Edited Transcript of SWX.N earnings conference call or presentation 27-Feb-20 6:00pm GMT

Our regulated utility management team is focused on customer growth and economic development, affordable builds for our customers, opportunities for capital investment and rate base growth, decreasing greenhouse gas emissions and continued earnings and dividend growth. Similarly, our Centuri management team is focused on excellent operations execution, cost management, opportunities to cross-sell services as we expand our electric presence, continued earnings and dividend growth and providing cash for Southwest Gas Holdings.

Moving to Slide 5. We outlined some highlights for 2019. From a consolidated results perspective, we realized year-end earnings per share of $3.94. Earlier this week, our Board of Directors authorized a $0.10 per share increase in our annual dividend, increasing it from $2.18 to $2.28 per share. And we completed our reincorporation from California to Delaware as overwhelmingly authorized by our shareholders at our last annual meeting to provide our company more developed, predictable and responsive legal jurisdiction that we believe will make our company more attractive to investors, directors and executive officers.

At our regulated utility operations, we continue to see strong regional economies in which we added 34,000 new customers last year, an annualized growth rate of 1.7%. We realized $23 million in additional margin due to the referenced robust customer growth as well as incremental rate relief. And we have major rate case applications now on file in Arizona and Nevada as well as in California and for Paiute Pipeline.

At our Centuri Infrastructure Services business, we saw record revenues of $1.75 billion, record net income of $52.4 million and significant expansion of our electric operations with a full year of financial results from our Linetec services group.

On Slide 6, we provide an outline for today’s call. Greg Peterson will provide an overview of financial results for the corporation, the segment breakdown for both regulated and nonregulated utility operations. Justin Brown will provide a review of our extensive regulatory activities, including the rate case activity I referenced, and I will wrap up the call with an update on our regional economic conditions and customer growth, planned capital expenditures, growth in dividends, sustainability efforts and our expectations for 2020 and beyond.

With that, I will 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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Thanks, John. Yesterday afternoon, we announced our 2019 earnings and provided some statistical information in the Form 8-K filing with the SEC. We also filed a Nevada general rate case yesterday that Justin will comment on in his regulatory presentation. We plan to file our annual report on Form 10-K, which will include information regarding the rate case, with the SEC later tomorrow or Monday morning. Please refer to these documents for a comprehensive analysis of our operations for 2019.

Let’s start today with a comparative summary of total company income on Slide 7. For 2019, consolidated net income was $213.9 million or $3.94 per diluted share compared to $182.3 million or $3.68 per share for 2018. The EPS result of $3.94 for 2019 exceeded the top end of our revised EPS guidance, which was $3.80 per share, primarily due to 3 items associated with natural gas operations: one, COLI cash surrender value increases were $6.2 million in the fourth quarter versus an estimated $1 million, resulting in a $0.10 per share incremental increase; two, incremental operating margin partially due to higher volumes resulted in a margin increase of 4.8% between years, above our revised high end of 4.5%; and three, changes in state tax apportionment methodology option and other factors reduced the effective income tax rate and income taxes for 2019.

Revenue increases for Centuri were at the top end of our revised guidance of 15% but were partially offset with a percentage of operating income of 5.1% that was near the lower end of our revised guidance of 5.0% to 5.5%. The relative incremental contributions to net income between years for each operating segment are shown on the next slide.

Slide 8 depicts the composition of the $31.6 million increase in consolidated results between 2018 and 2019. Net income for the natural gas operations segment increased $24.3 million, and net income for the utility infrastructure services segment was up $7.4 million between years. I’ll provide some additional details surrounding the changes in each segment in the following slides.

As shown on Slide 9, and as John previously mentioned, the natural gas operations segment provided approximately 3/4 of Southwest Gas Holdings consolidated net income in 2019. And Centuri, our utility infrastructure services segment, contributed 1/4.

The chart on Slide 10 shows the components of the $24.3 million increase in natural gas operations results between 2018 and 2019. Additional details are on Slide 32 of the presentation appendix. The $45.4 million operating margin increase includes $11 million from 34,000 net new customers added during the past 12 months, a 1.7% growth rate. Rate relief in Nevada and California attrition collectively provided $12 million in operating margin. The remaining increase primarily resulted from surcharges to recover regulatory assets with a partial loss of $12.2 million in amortization expense.

These program recoveries included California Public Purpose and cap-and-trade program and Nevada renewable energy and infrastructure replacement program, partially offset by credit for conservation and energy efficiency programs. The $17.4 million or 4% increase in operations and maintenance or O&M expense, was primarily due to general cost increases and higher legal claims experienced. O&M expenses were also impacted by a $2.4 million increase in line-locating or call-before-you-dig cost associated with population and customer growth throughout our service territory as well as nearly $2 million in costs associated with our customer data modernization initiative.

Depreciation and amortization increased $23.8 million, including the $12.2 million in regulatory account amortization I previously mentioned. Capital expenditures of $779 million in 2019 drove a $586 million or 9% increase in average gas plant in service and an $11.6 million increase in depreciation and amortization.

The $26.8 million improvement in other income primarily reflects changes between years and the cash surrender value of company-owned life insurance or COLI policies. COLI values increased $17.4 million in 2019 as a major portion of the underlying investments surged with the general stock market. COLI values declined $3.2 million in 2018, consistent with market volatility experienced that year.

Additionally, nonservice-related pension and post-retirement benefit costs declined $6 million between years. The $13.3 million increase in interest expense reflects higher outstanding debt balances, including $300 million of 4.15% senior notes issued in May 2019. Southwest’s ongoing capital expenditures are being financed with a combination of debt and equity issuances to supplement cash flows from operations. The $9 million decrease in income tax expense and lower effective tax rates include the impact of lower state income taxes due to changes in apportionment methodology options and $2.3 million in amortization of excess deferred taxes following U.S. tax reform.

We’ll now review Centuri results starting with Slide 11. This chart shows the components of the $7.4 million increase in utility infrastructure purposes net income between 2018 and 2019. Additional details can be found on Slide 39 in the appendix of our presentation.

Centuri revenues increased $229 million due primarily to a full year of revenues, about $236 million from Linetec versus $14 million of 2018 Linetec revenues, subject to — subsequent to our acquisition of them in November 2018. Partially offsetting these increases were decreased revenues from certain non-routine projects such as customer-requested support in 2018 during that customer’s labor dispute work stoppage. Revenues for 2018 also included 9 — a $9 million negotiated settlement of an earlier water pipe replacement contract dispute.

Revenues from contracts with Southwest totaled $158.7 million in 2019 and $135.9 million in 2018, representing 9.1% and 8.9% of Centuri’s total revenues for 2019 and 2018, respectively. Centuri expenses were $185.5 million higher than the prior year. Incremental Linetec expenses were $172.1 million between years. Implementation of new regulatory requirements for operating locations within certain states in the Eastern U.S. resulted in productivity inefficiencies and higher costs during 2019.

Approximately $8 million in additional costs were also recognized associated with an industrial project in Canada. Incremental general and administrative costs were also incurred to provide support of the overall growth in operations.

Depreciation and amortization increased $30.2 million, primarily due to $25 million of incremental depreciation as well as amortization of intangible assets associated with the Linetec acquisition. The $2.6 million decline reflected as Other on the chart includes $2.7 million of income in 2019 that is attributable to the noncontrolling parties that still own an ownership interest in Linetec operations.

Income tax expense increased $3 million between years primarily due to the increase in pretax income. Overall, Centuri posted record revenues and record net income in 2019 and is poised for record results for calendar year 2020.

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. – SVP & General Counsel of Southwest Gas Corporation [5]

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Thanks, Greg. As both John and Greg alluded to in their comments, we filed a Nevada rate case yesterday. And with that filing, we now have rate cases in each of our regulatory jurisdictions. And collectively, these cases total nearly $144 million in proposed revenue. We anticipate that we will start to see decisions from these various proceedings beginning with Arizona this summer and continuing through the remainder of this year.

Speaking of Arizona, we recently received testimony from the intervening parties and the staff and consumer advocates’ position as compared to our proposals, are shown here on Slide 12. In addition to our proposal on deferred taxes, the staff has proposed the additional amortization of approximately $15 million associated with certain plant that we originally classified as protected, which the staff claims should be unprotected and, thus, the excess deferred taxes should be returned to customers faster than the IRS’ prescribed methodology for protected plant. In addition, they’ve also proposed an interest component based upon their interpretation of the commission’s decision on our 2018 tax reform proposal.

Some other noteworthy items from staff’s testimony: They do not oppose the inclusion of the LNG facility and the COYL and VSP work that was done through December 31, 2019 as part of our post-test year plan adjustment in the case. In addition, they do not oppose our proposal to amortize approximately $12 million of VSP and COYL surcharge revenue that we proposed last year as part of our annual surcharge filings. We are currently preparing rebuttal testimony, and we’ll be preparing for the upcoming hearings that are currently scheduled for April 20.

Turning to Slide 13. We continue to work through the discovery phase of our $12.8 million California general rate case that was filed last August. We expect to see the public advocate testimony March 27, with hearing scheduled to begin June 3.

As I mentioned previously, we just filed our 2020 Nevada general rate case. We are requesting an increase in revenues of $38 million, which incorporates the requested ROE of 10% relative to an equity ratio of 50%. The request is primarily driven by the significant investment in our distribution system to ensure continued safe and reliable service to our customers, which results in a proposed rate base of approximately $1.5 billion, an increase of $230 million.

Consistent with the commission’s decision on our customer data modernization initiative proposal last fall, we are also requesting to recover certain costs associated with the CDMI in this case. We are also renewing our request to include some of the other items that were not allowed to be recovered in rates as part of our last rate case.

Speaking of our 2018 rate case, just a quick update on the judicial review proceeding. The district court held a hearing in early January and upheld the commission’s underlying decision. Once the court issues its final notice of entry of order, we plan to evaluate the decision, and then we’ll likely file a Notice of Appeal with the Nevada Supreme Court.

Turning to Slide 14. In addition to our state rate cases, we recently received — or I’m sorry, we recently reached a black box settlement on our Paiute rate case that will reduce the existing cost of service by $700,000 based upon a stated pretax rate of return of 9.9%. Similar to our state cases, this case resolves all tax reform issues. In addition, the parties agreed to continue the term-differentiated rate design, and both transportation and LNG storage customers agreed to 5-year contract extensions as part of the settlement. The parties are currently in the process of documenting the stipulation, and we are targeting submittal to FERC by the end of March. The agreement is still subject to the FERC’s approval, which should occur in the second half of this year.

Turning to Slide 15 and an update on several expansion-related projects. The LNG facility in Southern Arizona is complete and was placed in service in December. We’re currently in the process of filling the tank with LNG, but it is ready and available for use if necessary. We continue to make progress on building out our distribution system in Mesquite and hooking up new customers, including work on bringing the permanent gas supply to Mesquite with an approach main, which is still expected to be in service by the first quarter of 2021.

Meanwhile, we’ll continue to serve customers with our temporary virtual pipeline and compressed natural gas.

Lastly, we recently received approval to proceed with a $62 million SB 151 Spring Creek proposal. We submitted a stipulation with the commission last fall, which was approved in December. We are targeting the start of construction this summer, with the potential to begin serving customers by fall.

Turning to Slide 16 and our customer data modernization initiative. We are still working our way through the regulatory process in hopes of receiving constructive regulatory support in Arizona to help facilitate the timely and complete cost recovery of the project. Hearings are currently scheduled for April 20.

In California, we did receive approval to establish a memorandum account to begin tracking costs, 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 count to recover costs. That settlement has been documented and submitted to the commission for approval, and we expect a final decision later in the second quarter.

Turning to Slide 17. Another important focus at Southwest Gas has been working with stakeholders on various sustainability initiatives, including partnering on compressed natural gas and renewable natural gas opportunities as well as most recently as a member of a coalition of diverse businesses and interest groups in support of the bipartisan passage of the Balanced Energy Solutions Act in Arizona. This bipartisan legislation that was signed into law last week by Governor Ducey preserves Arizonans’ ability to take advantage of each and every energy option that is offered to them for use in their homes and businesses, including natural gas.

Some other recent developments include a proposal in California to amend our tariff to facilitate renewable natural gas purchases and include them in our gas portfolio. This was a proposal that we submitted almost 1 year ago, and then we were able to reach an agreement with the Public Advocates Office last fall on a stipulation that’s been submitted to the commission for approval. We expect a final decision any day.

Also in Nevada, with the passage of SB 154 in 2019, we are working through the final stages of a rule-making process that will establish regulations to support our ability to engage in renewable natural gas activity, which includes the investment in RNG facilities and the purchase of RNG as part of our gas portfolio.

And with that, I’ll turn it back to John.

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

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Thanks, Justin. Turning to Slide 18. As I mentioned at the outset of our call, regional economic conditions throughout our regulated service territory remain robust. We expect population growth in Arizona, California and Nevada to exceed the national average over the coming 5-year period. Job growth continues at levels significantly higher than the national average, and new home construction is expected to remain strong over the next several years.

Moving to Slide 19. As I also mentioned at the outset of the call, we continue to see strong customer growth across our regulated utility service territory. Customer additions over the next several years are expected to continue at a rate of 35,000 or more per year, growing to just under 2.2 million customers by the end of 2022.

On Slide 20, opportunities to invest in our regulated utility operations to increase safety, reliability and serve new growth remain strong. We anticipate investing approximately $700 million per year over the coming 3-year period, a regulated capital expenditure budget of $2.1 billion. Approximately 50% of the funds will come from internal cash flows, with the remaining needs provided by an equal mix of debt and equity, including issuances through our ATM program.

Turning to Slide 21. We illustrate a more detailed breakdown of total capital needs and sources for our natural gas operations over the 3-year period ending 2022.

On Slide 22, we show how our regulated utility capital investments impact rate base levels over the coming 5-year period. With continued average annual capital expenditures of $700 million per year, we expect to see rate base increase from $4.1 billion at the end of last year to $6.2 billion by the end of 2024, an increase of 50% in regulated utility rate base over the next 5 years.

Moving to Slide 23. We show our successful track record of increasing our dividend, a compounded annual growth rate of 7% over the last 5 years, culminating with the newest increase in our dividend to an annual rate of $2.28 per share approved by our Board of Directors earlier this week. Prospectively, we plan to maintain a payout ratio between 55% and 65% of future dividend increases expected to correlate with continued increases in earnings.

On Slide 24, we return to the sustainability theme and show some of our ongoing greenhouse gas mitigation efforts in addition to those touched on earlier by Justin. As a company, we committed to reducing our greenhouse gas emissions from our fleet and facilities by 20% by the year 2025. We plan to accomplish this through a combination of energy efficiency efforts, increased use of vehicular CNG and other initiatives. We are also working with large fleet operators in our service territory, including the mass transit bus operators in Las Vegas and Phoenix as well as UPS, Waste Management and Republic Services as those business partners seek to lower their carbon footprint through increased use of compressed natural gas.

We’re also excited about securing renewable natural gas supply for the portfolio of our sales customers. These supplies can be secured from landfills, sewage treatment plants and dairy farms and are considered to be either carbon neutral or carbon negative sources of supply.

Next, on Slide 25, we compare our earnings per share results of 2019 to our expectations for 2020. Our guidance range for 2020 is from $3.75 to $4 per share, including normalized company-owned life insurance returns of $3 million to $5 million. For comparative purposes, our 2019 earnings included approximately $0.25 per share of COLI earnings beyond normalized annual expectations.

On Slide 26, we detail expectations that underlie our 2020 earnings per share guidance. At our regulated utility operations, we anticipate operating margin to increase by 4% to 5%; operating income to increase by 3% to 5%; pension costs to increase by $13.6 million due to lower end of year discount rates, partially offset by positive asset returns with approximately $5.2 million of the pension increase reflected in other expense; normalized COLI returns of $3 million to $5 million; capital expenditures of $650 million to $700 million; and equity issuances of approximately $200 million through our ATM program.

At our Centuri business segment for 2020, we expect organic revenue growth of 5% to 10%; operating income equating to 5.5% to 6% of revenues; interest expense between $13.5 million to $14.5 million; net income expectations are net of noncontrolling interest; and due to our Canadian operations, fluctuations in Canadian exchange rates can influence results.

Moving to Slide 27. With respect to longer-term expectations at the holding company level, we expect equity issuances of $500 million to $675 million for the 3-year period ending 2022 to continue funding the growth of our business. We will also endeavor to maintain a dividend payout ratio of 55% to 65%.

For our natural gas operations, we anticipate investing $3.5 billion in capital expenditures over the 5-year period ending 2024, with rate base increasing by 50% over that same period. And at our Centuri business segment, we expect average annual revenue growth of 5% to 8% through 2022, with operating income expected to equal 5.5% to 6.5% over that same period.

And finally, on Slide 28, we believe that both business segments of Southwest Gas Holdings are well positioned for excellent growth in the years to come, with regulated utility operations expected to contribute approximately 73% of holding company net income over the coming 3-year period. Our regulated natural gas operations are experiencing great customer growth and strong rate base growth, which is increasing the safety and reliability of our well-maintained gas distribution systems.

Meanwhile, at Centuri, we believe our investors have a high quality and relatively low risk utility services business with great prospects for continued growth, partnering with mainly regulated utilities in 40 different states and provinces across United States and Canada.

With that, I’ll now turn 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. 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, Inc. and its 2 business segments. These slides can be reviewed at your convenience.

Our operator, Latif, 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) Our first question comes from Aga Zmigrodzka of UBS.

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

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Congratulations on the quarter.

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

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Thank you.

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

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On the last earnings call, you revised down 2019 utility operating margin growth, and 4Q net margin well exceeded the revised range. What were the key drivers that were not included in 3Q guidance and exceeded expectations?

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Gregory J. Peterson, Southwest Gas Holdings, Inc. – Senior VP & CFO [5]

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Aga, this is Greg. Are you talking specifically about the margin number?

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

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Yes, net operating margin for gas utility.

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

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Yes, it was really a combination of several items but partially was volumetric. So if you compare the fourth quarter volumes in 2019 to the fourth quarter volumes in 2018, they were up. And part of that is we are decoupled, but we do have some volumetric surcharges. And so that created part of the growth, as I discussed earlier, in margin. Not as big an impact in net income, but some because some of our customers outside the decoupling also experienced higher volume usage.

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Aga Zmigrodzka, UBS Investment Bank, Research Division – Associate Director and Equity Research Associate, MLPs [8]

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Perfect. That’s very helpful. Could you please also provide a little more color on the Arizona rate case, in particular on recommendations opposing future VSP and other replacement programs that you highlighted on Slide 12, how that could impact announced utility CapEx in the future and the potential regulatory lag?

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Justin L. Brown, Southwest Gas Holdings, Inc. – SVP & General Counsel of Southwest Gas Corporation [9]

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Yes. Aga, this is Justin. The staff and the consumer advocate position, so the staff came out in support of the COYL program, so a continuation of it, but with respect to the VSP and the plastic pipe program, they found that, kind of, moving forward that they felt like a case had not been made that the programs were in the public interest. And so that was really their position. I think we still have some pretty compelling arguments and things that we’ll make on rebuttal and through hearing in hopes that the ALJ or the commission picks up on some of those because, again, I think, one of the important things with these tracker programs that we’ve established in Arizona and Nevada, quite frankly, is that they’ve always been identified as this is work we’re willing to do if we have supportive regulatory mechanisms from a cost recovery standpoint.

So obviously, if they’re signaling a desire not to do the proactive VSP or plastic pipe work, then naturally, we’re not necessarily going to spend that same level of capital on those projects if we’re not going to have the support of cost recovery. So I think that addresses the lag question I think you have.

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Operator [10]

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And next question comes from Ryan Levine of Citi.

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Ryan Michael Levine, Citigroup Inc, Research Division – Equity Analyst [11]

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Can you speak to what your longer-term R&D strategy is? It looks like it’s — you’re pursuing it in Arizona, although it’s opposed. Are you looking at purchasing RNG? It’s for the — to reduce your greenhouse gas emissions per your goal? Or are you willing to invest in some of the infrastructure to build out that device source?

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John P. Hester, Southwest Gas Holdings, Inc. – CEO, President & Director [12]

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Ryan, this is John. And I think the answer to that, both of those items, we are certainly looking at the prospects of acquiring RNG, but we also are working with a variety of entities throughout our service territory, actually in all 3 states, including Pima County in Arizona; RTC here in Nevada, which operates the mass transit system; and the Victor Valley Water Reclamation Authority in California.

And partnering with those entities, we have a couple of different options, including, as I think Justin alluded to in one of his earlier slides, the possibility of investing in the facilities that are needed to collect and scrub that gas and get it into our pipeline. So both opportunities are future opportunities for the company. And we think it’s pretty exciting.

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Ryan Michael Levine, Citigroup Inc, Research Division – Equity Analyst [13]

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Is there a way to frame the potential amount of dollars that you’d be willing or evaluating to pursue that build out?

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

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I think it’s pretty early in the game to come up with a number like that. I think that it probably would be safe to say that those dollars would be under the umbrella of the $700 million per year capital budget that we have.

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Ryan Michael Levine, Citigroup Inc, Research Division – Equity Analyst [15]

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Okay. And — okay. And then last one for me. In terms of your CapEx spending outlook, could you speak to how much of that spending is tied to purchasing pipe versus other forms of — components of that CapEx?

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Gregory J. Peterson, Southwest Gas Holdings, Inc. – Senior VP & CFO [16]

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Yes, Ryan, this is Greg. Yes, we’re trying to get some of the breakout of that. That’s not something that we really have. Certainly, there are fluctuations in the market, that might be part of the source of your comment, but I don’t have in front of me a specific breakdown as far as pipe, outside services or internal labor. But it’s not a different mix from what we’ve normally experienced, but I don’t have any of those details right in front of me.

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Operator [17]

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Our next question comes from Chris Ellinghaus of Siebert Williams.

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Christopher Ronald Ellinghaus, Siebert Williams Shank & Co., L.L.C., Research Division – Principal & Senior Equity Utility Analyst [18]

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The various filings for RNG, do you have any sense of when you may have greater details on what you might pursue?

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John P. Hester, Southwest Gas Holdings, Inc. – CEO, President & Director [19]

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Chris, this is John. I’ll start that then maybe I’ll turn it over to Justin, but I think that those efforts are underway right now. I think that there really isn’t anything that’s an obstacle to us moving forward with, for example, any of the projects that I briefly referenced in the previous question.

I think the general reception from our regulators actually has been pretty enthusiastic about this. It’s just making it through some of the various administrative provisions. For example: How do you include that type of cost in your gas supply; what opportunities do you have to invest in those incremental facilities that I mentioned in the previous question; and then how does that translate into rate recovery.

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Justin L. Brown, Southwest Gas Holdings, Inc. – SVP & General Counsel of Southwest Gas Corporation [20]

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Yes. Thanks, John. Chris, this is Justin. Yes, consistent with what John said, the idea was to make sure that we get a framework in place in each jurisdiction to support those initiatives and to work with the various policymakers, whether at the state level or at the commission level, on — as well as being able to support customers that are desiring that type of energy as well.

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Christopher Ronald Ellinghaus, Siebert Williams Shank & Co., L.L.C., Research Division – Principal & Senior Equity Utility Analyst [21]

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Right. Okay. Justin, while you’re here, the — what do you think that the, I hesitate to say, odds are, but how well do you think that things like the Driscopipe replacement program might be received by an ALJ or the commission relative to the stance that the staff has taken?

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Justin L. Brown, Southwest Gas Holdings, Inc. – SVP & General Counsel of Southwest Gas Corporation [22]

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Well, being your Vegas guy, Chris, I was talking about Vegas, I’m not — I can see how you wanted to say odds, but yes, that’s — it’s tough to answer in that way. I mean, I do think that we’ll be preparing our rebuttal case. We’ll be filing here in the second week of March, which I think I’d encourage you to look at that when we file that case because I think we’ve got some pretty good arguments on why it makes sense to look at proactive replacement on some of this aging infrastructure. And so I think from our perspective, I think we feel pretty good about our case. But we also recognize that there’s a lot of deference to the staff in these proceedings. And so it is really hard to handicap.

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Christopher Ronald Ellinghaus, Siebert Williams Shank & Co., L.L.C., Research Division – Principal & Senior Equity Utility Analyst [23]

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Well, the part that surprised me a little bit about the staff’s sort of opinion on plastic pipe replacement, I thought was kind of interesting because given the number of safety issues that have arisen nationwide and also the significant concern about environmental issues with methane release, I would have thought that they will be more amenable to both of these issues being in the public interest. So that’s really why I’m curious is whether maybe higher-level thinkers like ALJs and commissioners might be more interested in those topics than staff who are thinking about costs.

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Justin L. Brown, Southwest Gas Holdings, Inc. – SVP & General Counsel of Southwest Gas Corporation [24]

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Yes, it’s very possible. I mean I agree, Chris, it was — they’re fairly conservative positions that were taken.

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Christopher Ronald Ellinghaus, Siebert Williams Shank & Co., L.L.C., Research Division – Principal & Senior Equity Utility Analyst [25]

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Right. Yes. Okay. Well, that bears some interesting watching. As far as the Centuri long-term guidance that you gave, I appreciate the insights there. The 5% to 8% annual revenue growth, I assume that’s incorporating things like cross-selling opportunities and things like that. But what is the sort of — can you give us some color on what you think the base core growth opportunity is, excluding, say, Linetec’s addition?

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Gregory J. Peterson, Southwest Gas Holdings, Inc. – Senior VP & CFO [26]

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Yes, Chris, this is Greg. Everything is included in that 5% to 8%. That’s our organic growth number that we think that we can do over the next several years. We do expect Linetec to continue to grow, and we do expect that we will get some of those cross-selling opportunities. As I mentioned previously on one of our earlier calls, the utility customers that we do business with operate much like Southwest Gas does in which they forge long-term relationships with the contractors that do business with them. And so it’s not a quick spin that somebody will move their entire electric or gas operations to Centuri. But we continue to work on that, and that is included in those growth levels.

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Christopher Ronald Ellinghaus, Siebert Williams Shank & Co., L.L.C., Research Division – Principal & Senior Equity Utility Analyst [27]

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Okay. And as far as the margins, do you think that’s a fair range sort of regardless of economic conditions? Or is that more indicative of sort of status quo, pretty respectable economic conditions?

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Gregory J. Peterson, Southwest Gas Holdings, Inc. – Senior VP & CFO [28]

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Yes, this is Greg again. I — certainly, we’ve experienced and expect to continue to experience that Centuri will grow despite or even in light of whatever economic conditions are out there. It’s a service that’s needed, and we provide that service in good times and in bad in economic times. So I think that the 5.5 to 6.5 long-term percentage of operating income of revenues is pretty indicative of what we really expect, again, come good or bad in the economy.

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Operator [29]

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Our next question comes from Chris Sighinolfi of Jefferies.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division – MD and Equity Research Analyst [30]

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If I could circle back, I guess, a couple topic areas I want to touch on. But if I could start maybe with where Chris was and Aga was earlier in regards to the replacement programs and the opposition in Arizona. And I guess what I’m interested to know is if I look at Slide 20 on the capital expenditure breakdown by year, by type, that golden bucket of infrastructure under trackers, I mean, is that — if you don’t — if this proves to be something that the jurisdiction in Arizona doesn’t seem to be supportive of, is that biased down? Or is this based on just the programs you know will continue?

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

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Yes, this is Greg, Chris. Yes, the gold band across the top on Slide 20, it includes what we expect to happen there. We know that there might be some fluctuations. If the capital tracker programs that we currently requested are not accepted or authorized, certainly, we’ll continue to seek other ways to do that. And I don’t see that there’ll be much degradation or change in our overall capital spend. We would probably just change the mix of work that we do, but that includes both tracker mechanisms that are in place and things that we think might be in place in the coming years.

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John P. Hester, Southwest Gas Holdings, Inc. – CEO, President & Director [32]

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And Chris, another potential impact, and then I’ll let Justin expand on this, as you know, it may — depending on the capital spend that we have associated with trackers, if that fluctuates, that could have impacts on the frequency of us filing general rate case proceedings.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division – MD and Equity Research Analyst [33]

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Yes. Okay. I guess related to that, and I appreciate, Greg, your clarity on the financing side of the house, what’s anticipated over a multiyear period. I think it’s the very next slide. Just curious, should we think that the ATM issuance happens in sort of a ratable fashion? Or given that it looks like you’ll be out of rate case for a little bit in all 3 areas after this year, do you take advantage of low interest rates and do more debt and defer some of the equity? Or what do you — I guess, what would you advise that we model?

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Gregory J. Peterson, Southwest Gas Holdings, Inc. – Senior VP & CFO [34]

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Yes. This is Greg, Chris. Certainly, we will look at what’s happening in the market as we encounter the need. I think we’ve been pretty clear that our needs will be ongoing, but whether we choose to issue debt or equity will depend on market conditions at the time and our expectations for what’s most advantageous, whether it relates to rate case planning or just trying to — I won’t say we’re trying to time the market, but we will look and see what seems to make the most sense at the time. But I think you can expect that, generally, this will be consistent over the course of the 3 years that are in this schedule.

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Christopher Paul Sighinolfi, Jefferies LLC, Research Division – MD and Equity Research Analyst [35]

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Okay. And then final question for me. You’ve given color and you always have on the capital expenditure plans at the utility. You’ve now given — you’ve been talking about a multiyear growth rate at Centuri. I’m just wondering what level of spend you think is required to effect that type of revenue growth.

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Gregory J. Peterson, Southwest Gas Holdings, Inc. – Senior VP & CFO [36]

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Yes, this is Greg. Centuri does a great job in working with the suppliers of the equipment that they need to do their ongoing business. While I don’t have the number right in front of me, I believe the number for 2019 was about $150-ish million of CapEx for their equipment that they use to grow the business. And Centuri, certainly, with the acquisition of Linetec, experienced some considerable growth during 2019. A run rate number is probably in that 100-ish to 150 neighborhood, depending on the growth requirements that they have.

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Operator [37]

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(Operator Instructions) Our next question comes from [Stephen D’Ambrisi] of Granite Lane.

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Unidentified Analyst, [38]

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Just on the operating margin growth for 2020, the 4.5% at the midpoint looks like that’s roughly $45 million. Could you bucket some of the main drivers of that? So I know you called out customer growth, and then, I guess, you have a rate case. But can you bucket like the infrastructure pieces, the rider pieces and what other type of contribution you guys are seeing?

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Gregory J. Peterson, Southwest Gas Holdings, Inc. – Senior VP & CFO [39]

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Yes. This is Greg. I think the bucket that would be easiest for us to identify and share is the customer growth bucket, and that number will be relatively consistent with what we’ve seen in prior years. The others, whether they’re trackers or the rate cases, yes, we’re waiting for a little more clarity on what the rate cases will be. But the customer growth side of that should be consistent with what we experienced in ’19.

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Unidentified Analyst, [40]

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And can you just remind me what that was? Sorry, I know you said in the script, but…

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Gregory J. Peterson, Southwest Gas Holdings, Inc. – Senior VP & CFO [41]

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Yes. So about $11 million.

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Unidentified Analyst, [42]

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$11 million. Okay. And just on the Nevada rate case, what’s the expected timing for rates to be effective? I think it was a decision by the end of the year, maybe? Or can you just remind me about that?

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Justin L. Brown, Southwest Gas Holdings, Inc. – SVP & General Counsel of Southwest Gas Corporation [43]

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Yes, Stephen, this is Justin. In Nevada, they have a 210-day time cost. So we filed yesterday. Once they accept the filing, they’ll have 210 days. Generally speaking, we’re looking at like an estimated October 1 rate effective date.

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Operator [44]

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At this time, I’d like to turn the call back over to Ken Kenny for closing remarks. Sir?

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Kenneth J. Kenny, Southwest Gas Holdings, Inc. – VP of Finance & Treasurer [45]

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

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Operator [46]

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Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.