Southwest Gas Holdings, Inc.
Q4 2009 Earnings Call Transcript

Published: 2 Mar 2010

[Operator:]

Good day, ladies and gentlemen and welcome to the Southwest Gas 2009 year end conference call. My name is Jeff, and I’ll be your operator for today. At this time, all participants are in a listen-only mode. Later we will facilitate a question-and-answer session. (Operator instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Ken Kenny, Vice President and Treasurer. Please proceed, Mr. Kenny.

[Ken Kenny:]

Thank you, Jeff. Welcome to Southwest Gas Corporation’s 2009 earnings conference call. As Jeff mentioned, my name is Ken Kenny, and I am the Vice President, 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 Web site at www.swgas.com and click on the “Conference Call” link. Today, we have Mr. Jeffrey W Shaw, Southwest’s Chief Executive Officer, Mr. John P Hester, Southwest’s Senior Vice President, Regulatory Affairs and Energy Resources and other members of senior management to provide a brief overview of 2009 earnings and an outlook for 2010. Our general practice is not to provide earnings projections. Therefore, no attempt will be made to project earnings for 2010. Rather, the Company will address those factors that may impact this coming year’s earnings. Further, our lawyers have asked me to remind you that some of the information that will be discussed contains forward-looking statements. These statements are based on management’s assumptions, which may or may not come true, and you should refer to the language in the press release and also our SEC filings for a description of those factors that may cause actual results to differ from the 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 Jeff.

[Jeff Shaw:]

Thank you, Ken. Thank you for joining us today on this call. And we’re pleased with the operating results we have to announce or have announced to the market. It’s a marked improvement over the prior year. I believe we continue to demonstrate resilience in a very challenging economic environment, by remaining focused on our core fundamentals of our business. Many say that but I think I’m going to be able to demonstrate in the comments that I give today that in fact that has really helped us to make progress by focusing on the core fundamentals. The detailed numbers are in our documents and I would point you to those. I won’t spend a lot of time on any of those detailed numbers, but I will discuss a number of noteworthy factors that point to our success. On an annual consolidated basic EPS basis, we achieved $1.95 in 2009, as opposed to $1.40 in 2008. The increase in earnings was principally attributable to higher operating income from the natural gas segment and a positive swing in contribution for other income. What you have seen in our documents referred to as Company-Owned Life Insurance or COLI. I will refer to that as COLI going forward. Our operating margin in 2009 grew by $13 million or 2%. The net result of several factors. Margin from our customer growth contributed $1 million and rate relief from all regulatory jurisdictions in 2009 accounted for $30 million. This was somewhat offset by warmer than normal weather. The difference between years was $7 million to the negative in 2009 as opposed to 2008. In 2009, we estimate that the negative impact of weather principally in the Arizona jurisdiction was about $18 million versus $11 million in 2008. Conservation due to energy efficiency and the impacts of the current challenging economy in our service area has resulted in about an $11 million decline to operating margin. And if you take a look at our operating margin as we analyze our earnings, while I won’t give a point estimate on a normalized basis, I can point to two significant factors that we look at. We believe COLI kind of bring a lot of noise to our operating results. If you looked over 2006 and '07, we had an average amount in there that we would see some growth. And then if you take a look at the volatility in the Company life insurance and its impact to earnings, we estimated it was about $0.15 negative you would take away from our earnings in 2009 due to the increase in the valuation of the assets embedded in the policies that we have for that Company-owned life insurance. Again, that’s a 15% takeaway, whereas in 2008 you would have to add back $0.32 we estimate. Then if you take a look at weather, again, the $18 million versus the $11 million, in 2009 you would add back as a result of weather net of tax about $0.25 and in 2008, you would add back about $0.16. Now, there are a number of other factors, not to the magnitude of the two that I just referenced that would impact earnings. The reason for this exercise we go through for analytic purposes is just to sort of indicate what has been the historical trend of our earnings as a result of our focusing on the core fundamentals of our business. And we can definitely see, based upon that exercise, by adding back and taking away in those two years, just those two big components, we can see a positive trend that has developed in the last two years. It speaks to the fact that we focused on those core fundamentals. Now, as a result of our efforts to work with our regulatory commissions to improve and bring stability to our revenues and cash flows we realized rate relief in 2009 in every jurisdiction that we serve. What I’d like to do is for a few moments turn the time over to John Hester, our Senior Vice President of Regulatory Affairs and Gas Resources, and he will address by state and our jurisdictions what has occurred from a regulatory standpoint and then I will have some other matters to discuss. John?

[John Hester:]

Thanks, Jeff. I’ll start with Arizona. In December of 2008, the Arizona Corporation Commission issued a decision in Southwest general rate case which authorized a $33.5 million increase in margin rates. As part of that application, Southwest sought implementation of a decouple rate design. While the Commission did not grant Southwest’s request on the rate design changes, the Commission has continued to review decoupling issues as part of a separate docket which is examining rate and regulatory incentives for the state’s gas and electric utilities. Southwest is actively participated in that docket, along with other utilities, the Commission staff, the Residential Utility Consumer Office, and Energy Efficiency advocates. The proceeding is focused on establishing utility energy efficiency standards and feature as much as discussion on decoupling. A draft regulation for the electric utilities was issued in October by staff, and was reviewed, modified and voted upon by the Commission in December of last year. Southwest is now waiting staff issuance of a draft regulation for gas utilities and expect that various state administrative reviews of the gas and electric utility rules will be completed later this year. Separately, having now experienced the rates established in our last rate case for just over a year, Southwest will be reviewing the potential timing of our next Arizona rate case over the next several months. Historically, Southwest has filed a rate case application in Arizona about once every three years. Once we complete the first quarter of this year we will review our results of operations and be better positioned to evaluate the timing of our next application then. There may also be some interplay between the timing of our next rate case application and the outcome of the rate and regulatory incentive docket I referenced. And so far as any opportunity to institute a decouple rate design outside of a rate case for that separate docket, may potentially delay the timing of submitting our next rate case application. Again, we will await issuance of staff’s draft gas utility regulation and the Commission’s vote on that regulation for further direction. Moving on to Nevada, in October of 2009, the Public Utilities Commission of Nevada approved an annual revenue increase of $17.6 million in Southern Nevada and a $500,000 decrease in Northern Nevada. On a combined basis, after considering various O&M adjustments, the rate relief is designed to increase operating income for Southwest by $19.1 million annually. The rate relief that was authorized as part of the Commission’s decision provided an operating margin increase of $2 million in 2009. Also noteworthy, the Commission’s decision authorized Southwest to implement a decoupled rate structure which will help stabilize margin by insulating Southwest from the effects of lower usage associated with conservation or unusually warm weather. And Nevada decoupled rate structure also positions the Company to more aggressively pursue conservation and energy efficiency programs on behalf of our Nevada customers. Southwest has a suite of conservation and energy efficiency programs that the Nevada Commission has approved with budgets that increase annually over the next three years. Then, finally, turning to California, effective January 2009, Southwest received general rate relief for its California service territories from the California Public Utilities Commission. CPUC authorized an overall increase of $2.8 million for the 2009 base test period, with an additional $400,000 in margin, which was deferred to 2010. In addition to the base year margin increase, attrition year increases were approved to be effective for the years 2010 through 2013. Attrition year increases help the Company recover generally increasing costs of service in between our rate case applications. A first attrition request was submitted in October of 2009 and was approved effective January this year. The amount of the attrition increase was approximately $2.7 million. Our next general rate case in California will be for a 2014 test year and is scheduled to be submitted to the CPUC in December of 2012. In closing, on the regulatory update, I would also note that management’s adherence to the Company’s key business strategies of controlling costs and exceeding customer expectations has really helped support our regulatory efforts as our state commissioners are very attendant to both of these issues as part of the regulatory review process. With that I’ll turn it back to Jeff.

[Jeff Shaw:]

Thank you, John. What I’d like to do now is spend a little time on two of the items John referenced. In particular, our cost control efforts and how we are trying to achieve customer satisfaction. Two items I think are, again, to reemphasize what he has just said, in order to be successful and productive working with our regulators in the various jurisdictions we serve, we must show, we believe, the progress in the areas that we have control over. And I think we can do that and I’m going to talk about that now. First of all, with respect to our operating expenses, they were held to a modest 2% increase over 2008 during 2009. Depreciation expense increased by $513,000 only, less than $0.5% and average gas plant in service increased about $193 million or 5%. Depreciation expense was impacted by lower authorized depreciation rates in both California and Nevada through the most recent regulatory decisions. California had a $3 million annualized reduction effective January 2009. Nevada had a $2.3 million annualized reduction effective June of 2009. Operation and maintenance expenses, if you look over the last four years, we had between 2005 and 2006, a 2% increase, during the next year period, a 3.2% increase, the next year period, a 2.2% increase and last year, year-over-year, our O&M was 3% higher over the prior year. Now, our cost control efforts, the things that we have done, the investments in technology and operational innovations have allowed us to hold these increases to a rate of below that of inflation. And that’s been important. In fact, it’s been recognized even on the record in our regulatory filings that we’ve made. So that’s important and it’s been recognized and it’s helped us to recover those costs. Our operational improvements in innovation result in a number of our full time employees declining over the last several years. In fact, if you look from the year 2005, we had 2,590 employees. At the end of 2009, we had 2,423 employees, a reduction of 167 employees during that time period or 6.4%. We were only able to do that as a result of sensible and wise investments in technology and some of the changes that we have made operationally. Our customer to employee ratio improved from 743

[Ken Kenny:]

Thanks, Jeff. That concludes our prepared presentation. Our operator, Jeff, will now explain the process for asking questions.

[Operator:]

(Operator instructions). Okay, looks like there are no questions in the queue.

[Ken Kenny:]

With no questions then, that concludes our earnings conference call today and we want to thank everyone for listening. Thank you.

[Operator:]

Ladies and gentlemen that concludes today’s conference. Thank you so much for your participation. You may now disconnect. Have a wonderful day.