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Edited Transcript of SWX.N earnings conference call or presentation 7-Nov-19 6:00pm GMT

Q3 2019 Southwest Gas Holdings Inc Earnings Call

LAS VEGAS Nov 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Southwest Gas Holdings Inc earnings conference call or presentation Thursday, November 7, 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 Holdings, Inc. - Senior VP & General Counsel of Southwest Gas Corporation

* 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 James Turnure

JP Morgan Chase & Co, Research Division - Analyst

* Christopher Paul Sighinolfi

Jefferies LLC, Research Division - MD and Equity Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Southwest Gas Holdings 2019 Third Quarter Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to speaker today, Vice President of Finance and Treasurer, Ken Kenny. Please begin.

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

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Thank you, Demetrius. Welcome to Southwest Gas Holdings, Inc. 2019 Third Quarter Earnings Conference Call. As Demetrius stated, my name is Ken Kenny, and I am the Vice President, Finance and Treasurer. Our conference call is being broadcast live over the Internet. For those of you who would like to access the webcast, please visit our website at www.swgasholdings.com, otherwise, www.southswgasholdings.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 and Chief Financial Officer; and Mr. Justin L. Brown, Senior Vice President, General Counsel, Southwest Gas Corporation and other members of senior management to provide a brief overview of the company's operation and earnings ended September 30, 2019, and to address earnings per share guidance for 2019. Also, the company will discuss 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 should refer to the language on Slide 3 and 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.

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

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Thanks, Ken. Turning to Slide 4. We show some of our 2019 highlights. From a consolidated perspective, we saw earnings per share of $0.10 for the quarter. We realized record 12-month revenues of $3.1 billion. We completed our reincorporation of Southwest Gas Holdings from California to Delaware, and we are modifying our 2019 earnings per share guidance from the previously announced range of $3.75 to $4 to a new range of $3.60 to $3.80. For the natural gas segment, we continued to experience strong customer growth, having added 34,000 customers over the past year for an annualized growth rate of 1.7%. We also submitted a new California rate case application in August, requesting a revenue increase of $12.8 million. And we recently saw Standard & Poor's upgraded our utility credit rating to A minus. Then at our Centuri utility infrastructure services segment, we saw record quarterly revenues of $515 million, including a strong performance from our Linetec Services Group, which contributed $70 million. Centuri's net income for the past year totaled $46.7 million.

Moving to Slide 5. We show an outline for today's call. First, Greg Peterson will provide an overview of our financial results with segment details of natural gas operations and utility infrastructure services group. Justin Brown will provide a regulatory update, including detail on our 3 current rate case proceedings. And I will wrap up our presentation with an update on customer growth and regional economic conditions, our planned capital expenditures and our expectations for the rest of 2019 and beyond.

With that, I will now turn the call over to Greg.

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

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Thank you, John. Our earnings press release and quarterly report on Form 10-Q were made available yesterday afternoon, and I invite you to read those documents for additional details of our third quarter operating results and outlook for 2019. For today's call, let me start with a summary of total company operating results on Slide 6. For the 12 months ended September 30, 2019, net income was $191.5 million or $3.59 per diluted share compared to net income in the prior year period of $209.4 million or $4.29 per diluted share. The 2018 period included a onetime tax reform benefit of approximately $20 million or $0.41 per share. For the third quarter of 2019, consolidated net income was $5.4 million versus $12.3 million for the prior year. Third quarter EPS declined from $0.25 in 2018 to $0.10 in 2019. Some of the major items impacting third quarter 2019 results are reflected on Slide 7.

Natural gas operations currently reflect the cost of substantial investments we have made in our system to ensure safe and reliable service to our customers. These long-term investments also ultimately benefit shareholders as amounts are included in the calculation of customer rates and company revenues. In February 2019, Southwest requested an aggregate $12.7 million surcharge increase effective June 2019 as part of its annual filings for Vintage Steel Pipe or VSP and customer-owned yard line or COYL program.

In October, the Arizona Corporation Commission issued an order to consolidate consideration of the VSP and COYL requests into the Arizona general rate case. A decision in the general rate case is not expected until the first half of 2020. This adversely impacted third quarter operating results and cash flows by delaying recovery of a portion of the aggregate $12.7 million request.

Centuri's quarterly performance was negatively impacted by implementation of new regulatory requirements within certain eastern states in the U.S. resulting in production inefficiencies and revenue reductions totaling an estimated $4 million. Extra efforts to complete and delays in commissioning an industrial construction project in Canada resulted in approximately $2 million of additional costs.

Additionally, changes in the mix of work requested in 2019 by certain customers resulted in higher labor and equipment cost compared to the work originally anticipated. These negative impacts primarily occurred in the early part of the third quarter's operations and are not expected to substantially influence future results.

I'll now provide some highlights of comparative results by segment beginning with quarterly natural gas operations on Slide 8. This waterfall chart shows the components of the $6.3 million decrease in natural gas operations results between quarters. Due to the seasonality of our business, utility losses during the third quarter are expected. The $7.3 million increase in operating margin includes $2 million from customer growth, as 34,000 net new customers were added over the past 12 months and a combined $2 million from California attrition and Nevada rate relief. Higher regulatory surcharges and miscellaneous revenues accounted for the remainder of the margin increase. O&M expenses between quarters were up 4% or $4.4 million, about half of which was related to higher legal costs. The $4.7 million increase in depreciation, amortization and general taxes reflects the impact of a $602 million or 9% increase in gas plant in service. The $2.2 million decrease in other income reflects lower increases in the cash surrender value of the company-owned life insurance, or COLI policy, this quarter, $200,000 versus last year, $4.7 million. Partially offsetting the COLI impact was a $1.5 million reduction in non-service pension-related costs.

Lastly, the $3.2 million uptick in interest expense reflects higher debt outstanding, including $300 million of senior notes issued in May this year to facilitate Southwest's robust capital expenditures program.

Turning to Slide 9, we see the quarterly changes for Centuri, our utility infrastructure services segment. The increases in revenues and expenses as well as depreciation and amortization were primarily due to the operations of Linetec, which we acquired in November 2018. This Southeast based electric utility infrastructure services company contributed approximately $3.7 million towards Centuri's $25.8 million of net income for the quarter.

As discussed earlier, the current quarter was adversely impacted by approximately $6 million due to new regulatory requirements in a Canadian industrial project. Additionally, mix of work changes were experienced with several utility customers. As John previously mentioned, Centuri recognized a record $515 million of revenues for the quarter.

Well, next, we'll transition to a review 12-month activities beginning on Slide 10. Slide 10 depicts the relative contributions by our 2 business segments during the 12 months ended September 30, 2019. As you can see, natural gas operations provided about 3/4 of our consolidated net income, while Centuri's utility infrastructure services group provided about 1/4.

Let's move to Slide 11 and look at each segment's impact, the consolidated change between 12-month periods. Slide 11 depicts the components of a $17.9 million decline in consolidated earnings between 12-month periods. I should note that the results for the 12 months ended September 30, 2018, included approximately $20 million of onetime tax benefits recognized in connection with the enactment of tax reform in December 2017. I'll provide additional details on each segment's performance in the next couple of slides.

Slide 12 depicts the components of the changes in natural gas operations results between 12-month periods. The $24.8 million improvement in operating margin includes $11 million from continuing customer growth and $9 million in combined rate relief in Nevada and California. Miscellaneous revenues and higher surcharges associated with recoveries of regulatory assets were partially offset by the regulatory impacts of U.S. tax reform, primarily a related $4.7 million onetime reduction to margin tracker recoveries ordered by the Arizona Corporation Commission in the first quarter of this year. The $7.8 million or 2% increase in O&M reflects general cost increases as well as $2.4 million of incremental damage prevention or call before you dig costs associated with utility and general construction activities throughout our service territories.

The $13.8 million increase in depreciation, amortization and general taxes reflects the impact of a $550 million or 8% increase in average gas plant in service. The $1.2 million increase in other income includes a $4.5 million increase in the equity component of ASEC -- AFUDC or allowance for funds used during construction and $1.4 million in additional interest income.

Non-service pension costs declined approximately $4 million between periods. COLI cash surrender value income was $2 million in the current period versus $9.5 million in the prior year, a decline of $7.5 million. The $14.1 million increase in interest expense is due to higher outstanding balances on Southwest's credit facility as well as debt issuances of $300 million in March of 2018 and $300 million in May of 2019 as we continue to finance capital expenditures to expand and fortify our distribution system.

Next, I'll discuss the components of the 12-month change in our utility infrastructure services segment, beginning on Slide 13. This slide shows the components of the $11 million decrease in Centuri net income between 12-month periods. As I previously mentioned, the prior period included a $12 million onetime tax benefit recognized in connection with enactment of tax reform in December 2017. Our acquisition of Linetec in November 2018 provided significant benefits to Centuri's results, accounting for approximately $9 million of net income. Overall, revenues increased $219 million, including $189 million of new revenues from Linetec. Utility infrastructure revenues also benefited from some nonroutine projects including customer-requested support during strike-related and emergency response situations in the latter part of 2018.

Infrastructure services expenses were $185 million higher than the prior year period, primarily due to nearly $150 million for Linetec operations.

Depreciation and amortization increased $27 million, including $22 million from the Linetec acquisition and operations. The other category primarily reflects the portion of Centuri's net income attributable to the noncontrolling interest in Linetec.

Slide 14 depicts the investment-grade ratings currently assigned by the 3 major credit rating agencies. The company periodically meets with these agencies to provide updates on the company's overall and individual segment operations. As noted on the slide, on October 30, 2019, Standard & Poor's upgraded the rating for the utility operations to A minus from BBB+.

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

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

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Thanks, Greg. We have a significant number of meaningful regulatory initiatives currently going on. Namely rate case related proceedings in each of our regulatory jurisdictions as well as several other initiatives that will continue to provide an opportunity for us to invest in our distribution system to serve the needs of our customers. Let's start on Slide 16, with our Arizona general rate case. Our application requested an increase in revenues of $57 million, including a proposed return on equity of 10.3%. There were 2 primary drivers for this case. Two -- number one, to fully reflect the impact of tax reform in base rate; and second, to update rate base to reflect the nearly $700 million that has been invested in Arizona since our last rate case. With respect to tax reform, the proposed $57 million increase in revenues is net of any offset from tax reform. We propose to amortize the excess deferred income tax balance consistent with the IRS prescribed methodology, and at the time of filing, we anticipated this amount to be approximately $21 million. However, since the filing, we finalized our 2018 tax return and we were able to determine the actual amortization amount, which ended up being about $15 million less than what we originally estimated. This difference will result in an increase in both margin and federal income tax expense and will thus have no impact on earnings. We also made a recent filing in the rate case to supplement the requested Post-Test Year plan increase by approximately $125 million, which I will discuss in more detail later in my comments when I provide an update on the status of our Arizona tracker program. The commission issued an order in June, establishing a schedule where intervenor testimony will be due around the 1st of December, a hearing in February, and hopefully, a decision by the second quarter of 2020. However, just this week, the commission scheduled another procedural conference for November 14 to entertain recent proposals from several intervenors who claim they need additional time due to our recent supplemental filing. Parties have requested moving the hearing date back anywhere from 6 to 11 weeks. We should know the extent of any changes in the procedural schedule after the 14th.

Turning to Slide 17. We filed the California general rate case at the end of August. Similar to our Arizona case, the proposed $12.8 million revenue increase is inclusive of approximately $10.9 million revenue reduction associated with tax reform. This revenue reduction consists of 3 components: first, approximately $7.4 million is attributable to the change in tax rate. Second, $1.6 million is a result of our proposal to amortize the excess accumulated deferred income taxes over the rate case cycle. And lastly, $1.9 million is associated with the amortization of the difference between the authorized and the actual federal income tax expense for years 2019 and 2020 that we are currently tracking.

In addition to the various tax reform changes that are reflected in the $12.8 million revenue increase, the proposal also includes an ROE of 10.5% relative to an equity ratio of 53%. Our proposal to increase rate base by $230 million to reflect the various investments we've made in our distribution system since the last rate case. We are also proposing to continue our Post-Test Year attrition adjustment of 2.75%, and in compliance with the commission's new risk-informed decision-making process, we've proposed 3 different tracker programs whereby we would adjust rates annually to recover our costs associated with the programs. If approved, these programs could result in an additional investment opportunity of approximately $40 million a year over the 5-year rate cycle or $200 million in total. We anticipate participating in a procedural conference within the next 30 days to finalize the schedule, but generally, we expect to have a hearing completed by the first half of 2020.

Before we move on to Paiute, I'd also like to provide a quick update on our Nevada rate case and the pending judicial review. You may recall, following our rate case last year, we filed for judicial review of that decision. The court recently set a hearing date for December 17, and consistent with our previous discussions on this topic, subject to the outcome of that hearing, we will likely look to file our next Nevada rate case next year, and could be as early as the first quarter of 2020.

Moving to Slide 18 and Paiute Pipeline. In addition to our state rate cases, our FERC-regulated pipeline company filed a rate case in May requesting to increase revenues by $7.1 million, which includes revenue of about $1.8 million associated with a proposal to increase depreciation rates. Similar to our state cases, the increase is net of any adjustment for changes in tax reform, including a proposal to start amortizing the $15 million of excess accumulated deferred income taxes by approximately $340,000 a year. We expect interim rates to become effective in December of '19. Hearings are currently scheduled for June of 2020, and we expect a final decision by the end of the third quarter of 2020.

Turning to Slide 19. In our customer data modernization initiative, we're still working our way through the regulatory process in hopes of receiving constructive regulatory mechanisms in each state to help facilitate timely and complete cost recovery of the project.

In Nevada, following a hearing in August, the commission concluded that the rate case venue was the most appropriate venue to seek recovery of the project costs. Following our review of that decision, we decided to file a petition for reconsideration of that order and that is currently pending, and we anticipate a decision as early as next week. Arizona scheduled a hearing for February 17, 2020, and in California, we recently received approval to establish a memorandum account to begin tracking the cost and we've also reached an agreement in principle with the public advocates office on our request for approval of the project and to establish a 2-way balancing account to recover the costs. We are currently documenting that agreement and plan to submit it to the commission for approval later this month.

Turning to Slide 20 and an update on several expansion related projects. We're in the final stages of testing before we place the Southern Arizona LNG facility into service. As a reminder, we've also included the cost of this facility in our current rate case as part of our Post-Test Year plan adjustment. In Nevada, we continue to make progress on building out our distribution system in Mesquite and hooking up new customers, including working on bringing the permanent gas supply to Mesquite with the approach main, which is still expected to be in service by the first quarter of 2021. Meanwhile, we'll continue to serve customers with a temporary virtual pipeline and compressed natural gas. We recently received testimony from staff and the consumer advocate on our $62 million SB 151 Spring Creek proposal. No one opposed the proposal, and we have held numerous settlement discussions with the parties. And if the case does not settle, we anticipate a hearing the week of November 18, with the final decision in early 2020.

Turning to Slide 21. You may recall, we made filings in February of this year to update the surcharge revenue associated with both our customer-owned yard line and Vintage Steel Pipe replacement program. The proposals would have increased surcharge revenue by approximately $12 million beginning in June of this year to recover the costs associated with the investments from 2018. The commission ultimately decided to not adjust the surcharge revenue and instead will address cost recovery as part of our pending rate case. As part of this decision, the company will also -- the company will also not make a surcharge filing in February of 2020, for the 2019 work that is currently being completed. This is the impetus for us making a supplemental filing in our rate case to include the COYL and VSP projects that are being worked on in 2019. This is the $125 million increase I mentioned previously, which is also estimated to increase the rate relief request by approximately $17 million.

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 22, we illustrate the robust economic conditions that exist throughout our 3-state service territory. Over the coming 5-year period, we expect population growth in Arizona, Nevada and California to exceed national growth rates. Turning to Slide 23, the high rates of growth in the states we operate in, result in additional customers for our utility operations. This year, we expect to add 35,000 new customers with that trend anticipated to grow even further in subsequent years.

Moving to Slide 24. Additional customers and our continued investment in the safety and reliability of our gas distribution systems requires a healthy capital expenditure budget. As we've previously indicated, we expect to invest $2.1 billion into our natural gas operations in the 3-year period ended 2021. Approximately 45% to 50% of our capital needs will be generated through internal cash flows, with the balance being funded through a combination of debt and equity issuances. All told, we now expect 2019 total capital expenditures to reach $730 million by year-end.

Turning to Slide 25. Our continued natural gas operations, capital expenditures ultimately translate into growing rate base. We expect that rate base will grow from $3.5 billion at the end of last year to $4.8 billion by the end of 2021. This growth represents an 11% compounded annual growth rate over that 3-year period.

On Slide 26, we illustrate the revised earnings guidance range I referenced at the outset of the call. At the end of this year, we currently anticipate that our earnings will be in the range of $3.60 to $3.80 per share.

Moving to Slide 27. We provide some additional color on our 2019 expectations. First, for our natural gas operations, we believe that operating margin for the year will increase by 4% to 4.5%. Operating income should decrease slightly. We anticipate an additional $1 million of company-owned life insurance earnings in the fourth quarter. And as I previously mentioned, capital expenditures for the year should total $730 million. At our utility infrastructure services group, 2019 revenues should increase by 10% to 15%. Operating income should approximate 5% to 5.5% of revenue. And please keep in mind that net income expectations are net of noncontrolling interest and the fluctuations in Canadian exchange rates can influence results.

Finally, on Slide 28, we summarize key long-term value drivers for our shareholders. For our natural gas operations segment, we continue to experience strong customer growth, expecting to add in excess of 35,000 customers per year for the 3-year period ended 2021. And we also anticipate investing $2.1 billion over that same period to not only serve the growing demand, but to enhance the safety and reliability of our gas distribution system. Our capital investments should drive significant rate base growth, which we expect to increase in an 11% compounded annual growth rate. And as Justin Brown detailed earlier, we strive to collaborate with our regulators to establish constructive rate mechanisms to enhance time and cost recovery in conjunction with the filing of regular rate case applications. At our Centuri utility infrastructure services business, we are one of the largest specialty utility contractors in North America, now operating in 40 different states and provinces across the United States and Canada. Our customer relationships are long term in nature, with the average customer relationship among our top customers being in excess of 20 years. We believe the Centuri segment has strong continued prospects for growth as utilities across the country reinvest in their businesses to enhance the provision of utility service to their customers.

With that, I'll now turn the call back 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. For those who have access to our slides, we have also provided an appendix with slides that includes other pertinent information about Southwest Gas Holdings and its 2 business segments. These slides can be reviewed at your convenience.

Our operator, Demetrius, will now explain the process of asking questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Christopher Turnure with JPMorgan.

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Christopher James Turnure, JP Morgan Chase & Co, Research Division - Analyst [2]

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I wanted to make sure I understood the COYL order in Arizona and just how that tracker works in the first place versus folding it into the general rate case. Do you get a return on that asset? And basically, even though you're clearly not going to be able to book it this year or part of it this year, do you actually lose anything on a net present value basis for your shareholders?

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Justin L. Brown, Southwest Gas Holdings, Inc. - Senior VP & General Counsel of Southwest Gas Corporation [3]

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Yes, Chris, this is Justin Brown. Yes. In Arizona, the COYL and VSP programs do not have a deferral aspect to them. So we invest money and then we implement a surcharge based on the revenue requirement at a point in time. And so yes, there's some regulatory lag associated with that.

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Christopher James Turnure, JP Morgan Chase & Co, Research Division - Analyst [4]

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Okay. So your original filing there was for 2018 spending and to get a return on and of that and simply now, you'll have to wait until next year to get that to flow in. So hopefully, you get the same absolute amount, it's just on a delayed basis.

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

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Correct.

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Christopher James Turnure, JP Morgan Chase & Co, Research Division - Analyst [6]

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Okay. And any reason why the commission decided to roll it together with the general rate case? Is this kind of outside the normal practice with this filing?

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Justin L. Brown, Southwest Gas Holdings, Inc. - Senior VP & General Counsel of Southwest Gas Corporation [7]

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Yes, both -- well, the VSP program's fairly new, but the COYL program's been around, and there's been a history of adjusting those on an annual basis. I think it's just the timing of them and the fact that you have some new commissioners and kind of an interest in looking at the underlying programs themselves. I think, for the most part, all the commissioners are pretty supportive of the program. But I think because of the ongoing rate case, they've got more comfortable consolidating everything and taking a thorough review of the programs and moving forward as part of the rate case.

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Christopher James Turnure, JP Morgan Chase & Co, Research Division - Analyst [8]

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Okay. And then the permitting issues that you're having at Centuri, sound like they are temporary based on your prepared remarks. And I think that was kind of the color that you provided at your second quarter call as well. I'm just wondering if you could give us some more detail on the nature of those. Is there an ability to kind of protect yourself in future contracts or as kind of current contracts roll forward for customers. And is this something that you can kind of break out between Linetec and your legacy Centuri businesses?

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Gregory J. Peterson, Southwest Gas Holdings, Inc. - Senior VP & CFO [9]

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Yes, this is Greg. To your point, this is something that's happening generally in the Northeast part of the U.S. from some incidents that happened not related to us a year or so ago. As far as putting something in our contracts that would help insulate us from this, I think we're -- our customers are really the ones that are subject to the regulation. And then, of course, we work for our utility customers back east and they have desires and requirements for us to do work for them. So I do believe it's temporary in nature, again, kind of the delay that happened when these things were first implemented, as we previously discussed, has substantially subsided, and we are just now getting work on a going-forward basis, again, but there was an initial delay that we saw and it impacted both Q2 and Q3 results.

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Christopher James Turnure, JP Morgan Chase & Co, Research Division - Analyst [10]

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Okay. Is it isolated to 1 customer or is it several customers in the Northeast region?

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Gregory J. Peterson, Southwest Gas Holdings, Inc. - Senior VP & CFO [11]

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This is Greg. And there's a couple of customers up there. And it does -- it's impacted for us in multiple states up there because of where these customers operate their businesses, but it's a couple of customers up there.

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Operator [12]

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And our next question comes from Aga Zmigrodzka with UBS.

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Aga Zmigrodzka, UBS Investment Bank, Research Division - Associate Director and Equity Research Associate, MLPs [13]

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Do you expect to renegotiate revenues related to the project in Canada to recover the higher cost? And if yes, what is the expected timing of it?

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John P. Hester, Southwest Gas Holdings, Inc. - President, CEO & Director [14]

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Aga, this is John. We are working through those cost incurrences now. We're talking to one of the subcontractors that we have, and we're coming to the end of that project. So the customer currently is inspecting and getting to the point where we want to see them accept commissioning of the project. So we will be looking at that as we close out the project.

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Aga Zmigrodzka, UBS Investment Bank, Research Division - Associate Director and Equity Research Associate, MLPs [15]

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And some of this increased 2019 CapEx, and during your prepared remarks, you mentioned some additional spending in California. How should we think about your CapEx program going forward? Is there a potential for upward revision?

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

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This is John, again, Aga. I think that you probably should continue to think about it as a $2.1 billion 3-year run rate. We're going to have some fluctuations in that number from year-to-year, it could be a little higher, it could be a little bit lower. We've seen a lot of projects get closed out this year, and we've actually seen, particularly in Arizona, some additional demands by customers for gas service that has caused those end of year numbers to flex up a little bit. But I think that going forward, at this time, we're kind of looking at that plus or minus $700 million a year number, but $2.1 billion on a 3-year run rate.

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Operator [17]

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And our next question comes from Chris Sighinolfi with Jefferies.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division - MD and Equity Research Analyst [18]

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Justin, I just want to follow back upon Chris' earlier question, just so that I better understand because I think you had both the COYL and VSP surcharge through delayed timing of that, but then also this delay in your filing for the '19 recoveries. I guess, if I -- I want to just make sure I'm understanding correctly your answer to him, there wouldn't be necessarily like a catch-up that we should expect maybe on the back of the rate case next year if everything is approved as you expect it to be. Is that correct? You get the absolute amounts, but you wouldn't get a catch-up for the delay from now in recovery from your timing line that you had originally planned versus what now looks like will happen?

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

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Yes. I think, generally, that's correct, Chris. There is nothing that precludes it in the decision. So obviously, it's something we're going to continue to look at and evaluate. But I think, generally speaking, it's probably a fair way to look at.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division - MD and Equity Research Analyst [20]

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Okay. And then if I remember correctly, the last case you had there, you guys were able to settle that a little bit early. I'm just curious your thoughts on that, given the -- it seems like there's quite a bit more involved this time around. Is that something you are hopeful for? Or do you think litigated time line's probably the best one to anchor to?

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

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Yes. I think, given the current climate there of litigation track, most likely, the director of the staff pretty much indicated at a staff meeting that they're not entertaining any settlements, just period the end. And so obviously, we have a good relationship with them. We're going to continue to try to work on and narrow the issues from a litigation standpoint. But I think from a policy standpoint, where it stands right now in Arizona, they're just not entertaining any settlement negotiation period.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division - MD and Equity Research Analyst [22]

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Okay. And then, I guess, final question for me. I think you had mentioned in the commentary around Spring Creek that there has been no opposition in the hearings thus far to your proposed expansion there. I guess, from your vantage point or maybe influenced by the way that the Mesquite expansion unfolded, is the absence of opposition enough for that authorization to happen? Or I guess, did you get what you were hoping to get in the form of support in those areas?

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

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Yes. So hearings are actually scheduled for the end of the month. And I think based on the testimony, I would like to think we can work out some of the nuances and hopefully reach an agreement with the parties because they were all -- the consumer advocate was kind of noncommittal one way or the other, whereas the staff, I think, was generally supportive of the expansion. And so I think there's enough there to work with. That's why we're hoping to work with them to see if we couldn't reach an agreement, that we could just submit to the commission for consideration. And alternatively, we'll have a hearing at the end of the month that I think would be pretty limited in scope in terms of kind of the issues that are outstanding. And I don't think it would impact anything in terms of our underlying proposal of how we would approach expanding to Spring Creek.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division - MD and Equity Research Analyst [24]

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Okay. All right. I guess, final question for me. And John, this is probably for you. Just can you remind me what motivated the reincorporation from California to Delaware? What advantages do you pick up in doing that?

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

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Well, there's a number of advantages from the perspective of Delaware law, you see that the vast majority of corporations are incorporated there. So we thought that it was kind of a best practice to move in that direction.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division - MD and Equity Research Analyst [26]

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Okay. So nothing necessarily tangible on our end, but optionality on the legal front, probably enhanced [thing] we're seeing there?

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John P. Hester, Southwest Gas Holdings, Inc. - President, CEO & Director [27]

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Yes. Yes, I think that's fair.

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Operator [28]

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

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Kenneth J. Kenny, Southwest Gas Holdings, Inc. - VP of Finance & Treasurer [29]

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

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Operator [30]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.