Southwest Gas Holdings - Earnings Call - Q1 2021

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by and welcome to the Southwest Gas Holdings 2021 first quarter earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. If you would like to ask a question during this time, you will need to press star, then the number one on your telephone keypad. To withdraw your question, press the pound key. Thank you. I'd like to turn it over to Mr. Ken Kenny, Vice President of Finance and Treasurer. You may begin the conference, sir.

Ken Kenny (VP of Finance and Treasurer)

Thank you, John. Welcome to Southwest Gas Holdings Inc 2021 first quarter earnings conference call. As John 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, 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 31st, 2021, and an update to earnings per share guidance for 2021.

Also, the company will address certain 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 three 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.

John P. Hester (President and CEO)

Thanks, Ken. Turning to slide four, we outline 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 $4.00-$4.20 in observation of our first quarter results. At 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.

At 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 that experienced impacts from the February Texas freeze. We also saw EBITDA for the quarter doubling to $26.7 million. Moving to slide number five, 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.

Gregory J. Peterson (SVP and CFO)

Thanks, John. Let's begin with a summary of total company operating results on slide six. 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 a nickel 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 a quarterly comparison of natural gas operations on slide seven. 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 three-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 increase 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 remember, COVID-19 influenced a 20% decline in the S&P 500 during the first quarter of 2020, resulting in a $15.5 million COLI loss for Q1 2020 for us. At that time, the investments underlying the cash surrender values of the policies were weighted over 50% towards equities. After recovery of the market and our COLI values later in 2020, the company rebalanced the underlying investments to approximately 25% in equities, which is designed to reduce the volatility in COLI income. In the current quarter, COLI income was $2.7 million. The $8.3 million increase in depreciation, amortization, and general taxes includes $4 million from depreciation and $4.3 million from general taxes.

The general tax increase is due to the resetting of the Arizona property tax tracker, and quarterly year-over-year comparisons are anticipated to reflect a somewhat similar level of expense increase for each quarter in 2021. In addition to the normal increase in depreciation due to our current level of capital expenditures, the implementation of the new customer service system placed in service in May and an anticipated implementation later in the year of a new gas transaction system are expected to increase full year 2021 amortization expense by $5 million-$6 million. Operations and maintenance, or O&M, expense increased $3 million, or 3%, compared to the prior year quarter, and includes about $400,000 of incremental bad debt expense. Late payment fee moratoriums are beginning to be lifted as the economies in our service territories return to more normal operations.

Let's go to slide eight, which depicts Centuri's comparative changes for the first quarter. Results for Centuri, our utility infrastructure services segment, improved $9.3 million in the first quarter of 2021 versus the first quarter of the prior year. Due to business seasonality, losses during the first quarter are typical due to the impact of winter weather on operations. As shown on this slide, the current quarter reflects a revenue increase of $30.5 million, or 9%, primarily due to $21.6 million of incremental electric infrastructure work, which includes approximately $9 million from emergency storm restoration services performed by Linetec following tornadoes and ice storms in Texas and surrounding areas. The remaining revenue increase includes the benefits of favorable weather working conditions in several areas, accelerating some work previously planned for later in the year.

Infrastructure services expenses increased $16.3 million, or 5%, primarily due to costs associated with the increase in work performed. Operating efficiencies improved due to favorable weather conditions and reduced COVID-19 restrictions from the prior year. Let's look at total company 12-month results on slide nine. This slide depicts the relative contributions by our two business segments during the 12 months ended March 31, 2021. As you can see, natural gas operations provided 70% of our consolidated net income, while Centuri's utility infrastructure services group provided 30%. This is consistent with our near-term expectations. Slide 10 shows the components of a $50.8 million increase in natural gas operations income between 12-month periods.

Like the first quarter, COLI fluctuations had a significant impact as the current 12-month period includes a $27.4 million increase in COLI cash surrender values, reflecting the rebound from the COVID-influenced first quarter of 2020 and outsized performance during the remainder of that year. The prior 12-month period reflected a COLI loss of $5.7 million, resulting in a $33.1 million change between periods. As I mentioned earlier, we rebalanced the underlying investments associated with COLI policies to minimize future cash surrender value volatility while maintaining the face values of the policies. The $33.9 million improvement in operating margin includes $24 million in combined rate relief in Arizona, California, and Nevada, and $15 million from solid customer growth. The $10.3 million, or 2%, decrease in O&M includes lower travel and in-person training costs of $5 million due to the impacts of COVID.

A modified process to minimize customer contact during tenant changes saved about $3 million between periods. Partially offsetting these benefits was $6 million of incremental damage prevention, or call-before-you-dig costs associated with utility and construction-related activities throughout our service territories. The $21.8 million increase in depreciation, amortization, and general taxes reflects the impacts of a $634 million, or 8%, increase in average gas plant and service, and one quarter of the new level of property taxes under the Arizona tracking mechanisms. The components of the 12-month change in our utility infrastructure services segment are reflected on slide 11. This slide shows the components of the $34 million increase in Centuri net income between 12-month periods. Revenues increased $207 million, or 12%, including $166 million of incremental electric infrastructure revenues.

Included in the incremental electric revenues in the 12-month period was $90.5 million from emergency restoration services performed by Linetec following hurricane, tornado, and other storm damage to customers' above ground utility infrastructure, compared to $13.2 million in similar services during the corresponding period a year ago. Revenues also grew with existing gas infrastructure customers. Infrastructure expenses were $154 million, or 10%, higher than the prior year period, largely due to incremental expenses related to electric infrastructure work of $91.4 million, including costs associated with storm restoration work. General and administrative costs, which are a component of infrastructure services expenses, were $26 million higher in the current 12-month period due to the growth of the business and higher profit-based incentive compensation costs. Depreciation and amortization increased $7.9 million, including $6.3 million associated with equipment utilized to support the expanded electric infrastructure services work.

For the 12 months ended March 31, 2021, Centuri operations contributed $84.2 million in net income toward our consolidated results. Slide 12 depicts the substantial increase in Centuri EBITDA for the quarter and 12 months ended March 31, 2021. The quarterly increase was $13.2 million, or 98%, while the 12-month increase was $48.9 million, or 28%. Slide 13 shows the comparative position of Centuri versus a core group of peer companies. Over the past 10 years, Centuri ranked highest in compound annual growth rates for both net income and EBITDA, while maintaining the lowest volatility for those metrics. We believe Centuri's focus on distribution construction for both gas and electric is a competitive advantage. Let me briefly touch on our gas segment, liquidity, capital expenditures, and the associated financing plans beginning on slide 14.

This slide shows the solid liquidity position of our utility, with the issuance of $250 million in short-term borrowings in March to pay for the like amount of incremental gas costs associated with the spike in prices in February. We had available capacity under our revolving credit facility of $233 million and cash on hand of $49.8 million as of March 31, 2021. Our plans for capital investment across our three-state service territory are detailed on slide 15. We plan to invest approximately $2.1 billion over the next three years to serve new growth and reinforce the safety and reliability of our gas distribution network. We anticipate funding about 50% of those investments with internal cash flows and funding the remaining balance with a pretty even mix of equity and debt.

As shown on slide 16, when you add in our utility upstream dividend payout expectations, we anticipate our three-year capital needs will be approximately $2.5 billion. We plan to source up with about $1.2 billion in cash flow from operations, approximately $600 million in utility debt issuances, and about $700 million in equity issuances. As indicated in our Form 10-Q, Southwest Gas Holdings has a new $500 million ATM program that we plan to utilize over the next two to three years. The graphic on slide 17 illustrates the continued expected investment of capital of about $700 million per year compared to our historic expenditures. Slide 18 shows the recent growth of the dividend at SWX, which we believe is an important part of the total shareholder return we offer to our investors.

We have increased the dividend each year for the past 15 years and target a payout ratio of about 55%-65%. Turning to slide 19, the continued investment in our natural gas distribution system is expected to grow our rate base from $4.5 billion at the beginning of this year to $6.5 billion at the end of 2025, a five-year compound annual growth rate of 7.5%. I'll now turn the call over to Justin Brown for an update on regulatory matters.

Justin L. Brown (SVP and General Counsel)

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 refreshed 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 five-year rate cycle. Rates became effective April 1st, but the company was previously authorized to track the impact of the change in margin beginning January 1st 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 1st.

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 five years to ensure continued safe and reliable service to our California customers, and we will 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 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 test period in our original filing, which accounted for about $4 million of the original $12.8 million proposed deficiency in the case. This amount will now be recovered annually through a surcharge as segments of the project are completed.

Turning to slide 21, rates resulting from our Arizona general rate case became effective January 1st, allowing for increased revenues of approximately $37 million in 2021. This increase is in addition to the approximate $23 million increase that was approved in the company's Nevada general rate case last year, with rates that became effective in October of 2020. Moving to slide 22, in February, we made a compliance filing in Arizona identifying our plan for reconciling unrecovered revenues from the previously approved COYL and VSP programs. In 2019, the commission froze the existing surcharges and suspended future surcharge filings pending the outcome in our general rate case.

As such, we now need to reconcile the differences between the COYL and VSP surcharge revenue we've received to date and the amount outstanding through calendar year 2020, plus address the VSP plan that was not included in base rates following our most recent rate case. In total, this adds up to about $74 million. We plan to make a filing later this month requesting to adjust the surcharges to recover these amounts, at which time the commission will evaluate the proposal, including the time period in which the costs are to be recovered. We'd expect to see a decision before the end of the year. Turning to slide 23, with a quick update on our current expansion-related projects that are underway in Nevada.

In Southern Nevada, we continue to make progress on our $28 million expansion project in Mesquite, with both homebuilders and commercial customers securing contracts for natural gas service as we continue to build out the infrastructure within the city. In Northern Nevada, the $62 million expansion project in Spring Creek also continues to make progress as we will begin build-out of the second phase of the project in 2021, while we continue to hook up customers from the first phase where we saw 100% of the eligible customers request gas service. Lastly, turning to slide 24, we have a new expansion opportunity in Arizona that will involve the acquisition of the gas assets of Graham County Utilities, a member-owned cooperative located in southeast Arizona.

The acquisition contemplates a $3.5 million transaction comprised of an approximate rate base of $2.5 million and an acquisition of approximately $1 million, which will be proposed for recovery in the company's next general rate case. Graham County Utilities has approximately 5,200 members who are also customers of the utility, and they've already voted in favor of the sale of the gas assets to Southwest Gas. Subsequent to the member approval, Southwest Gas and Graham County filed a joint application with the Arizona Corporation Commission in April seeking final authority to close the acquisition. We anticipate receiving approval of the acquisition before year-end. With that, I'll turn it back to John.

John P. Hester (President and CEO)

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 earn 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 three 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 two 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 continued high demand for natural gas service is allowing us to expand our service territories and reach new customers. Pursuant to economic development-oriented legislation in Nevada, we have apportioned up to $100 million of new capital to reach these communities in both Northern and Southern Nevada. Service territory expansions in Mesquite and Spring Creek will not only provide convenience and energy cost savings to our new customers but will allow them to reduce their community's carbon footprint as they move towards natural gas usage and away from more carbon-intense energy alternatives. Slide 31 is a reminder that sustainability is a primary focus at Southwest Gas as we embrace greenhouse gas reduction efforts and pivot our supply towards exciting new opportunities.

Turning to slide 32, we outline a variety of legislative and regulatory efforts we have undertaken in each of our states to pursue compressed natural gas, renewable natural gas, hydrogen, and more. We're finding very favorable support in both our legislative and regulatory venues to continue pursuit of initiatives that are aligned with the efforts to reduce greenhouse gas emissions and be responsive to interests related to climate change. Moving to slide 33, the policy support and commercial interest that we're seeing in our service territories related to renewable natural gas, compressed natural gas, hydrogen, and other technologies is translating into real projects throughout our service areas. Southwest Gas is partnering with dairy farms, wastewater treatment plants, landfills, and fleet transportation operators to provide environmentally friendly energy options that we expect to continue to grow significantly in the coming years.

On slide 34, we reference our efforts to ensure methane emissions, an important greenhouse gas concern from our distribution system, are minimized. Southwest Gas operates one of the most modern gas distribution systems in the nation. Our initiatives to replace older vintages of pipe and adopt operational practices that reduce escaping methane have allowed us to significantly reduce methane emissions, even while the number of miles of pipe and service has grown dramatically. Turning to slide 35, for more on our many initiatives pursuing a sustainable future for the communities we serve, please see our latest sustainability report, which can be accessed at the website noted near the bottom of the slide. Moving to slide 36, we summarize the key components of our business that we believe create an excellent value proposition for our investors.

For our natural gas operations, we anticipate continued strong customer growth, investment in CapEx, and resultant rate base growth. We will continue to prioritize cost controls and low bills as a competitive advantage for us compared to other energy providers. We will continue to expand our efforts pursuing a sustainable energy future for our customers. We will continue constructive collaborative relationships with our regulators and seek continued growth in both earnings and dividends. At our utility infrastructure services business segment, we will pursue growing opportunities to replace gas and electric infrastructure with our regulated utility customers, manage our costs with an eye towards operational excellence, grow our profitability and dividends, and provide a source of cash for Holdings.

On slide 37, as I indicated at the outset of the call, in recognition of our first quarter performance, we're slightly modifying our previously provided earnings guidance range of $3.95-$4.20 and moving to a range of $4.00-$4.20, trimming $0.05 off the bottom of our previously provided range. On slide 38, we provide 2021 line item guidance supporting our earnings per share guidance range. At our natural gas operations, we expect operating margin to increase by 6%-8%, operating margin to rise by 3%-5%. Total pension costs are expected to be flat compared to last year. We assume normalized company-owned life insurance returns of $3 million-$5 million and expect capital expenditures for the year to total about $700 million. At our Centuri infrastructure segment, revenues should rise by 1%-4% over our record results this past year.

Operating income should be 5.3%-5.8% of revenues. Interest expense is estimated at $7 million-$8 million. Net income expectations are net of non-controlling interest. Recall that fluctuations in Canadian exchange rates can influence results due to our Canadian operations. Moving to slide 39, we share some of our longer-term expectations. At the Southwest Gas Holdings level, we anticipate equity issuances totaling $600 million-$800 million over the three years ended 2023 and a targeted dividend payout ratio of 55%-65%. At our regulated utility operations, we expect to invest $3.5 billion to grow and modernize our gas distribution network over the five years ended 2025, with rate base expected to grow at a compounded annual growth rate of 7.5% per year over that same period.

At our Centuri operations, we expect revenues to grow an average of 5%-8% annually over the three years ending 2023. Operating income is expected to be 5.25%-6.25% over that same period, and EBITDA should approximate 10%-11% of revenues. Finally, turning to slide 40, we believe Southwest Gas Holdings offers our investors a compelling growth-oriented investment. We offer two complementary business segments, which are both poised for significant growth in the years ahead, with our regulated operations expected to contribute 71% of Holdings' net income for the three-year period ended 2023 and our infrastructure services segment contributing 29%. Our regulated utility operations are expected to continue experiencing great growth in customers, CapEx, and rate base while providing safe, reliable, affordable, and sustainable energy services to our customers.

With our Centuri infrastructure services segment providing complementary growth opportunities, serving the growing needs of gas and electric distribution companies across North America while providing increasing dividends and cash flows for Southwest Gas Holdings. With that, I'll return the call to Ken.

Ken Kenny (VP of Finance and Treasurer)

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

Operator (participant)

Thank you. At this time, I would like to remind everyone, if you would like to ask a question, you can press star, then the number one on your telephone keypad. Again, that's star, then the number one on your telephone keypad to ask a question.

We'll pause just for a moment to compile the Q&A roster. First question is coming from the line of Richard Sunderland from JPMorgan. Your line is open.

Richard Sunderland (Equity Research Analyst of North American Utilities and Power)

Hi, good morning. Thanks for the time today.

John P. Hester (President and CEO)

Morning.

Ken Kenny (VP of Finance and Treasurer)

Thanks. Good morning, Richard.

Richard Sunderland (Equity Research Analyst of North American Utilities and Power)

We've started on Centuri. Just curious on Centuri's result this quarter. Do you see these contributions as sustainable and potentially leading to additional growth on the electric side?

John P. Hester (President and CEO)

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.

In other words, if we have a long-standing relationship with a combination utility that we're currently doing a lot of gas work for, we're going to make sure that they know that we can offer them electric services with the same level of high quality and safety. 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.

Richard Sunderland (Equity Research Analyst of North American Utilities and Power)

Got it. Appreciate the color there. Maybe turning to the upcoming COYL VSP filing, what are your expectations for the recovery process following the denial of the electric rider in the state recently? Just curious if there's opposition to these types of mechanisms right now or maybe how it fits within the larger post-test year discussion within the state.

Justin L. Brown (SVP and General Counsel)

Yeah, 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 APS's rate case and things. I mean, these were previously approved. I think we had talked before also about the fact that 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, and that was ultimately approved. 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.

Richard Sunderland (Equity Research Analyst of North American Utilities and Power)

Got it.

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 recovery, or do you see other issues cropping up here?

Justin L. Brown (SVP and General Counsel)

Yeah. I mean, I think that's a fair way to look at it. I know in our rate case example, as I mentioned, the 12, we had included kind of that over a three-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.

When you look at kind of that record combined with the experience that we saw with moving the 2019 surcharge amount to the rate case, it's hard to imagine that there's going to be other issues that crop up. In these regulatory proceedings, there's always something that comes up. Someone makes an argument that we'll plan on addressing. As we stand here today, I think we have a pretty good case in terms of what was previously approved, the mechanisms, our performance in adherence to those mechanisms. Now it's a matter of just kind of truing that up and figuring out the timeframe for which that'll occur.

Richard Sunderland (Equity Research Analyst of North American Utilities and Power)

Got it. Appreciate the context here. Thank you.

Operator (participant)

Again, if you would like to ask a question, please press star, then the number one on your telephone keypad.

Next question is coming from the line of Kody Clark from Bank of America. Your line is open.

Kody Clark (Equity Research Associate)

Hey, everyone. Thanks for taking my question.

Justin L. Brown (SVP and General Counsel)

Sure. Morning.

Kody Clark (Equity Research Associate)

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.

Justin L. Brown (SVP and General Counsel)

Hey, Kody. It's Justin again. When we first experienced the price spike, 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 on which those are going to be recovered because of that sensitivity. 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 three to five 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. We do not anticipate any issues with respect to the gas cost recovery as it stands today. We anticipate currently that our mechanisms will allow to recover those costs over the time periods by which the mechanisms are designed. I think that kind of goes hand in hand with the tracker. I mean, 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 wrongdoing whatsoever. 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.

Kody Clark (Equity Research Associate)

Okay. Got it. That's super helpful. Is there any initial thoughts around timing on when we might get some more details on that?

Justin L. Brown (SVP and General Counsel)

On the surcharge filing?

Kody Clark (Equity Research Associate)

Yeah. Right. Exactly.

Justin L. Brown (SVP and General Counsel)

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

Kody Clark (Equity Research Associate)

Gotcha. Okay. Just on RNG, if I can quickly, can you provide a little bit more color into 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. It seems like there could be some upside.

John P. Hester (President and CEO)

Yeah. 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. 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. 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.

We worked with them to get a supply for them of RNG that will essentially let them transition from compressed natural gas that's conventional to compressed natural gas that's RNG and be able to address their interest in reducing greenhouse gases. I think you're going to see a lot of opportunities on that on the road ahead. We're excited about it.

Kody Clark (Equity Research Associate)

Great. That's awesome. That's all I had. Thanks so much for your time.

John P. Hester (President and CEO)

Okay. Thanks, Kody.

Operator (participant)

Next question is coming from the line of Chris Ellinghaus from Siebert Williams. Your line is open.

Chris Ellinghaus (Managing Director and Senior Electric, Natural Gas Utilities, and Alternative Energy Equity Analyst)

Hey, guys. Good morning.

John P. Hester (President and CEO)

Hey, Chris.

Chris Ellinghaus (Managing Director and Senior Electric, Natural Gas Utilities, and Alternative Energy Equity Analyst)

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

Gregory J. Peterson (SVP and CFO)

Hey, Chris, this is Greg.

I don't know that I would classify it 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 wintertime weather that they work in. It kind of slows the gas work. We were very pleased with the level of work that they were able to get done in the first quarter. It took a little bit of the uncertainty out of the rest of the year by doing that. That was the impetus and the basis for raising that bottom part of the guidance up a nickel.

Chris Ellinghaus (Managing Director and Senior Electric, Natural Gas Utilities, and Alternative Energy Equity Analyst)

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

Gregory J. Peterson (SVP and CFO)

Yeah. 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. 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. I think the future is very bright for Centuri. Maybe Q1 is just a small indication of what lies ahead for them.

Chris Ellinghaus (Managing Director and Senior Electric, Natural Gas Utilities, and Alternative Energy Equity Analyst)

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 of the accident?

John P. Hester (President and CEO)

Hey, Chris. This is John. I think really it's both. I think that when we made the Linetec acquisition and were able to grow that, it really provided great opportunities to provide more electric services as part of their platform. I think that strategically, that's a 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. We think that there are a lot of opportunities in the unionized electric space as well.

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 them. 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.

Chris Ellinghaus (Managing Director and Senior Electric, Natural Gas Utilities, and Alternative Energy Equity Analyst)

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 customers. I assume that the casinos are pretty well behind the effort.

John P. Hester (President and CEO)

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.

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. I think that definitely there will be opportunities with the resorts. 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. I think RNG is one of the ways they can do that in a fairly seamless way at a fairly low cost. 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.

Chris Ellinghaus (Managing Director and Senior Electric, Natural Gas Utilities, and Alternative Energy Equity Analyst)

Lastly, the small acquisition in Arizona.

Are you guys seeing other co-op opportunities out there?

John P. Hester (President and CEO)

Chris, this is John again. I think that there could be other opportunities. We have talked with a number of other parties. We do not have anything else on the board right now. As I am sure you will appreciate, the operational requirements of running a natural gas distribution system with safety, with upgrading your distribution network, etc., I think that there are other folks that are looking at whether that is a responsibility that they would just as soon turn over to another party like us. Certainly, we are going to be very interested in that. As we see those opportunities come up, we will want to capitalize on them.

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.

Chris Ellinghaus (Managing Director and Senior Electric, Natural Gas Utilities, and Alternative Energy Equity Analyst)

Sure. Okay. Thanks, John. And everybody have a great weekend.

John P. Hester (President and CEO)

Okay. You too, Chris. Thanks.

Operator (participant)

We do not have any questions at this time. I will be turning it back to the presenters.

Ken Kenny (VP of Finance and Treasurer)

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

Operator (participant)

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