of $2.04. We also increased our dividend for the 15th consecutive year, and we slightly narrowed our earnings guidance range to $4 to $4.20 in observation of our first quarter results. In our regulated natural gas utility operations, we continue to experience strong growth, adding 37,000 new customers over the past year. Our operating margin increased by $24 million. We established a $250 million 364-day loan to fund an incremental gas cost associated with extreme Texas weather in February. And the settlement we had previously reached in our California rate case was approved by the CPUC. And our utility infrastructure services group, revenues increased by $30 million or 9.1%, some of which derived from support to some of our utility customers to experience impacts from the February Texas freeze. We also saw EBITDA for the quarter doubling to $26.7 million. Moving to Slide number 5, we provide an outline for today's call. Greg Peterson will provide a detailed update on our financial results for the period ended March 31 with segment breakdown for our regulated and unregulated operations, along with expectations for our liquidity, planned capital expenditures and dividend and rate base growth. Justin Brown will provide a regulatory update, and I'll provide an update on our growing customer base, our continued focus on sustainability and our expectations for 2021 and beyond. With that, I'll turn the call over to Greg.

Thanks, John. Let's begin with a summary of total company operating results on Slide 6. For the first quarter of 2021, consolidated net income was $117 million or $2.03 per diluted share compared to $72.5 million or $1.31 per share for the first quarter of 2020. Temporary changes in the cash surrender values of company-owned life insurance or COLI policies reflected income of $2.7 million or $0.05 per share in the current quarter versus a loss of $15.5 million or $0.28 per share in the prior year quarter. For the 12 months ended March 31, 2021, net income was $277 million or $4.89 per diluted share compared to net income in the prior year period of $192 million or $3.50 per share. The current 12-month period included $27.4 million or $0. 48 per share in COLI income, while the prior year period experienced a COLI-related loss of $5.7 million or $0.10 per share. Next, we'll take a detailed look into each segment, starting with the quarterly comparison of natural gas operations on Slide 7. Net income for the natural gas operations segment was $118.7 million for the first quarter of 2021, an increase of $35.1 million compared to last year's first quarter. A couple of items stand out in this waterfall chart, and I'll touch on them first. The $23.9 million increase in operating margin was driven by $18 million of rate relief associated with recently completed rate cases in our 3 state service territory. Continuing strong customer growth contributed $6 million of operating margin as we experienced 37,000 first time meter sets over the past 12 months, a 1.8% growth rate. The other income increased of $21.1 million primarily is due to changes in the cash surrender values of COLI policies between quarters that I mentioned. As you may…

Thanks, Greg. During the first quarter, we received final approval of our proposed settlement in our California general rate case. With this approval, we'll see increased revenues of approximately $66 million year-over-year due to refresh rates across each of our state regulatory jurisdictions. As shown on Slide 20, the final decision on our California general rate case settlement was approved in March. The decision provides a revenue increase of approximately $6.5 million and an ROE of 10%, relative to an equity layer of 52%. The approval allows the company to continue our annual attrition filings, which will allow us to adjust revenues by 2.75% annually over the next 5-year rate cycle. Rates became effective April 1 but the company was previously authorized to track the impact of the change in margin beginning January 1 in a memorandum account until rates became effective. As such, we plan to make a filing later this year to adjust rates to reflect those amounts that have been tracked since January 1. Two other very important components of the rate case include approval of our proposed risk informed decision-making programs, which will allow us to invest up to $119 million over the next 5 years, to ensure continued safe and reliable service to our California customers, and we'll also be allowed to recover these costs annually through a surcharge. In addition, we agreed to remove a large replacement project in North Lake Tahoe from rate base -- or from base rates and move it to a surcharge. This project was originally estimated as a $60 million project, and we included half as part of the future this period in our original filing, which accounted for about $4 million of the original $12.8 million proposed efficiency in the case. This amount will now be recovered annually…

Thanks, Justin. Turning to Slide 25. As I mentioned at the outset of the call, we continue to experience strong customer growth as our local economies rebound from COVID-related commerce restrictions and people and businesses continue to find our service territories desirable places to relocate to and grow. Slide 25 not only shows that we added over 37,000 customers over the past year, but the year-on-year trailing 12-month gains in each month were stronger than the year before. Moving to Slide 26. Part of the continued strong demand for natural gas in our service territories is attributable to the excellent customer service our employees provide our customers. We earned a 96% satisfaction rating for our customers, and 91% of our customers consider Natural Gas service to be their preferred energy provider. We've also won recent J.D. Power Best in the West service awards in both the residential and business categories. On Slide 27, we show some additional detail on the diversified nature of our customer base. Our customers are mostly residential and commercial and are spread across 3 different states, each of which has constructive decoupled rate designs that not only provide revenue stability, but also support our encouragement of energy efficiency to keep bills low for our customers. Turning to Slide 28, we provide some recent media references to the strongly rebounding Arizona economy, where half of our 2 million customers reside, population growth, new home sales and economic momentum in Arizona all significantly exceed national averages. Moving to Slide 29. Similar to Arizona, in Nevada, we also see very brisk economic growth, where our rebounding economy, continued population in migration and new home sales continue at accelerated paces due to our state's business-friendly climate and desirable desert living lifestyle. On Slide 30, as Justin referenced, we show that…

Thanks, John. That concludes our prepared presentation. For those who have accessed our slides, we have also provided an appendix with slides that include other pertinent information about Southwest Gas Holdings and its 2 business segments. These slides can be reviewed at your convenience. Our operator, John, will now explain the process for asking questions.

[Operator Instructions] The first question is coming from the line of Richard Sunderland from JPMorgan.

Maybe starting on Centuri. Just curious on Centuri's results this quarter. Do you see these contributions sustainable and potentially leading to additional growth on the electric side?

Richard, this is John. I think that definitely we expect to see continued growth at Centuri on the electric side. We think that there are opportunities to expand the work that we're doing with our current customers. We also are looking at opportunities to cross-sell services. So in other words, if we have a long-standing relationship with the combination utility that we're currently doing a lot of gas work for, we're going to make sure that we know that they know that we can offer them electric services with the same level of high-quality and safety. And then, of course, if there are any opportunistic bolt-on M&A options in the future, the electric sector is certainly something that we would look towards possibly expanding further in that manner as well.

Got it. Appreciate the color there. And then maybe turning to the upcoming COYL and VSP filing. What are your expectations for the recovery process following the design on the electric rider in the state recently? Just curious there's oppositions of these types of mechanisms right now? Or maybe how it fits within the larger post presser discussion other than the state?

Yes, Richard, it's Justin. I think this is a little bit different than some of those discussions. I think those were some of the more recent ones are more kind of prospective in nature as they're evaluating UPS's rate case and things. I mean these were previously approved. I think we've talked before also about the fact that when these were -- when the surcharges were originally frozen and suspended, we actually moved the 2019 request, which was $12 million into the rate case as part of our amendment, that was ultimately approved. And so I think from our perspective, when we look at that track record, I mean, we anticipate that this is something that we'll go through, that they'll evaluate it. And it should, I think from our perspective, follow a similar path to that, is kind of our expectations.

Got it. So maybe in terms of the guardrails on the process here. Do You see the debate centering more around, I guess, the timing or cadence of the recovery? Or do you see other issues cropping up here?

Yes. I mean, I think that's a fairer way to look at it. I know, like in our rate case example, as I mentioned, the 12 we had included kind of that over a 3-year period, so about $4 million a year. I would expect that consistent with your comment that some of the discussion is going to be more on the cadence and timing of it rather than the actual merits. I think from our perspective, we went through the rate case process. There was absolutely zero findings about the plant that was invested, the performance of the mechanisms. They continued the COYL program. They decided not to continue the VSP. But when you look at kind of that record, combined with the experience that we saw with moving the '19 surcharge amount to the rate case, it's hard to imagine it there's going to be other issues that crop up. But in these regulatory proceedings, there is something that comes, someone makes an argument that we'll plan on addressing. But as we stand here today, I think we have a pretty good case in terms of what was previously approved, the mechanisms, our performance and adherence to those mechanisms. And now it's a just kind trueing that up and figuring on the time frame for which that will occur.

[Operator Instructions] Next question is coming from the line of Kody Clark from Bank of America.

So just on recovering the gas purchase costs, I'm wondering how you're thinking about rate inflation considerations while also trying to get recovery on the riders that you just talked about?

Kody, it's Justin again. When we first experienced the price bag, I mean, one of the first things we did was evaluated kind of what the anticipated impact was going to be and looked at whether we needed to make any kind of incremental filing to extend the time period in which those are going to be recovered because of that sensitivity. And as John mentioned during the call, we have a big focus on making sure that our bills are affordable and competitive. Based on our analysis and looking where gas costs have been as recently as the last 3 to 5 years, what we're going to experience as a result of this spike is not going to exceed those amounts that customers were experiencing just a few years ago. So we don't anticipate any issues with respect to the gas cost recovery as it stands today, and we anticipate currently that our mechanisms will allow to recover those costs over the time periods by which the mechanisms are designed. And I think that kind of goes hand-in-hand with the tracker. I mean it's -- when you look at the tracker dollars, this is something where the commission had in place, the annual surcharges. They wanted to take a closer look at some of the things based on some accusations that some intervenors had made in the surcharge filings. We went through that process. There were no findings of any wrong doing whatsoever. And so from our perspective, we'll work with them on a cadence of what time period to recover these to make sure that, again, there's not any kind of unconscionable bill impact to customers because that's something we're sensitive to.

Okay. Got it. That's super helpful. And is there any initial thoughts around time? I mean, on when we might get some more details on that?

On the surcharge filing?

Yes. Right. Exactly.

Yes. We're going to make that filing this month. So that's something you should be able to see as part of our filing before the end of the month.

Got you. Okay. And then just on RNG, if I can, quickly. Can you provide a little bit more color on how you're thinking about this opportunity in terms of your longer-term growth? You operate in some of the more constructive jurisdictions in the country for these kind of projects. So it seems like there could be some upside.

Yes, Kody, this is John. I agree with you. I think there is upside for that. I think it's an exciting new opportunity. We have already, as I mentioned earlier, started a lot of projects. We've been working with our legislatures and our regulators. And for the most part, it's kind of all good. We're also seeing a higher interest by our customers in this kind of product. For example, here in Southern Nevada, the municipal bus fleet operator was previously operating their buses on compressed natural gas. And they wanted to reduce their carbon footprint even more so, they were considering the possibility of electric buses, but they are significantly more expensive and operationally inferior. So we work with them to get a supply for them of RNG that will essentially let them transition from compressed natural gas that's conventional to compress natural gas that's RNG and be able to address their interest in reducing greenhouse gases. So I think you're going to see a lot of opportunities on that -- on the road ahead, and we're excited about it.

The next question is coming from the line of Chris Ellinghaus from Siebert Williams.

The $0.05 increase in the bottom end of the guidance range, can we infer that, that's the -- maybe what you might call the unusual level of Centuri restoration work in the first quarter?

Chris, this is Greg. I don't know that I would classify this as something to do with the level of storm work that they did in Q1, more that they had solid performance in Q1. As you're aware, the first quarter is always a down quarter for Centuri. That's the worst winter time weather that they work in that kind of slows the gas work. And so we were very pleased with the level of work that they were able to get done in the first quarter. And it took a little bit of the uncertainty out of the rest of the year by doing that. So that was the impetus and the basis for raising that bottom part of the guidance up $0.05.

Does that sort of accelerated work level give them greater opportunities for the rest of the year?

Yes. This is Greg again. I think they've always had really good opportunities. As I mentioned in my remarks, some of the work that they did get because there was some favorable weather in Q1 was some work that they had planned to do a little later in the year, but they are certainly open and doing well with their customers. As we're all aware, the infrastructure area throughout the U.S. is looking to harden their assets, right, both on the electric and gas side, to make them safer and more reliable. So I think the future is very bright for Centuri, and maybe Q1 is just a small indication of what lies ahead for them.

Obviously, you've had some pretty strong Centuri revenues from the electric side. Can you give us some color about how much of that is just some of the hurricane restoration and the winter restoration as opposed to how much traction you're getting in the cross-selling opportunity that you had at the time?

Chris, this is John. I think really, it's both. I think that when we made the Linetec acquisition, and we're able to grow that. It really provided great opportunities to provide more electric services as part of their platform. And I think that strategically, that's the direction we want to continue to grow. When we added the Linetec business, we were able to add what we would classify as a non-union electric provider, and we think that there are a lot of opportunities in the unionized electric space as well. So not only, as you pointed out, are we going to want to make sure that we're there to help our regulated electric utility customers rebound from events that mother nature imposes on the them. But we also are going to want to see if there are opportunities to continue to expand the percentage of revenues that, that business generates from the electric sector.

Okay. I think Justin mentioned this about good interest on the RNG side. The casinos in Vegas have been pretty aggressive on sustainability issues. You talked about interest coming from your [indiscernible] customers. I assume that the casinos are pretty well aligned to the effort?

Absolutely, Chris. This is John again. They're very interested in that. In fact, we were recently working with one of the larger properties to see if there was an opportunity to convert their supply entirely over to hydrogen. So that's another option because, as you know, Chris, from spending a regular amount of time in our service territory. That is a differentiator that a lot of those properties look towards to encourage customers to visit their property vis-à-vis other properties. So I think that definitely there will be opportunities with the resorts, but there will also be opportunities with a lot of other businesses that I'm sure you could name that are very sensitive about their carbon footprint, looking for opportunities to reduce it. And I think RNG is one of the ways they can do that in a fairly seamless way at a fairly low cost. So we're going to want to continue to pursue those opportunities, not only because we think that it helps us project a sustainable image for the future, but frankly, because our customers are demanding it.

Okay. Lastly, the small acquisition in Arizona, are you guys seeing other co-op opportunities out there?

Chris, this is John again. I think that there could be other opportunities. We have talked with a number of other parties. We don't have anything else on the board right now. But as I'm sure you will appreciate, the operational requirements of running a natural gas distribution system with safety, with upgrading your distribution network, et cetera. I think that there are other folks that are looking at whether that is a responsibility that they would just assume turn over to another party like us. So certainly, we're going to be very interested in that. And as we see those opportunities come up, we'll want to capitalize on them. And I think that the regulators are, frankly, supportive of that because if you can move from a relatively small operator and get that in the family of a relatively big operator like us, it makes safety-oriented regulation and potential rate impacts from aging infrastructure, a lot more palatable to those communities.

We don't have any questions at this time. I'll be turning it back to the presenters.

Well, that concludes our prepared presentation. Thank you, John, for doing your work as the operator, and we appreciate the participation and interest in Southwest Gas Holdings, Inc. Everyone, have a great weekend. Thank you.

This concludes today's conference call. Thank you all for participating. You may now disconnect.