Good day, ladies and gentlemen, and welcome to the Southwest Gas 2013 Mid-year Earnings Conference Call. My name is Erica, and I'll be your operator for today. [Operator Instructions] I would now like to turn the call over to Ken Kenny, Vice President of Finance, Treasurer. Please proceed.

Thank you, Erica. Welcome to the Southwest Gas Corporation 2013 mid-year conference. As Erica 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.swgas.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. Jeffrey W. Shaw, Southwest's President and Chief Executive Officer; Mr. Roy R. Centrella, Senior Vice President and Chief Financial Officer; and Mr. John P. Hester, Senior Vice President, Regulatory Affairs and Energy Resources; and other members of senior management to provide a brief overview of the company's operations and earnings ended June 30, 2013, and an outlook for the remainder of 2013. Our general practice is not to provide earnings projections. Therefore, no attempt will be made to project earnings for 2013. Rather, the company will address those factors that may impact the company's year's earnings. Further, our lawyers have asked me to remind you that some of the information that will be discussed contains forward-looking information. These statements are based on management 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 description of other 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 Jeff.

Thank you, Ken, and thank you for joining us today on the call. First, what I'd like to do is just state that we believe that our strategy of sticking to the fundamentals has really produced some results that we're pleased with, and we remain focused on the core fundamentals. On a consolidated basis, we're pleased to report a continued improvement in our financial metrics. The second quarter reflects solid performances for both the Natural Gas and the Construction Services segment, stock price is trading between $49 to $50 a share, we have seen continued improvement in our balance sheet and credit ratings, and we believe the Board is in a strong position to further consider increases in our dividend. The Gas segment operating results remained steady, higher returns associated with company-owned life insurance and lower interest expenses resulting in improved net income year-over-year. The Construction Services segment, NPL results were significantly improved over the prior year. Let me just quickly touch base on the call outline and who will be addressing today. First of all, from a consolidated earnings standpoint and based on the quarter and to 12 months ended June 30, Roy Centrella, our Chief Financial Officer, will give us the background and some of the details associated with those numbers. He'll also touch upon NPL Construction Co., break down some of the details of those earnings as well, as he will the Natural Gas segment. Following his comments, John Hester, our Senior Vice President of Regulatory Affairs and Energy Resources, will speak to regulation in each of our jurisdictions, including initiatives that we have taken to try to address issues of concern such as regulatory lag associated with investing in capital expenditures, so we will have him speak to that. I will then continue the call speaking to customer growth, our customer -- or excuse me, our construction expenditures, what we expect on a going-forward basis, our liquidity and our credit ratings. I will address dividends, what you might expect towards the end of the year. Then I'll touch upon a 2013 outlook update for the 2 segments of our business. So with that, I'd like to turn the time over to Roy Centrella. Roy?

Thank you, Jeff, and welcome to those of you who are listening. Now let's go right into the second quarter and rolling 12 months operating results, and as you mentioned, I'll highlight some of the key factors impacting the change in the related prior periods, and potentially impacting our full year 2013 results. Beginning on Slide 4, during the second quarter of 2013, we earned $10.1 million or $0.22 per share. That compares very favorably to a loss of $3.7 million or $0.08 per share during the second quarter 2012. The primary drivers of the improvement between periods were investment returns on company-owned life insurance, or COLI, policies, reduced financing cost at the Gas segment, along with strong financial performance at NPL. As I look at this 3-month period objectively, other than the COLI income being a little higher than normal, the financial results for the current period were pretty clean for both the -- both operating segments. Now for the 12 months ended June, we earned $149 million or $3.22 per basic share versus $115 million or $2.50 per share during the prior period. There were 3 significant factors which favorably influenced those current period operating results: outsize returns on our COLI policies, large gains on sales of equipment at NPL and change order revenue at NPL recognized in the fourth quarter 2012 with no related cost on the fixed-price contract. More on these as we move forward. Slide 5. NPL showed significant improvement between years in both the 3- and 12-month periods. NPL earned $8.1 million during the current 3-month period versus a loss of $300,000 during last year's second quarter. In comparing 12-month periods, net income increased from $15.7 million to $27.1 million. Slide 6. The primary cause of the increase between quarterly periods at NPL was…

Thanks, Roy. Turning to Slide 18. The last California rate case decision from the California Public Utilities Commission provided new base rates effective January 2009, along with annual attrition rate increases for the years 2010 through 2013. 2013, our California attrition rate increase was $2.4 million. Attrition increase was somewhat offset by a decrease in our authorized return on equity which was adjusted pursuant to our automatic rate of return adjustment mechanism. The rate of return adjustment reduces our 2013 margin by $1.3 million. The net margin impact of the attrition rate increase and the rate of return decrease is a 2013 margin increase of $1.1 million over 2012 levels. Cost plus rate of return will be reevaluated again in 2014 as part of our pending California general rate case application. Turning to Slide 19. We filed our most recent California general rate case in December of last year. Rate case incorporates a 2014 future test year. The application requests an overall margin increase of $11.6 million. Our requested California margin increase is based on the capital structure, incorporating a 57% common equity component, and 10.7% proposed return on equity. In addition to the 2014 test year margin increase, we are requesting annual attrition margin increases at a rate of 2.95% for the years 2015 through 2018. The application also requests establishing an infrastructure reliability and replacement adjustment mechanism. This proposal is similar to mechanisms we have in Arizona and Nevada, and would allow Southwest to propose specific infrastructure replacement projects outside of the normal rate case process. Costs of such projects are proposed to be deferred to a regulatory asset account for future annual surcharge recovery. Rates on the proposed to be effective for this rate case as of January 1, 2014. In June, Southwest received responsive testimony from…

Thank you. Beginning with Slide 23, I'd like to address customer growth. You can see on this table that we've had first-time meter sets, new meter sets, in each of the last 3 years, increasing gradually. And in fact, between 2012 and 2013, a reasonably nice-sized bump. We also can see on meter turn-on/turn-offs, a number of 4,000 net customers that occurred for the 12 months ended June 30, 2012 and 2013. The 24,000 net new customers, when you add the 2 for the 12 months ended June 2013, that 24,000 net new customer additions would equal about where we were at somewhere in the 2007 timeframe. So we've made gradual improvement back. We're certainly not at the levels we used to see in this company historically, but it is certainly directionally positive. Right now, our total excess inactive meters at June 30, we estimate to be approximately 29,000. And we expect a growth rate on a going-forward basis to hover around 1%, maybe slightly above. Looking at some of the drivers behind this customer growth, you can see on Slide 24, by jurisdiction, the unemployment rate for the 12 -- as of June 2012 and June 2013. And you can see improvement in every jurisdiction. Notably, in Southern Nevada, it's reasonably significant to drop from 12.1% to 10.1%. That being said, 10.1% is still well above the national average. But we're -- directionally, we're starting to see some positive things, and there is some construction occurring in the Southern Nevada area. Unemployment growth -- or excuse me, employment growth. You can see that in Southern Nevada, that is uptick from 1% to 2.2%. You can see in Central Arizona, they've remained relatively flat at 8% -- rather 2.6%, 2.7% rate. And that is driving the customer growth. We want…

Thanks, Jeff. That concludes our prepared presentation. It's my understanding that due to some technical difficulties, the slides were not available at the start of this call. I just -- for those who were not able to get the slides, they are out there, and you can pull up the deck of slides. For those who have accessed our slides, as Jeff mentioned, we have also provided an appendix of slides which includes other pertinent information about Southwest Gas and can be reviewed at your convenience. With that, our operator, Erica, will now explain the process of asking questions.

[Operator Instructions] And your first question comes from the line of Matt Tucker with KeyBanc Capital Markets.

First question on the Construction side. You sound pretty positive on what you're seeing in the market. And that's pretty consistent, I think, from what I've heard from your customer base and competitors. You also had nice growth in the second quarter there, but you're still talking about the top line being kind of flattish year-over-year. Could you, A, give us a little more color on why that's still the outlook for the second half? And B, could you maybe, looking out a little further, give us a sense for what you expect to be kind of longer-term growth rate for your market or kind of demand in general?

I'll start. With regards to the 2013 -- this is Roy. When you look at last year's run rate, we had that large fixed-price contract. That's largely come to a conclusion. And so, they're replacing that revenue and they have done a good job of replacing that. But when you pull that out of the equation, their growth level is there. But you're starting from, essentially, a high base last year because of that contract. So they did about $270 million, I think, in the first 6 months of the year and even getting to the $600 million level would be the growth rate from first half to second half of the year. So we still think that's a pretty fair estimate of where they're going to come in.

This is Jeff. Let me just add, with respect to the longer-term growth rate expectations, we've charged the management team with the goal to grow revenues and net income by about 5% to 8% per year. That's going to require them to continually try to organically grow, find new areas that they may serve. They're also looking at some bolt-on acquisitions, if possible, maybe to increase some of the business lines. They have a strategy of growth of that 5% to 8%. They're also rightsizing the business from a management standpoint. I think they were in need of certain, I guess you would say, personnel infrastructure to be added. But we've seen some increases in the G&A as a result of that. And we think that that's going to produce some very good results on a going-forward basis. So I think it's possible for us. I think we've positioned ourselves, speaking of NPL, to be able to grow at that 5% to 8% level based upon some of the changes that we have made and infrastructure we've put in place.

That was very helpful. And as a follow-up to that, when you talk about replacing the large projects that you had last year, I guess that does kind of suggest you're seeing sort of growth in, what I would consider, kind of the base business. Is that coming more from growth with existing customers or are you also adding the customers this year?

I would say it's a combination of both, and that's generally speaking. The way we want them to grow the business is to the extent we can do additional work for existing customers where we have solid relationships that makes a lot of sense. But there are also some areas that we believe we can come in and leverage off of our reputation for quality and safety, and be able to go into a new area and do some additional work for new customers. And we're being both of those presently.

And if you look at -- I think in the past, we've said they're in 18 major markets. This year, we say they're in 20 major markets, so they've picked up a couple of new areas. And usually, when you go into a new area, it takes time to see where that revenue potential can lead you, but we are definitely experiencing some new market growth.

And one more if I could. On the Natural Gas side, you talked about expecting interest expense to be down about $5 million year-over-year. But if I look at the second quarter interest expense and use that as a run rate, I think you get better than $5 million savings. So am I kind of splitting hairs there or are you planning something in the second half, maybe trimming out some of that credit facility debt that could incrementally increase interest expense going forward?

If you look at that second quarter, in particular, last year, we did the refinancing. And there was a couple of months there where we had dual interest outstanding, if you will, interest on the new facility and interest on the old one, I think roughly 45 days into that second quarter. And so there's some overlapping interest, that's why the quarter looks practically high.

I guess my question, though, is if you take even that -- the number for the second quarter and you assume that's the run rate for the rest of the year, I think you save more than $5 million versus last year. Is that -- is it possible that you're better than the $5 million then or would interest expense increase when you -- in the second half?

Well, we did have -- we didn't have any short-term debt outstanding last year. Our -- we've -- with the -- some of the refinancing work we've done and taking out the industrial development funds, we're carrying a balance on short-term debt of $119 million currently. Ordinarily, we would be out of that facility for a good chunk of the year. And so we are -- there will be some expenses associated with that, and that's why we're still coming back to about $5 million.

Your next question comes from the line of Dan Fidell with U.S. Capital Advisors.

Just a couple of questions on my side. I guess, first, on the construction, kind of just following on. I know part of achieving the 5% to 8% growth target includes what you'd mentioned on the bolt-on acquisitions. Can you give us a little bit more color on that? Are you sort of just in an opportunistic mode at this point or might we expect some announcements here into the second half of the year?

I think, Dan, I don't know if I could tell you with any certainty that you would expect an announcement by the end of the year. But we are currently very -- I would say, we are being reasonably aggressive, out looking for the right opportunities. We're going to be patient and disciplined and make sure that it will provide some ongoing benefits to the company. They have quite a nice little bit of diversification that they're doing. They're doing some electric conduit work underground. We have the barricade business. They do the typical trenching, that's their bread and butter, but also looking at other things related to underground, other utilities, wet utilities and so forth. So anything that opportunistically, that is in the general category of underground construction or construction generally, they're going to be taking a look at. So I think -- I don't know that I could tell you of any announcements that are imminent or will we have any by the end of the year. I don't know if they will be significant, so I think there is an opportunistic element to it. But they are -- there is a department that's been established within the last year whose sole responsibility it is to get out and look for those opportunities. So I think as they ramp up, as they continue to look, I would expect we would see some opportunities come forward.

Good color. A question just quickly for John. On the California case, any color as to why the Ratepayer Advocate would oppose an infrastructure tracker? Is that just generally -- they generally just oppose the concept of trackers or is it unique to this case?

Dan, I think, if you look at the testimony that they put in our case, one of the things that they'd mentioned is that some of the projects that we've talked about potentially putting into a mechanism like that, they don't believe that the Commission has ordered us to proceed with that type of work. So as a result, from their perspective, they're not supportive of the mechanism itself. Now the way we proposed it, we would go into the Commission and we would suggest projects for them to review and approve, and we would only proceed with the projects that, ultimately, the Commission approves. So I don't know that we find that to be a particularly reasonable solution on their part.

Fully agree. Last question on my side from -- maybe for Jeff. Just sort of a broader picture question as it applies to sort of the -- for the macro strategy going forward. Thoughts on M&A. You -- certainly, your organic growth profile is very strong. You don't need to do anything externally, but just wondering what your appetite is for external growth just after we've seen Atico and MidAmerican do some transactions right in your backyard?

I think that's a good question. I will tell you that we do have a senior level executive that is constantly looking for opportunities. And I guess coming back to the word you used, it is going to be opportunistic. I'm not sure we're going to be aggressive going out there and overpaying for assets or companies. But I think if there is a good opportunity that makes a lot of sense for our shareholders, we certainly we would pursue that.

[Operator Instructions] Your next question comes from the line of John Hanson with Praesidis.

Just -- most of my questions have been asked, but just to follow up a little bit on the interest cost. Any more near-term refi opportunities that we have left on the balance sheet or are we getting pretty down, pretty well down there now?

Very minor amount of industrial development bonds that can come out later this year. We do have some more in 2014 in the same category, the industrial development bonds are callable at par. What is that number, Ken? $60 million...

$65 million.

$65 million in 2014, but nothing else of substance in 2013.

And do you know what rate is on debt right now or not?

What's the rate on that debt? It's in the low 5s, between 5% and 5.5%.

Your next question is a follow-up question which comes from the line of Matt Tucker with KeyBanc Capital Markets.

Just one quick follow-up. Your comment that the depreciation trend lines should continue for Construction, should we interpret that as we should see similar sequential increases going forward as we've seen over the past 3 quarters or did you mean that the second quarter level is a good run rate going forward?

You'd see a little bit of a ramp up -- you'd see what happened in -- if you look at our Q1 and our Q2, sort of that trend line would continue -- I think, it went up a few hundred thousand -- between 1 and 2. They have a little bit of construction equipment we have to buy this year. And so we would expect to see that just trend up at a similar rate.

You have no further questions. I will now turn the call back over to Ken Kenny for any closing remarks.

Right. Thank you, Erica. This concludes our conference call, and we appreciate your participation and interest in Southwest Gas Corporation. Thank you.