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Edited Transcript of SWX.N earnings conference call or presentation 28-Feb-19 6:00pm GMT

Q4 2018 Southwest Gas Holdings Inc Earnings Call

LAS VEGAS Mar 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Southwest Gas Holdings Inc earnings conference call or presentation Thursday, February 28, 2019 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregory J. Peterson

Southwest Gas Holdings, Inc. - Senior VP & CFO

* John P. Hester

Southwest Gas Holdings, Inc. - President, CEO & Director

* Justin L. Brown

Southwest Gas Corporation - Senior VP & General Counsel

* Kenneth J. Kenny

Southwest Gas Holdings, Inc. - VP of Finance & Treasurer

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Conference Call Participants

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* Aga Zmigrodzka

UBS Investment Bank, Research Division - Associate Director and Equity Research Associate, MLPs

* Christopher Paul Sighinolfi

Jefferies LLC, Research Division - Senior Equity Research Analyst, Master Limited Partnerships

* Dennis Paul Coleman

BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD

* Paul Thomas Ridzon

KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst

* Sarah Elizabeth Akers

Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst

* Stephen D'Ambrisi

Castleton Investment Management, LLC - Security Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Southwest Gas Holdings 2018 Year End Earnings Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Mr. Ken Kenny, Vice President of Finance and Treasurer. Sir, you may begin.

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Kenneth J. Kenny, Southwest Gas Holdings, Inc. - VP of Finance & Treasurer [2]

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Thank you, Demetrias. Welcome to the Southwest Gas Holdings, Inc. 2018 Earnings Conference Call. As Demetrias 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 the 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, Chief Financial Officer; Mr. Justin L. Brown, Senior Vice President, General Counsel; and other management -- other members of senior management to provide a brief overview of 2018 earnings and provide earnings per share guidance for 2019.

Also the company will address 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. You should refer to the language in the press release, our SEC filings, and also slide number 3 presented today for a description of 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.

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John P. Hester, Southwest Gas Holdings, Inc. - President, CEO & Director [3]

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Thanks Ken. Turning to slide number 4, we present a variety of highlights for our company over the past year. We're pleased to report diluted earnings per share of $3.68, which compare favorably to our 2017 results after considering the impacts of tax reform and company-owned life insurance. Adverse broader stock market results in 2018 resulted in a per share loss from company-owned life insurance of $0.06. Considering this past year's financial performance, our Board of Directors has increased our annual dividend to $2.18 per share.

In our regulated utility operations this past year, we saw new customer growth of 1.6% to 32,000 customers, completion of our Nevada rate case proceeding, which was filed in May, approval of a $6 million increase in our gas infrastructure replacement surcharge for 2019 and initiation of a gas distribution service to Mesquite just this past month, pursuant to a decision issued by the Public Utilities Commission of Nevada this past May. In our unregulated utility infrastructure services segment this past year, we saw record revenues of $1.5 billion, record annual net income of $45 million, superb performance from our Neuco non-union gas subsidiary and completion of our Linetec non-union electric acquisition in November of last year.

On Slide 5, we detail an outline for today's call. Greg Peterson will present our 2018 consolidated earnings results with business segment detail for both the natural gas and utility infrastructure services segment, Justin Brown will follow with an overview of our various regulatory proceedings and I then will close with an overview of customer growth, regional economic conditions, planned capital expenditures, dividend growth and our expectations and focus for 2019.

I'll now turn the call to Greg.

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Gregory J. Peterson, Southwest Gas Holdings, Inc. - Senior VP & CFO [4]

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Thanks John. We announced our 2018 earnings yesterday afternoon and filed our Annual Report on Form 10-K with the SEC this morning. Please refer to those documents for a comprehensive analysis of our operations for 2018.

I will provide a brief overview of operating results beginning with Slide 6 which shows a comparative summary of net income. For 2018, consolidated net income was $182.3 million or $3.68 per diluted share, compared to $193.8 million or $4.04 per share for 2017. It should be noted that consolidated net income for 2017 includes a onetime tax reform benefit of approximately $20 million or about $0.42 per share recorded in December '17, while 2018 results reflect some net benefits of lower income tax rates.

The relative contributions during 2018 for each operating segment are shown on the next slide. As shown on Slide 7, the natural gas operations segment provided approximately 76% of Southwest Gas Holdings consolidated net income in 2018. In Centuri, our utility infrastructure services segment contributed 24%.

Slide 8 depicts the composition of the $11.5 million net decrease in consolidated results between 2018 and 2017. Net income for the natural gas operations segment declined $18 million, while net income for the utility infrastructure services segment was up $6.6 million between years. I'll provide some additional details surrounding the changes in each segment in the following slides.

The waterfall chart on Slide 9 shows the components of the $18 million decrease in natural gas operation results between 2017 and 2018. Operating margin includes an $11 million increase from 32,000 net new customers added during the past 12 months a 1.6% growth rate as John alluded to earlier. Three months of residual rate relief from the April 2017 General Rate Case decision in Arizona and attrition rate relief in California collectively provided $6 million in operating margin.

Reductions in surcharge recoveries and other reductions in miscellaneous revenues resulted in a $6 million decrease in operating margin between years. This collective net improvement of $11 million was offset by a $20 million decrease in operating margin due to the impacts of tax reform reflected in customers' bills resulting in a net $9 million reduction to operating margin when compared to 2017. The $19.1 million decrease in income tax expense reflected on the chart is due to lower tax rates in effect during 2018 and lower pre-tax income in 2018 primarily due to the $20 million reduction in customer bills associated with tax reform that I talked about earlier.

The $13.5 million increase in operation and maintenance, or O&M expense, includes the impacts of an $8 million increase in pension costs. O&M expenses were also impacted by incremental integrity management and damage prevention program costs, including a $3.4 million increase in line locating or call before you dig costs due to population growth and the associated increase in commercial and residential construction activities throughout our service territories.

Despite a $466 million or 7% increase in average gas plant and service, depreciation, amortization and general taxes declined $8.3 million between years. Lower depreciation rates in Arizona resulting from the April 2017 rate case decision coupled with lower amortization associated with regulatory surcharges more than offset the additional depreciation due to the increase in gas plant. The $10.9 million reduction in other income primarily reflects changes between years and the cash surrender values of company-owned life insurance or COLI policies.

COLI values declined $3.2 million in 2018 while COLI values increased $10.3 million in 2017. The cash surrender values of these policies fluctuate based on the value of the underlying investments. The $12 million increase in interest expense reflects higher outstanding debt balances, including $300 million of 3.7% senior notes issued in March 2018. Southwest's ongoing capital expenditures are financed with a combination of debt and equity issuances to supplement cash flows from operations.

We'll now review Centuri results starting with Slide 10. This chart shows the components of the $6.6 million increase in utility infrastructure services net income between 2017 and 2018. Century revenues increased $276 million or 22% due primarily to a full year of revenues about $148 million from New England utility constructors or Neuco that was acquired in November 2017 and $14 million of revenue of Linetec Services that was acquired on November 30, 2018.

Revenues were also favorably impacted from certain non-routine projects such as customer requested support during strike-related and emergency response situations. Centuri's expenses were $239 million higher than the prior year. Neuco expenses -- of that total Neuco expenses were $120 million in 2018 and Linetec expenses were $12.7 million excluding about $6.9 million of deal costs associated with this acquisition. Incremental general and administrative costs were also incurred to provide support for the overall growth in operations.

Depreciation and amortization increased $8.4 million partially due to amortization of intangible assets associated with the Neuco and Linetec acquisitions and depreciation on incremental equipment purchases to support growing operations, partially offset by a $6.9 million reduction in depreciation associated with the extensions of estimated useful lives of certain depreciable equipment. The $6.2 million increase in interest expense is primarily due to higher debt outstanding including amounts associated with the Neuco and Linetec acquisitions. Income tax expense increased $16 million between years. 2018 reflects a higher level of pre-tax income but lower tax rates while 2017 included a one-time approximate $12 million benefit recognized in December '17 associated with tax reform.

Before we move on to the regulatory update, let's turn to Slide 11 that highlights the Linetec acquisition. Centuri acquired 80% of Linetec services on November 30, 2018. Linetec currently operates in the Gulf Coast and mid-Atlantic regions of the company -- of the country providing electrical distribution and transmission utility infrastructure services.

The preliminary purchase consideration of $327 million for an 80% interest was based on 8.5 times EBITDA for 2018 and includes an estimated $24 million for a tax election as well as additional amounts for working capital and other adjustments. The purchase was funded with a combination of equity proceeds from Southwest Gas Holdings and debt under Centuri's expanded secured revolving credit and term loan facility. The purchase price is subject to adjustment and will be finalized in 2019. We have an option over the next several years to purchase the remaining 20% interest.

Linetec is led by a seasoned leadership team including its founder and CEO who continues to hold a 20% interest in the company. At the acquisition date, there were about 700 employees at Linetec. There are currently more than 800 employees and still growing. We're excited about the growth opportunities of Linetec, the expansion into new regions of the country and the skilled and seasoned workforce it brings to Centuri's operations.

With that I'll now turn the call over to Justin Brown for the regulatory update.

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Justin L. Brown, Southwest Gas Corporation - Senior VP & General Counsel [5]

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Thanks Greg. As highlighted on Slide 12, my comments today will focus on upcoming rate case activity, progress on our infrastructure tracker programs and an update on several expansion projects.

Let's start on Page 13 with an update on our recently completed Nevada general rate case. In December the commission approved a $7.5 million revenue increase and an $800,000 reduction in depreciation expense. This increase was based on an approved rate base of $1.24 billion, an ROE of 9.25% relative to a capital structure with an equity ratio of 49.66%. Other aspects of the case included continuation of our fully decoupled rate design, denial of our request to implement a pension tracker, approval of our projects that have been replaced as part of our gas infrastructure tracker program including updating the surcharge revenue as well as approval of a renewable natural gas and compression tariff to help facilitate development opportunities in both markets.

In January both the company and the commission staff filed petitions for reconsideration. Earlier this month, the commission granted both petitions but did not make any substantive changes in response to the company's proposals that impact revenue. The commission did provide clarification response to several of staffs' requests with respect to certain items, primarily the clarification regarding the decision's results and how to calculate them. This resulted in a final increased operating income of $7.9 million comprised of a revenue increase of $7.1 million and a reduction in depreciation expense of $800,000.

In light of the commission's final decision following our petition for reconsideration, we are currently evaluating our options in light of the decision not necessarily being in line with our expectations based upon prior rate case results in both Nevada and in our other state jurisdictions.

Some potential next steps include requesting judicial review or adjusting the timing of our next Nevada general rate case or both. This is something we will continue to evaluate as we need to make a final decision on whether to pursue judicial review within the next -- or within 30 days of the commission's decision which is currently estimated to be March 18th. There are also no limitations on the timing of when we could file another Nevada rate case.

Turning to Page 14 and starting with Arizona. We're currently preparing our next Arizona general rate case and plan to make a filing on or about May 1st. As part of our last settlement agreement, we agreed not to file another general rate case prior to May 1st, 2019. We're hopeful that new rates from this upcoming case will become effective in the first half of 2020.

With respect to California, we are targeting to file our next California general rate case on or about September 1st of this year. The rate case will use a calendar year 2021 test period with new rates becoming effective in January 2021. In the meantime, we'll continue to make annual adjustments to margin through 2020 as part of our annual 2.75% attrition filing. In fact for 2019, we are authorized to increase revenue by $2.8 million beginning January of this year.

And with respect to Paiute, similar to Arizona's part of Paiute's last general rate case in 2014, Paiute agreed to file no later than May of 2019. As such we're currently working on preparing a rate case that will be filed by the end of May. And, we would likely expect to see interim rates in place by December 1st, 2019.

With respect to tax reform proceedings, we worked diligently with our regulators last year to ensure a fair and balanced approach to passing tax reform savings back to customers in a timely manner. In Arizona, the commission approved an annual refund of approximately $20 million for 2018, and that credit remains in effect today. We estimate that this rate will remain in place during 2019, and that any further modification to revenues to reflect tax reform implications will occur as part of our upcoming rate case filing in May.

In Nevada, tax reform was addressed as part of our recently completed rate case. And, with respect to California there was no adjustment for 2018, but in 2019 and 2020 we will be tracking all impacts associated with tax reform through regulatory accounting treatment in the form of a memorandum account and these amounts will be incorporated in our upcoming rate case filings.

And lastly with respect to Paiute, Paiute filed its Form 501-G late last year, in compliance with the FERC's decision directing pipelines to file a Form 501-G to calculate the impact of tax reform on its current cost of service. We have not yet received a response from FERC on the filing, and we currently anticipate incorporating any impacts of tax reform as part of our May general rate case filing.

Turning to Slide 15. We continue to focus on maintaining infrastructure recovery mechanisms in each of our jurisdictions to timely recover capital expenditures associated with commission approved projects that enhance safety, service and reliability for our customers. We have two such programs in Arizona. First, our coil replacement program. Since our last general rate case, we have invested approximately $58 million in this program and have been able to make annual filings to recover our costs in a timely manner. Yesterday we filed our annual report with the Arizona Corporation Commission requesting to increase our surcharge revenue from $3.5 million to $6.7 million, based upon cumulative capital expenditures of approximately $58 million, $27 million of which was invested during 2018.

Turning to Slide 16. We also made our second VSP or Vintage Steel Pipe annual report filing yesterday, requesting to increase our surcharge revenue by $9.5 million to $11.9 million, to recover the $100 million in capital investments that were made in 2018. We expect decisions on both Arizona filings in time for rates to become effective by June of 2019.

Turning to Slide 17. Since 2004 we've received approval to replace over $215 million of qualifying replacement projects through the GIR application process, including the recently approved $35 million worth of projects targeted for replacement during calendar year 2019. As part of our recently approved rate case, the commission also approved the prudence of each of the projects that had been previously placed in service through July of 2018. And we incorporated these projects into rate base. We also received approval to increase our GIR surcharge revenue by $6 million from $8.7 million to $14.7 million for 2019.

Turning to Slide 18 to provide an update on several expansion project initiatives. We expect to see the completion of the Southern Arizona LNG facility later this year, which should sync up nicely with the filing of our Arizona rate case and the inclusion of the facility in rate base. In Nevada we received approval for a $28 million expansion as part of the first ever SB 151 filing authorizing us to extend our facilities to Mesquite, Nevada. As John mentioned, earlier this month we officially welcomed our first Mesquite customer. We anticipate continuing to hook up other customers throughout the remainder of the year using a temporary virtual pipeline and compressed natural gas, while we continue to work on the design and construction of the permanent gas supply over the next 18 to 24 months.

Lastly, Paiute you completed the construction on their $22 million project last fall and it was placed in service in November. We are currently collecting incremental revenue of approximately $3.3 million associated with this project.

And with that I'll turn it back to John.

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John P. Hester, Southwest Gas Holdings, Inc. - President, CEO & Director [6]

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Thanks, Justin. On Slide 19, we show some indicative metrics on regional economic conditions in our service territories. Over the coming five-year period we expect population growth in each of our states to exceed national population growth rates. Similarly, unemployment rates in each of our service territories remain low and job growth continues to be strong. With major economic development projects in Las Vegas alone, including construction of the Raiders football stadium, a new minor league baseball park in Summerlin, expansion of the convention center, continued progress on Resorts World, Las Vegas, and the Las Vegas Sands, MSG Sphere, Southwest Gas anticipates robust new customer growth for years to come.

Turning to Slide 20. We show our projections of utility customer growth for the coming three-year period, reaching 37,000 annual customer additions by 2021.

Turning to Slide 21. We provide estimates of our annual capital expenditures for the coming three-year period. Total capital investment for the coming three-year period is expected to total $2.1 billion. We expect to fund between 45% and 50% of these investments through internal cash flows with the balance being funded through a mix of future debt and equity issuances.

On Slide 22, we illustrate how our prospective capital expenditures translate into rate base. We expect that rate base will increase from $3.5 billion at the and of 2018 to $4.8 billion by the end of 2021. This growth and rate base represents an 11% compounded annual growth rate over the coming three years.

On Slide 23 we show the significant growth we've experienced in our dividend over the past six years. Growth in our dividend over this period has progressed at an 8.35% annualized rate. As I indicated earlier in our call, at our Board of Directors meeting just earlier this week, the board authorized increasing the dividend to an annual rate of $2.18.

Turning to Slide 24. Perhaps one of the more noteworthy slides in our presentation today features our newly provided annual earnings guidance. For 2019, we're projecting that our diluted earnings per share will come in at between $3.75 and $4. As we move forward, in future quarterly earnings calls this year we will either affirm that end of year estimate or potentially modify the end of year projection as we gain additional information on our operating units as the year progresses.

Next on Slide 25 we provide some of the underlying fundamentals for our 2019 guidance. Specifically, for our regulated gas utility operations we expect operating margin to increase by 4% to 5%. Operating income is expected to increase moderately, and our annual capital expenditures should total $710 million. Meanwhile, at Centuri, we expect year-on-year growth in revenues of 15% to 20% driven partly by our recent Linetec acquisition, operating income equal to 6% to 6.5% of revenues and please note, that our 2019 Centuri expectations are net of non-controlling interest and can be influenced by changes in Canadian dollar exchange rates.

Finally, wrapping up on Slide 26. We list a summary of long-term drivers for our shareholders. In our regulated utility operations, we expect annualized customer growth over the coming 3-year period in excess of 35,000, capital investments over the period in excess of $2 billion, a 11% compounded annual growth on rate base and mitigation of regulatory lag through the use of constructive rate mechanisms.

In our utility infrastructure services segment, we're poised to grow our business as one of the largest specialty utility contractors in North America now serving 28 different markets in the U.S. and Canada with our largest customers having an average relationship with us of over 20 years.

I'll now return the call to Ken.

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Kenneth J. Kenny, Southwest Gas Holdings, Inc. - VP of Finance & Treasurer [7]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Aga Zmigrodzka.

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Aga Zmigrodzka, UBS Investment Bank, Research Division - Associate Director and Equity Research Associate, MLPs [2]

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Could you please discuss the revisions to CapEx and in which jurisdictions do you expect to spend more?

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Gregory J. Peterson, Southwest Gas Holdings, Inc. - Senior VP & CFO [3]

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Yes. This is Greg, Aga. Aga, our revisions you can see they are just up slightly from the high $600 million -- the $690 million areas that we were at before. You can see that we've added about $20 million or so to each of the years. I don't think there's a specific jurisdiction that we're really adding these CapEx items into. You can see that in comparison some of our general plant and staff items are a little higher than they were in the past. We're undertaking some initiatives on some of the computer systems that we have to better serve our customers. So that's part of the growth that you see there.

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Aga Zmigrodzka, UBS Investment Bank, Research Division - Associate Director and Equity Research Associate, MLPs [4]

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Perfect. Thank you for clarification. And then on Slide 20, you expect an acceleration of customer growth in 2019. What are the drivers?

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John P. Hester, Southwest Gas Holdings, Inc. - President, CEO & Director [5]

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Aga, this is John. Just fundamentally solid economic conditions throughout our service territories. We do have in addition to those fundamentals some of the additional plans that we've talked about before including the Mesquite project that we talked about earlier on this call and then a plan to do a similar project up in Northern Nevada. But primarily it's related to a continued interest by residents and businesses to do business and live in the desert southwest.

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Aga Zmigrodzka, UBS Investment Bank, Research Division - Associate Director and Equity Research Associate, MLPs [6]

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Great. And thank you for providing EPS guidance for this year. I have one question on the discussion around the guidance. So how we should think about O&M and depreciation in '19? You talked about only modest growth in operating income (inaudible) level. What kind of like growth in O&M you expect in '19?

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Gregory J. Peterson, Southwest Gas Holdings, Inc. - Senior VP & CFO [7]

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Yes, this is Greg. We didn't provide the details of that. I think that you could look at our past history and know that both O&M and depreciation are expected to go up. O&M from more an inflationary and customer growth aspect as we've had in the past. Certainly depreciation will increase as we continue at this capital spend level of around $700 million a year. So both of those line items will grow and that's why we get to the modest growth in operating income.

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Operator [8]

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Paul Ridzon, KeyBanc.

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Paul Thomas Ridzon, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [9]

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What is your expectation for pension expense at the utility? I know you had an $8 million headwind last year. What's that going to do this year?

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Gregory J. Peterson, Southwest Gas Holdings, Inc. - Senior VP & CFO [10]

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Yes. This is Greg. We have with the revised discount rate which is a discount rate similar to what we had two years ago. Pension expense will be about in the $37 million neighborhood for 2019. So about a $9 million reduction from where it was in 2018 and again much more similar to what we had in the previous year 2016.

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Paul Thomas Ridzon, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [11]

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And what's embedded for COLI in guidance?

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Gregory J. Peterson, Southwest Gas Holdings, Inc. - Senior VP & CFO [12]

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I think our normal COLI levels as we've talked about for several years we've kind of talked about this $3 million to $5 million level. As you know because of a big piece of our company-owned life insurance is tied to movements in the broader stock and debt markets that it can't fluctuate quite a bit. But I think that $3 million to $5 million range is something that we're comfortable on a long-term basis with expecting.

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Paul Thomas Ridzon, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [13]

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And can you give any detail around what your expected effective tax rate target at the utility and in Centuri?

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Gregory J. Peterson, Southwest Gas Holdings, Inc. - Senior VP & CFO [14]

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I don't expect anything major to change, this is Greg again, on the tax rate side. We haven't provided the details but with a 21% federal rate and the state taxes I think you'll see that our effective tax rates are similar to the guidance that we provided last year.

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Paul Thomas Ridzon, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [15]

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And then -- thank you very much. And lastly, you've kind of done an acquisition a year, kind of what's on your radar at this point?

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John P. Hester, Southwest Gas Holdings, Inc. - President, CEO & Director [16]

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Paul, this is John. We still continue to look for the potential for acquisitions. We don't have anything that is imminent that we're going to close on. We continue to look for ways to grow the businesses both on the utility and the construction services side. From our perspective potential acquisitions on the utility side are relatively pricey compared to our opportunity to reinvest in our system with our pretty robust capital expenditure plan. And then on the construction side, we will look for opportunities to continue to grow and diversify that business. I think for the last couple of years when we've talked to our investors we've talked to them about wanting to see a little more increased diversification in the line of businesses that we do in the construction and we've talked about the fact that we don't do much work in the southeast. So when we started talking to the folks at Linetec, we thought that that was a perfect opportunity to address both of those desires on our part. So we'll look for additional possibility bolt-on enterprises that might be a good fit for our company. But nothing that is imminent immediately.

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Operator [17]

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Dennis Coleman, Bank of America.

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [18]

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I guess I'm hoping to get just a little bit more color about that Nevada outcome and sort of the refusal to rehear the appeal. And anything you can add in terms of, I mean does it change the view? Would you sort of go back with another rate case pretty quickly as a way to further contest it I guess with -- for lack of a better way to say?

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Justin L. Brown, Southwest Gas Corporation - Senior VP & General Counsel [19]

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Yes, Dennis this is Justin Brown. No, it's a good question and it's something we continue to evaluate as I mentioned. So they did entertain the petition for reconsideration. It's a process that we've utilized in the past back in 2012. As part of that rate case we had made a filing. They granted the petition. They just, based on their review and based on our arguments of what we wanted them to reconsider, they ultimately decided that they weren't going to change their initial filing -- findings, I should say. And so as a result we'll look at continue administrative remedies whether that's making a filing with the district court for judicial review which I mentioned we would need to do within 30 days as a decision which is about mid-March. The other option is as you mentioned or doing both quite frankly would be to file another rate case because there is no restriction on the timing. So that's something we could definitely avail ourselves of. And so we will continue to kind of evaluate the outcome, how it fits in with our plans for this year as well as kind of judicial review route as well.

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [20]

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So those would -- that -- if I understand it, those would take a parallel path and you could challenge it in the courts and also initiate another rate case? They wouldn't --

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Justin L. Brown, Southwest Gas Corporation - Senior VP & General Counsel [21]

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Yes, that is a possibility.

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Paul Thomas Ridzon, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [22]

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It doesn't prevent you from -- one doesn't prevent the other?

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Justin L. Brown, Southwest Gas Corporation - Senior VP & General Counsel [23]

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Correct.

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [24]

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Okay. I guess for me a follow-up would be, as you continue to grow Centuri, S&P obviously has taken a little more aggressive view on the rating, any color you can talk about there, conversations with S&P?

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John P. Hester, Southwest Gas Holdings, Inc. - President, CEO & Director [25]

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Dennis this is John. Certainly we're very mindful of our credit ratings and how the rating agencies look at our business. I think that we are going to, like I mentioned before, continue to want to grow both sides of the business. I think that one of the things that we look at when we look at the possibility of getting additional growth on the construction side is how we finance that. So we may see a little bit higher equity percentage in funding of that growth vis-a-vis what we see on the utility side. We are going to continue to work with the rating agencies. We think that the construction business is a really solid business. We think that it's not a typical construction company, it's not subject to the kind of variations in macroeconomic variables that might impact, say, a homebuilder or such. We think a lot of times that Southwest Gas on the utility side is a little bit of a microcosm of the utility markets that we see across the country. So we, like utilities across the country, have long lived construction investment programs for not only growth but for pipe replacement, electric line replacement and we're going to continue to work with rating agencies to communicate how we think that's a solid business.

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [26]

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Okay. That's all I have for today. See you all or some of you next week.

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Operator [27]

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Sarah Akers, Wells Fargo.

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Sarah Elizabeth Akers, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [28]

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I know you're not giving EPS guidance by segment, but is it reasonable to assume that the contribution from construction is going to be materially up from the 24% contribution in '18?

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Gregory J. Peterson, Southwest Gas Holdings, Inc. - Senior VP & CFO [29]

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This is Greg, Sarah. I think what we're going to see is that, we expect growth on both sides of the business. I think you can see from top line growth that we've set out that Centuri we expect the revenues to grow 15% to 20%. So there might be some uptick on that side, but again we expect positive results from both segments of the business.

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Sarah Elizabeth Akers, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [30]

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Okay. Got it. And then on the utility guidance, the assumptions from a modest increase in EBIT, is it safe to assume the message there that that's a decently -- that decline, I am sorry, that increase is decently below the 4% to 5% growth in operating margin?

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Gregory J. Peterson, Southwest Gas Holdings, Inc. - Senior VP & CFO [31]

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I don't know that we want to handicap it but certainly the increase in operating margin includes some recoveries from these various mechanisms which will have corresponding or substantially corresponding amounts in depreciation or amortization expenses. So it might be reasonable to assume that the growth might not quite be at that level of the operating income line item.

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Sarah Elizabeth Akers, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [32]

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Okay, perfect. And then what would be earned ROE at the regulated utility that's implied in the guidance for '19?

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John P. Hester, Southwest Gas Holdings, Inc. - President, CEO & Director [33]

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Sarah, this is John. We don't provide that on a prospective basis as part of our guidance. We have provided information on a historical basis. We have a number of filings that we're going to be making this year. So we don't provide that level of detail on a prospective basis.

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Sarah Elizabeth Akers, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [34]

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Okay. And then last question, on the construction front I know there'd been that water contract that has been a drag on margins. Does that project continue into '19? Or will that pressure go away, is that contract over now?

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John P. Hester, Southwest Gas Holdings, Inc. - President, CEO & Director [35]

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I think probably both of those statements are correct. It will go on into '19 for part of the year but it's going to be coming to a conclusion in a relatively near future.

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Operator [36]

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Chris Sighinolfi, Jefferies.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division - Senior Equity Research Analyst, Master Limited Partnerships [37]

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I just want to follow up on Dennis' questions, I think Justin this is for you, with regard to Nevada. I know there were multiple components of the filing when you made it. The headline ask I think included legacy GIR approvals. You also had, I think, rolled into that efforts for '19 so you wouldn't have to make a separate GIR filing. And can you just correct me if I'm wrong when I look at Slide 13 and the outcomes, that I think John made reference to it, but you've got another $6 million for '19 in terms of GIR. But how does the legacy amount compare to what was authorized. here relative to what you asked? Or does that make sense?

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Justin L. Brown, Southwest Gas Corporation - Senior VP & General Counsel [38]

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I am not sure -- yes, I am not sure I am following you.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division - Senior Equity Research Analyst, Master Limited Partnerships [39]

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Your headline filing, I thought when you made the request, included amounts that had already been authorized and that would just be rolled into base rates now?

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Justin L. Brown, Southwest Gas Corporation - Senior VP & General Counsel [40]

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Correct. Not the revenue but the projects themselves. So the remaining flat balances were being rolled over. Correct.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division - Senior Equity Research Analyst, Master Limited Partnerships [41]

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Okay. And then I guess is my understanding correct that those were then not going to be an incremental step up, they were just going to be sort of formally recognized now in base rates and out of those programs separately?

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Justin L. Brown, Southwest Gas Corporation - Senior VP & General Counsel [42]

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Correct.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division - Senior Equity Research Analyst, Master Limited Partnerships [43]

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Okay. And so when I look at -- I guess when I look at the $7.1 million authorized versus your ask, I guess what I'm trying to get after is, is that a real apples to apples comparison or not? My impression was that it was not a comparison number given there were amounts already included but I'm not sure given all of the challenges with that case at the end the sort of rehearing request and what not, I don't know how to interpret that. So I'm just asking for a clarification.

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Justin L. Brown, Southwest Gas Corporation - Senior VP & General Counsel [44]

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Yes. So the -- and that's I guess where we had the GIR rate that was approved that picks up an additional $6 million. And that's basically clearing out -- because the way the mechanism works is that you basically defer the revenue requirement into like a regulatory asset, if you will, for lack of a better description. And then each year you clear that out. And so while the plan is moving over into rate base going forward you still have that deferral account that you're clearing out which is where the $6 million comes from.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division - Senior Equity Research Analyst, Master Limited Partnerships [45]

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Okay. And that's -- but that is separate from what's reflected on Slide 13? Or is that incorporated in this $7.1 million?

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Justin L. Brown, Southwest Gas Corporation - Senior VP & General Counsel [46]

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No, it's separate, so that [$60 million] incremental to the $7.1 million.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division - Senior Equity Research Analyst, Master Limited Partnerships [47]

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Yes, okay. And then I guess the elements -- I guess what I'm trying to get after is when I walk up to an implied 4% to 5% growth in utility net margin year-on-year. I am thinking about customer growth being relatively similar to the contributions you guys saw last year. We see the California attrition, we see the Arizona rider, we see the GIR approval of the $6 million, and now we see this. And I just didn't -- I don't quite get there if I do all of that. So I was just wondering if there's something else I'm missing or if there are other things that are sort of small in scale but when added up sort of represent the balance?

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Kenneth J. Kenny, Southwest Gas Holdings, Inc. - VP of Finance & Treasurer [48]

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Yes. Chris, this is Ken. The one item, it sounds like, you'd be missing in your calculation is the surcharge for Nevada CEE and of course that doesn't have an income statement impact because you have offsetting depreciation and amortization to that.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division - Senior Equity Research Analyst, Master Limited Partnerships [49]

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Okay, that goes back to what Greg was talking about earlier --

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Kenneth J. Kenny, Southwest Gas Holdings, Inc. - VP of Finance & Treasurer [50]

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Exactly.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division - Senior Equity Research Analyst, Master Limited Partnerships [51]

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In response. Okay. Have you provided that number, Ken?

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Kenneth J. Kenny, Southwest Gas Holdings, Inc. - VP of Finance & Treasurer [52]

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We have not.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division - Senior Equity Research Analyst, Master Limited Partnerships [53]

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Okay. If I could just ask a couple of other quick questions, Justin, the Paiute pipeline. I'm just curious did you provide a breakdown a lot of gas pipes that are going through the 501-G process now are sort of talking about how much cost of service represents versus negotiated rate or other forms of contracting that might lessen any potential impact. Could you just remind us how Paiute stacks up today in terms of contract structure?

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Justin L. Brown, Southwest Gas Corporation - Senior VP & General Counsel [54]

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I'm sorry, could you say that again Chris? The last part.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division - Senior Equity Research Analyst, Master Limited Partnerships [55]

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Is just -- how much of it is cost of services, is it all cost of service or are there portions in that that would be negotiated rates that might not be impacted by the FERC process?

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Justin L. Brown, Southwest Gas Corporation - Senior VP & General Counsel [56]

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No, if I am understanding your question correctly, it's all cost to service.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division - Senior Equity Research Analyst, Master Limited Partnerships [57]

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Okay. And with regard to the LNG facility, when that comes into service later this year, could you just remind us how that's treated in terms of rate base or regulatory treatment upon in service?

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Justin L. Brown, Southwest Gas Corporation - Senior VP & General Counsel [58]

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Yes, absolutely. So I mean it's kind of coincidently, given the timing of our next Arizona rate case, I think it's likely that depending on when that goes into plant and service, we'll be able to make a post test year adjustment as part of the rate case filing and include that in rates. If for some reason that doesn't happen as part of our last rate case, we had reached an agreement with the staff that once that goes into service, we'll be able to defer the revenue requirement associated that facility and tell rates become effective in a subsequent rate case. So I think either way we're in a good position to make sure to capture that revenue requirement. I think it's most likely given the timing of things and the way the rate case timing is playing out that it will likely be included as part of the rate case we won't need to necessarily avail ourselves of the regulatory accounting treatment that's previously been approved.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division - Senior Equity Research Analyst, Master Limited Partnerships [59]

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Okay, thank you for that. And then a final question for me. I think John this is probably for you, but just with regard to the dividend policy, I think my -- can you just correct me if my understanding is unchanged or is consistent with yours that your policy had been because of the construction business contributing to the net that that was a lower payout ratio? I think I remember somewhere around a 50% target for that. And then the utility was thought of as ex COLI being sort of 55% -- 60% payout ratio. Is that still -- is that correct and if that's correct is that your view going forward, just given that step-up in CapEx?

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John P. Hester, Southwest Gas Holdings, Inc. - President, CEO & Director [60]

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Yes, that's roughly correct, Chris. I think we've talked about wanting to be in the range of our peer companies and looking at that as probably 55% to 65% and because we have that segment with the construction company probably being on the lower end of that range and in consideration as you mentioned about the significant amount of CapEx we have planned on the utility side. So I would say our policy would be to be in that range prospectively. As you know we've made a lot of gains over the past several years to get into that range because we used to be below but probably on the lower end of that peer range.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division - Senior Equity Research Analyst, Master Limited Partnerships [61]

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Okay, thanks a lot for the time, guys. Sorry, if I garbled some of those questions. I appreciate the color.

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John P. Hester, Southwest Gas Holdings, Inc. - President, CEO & Director [62]

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Absolutely. Thank you, Chris.

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Operator [63]

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Stephen D'Ambrisi, Castleton Investments.

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Stephen D'Ambrisi, Castleton Investment Management, LLC - Security Analyst [64]

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I just wanted to follow up on Chris's question about the Nevada GRC and the guidance that that being an $8 million operating income increase year-over-year. It's my understanding that $29.7 million request on Slide 13 included like $18 million of an increase related to the previously approved GIR amounts. And so, when I think about -- when I was thinking about that $29.7 million request originally, the $18 million wasn't necessarily a driver of net income growth because you guys have been recognizing that as a -- that cost of capital deferral every year. Was I thinking about that right originally? Or is that I am misunderstanding what the ask was?

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Justin L. Brown, Southwest Gas Corporation - Senior VP & General Counsel [65]

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Yes. Stephen this Justin. I believe so, that sounds correct.

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Stephen D'Ambrisi, Castleton Investment Management, LLC - Security Analyst [66]

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Okay. And so then when I look at the $7.1 million, do I have to do the same math where basically I say of the $7.1 million you're already recovering '18, so it's actually -- or you're recovering some part of that '18 so it's really the operating income growth is flat or negative or net income [inside]?

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Justin L. Brown, Southwest Gas Corporation - Senior VP & General Counsel [67]

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No, I think it basically resets with the rate case is how I would look at it. So now it just becomes part of rate base.

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Stephen D'Ambrisi, Castleton Investment Management, LLC - Security Analyst [68]

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Right. So rate relief -- so you are already recovering $18 million in whatever -- you're already recovering the cost of carry, which is something around that $18 million in your income statement that was getting reflected as you went along and filed these GIRs. And so then you've got a $7 million rate increase, so am I thinking about it right that rates are up $7 million but that includes you moving $18 million into rates or is there like a [shift in that]?

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Justin L. Brown, Southwest Gas Corporation - Senior VP & General Counsel [69]

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Well, it's not the -- I wouldn't look at it as that. I don't think you look at it as the $18 million in revenue. I mean the projects move over, so a little reset and they are just included in base rates and then we'll still be clearing out the deferral that I was describing earlier with Chris on a go-forward basis.

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Stephen D'Ambrisi, Castleton Investment Management, LLC - Security Analyst [70]

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Okay. What I'm trying to do is get at it seems like there's some amount of this rate relief that is already being recognized in -- it wasn't in rates, it was just in the writer and you're just shifting the bucket. And I want to make sure that when I think about operating income year-over-year I'm getting to the right type of growth? Or should there be any growth since you already are recognizing a significant amount of this?

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Justin L. Brown, Southwest Gas Corporation - Senior VP & General Counsel [71]

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Yes, I think -- again if I'm following kind of your question I think it's basically it's getting moved over similar to like what we did on our Arizona trackers where it moves over and so you're not -- it would just be reflected as part of base rates and then you've got this clearing out of the residual amount as part of that deferral account.

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Stephen D'Ambrisi, Castleton Investment Management, LLC - Security Analyst [72]

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Yes.

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Justin L. Brown, Southwest Gas Corporation - Senior VP & General Counsel [73]

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On a go forward which will then kind of reduce over time as that balance clears out. And then as we continue to load new projects in there then that'll be happening on a go-forward basis with the new projects.

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Stephen D'Ambrisi, Castleton Investment Management, LLC - Security Analyst [74]

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Okay. But clearing out that deferral and that stuff is different. And I guess what I was thinking is while you move it into base rates for that 18 -- that existing part that doesn't really drive operating income growth?

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Justin L. Brown, Southwest Gas Corporation - Senior VP & General Counsel [75]

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Correct. I think that's correct way to look at it.

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Stephen D'Ambrisi, Castleton Investment Management, LLC - Security Analyst [76]

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Okay. And then just on the EBIT guidance of modest increase. Does that mean that net income is like a modest increase or are there impacts below the line that should change that one way or the other?

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Gregory J. Peterson, Southwest Gas Holdings, Inc. - Senior VP & CFO [77]

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This is Greg again. I think, again we talk about the top line growth or responded a little earlier that operating income that modest growth might be a little less than the top line margin growth. And again, there'll be some growth on the bottom line as well. So we're just not providing the detailed guidance for those things other than to say that we expect growth in both segments of the business.

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Operator [78]

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Thank you. Ladies and gentlemen this now concludes our Q&A portion of today's conference. I would now like to turn the call back over to Mr. Ken Kenny for any closing remarks.

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Kenneth J. Kenny, Southwest Gas Holdings, Inc. - VP of Finance & Treasurer [79]

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

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Operator [80]

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Ladies and gentlemen. Thank you for attending today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.