Southwest Gas Holdings, Inc. (SWX) Q2 2013 Earnings Report, Transcript and Summary

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 that last year's results included a $13 million pretax loss on a large fixed-price contract which did not recur in 2013. Secondary factor was an increase in revenues, driven by new replacement work, partially offset by higher D&A and depreciation costs, along with modestly lower gains on equipment sales. Next on Slide 7. Let's dissect the 12-month period. Revenue of $618 million is $43 million or 7% greater than during the previous 12 months, largely reflecting increased replacement constructions. Current period revenue includes $3 million of change orders received in the fourth quarter of 2012 on the fixed-price contract with no associated costs as they were previously recorded. Construction expenses were $532 million in the current period, up $15 million or just 3% from the prior period. 2 notable items impacted the low increased percentage. The prior period still included the $13 million loss on the fixed-price contract and then the current period included $7 million of gains on equipment sales, up $1.7 million from the prior period level. Most of those gains, $4.7 million of the $7 million, occurred between July and December 2012 when NPL was turning over a lot of equipment. Slide 8, we'll move on to the Gas segment and second quarter results. During the second quarter of 2013, the Gas segment contributed net income of $2 million compared to a loss of $3.4 million during the prior year quarter. Operating income was pretty flat between quarters, but an improvement in other income and reduced financing costs led to the positive change. The next few slides will highlight the significant changes in each caption. So on Slide 9, we break down the $6 million increase in operating margin between quarters. Rate reliefs in Nevada and California accounted for $2 million. Customer growth from a net 24,000 new customers contributed $2 million, and other factors also chipped in with $2 million. Slide 10, you'll see our operating expenses. Overall, they grew by 3.9%, which is consistent with our expectations of 3% to 4% growth. Pension expense, depreciation cost, resulting primarily from gas plant additions, and higher general taxes were the primary drivers. A portion of the operating cost increase, for example, certain regulatory amortizations, has direct revenue recovery associated with it. Slide 11. This slide summarizes the activity in other income which improved by $4.2 million between periods. Once again, income on COLI policies were the primary cause of the change as the current period reflected $1.8 million in investment returns and debt benefits, and the prior period experienced a loss of $1.9 million. Recall that its our intention to hold these policies until we collect that benefits, but we do have to recognize market movements along the way for investments underlying the policies. Also note, an unrecoverable pipe replacement cost decreased $1 million as the related replacement effort was largely concluded at the end of last year. Slide 12 breaks down financing cost which decreased $3.1 million between quarters. Items which gave rise to the interest savings include debt refinanced during 2012, the early redemption of $45 million in the fixed rate IDRBs this March, and lower deferred gas cost balances on which we pay interest. For the full year, we still expect to realize annualized savings of about $5 million. Next on Slide 13, we'll review the 12-month periods. The Gas segment contribution in net income increased to $122 million from $99 million. There was a nearly $18 million improvement in operating income due to rate relief and customer growth. In addition, other income improved by $11 million between periods while interest costs declined $6.3 million. Slide 14. Here, you can see the components of the $37 million jump in operating margin between 12-month periods. Rate relief in Arizona, which would have occurred from 2012, and a more recent rate relief in Nevada and California kicked in $23 million. We also recognized about $7 million in new margin from customer growth. The remaining improvement relates to a $3 million increase in miscellaneous revenues in the current period, recovering some of those amortizations I mentioned earlier, and the impact of a $4 million negative margin adjustment recognized in the third quarter of 2011. Slide 15. Operating cost increases between periods were pretty favorable at 3.3% overall. O&M costs were held to a 2% growth rate, while depreciation and general taxes increased by 5% and 7%, respectively, due to plant additions and Nevada rate case related changes. Now Slide 16. Other income increased $11 million between periods. The current period reflects an $8.9 million increase in COLI cash surrender values and debt benefits compared to an $800,000 loss in value during the prior year period. Current period results are significantly greater than our expected range of $2 million to $4 million, and we believe are not likely sustainable at this level for the mid- to long-term. Lastly, on Slide 17, you'll note that financing cost decreased $6.3 million between 12-month periods due to refinancing activity, early debt redemptions and reduced purchased gas adjustment balances. With that, let me turn the time over to John Hester to provide our regulatory update.

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 the Division of Ratepayer Advocates, or DRA. DRA's report supports only a $1.1 million margin increase for Southwest. DRA's margin increase is based on a capital structure that uses a 51.7% common equity component and 9.52% return on equity. DRA supports annual attrition increases, proposed with a formulaic approach that is based on the consumer price index. DRA does not, however, support establishing an infrastructure replacement mechanism. While Southwest and DRA have had a number of settlement discussions over the past few weeks, no settlement agreement has been reached to date. As for the settlement and the proceeding, hearings are scheduled to begin next week. Moving to Slide 20. Southwest continues to experience progress in its infrastructure replacement mechanism initiatives in both Arizona and Nevada. In Arizona, our December 2011 rate case decision established a customer-owned yard line replacement program. Customer-owned yard lines are service configurations in which Southwest meter is typically located near the rear property line of a home and the customer owns, operates and is responsible for maintaining service line that generally runs through the customers backyard to their home. Over time, these customer service lines may develop low-pressure leaks, at which time gas service is discontinued pending repair or replacement of the service line at the customer's expense. Southwest has approximately 100,000 of these customers, primarily in the Southern Arizona division. The last Arizona rate case decision established a program under which Southwest is decreed to survey approximately 1/3 of these lines a year and would offer to replace lines found to be leaking at no direct cost to the customer. If replaced, the meter is relocated next to the customer's home and Southwest takes over ownership of the new backyard service line. Cost for the replacements are deferred to a regulatory asset recovery through a surcharge approved by the Arizona Operation Commission. The program has been working extremely well. Southwest is ahead of schedule in evaluating the existing population of customer-owned yard lines and replaced approximately 2,000 lines last year at the cost of about $4 million. Southwest submitted its first request to establish a surcharge to recover the cost of this program in March. Effective June, the ACC approved a surcharge of about $0.001 per therm to recover first year program costs. The new surcharge will produce about $600,000 in annual margin. Turning to Slide 21. Southwest is also experiencing further infrastructure replacement mechanism progress for its Nevada customers. In March of this year, Southwest submitted an application to the Public Utilities Commission of Nevada to pursue $15.6 million of early vintage plastic pipe replacement. After several round of comments and settlement discussions, parties in the proceeding reached a settlement which was approved by the PUCN in June. The settlement provides for Southwest a deferred depreciation and a return on investment to regulatory asset for future recovery in a general rate case proceeding. Southwest expects to accomplish the approved pipe replacement projects during the balance of this calendar year. In a separate docket, Southwest is seeking to establish an ongoing accelerated pipe replacement program in Nevada effectively for the year 2014 and beyond. The docket where this mechanism is being reviewed as an outgrowth of our 2012 Nevada rate case proceeding where Southwest proposed to submit annual accelerated pipe replacement filings to the Nevada Commission for projects totaling up to $40 million per year, with the costs to be deferred to a regulatory assets and recovered through the establishment of annual surcharges. Several rounds of comments have been submitted in this docket reviewing the proposed infrastructure replacement mechanism. On July 1, the administrator law judge in the proceeding forwarded the draft regulation to the Nevada Legislative Counsel Bureau, a legislative counsel bureau will now review the regulation, potentially suggest modifications and then return the matter to the Nevada Commission for final resolution. Southwest believes that the draft regulation generally reflects the spirit of its original proposal and anticipates that the Nevada Commission will issue a decision in the proceeding later this year. Turning to Slide 22, in gas procurement matters, Southwest has made significant progress in reducing the over-collected gas cost balances that existed 1 year ago. The Arizona gas cost overrecovery balance has declined from $53.9 million to only $16 million as of June 30. Nevada's gas cost overrecovery declined from $16 million to $12.6 million. And California saw its overrecovered balance decline from $3 million to 0. Net change across our service territory has resulted in Southwest outstanding payable gas cost balance declining by $88.3 million over the past year. The decline is the product of our regularly changing gas cost rates and surcharges as well as marginally higher gas cost commodity prices over the past year. That concludes the regulatory update portion of the call, and I'll now turn things back to Jeff.

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 to -- those are significant metrics that we keep an eye on because they are indicative of what type of customer growth we may foresee. And we have heard others indicate that Tucson will likely follow Phoenix, but not immediately, it will be a delayed reaction. So we're keeping an eye on these employment numbers to see what might happen. Clearly, as we see those improve, we expect our customer numbers to also improve. On Slide 25, I'll touch upon capital expenditures. You'll see that in 2011 to 2012, we had $306 million, $309 million, respectively. We bumped that for 2013 to an estimated $320 million to $340 million. That is somewhat dependent upon how much of the infrastructure tracking mechanism-related CapEx that we're able to do. We expect, from 2013 to 2015, we will spend somewhere around $1 billion in capital expenditures. On Slide 26. Liquidity standpoint. We have a $300 million credit -- revolving credit facility which was refinanced in March of 2012 with an expiration date of March 2017. We have, historically, and we will continue to classify $150 million of this facility as long-term debt in the balance sheet, with the remaining $150 million as working capital. We have a $50 million commercial paper program that's supported by the company's current revolving credit facility. As of June 30, 2013, $119 million was outstanding in the long-term portion facility, including $50 million under the commercial paper program, which reflects first half -- which reflects the first half of 2,000 impacts of: A, refunds to customer resulting in a decline in the PGA balance by $64 million, something John referred to just a few moments ago; and B, extinguishment of $45 million in Clark County industrial development revenue bonds. We believe that the facility is adequately sized and there is currently remaining unused capacity of $181 million under the facility. Slide 27. I'll talk a little bit about our credit ratings. As a result of our continued improvement in our financial metrics, Southwest received credit-rating upgrades in the year 2013. In March of 2013, Standard & Poor's upgraded the company's credit rating to A- from BBB+ and retained Southwest's outlook as stable. And in May of 2013, Fitch upgraded the company's credit rating to A from A-, and revised Southwest outlook to stable. We're pleased with that and hopeful that we may even see some continual improvement in the ratings, especially with respect to Moody's. But we will continue to work with them and see what we can do. Slide 28. [indiscernible] dividend. The Board continually reviews dividend policy. As you know, historically, in February of each year, the Board have -- within the -- during the last 7 years, the company -- or the company's Board has increased the dividend in each of those years. And we expect that the Board will continue to review dividend policy going forward. Dividends are -- we consider both the adequacy and the sustainability of earnings and cash flows, the strength of the company's capital structure, the sustainability of the dividend through all business cycles and whether the dividend payout is within the normal range in the industry. And we recognize that our payout currently is low compared to the average of the industry. As I mentioned in February 2013, the Board raised the annual dividend by $0.14 from $1.18 per share to $1.32 per share on an annualized basis. It was an increase of about 11.9%. This is, again, the seventh consecutive annual increase in the dividend since 2007, with an annual dividend per share growth rate of approximately 7.96% over the last 5 years. Over time, again, the Board will continue to review dividend policy. It is the intent of the company and the Board to move the dividend payout to something that looks more like the average for the industry. More to come on that. Slide 29. With respect to expectations going forward, let me first touch upon Construction Services. 2013 revenues are expected to approximate 2012 level. We expect profitability in 2013 to probably approximate something you might have seen in 2011, however. 2013 construction expenses, we expect to continue at the current level as a percentage of revenues. The total expected loss on the large fixed-price contract was recorded in 2012. We don't expect something similar in 2013. Gains on equipment sales in the second half of 2013 should approximate the first half of 2013. And the depreciation trend line, we expect to continue. Slide 30. With respect to the Natural Gas segment, operating margin expected to be favorably influenced by Nevada rate relief and continued customer growth. It's nice to see that customer growth return, even though, albeit at lower levels than maybe what we historically had seen. Increases in operating costs, excluding the $5 million related to pension expenses, are expected to approximate somewhere between 3% and 4% for the full year. Our company-owned life insurance related returns for the 12 months ended June 30, 2013, again, significantly exceeded expected returns. And that's not expected to be sustainable at that level for the mid- to long-term. And then finally, due to debt financing refinancings and redemptions of approximately $5 million, we saw a favorable impact to the income statement between 2013 and 2012. Now before I turn it back over to Ken, let me just make -- mention of the fact we do have an appendix in this deck of slides. The Appendix will touch upon additional business segment information; service territories with customer and margin breakdowns; economic data by state; some historical capital structure information; a graph of stock performance historically; comparative total returns for 1-, 3-, 5- and 10-year periods; authorized rate base and rates of return by regulatory jurisdiction; and recent returns on equity, both on a consolidated and Gas segment basis. And we've concluded that, that you may have an opportunity to refer to that at your leisure. And certainly, we would encourage any questions either today or at some future date as you have a chance to review that information. With that then, I will turn the time back to Ken.

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.