Good morning, ladies and gentlemen, and welcome to the Southwest Gas Holdings 2020 Year-end Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to your host, Ken Kenny, Vice President of Finance and Treasurer. Thank you. Please go ahead.

Thank you, Sadie. Welcome to the Southwest Gas Holdings, Inc. 2020 Earnings Conference Call. As Sadie stated, my name is Ken Kenny, and I am the Vice President of Finance and Treasurer. Our conference call is being broadcast live over the internet. For those of you who would like to access the webcast, please visit our website at www.swgasholdings.com, and click on the conference call link. We have slides on the Internet, which can be accessed to follow our presentation. Today, we have Mr. John Hester, Southwest's President and Chief Executive Officer; Mr. Gregory Peterson, Senior Vice President, Chief Financial Officer; and Mr. Justin Brown, Senior Vice President, General Counsel; and other members of senior management to provide a brief overview of 2020 earnings and provide earnings per share guidance for 2021. Also, the company will address factors that may impact this coming year's earnings and provide some longer-term guidance. Further, our lawyers have asked me to remind you that some of the information that will be discussed contains forward-looking statements. These statements are based on management's assumptions, which may or may not come true. And you should refer to the language in the press release, our SEC filings and also Slide #3 presented today for a description of the factors that may cause actual results to differ from our forward-looking statements. All forward-looking statements are made as of today, and we assume no obligation to update any such statement. With that said, I'd like to turn the time over to John.

Thanks, Ken. Turning to Slide 4. Southwest closed out a strong year for 2020, realizing record net income of $232 million, representing record earnings per share of $4.15 and our 15th year of dividend increases with a $0.10 increase to our dividend to an annualized rate of $2.38 per share. For our regulated utility operations, we added 37,000 net new customers, the strongest gain we've seen since 2006. Operating margin increased by $24 million; decreased operations and maintenance expense of $16 million; approved rate relief of almost $60 million in Arizona and Nevada, and an agreement in our California rate case for over $6 million in rate relief and an expected forthcoming decision from the commission. Finally, at our unregulated infrastructure services operations, we realized record revenues of $1.9 billion, which represented a $197 million gain over the prior year. We saw significant storm restoration revenues of $82 million as we helped our regulated utility customers recover from 8 major weather events impacting retail customers in 14 different states. We experienced record net income of just under $75 million, a 43% increase over the prior year, and Centuri contributed cash dividends of $26 million to the parent corporation. Moving on to Slide 5 and outline for today's call. Greg Peterson will provide a financial results overview with segment breakdown for our regulated and unregulated operations; Justin Brown will provide an overview of our extensive regulated activities; and I will provide an update on our response to the coronavirus pandemic, our diversified and growing customer base, our efforts advancing interest and sustainability, our capital and rate base growth, our dividend and our expectations for the remainder of this year. With that, I will now turn the call to Greg.

Thanks, John. Yesterday afternoon, we announced our 2020 earnings and provided some statistical information in a Form 8-K filing with the SEC. We also filed our annual report on Form 10-K with the SEC. Please refer to these documents for a comprehensive analysis of our operations for 2020. I will touch on some highlights and additional details of our operating results for 2020. Let's start today with a comparative summary of total company income on Slide 6. As John mentioned, consolidated net income was a record $232 million or $4.14 per diluted share compared to $214 million or $3.94 per diluted share for 2019. The EPS result of $4.14 for 2020 exceeded the top end of our EPS guidance range, primarily due to tailwinds from incremental emergency storm restoration work performed by Centuri and sizable increases in the cash surrender values of company-owned life insurance at the utility. The relative incremental contributions to net income between years for each operating segment are shown on the next slide. Slide 7 depicts the composition of the $18.4 million increase in consolidated results between 2019 and 2020. Net income for the Natural Gas Operations segment declined about $4 million, while net income for the Utility Infrastructure Services segment was up over $22 million between years. I'll provide some additional details surrounding the changes in each segment in the following slides. The waterfall chart on Slide 8 shows the components of a net $4 million decrease in natural gas operations results between 2019 and 2020. Additional details are on Slide 40 of the appendix to this presentation. Let me start by saying that operating margin reached a historic level of $1 billion in 2020. The $24 million operating margin increase includes $14 million from 37,000 first time meter sets during the past 12 months,…

Thanks, Greg. As John referenced previously, subject to receiving final approval on our pending California settlement, we will see refresh rates in each of our state jurisdictions that will result in increased revenues of approximately $66 million. This will help us continue to provide safe, reliable and affordable energy service for over 2 million customers across our 3 state service territory. Starting with Slide 11. We've received final approval in December on our Arizona rate case. This results in increased revenues of nearly $37 million. We were also authorized to continue our fully decoupled rate design, our property tax tracker, implement a new income tax tracker and continue with a slightly modified COYL program. Turning to Slide 12. We also recently made a compliance filing identifying our plan for reconciling any unrecovered revenues from the COYL and VSP programs. In 2019, the commission froze the existing surcharge and suspended future surcharge filings, pending the outcome of our rate case. As such, we now need to reconcile the differences between the COYL and VSP surcharge revenue we've received to date and the amount outstanding through the calendar year 2020, plus address the VSP plant that is not included in base rates following our most recent rate case. In total, this adds up to about $74 million. We plan to make a filing in May requesting to adjust the tracker surcharges and recover these costs, at which time, the commission will evaluate the proposal, including the time period in which the costs are to be recovered. We'd expect to see a decision before the end of the year. Moving to Slide 13 in our Nevada rate case. The commission authorized a revenue increase of $23 million with an ROE of 9.25% and an equity ratio of just under 50%. Rates became effective…

Thanks, Justin. Moving to Slide 16. Southwest Gas has had a multifaceted response to the COVID-19 virus to protect the interest of our employees, our customers and our shareholders. To protect the interest of our employees, we successfully pivoted to a work-from-home environment last year for our office staff, and rolled out increased personal protective equipment and social and physical distancing guidelines for our field employees as well as our contractors. Protecting the interest of our customers, we temporarily suspended utility late payment and disconnections for non-payment, offered outreach assistance and flexible payment plans and coordinated with state and local government entities to secure funds available for payment of utility customer bills. And protecting the interest of our shareholders, our utility rate designs operate under decoupled revenue structures, while our Centuri utility infrastructure services revenues remained strong and growing. We're able to secure specific COVID-19 regulatory asset treatment in both our California and Nevada regulatory jurisdictions. Turning to Slide 17. We continued to experience strong customer growth, adding 37,000 new customers in the past year as homebuilding activity and in migration to our service territories remain strong. On Slide 18, we believe our continued significant customer growth is predicated on a great value proposition we offer to our customers. The natural gas service we offer is reliable, affordable, strongly demanded by both current and new customers and comes with a high bar for customer service, for which we realized a 96% customer satisfaction this past year, as noted by Greg, along with first place rankings and independent third-party customer satisfaction studies. Moving to Slide 19. We featured two of the newest areas of expansion in our service territory, as detailed by Justin earlier: Mesquite and Spring Creek, Nevada. Expansion into these areas was facilitated by supportive state legislation that allows…

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

[Operator Instructions]. For our first question, we have Richard Ciciarelli from Bank of America.

Just curious, on your 2021 guidance range -- and I appreciate all the drivers that you're giving for each segment. But just curious how you think about executing within that range, just given it is relatively wide? And are you assuming any revenue requirement from the trackers into that guidance, just given the time line there?

Richie, this is Greg. We're at the very beginning of the year. I think this $0.25 range that we provided is consistent with the $0.25 that we provided last year. So we give the guidance, and we will watch as the year progresses to see how we do. I believe there is some -- and Justin can certainly provide additional detail, but there is some level of recovery for the subsequent rate filing in the Arizona into those results. But again, we'll have to watch and see after the filing is made to see if that impacts the range at all.

Got it. And you said there is some additional detail there from Justin. I was just curious what that was?

Rich, it's Justin. No, I think he's just referring to -- I mean, it's kind of unique in that there's not like a set time frame. So I think our assumptions are based on -- typically, in the past, we would make a tracker filing in February. We would usually get a decision by June or July. And so we're kind of estimating, given the fact that it's related to the tracker programs, it should follow kind of a similar path. And so we expect to see a decision towards the end of the year, a similar time frame, and that's what's kind of reflected in terms of our guidance.

Okay. Got it. That's helpful. So there is some small amount, just given the timing there at the end of the year. And then I guess just on your long-term rate base growth assumptions. It looked like that stepped down to 7.5% from your prior guide of 8.6%. And the equity needs, just moved up a tad there. I guess, what's driving the delta between those 2 numbers, if you can go into a little bit more detail on that? Is there anything around the tracker or rider programs that are not included in there? Or how are you guys thinking about that altogether?

Richie, this is Greg. I can start. One, by saying that just the math, I guess, is what really drives the 3-year CAGR down on CapEx. If you remember, last year, it was still a $700 million a year expectation of CapEx on a lower beginning rate base. So as we've continued out that $700 million, just the math drives that down a little bit. And we're pretty comfortable with the $700 million range. We think it was what we executed to in 2020. And we see that available going forward in 2021, up through 2025. As it relates to the equity needs, I guess I'll start by saying we're using round tens of billions of dollars. And so that $600 million to $800 million range from equity, it's pretty much the same as what it was before, but just to make the math work, you end up ticking things up by $0.1 billion. So I wouldn't say that there's anything driving that. Other than it's just the math that makes it work. But again, we expect and are working to ensure that we maintain this 50-50 equity and debt mix that we have on our books. We think that's a good place to be. And so we will be issuing equity all along the way over the course of the next few years to ensure that, that's where we stay at.

All right. Got it. That was very helpful. And just last one, if I can sneak it in. On your infrastructure business, has the recent weather events caused any increased demand to that, the winter weather events in particular? And is that baked into your current expectations?

Richie, this is John. I think that the recent weather event for Centuri has kind of been a little bit of plus and minus. So I wouldn't say that we've seen any kind of significant uptick with the weather conditions that were as poor as they were, that caused a little bit of slowdown in normal work that you would be doing with utilities. And then they had some other limited opportunities to work with utilities that had their facilities that needed to be restored. So I would say that we're not expecting to see a big increase out of that most recent storm. And so it's not really reflected in the 2021 results and our 2021 -- our 2021 guidance wouldn't change as a result of that weather.

Okay. Great. That's very helpful. And any fuel impacts that you all experienced? Or I'm assuming not?

We actually did see some impact on the gas -- this is John, again. We did see some impact on the gas prices that we experienced with our customers. We get a fair amount of gas out of Texas for our Arizona customers, which are served primarily off of El Paso. I think that there were some lesser impacts on some of the other pipelines that we take gas off of, including Kern River, Northwest Pipeline, Ruby Pipeline. We're kind of tallying up those incremental costs now. We've got rate-making mechanisms in each of our jurisdictions that we think will accommodate the increased cost that we experienced. But it's something that we're going to go back, take a look at, have some discussions with our regulators, see if there are any incremental accommodations that we might need to make in the interest of our customers. But the important part for us was notwithstanding the cuts that we saw on some of our pipeline systems, we did not experience any outages for our end use customers, and we're pretty happy to see that.

For our next question, we have Richard Sunderland from JPMorgan.

Just maybe starting off with a follow-up on that last point there. The potential combinations you alluded to, would that be sort of around recovery timing or the length of period for recovery. Just curious if you speak to that element a little bit more.

Yes. This is John. That's exactly what we're talking about, Richard. I think that is something that we want to take a look at what the fluctuations and bills will be over time. How do those compare with the fluctuations that we've seen historically? And as you probably know, we've got relatively low bills in our service territory, our average bill in Arizona and Southern Nevada is probably in the neighborhood of $45. So when we are looking at an increase in gas costs and gas costs are less than half the bill, we want to be thoughtful of it. But yes, what we would be looking at is, there any particular areas that we would want to consider a longer amortization period than what would normally be included under the normally operating mechanisms.

Got it. That makes sense. And just to -- just looking forward here, when should we expect an update, maybe both, one, on the total cost; and two on those regulatory discussions?

Yes, Richard, this is Greg. I know our documents are pretty long. We did have a little bit of estimated flavor to say that these incremental gas costs that we incurred over that peak period were estimated at $200 million to $300 million. So I think that -- we've seen some of our other utility peers that operate in much colder climates have numbers that are 10x that big. So our range is $200 million to $300 million. We probably won't do any updates with that until we actually come out with the Q1 report. And that will also give us time to assess the timing and have the meetings that we intend to do with our regulatory body. So I wouldn't expect anything likely until the Q1 update in early May.

Great. I appreciate the color. And then one final one for me here. Just the COLI commentary earlier in the script, if I misunderstood this, I apologize, but it sounded like there were some changes made to the portfolio overall around the volatility going forward. But it doesn't look like the return expectations have changed at all. So just could you kind of thread the needle between those 2 elements or any other considerations here?

Yes, certainly, Richard. This is Greg, again. As you know, we've had some significant run ups, at least the last 2 years, right, our range has been $3 million to $5 million. And in 2019, it was $17.4 million of increase, a $9.2 million of increase. And those are really driven by the stock market returns. If you go back another year, it was a $3.2 million decline in COLI because of the stock market activity in 2018. So our overall expectations haven't changed. This is really just like balancing any other investment type portfolio you have. So we've moved stuff out of things that are more linked to stock and moved them into more of a fixed return component. Previously, probably in the last year, I talked about having over 50% of our cash surrender values invested in things that move like the stock market. That number is probably half that now. So it's probably more in the 25% range. So the $3 million to $5 million is still a good thing. We've got a big base to work with now, over $140 million of cash surrender value. So I think the range will still be fine. Our intent is to minimize the volatility because at the end of the day, the dollars that we actually get from this are based on the ultimate life insurance proceeds that come from those policies, which, as I indicated, total about $260 million.

For our next question, we have Chris Ellinghaus from Siebert Williams.

Can you talk a little bit, John, about what you're seeing in terms of RNG decarbonization investment opportunities out there?

Sure, Chris. I think that we see those opportunities existing now and growing. I think that our regulators have been pretty supportive of us moving into that venue. We have a lot of customers who are interested in harnessing the methane that is produced as part of their operations, whether you're a dairy farm or a sewage treatment plant or a landfill, some of those same partners. Maybe if you're a municipality, you have an interest in getting that renewable gas into your bus fleet. But the challenge for a lot of those customers is that they're not necessarily experts in operations of gas supply and distribution. So the commission has been supportive of us being able to partner with them, investing capital and helping them accomplish those goals. So we think it's definitely happening right now, and we expect that to continue to grow over time.

You sound like you have a very strong housing market in Vegas and Phoenix areas, in an acceleration in new housing starts that's material.

I lost a word that you said there, Chris. But if you're asking, is the acceleration of the housing market -- I think it definitely has been accelerated. It's very strong. And we're continuing to see a high demand by people that live in our service territory to buy new homes. There's a relatively low amount of inventory. Resale homes have seen some decent increases in price, although, regionally, it's still a very affordable market. So we continue to see that going on through this year and I think that if you look at any of the homebuilding stocks, certainly, you can see their expectations and their revenues and profits and share prices have increased significantly. So we think this continues to have legs for continuing to grow. And I think the other thing that we're seeing related to that, that I alluded to and that you've followed for years, Chris, is the interest in individuals relocating to the Desert Southwest for a number of different reasons, including the lifestyle that you might be able to enjoy here, tax considerations, as a lot of other states have some significant tax shortfalls that are going to be followed by significant incremental tax increases. So we think that the future looks pretty bright.

Okay. Justin, in Arizona, there's been some significant changes at the commission there. Give us sort of an assessment from your point of view of where you see the tenor of the commission going forward?

Yes. Chris, it's Justin. To your point, there's been some changes. With this election, you had the -- with a new chair as well. So we have a new Chairwoman in Lea Márquez Peterson, new Commissioner in Jim O'Connor and a new Commissioner in Anna Tovar. I know -- actually, it's scheduled to some meetings this last week where we've met with several of them, still got a couple left to meet with. But so far, I mean, I think things seem to be pretty positive. We have a nice long-standing relationship with Commissioner Tovar, given her days in the state legislature as well as being the former Mayor of Tolleson. So that's someone we know pretty well. And then I know with respect to Commissioner O'Connor, haven't had a chance to meet him yet. I think we've got a meeting next week with him, but my understanding is he's someone that's a pretty good friend with Doug Little, who's a former Commissioner. And my understanding is that they are like-minded, is what I understand. And so we're definitely anxious to get to know him and develop a good working relationship with him as well. And I think if he -- if what I'm hearing is correct, that he's similarly minded to Doug little, I think that will be a positive thing. Because I think Commissioner Little was a pretty constructive regulator during his time at the ACC.

Our last question, we have Aga Zmigrodzka from UBS.

Justin, I have one clarification question on the final VSP filing. I think you mentioned the rate increase of $74 million. Is that for both coal and VSP? And should we expect onetime rate increase? Or it will be more gradual increase over time for VSP?

Yes. Aga, it's Justin. That's a good question. So that's the total amount as kind of we've calculated it. And so really, to your second part -- so that would be in total. So that includes all 3 components. And then the second part of that is, I think there's probably some flexibility on whether, theoretically, that's a one year or if that's a multiyear thing. If you recall in our rate case, when we had made our 2019 surcharge filing and the commission kind of froze the surcharges at that time and moved things to the rate case, there was -- we had pending a $12 million increase to the surcharge. Well, ultimately, we moved that to the rate case and we proposed to amortize that over 3 years. So again, I think there's a little bit of a precedent there where some people may look to in terms of whether that's one year or whether that's over three years. And whether it's applied to one component or all three components, I mean, that's part of the process that we'll be working with the commission and the staff this summer as we look to get a decision, hopefully, by fall.

In the prepared remarks, I think it was mentioned that you have now tariffs for development of RNG projects. Do you plan to invest just in the connections or also in the facilities? Are those costs potentially going to be rent-based? What's kind of the spending that you're thinking about on the annual basis? Could that accelerate grid-based growth? If you could elaborate about that a little bit more.

Well, Aga, this is John. I'll start out, and then maybe I'll turn it over to Justin. I think that the increased opportunities for investing in facilities related to RNG would be considered to be included in that $700 million a year of capital that we plan moving forward with. I think that our primary interest is to work that through the regulatory process. The regulators have been pretty supportive of it and pretty interested in us acquiring those supplies and working with customers who might not naturally have the operational experience that we have in working with those types of fuels. So I expect it to continue to go up. But I think that it would be included in our express capital expenditure plans. Anything else on that, Justin?

Yes. So Aga, consistent with what John is describing and as I think was reflected on the slide that he touched on in the prepared remarks, starting a couple of years ago, we have just been focused on working with all 3 states on getting frameworks in place that will allow and support those opportunities as they arise. And so we'll continue to -- we've got some good legislation in Nevada. We've got some good tariffs in California and Arizona. We had a proposal on our Arizona rate case. They're going to have a workshop later this year to talk about that further. And so again, our plan is to continue to get that framework in place so that, that way, when opportunities arise, we'll be able to partner with those suppliers, those municipalities that have these resources available so we can bring them online.

I am showing no further questions at this time. I would like to turn the conference back to Ken Kenny.

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

Ladies and gentlemen, this concludes today's conference. You may now disconnect.