Good day, ladies and gentlemen, and welcome to the Southwest Gas 2014 Midyear Earnings Conference Call. My name is Estevan, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ken Kenny, Vice President, Finance and Treasurer.

Thank you, Estevan. Welcome to the Southwest Gas Corporation 2014 midyear conference call. As Estevan said, 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 our 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 Chief Executive Officer; Mr. John P. Hester, President; and Mr. Roy R. Centrella, Senior Vice President and Chief Financial Officer; and other members of senior management to provide a brief overview of the company's operation and earnings ended June 30, 2014 and an outlook for the remainder of 2014. Our general practice is not to provide earnings projections. Therefore, no attempt will be made to project earnings for 2014. 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 statements. These statements are based on management's assumptions, which may or may not come true, and you should refer to the language in the press release, Page 2 of our presentation and also our SEC filings for a description of the factors that may cause actual results to differ from our forward-looking statements. All forward-looking statements are made as of today, and we assume no obligation to update any such statement. With that said, I'd like to turn the time over to Jeff.

Thank you, Ken. Good morning, at least, it's morning here, and we thank you for joining us on the call today. First thing I'd like to do is just touch base on some second quarter highlights. There have been some recent management changes, you probably are aware of it, and I'll touch upon that later in the call. We did receive a decision in our California general rate case, and we consider it a good decision, and John will address that during his comments. And finally, NPLs, we believe is continuing to recover from the effects of extreme weather that we experienced in the first quarter, and we will go into some deep level of detail on NPL. With respect to the call outline, we'll begin with consolidated earnings for the periods ended June 30, 2014. We'll speak to the natural gas segment and performance of that segment. We'll also speak to the performance of NPL Construction Co. John will speak on regulation and some of the developments and initiatives that we are pursuing there. I will then touch upon customer growth, constructions, expenditures, dividends and then give a 2014 outlook update. So with that, let's move then to consolidated earnings, Roy Centrella.

Thank you, Jeff. As noted, I will review second quarter and 12-month financial results about the Natural Gas and Construction Services segments. I'll also highlight some of the key factors impacting the changes between the related periods and potentially influencing full year 2014 results. So Slide 5. You'll see our net income for the 3 months ended June 2014 was $9.6 million or $0.21 per share, a slight reduction from the $10.1 million or $0.22 per share earned during last year's second quarter. The contribution to net income from both operating segments was down modestly between periods, with NPL rebounding nicely from the first quarter of the year when extreme winter weather conditions negatively impacted results. For the 12-month period ended June, we earned $135 million or $2.91 per basic share, down from prior period net income of $149 million or $3.22 per basic share. Some of the factors which influenced the decline in results included legal expenses at both Southwest Gas and NPL and first quarter weather at NPL. I'll touch on these and other factors as we move ahead. Let's begin with second quarter results at the gas segment on Slide 6. Earnings were $1.8 million this period versus $2 million previously. Operating income was down slightly due to higher operating costs, while interest costs were up as a result of a long-term debt offering that we did last October. Other income increased by $1.4 million between periods, due mainly to favorable returns on company-owned life insurance or COLI policies. Slide 7 provides the breakdown of the $4 million operating margin increase, half of which came from customer growth and half from rate relief. We added 28,000 net customers over the last 12 months, consistent with our expectations for about 1.5% growth rate. Rate relief in California was…

Thanks, Roy. Starting with Slide 18, as Jeff and Roy previously mentioned, on June 12, we received the final decision on the California general rate case proceeding. The application in that proceeding was originally filed in December 2012 and contemplated new rates effective January 1 of this year. The commission's final order provides Southwest $7.1 million of incremental rate relief and was based on a capital structure incorporating a 55% common equity component and a 10.1% rate of return on equity. Operating income will actually increase by over $10 million on a prospective basis when you consider the $3.1 million reduction in depreciation expense provided in the order. Southwest will continue to be on a 5-year rate case cycle in California, with annual 2.75% incremental increases in margin approved for the following 4 calendar years. As Roy mentioned previously, approximately $5 million of the 2014 margin increase will be experienced in the second half of this year. Moving to Slide 19. Southwest continues to partner with it's Nevada regulators in the interest of maintaining a safe and reliable distribution system. The Public Utilities Commission at Nevada has worked favorably on Southwest proposals to ramp up the replacement of early vintage plastic pipe and has approved support of regulatory mechanisms to address the cost of these activities in between rate cases. The Nevada Commission previously approved regulatory assets for $15.6 million of pipe replacement for 2013 and $18.9 million for 2014. More recently, Southwest submitted a proposal for $35.8 million of plastic and steel pipe replacement in Nevada for 2015. The proposal was submitted in May, and Southwest anticipates the commission ruling in October. Actual replacement activity will occur in calendar year 2015, with the recovery surcharge to be established beginning in 2016. Ultimately, the capital investment of the various pipe…

Thank you, John. Please turn to Slide 22, where we discuss customer growth. Note that it's all directionally positive, not dramatic, but it's certainly directionally positive, and we're pleased to see that. New meter sets are remaining somewhat firm at around 20,000 per year level. And another positive development is the meter turn on/turn off number there you see, where we, in the trailing 12 turned on previously turned off about 8,000 customers. So that has whittled down from, we estimate, a peak of somewhere in the neighborhood of 55,000 we used to talk about in previous calls to less than 25,000 today. So we're pleased to see that progress being made, and we expect for 2014 to end up somewhere at about 1.5% on the year. Slide 23, we talk about the economic overview. Just to give you a flavor in our service areas and what the unemployment rates are and employment growth. And you can see that there's improvement year-over-year in just about every jurisdiction. Central Arizona employment growth dropped a little bit from 2.6% in June of 2013 down to 2.1% in June of 2014. I don't consider that remarkable, but I just make you aware of it. But generally speaking, as you look at the slide, again, gradual improvement, but nothing that I would consider dramatic. But it's good news for us. We're not seeing a decline, and that's important, given what we saw during the worst time of the recession. Slide 24, Natural Gas Operations' capital expenditures. You can see that we estimate about $375 million in this year. That includes some of the investments we're making under tracking mechanisms in our jurisdictions. And you can see that we have a pie chart here that shows the breakdown, franchise and other replacement work at about…

Thanks, Jeff. That concludes our prepared presentations. For those of you who have accessed our slides, we have also provided an appendix with slides which include other pertinent information about Southwest Gas. It can be reviewed at your convenience. Our operator, Estevan, will now explain the process of asking questions.

[Operator Instructions] Our first question comes from Tim Winter with Gabelli & Co.

Congratulations, Jeff, on your pending retirement.

Thank you, Tim.

I just wanted to ask a couple questions about NPL, just to clarify. I know there's been some items, but when you say you expect it to equal or exceed last year, we're talking net income of roughly $21 million for last year.

That's correct.

Yes.

Okay. And then given the sort of growth of this business and sort of a hot business pipeline replacement, are you being approached by any private equity or any other type of bankers regarding doing something creative with that business?

So Tim, this is Jeff. We talk about NPL with our board on a regular basis. Right now, we consider ourselves to be in a very fortunate place. We have a company that has a very good reputation in NPL. They do quality work and their safety ratings are very high. We believe that there's an opportunity to grow that business. And we think that for the benefit of the shareholders, the board's decision has been to continue to grow the business, grow it organically and also opportunistically look for opportunities to maybe add on to the business. But we think right now, we want to grow the business, and we think that will increase the optionality of the board as time goes forward. And I think as you consider NPL, we will do what we believe, over time, is in the best interest of the shareholders. We don't think doing anything right now, other than growing the business, is in the best interest of our shareholders.

Our next question comes from Chris Sighinolfi with Jefferies.

Jeff, congratulations as well. A couple of quick questions for me, I guess following on Tim's questions. For NPL, Jeff, when we think about the second half of the year, is it just sort of time and the team's ability to work through that delayed contract inventory? Or is there anything else that sort of we should contemplate and consider as we think about the recovery to a flat to modestly positive full year expectation?

No. I think that it's clearly just time, time and energy and effort, and we can bring some pretty decent results, again, comparable or maybe even slightly better than last year's results. It's -- you have a little bit of cost pressures that we absorbed the first part of the year because you just can't pick up and leave without incurring considerable cost and try to come back, and you have contractual obligations that you need to meet. So to be idle, to some extent, during weather conditions is not a positive. But we still will get the work done. We will do what we need to. If it takes some additional overtime, some additional crews, we're going to do what we need to meet those obligations for our customers. That's very important to them, and so therefore, it's very important to us.

This is Roy, just one other point there. We also had a -- remember that legal expense in last year's second half, and certainly, that was an unusual occurrence for us, so that should help offset sort of the first quarter bad weather.

Yes, it seems like the -- certainly, I think you guys have told the story and told it well in the first quarter as well, that there are some items that cropped up tail end of last year, beginning of this year, this should provide for, I don't want to say easy comps, but easier comps as we move through the year, the business just executes. So I was just -- I think it's helpful just to understand it's just timing to work through that. Jeff, I think in terms of longer term, NPLs had a bit of an evolution, at least just in the timeframe that I've followed you guys. Originally, it was positioned around new builds, and then there was sort of a transition at the business and particularly, in the way you do contracting as business became more geared towards replacement work. We had that issue with a fixed price contract a couple of years ago and there was a management shuffle and more of the regional focus of the teams. And now we have, I guess, weather impacts. So I'm just wondering as you go into the next round of sort of evolution at NPL, are we going to see any change in the behavior to incorporate contingencies for weather? Or is that even a thing of the business, I don't know.

I think I would have to characterize it as, if weather is really extreme, I'm not sure that there is something that you can do necessarily. We will look at creative ideas, and there may be some out there. I think when you have an event like this, it makes you really get focused and creative. And so if there is something we can do, we will do it. I don't have anything to report today, but we're focused on that. This weather event we had was really extreme. We hadn't seen anything like that in the entire time that we've had NPL. We've had cold weather and weather ebbs and flows, but not of the duration and how extreme it was. So I think it's more that sort of one of those anomalies of this last year, we hope. I hope I wouldn't see another one of those for some periods of time. But I do think that continuing to diversify geographically where we do business with NPL is one way to help kind of mitigate some of the volatility in the earnings and performance. And so we're focused on that. That's pretty obvious, probably, as I say that, but I think it's important. There are certain parts of the country we do business irrespective of weather. So I think that's something that we continue to look at, the Southern half of the country, what we can do if we do additional business down there, but we're not going to turn our backs on good work in the Midwest, Northeast or regions where weather can be extreme either, because we have great relationships with those customers, and we think in the long run, we want to continue to maintain those relationships and provide service. We have all the integrity work, the backlog of integrity work, that continues to persist in this nation. I think NPL is well situated to take advantage of that, and that's why I think our board is very focused on growing the business, taking advantage of the opportunities that are right for us.

Okay. One more on NPL if I could, and then I just have a separate question to ask. You have mentioned in the past that getting high-quality employees for that business is maybe one living factor to its growth. Can you just give an update on that, where you guys stand?

Sure. We're making progress, Chris. I don't think that limitation is permanent. I think it's just we ramped up. In fact, all contractors that are involved in this replacement, this infrastructure replacement work, had to ramp up activity. And therefore, you have to train and get creative in making sure that you build your workforce to accommodate the work and the growth. We've been working 2 programs that NPL has instituted to produce well-trained employees and also develop mid-level management, and that's critically important. So while I mentioned it before, I think it was an honest comment that I needed to make. And just to make sure that the market understood and it's going to take us little time, but I think we're making progress, and I'm pretty satisfied that the trajectory of that progress is good.

Okay. Okay, great. And then a final question for me, Jeff. Appreciate as always, the economic stats that you guys give for the service territories and what's going on, on the customer front. It's never really dawned to me to inquire the sort of surplus -- inactive access meters set were so large for so long, we were just focused on how large it was. In a normal run rate environment, what should we expect that number to decline to? I mean, I'm going to guess it's not 0. Where would sort of a normal operating friction where people are moving and leaving and coming and going, where would you expect that number to settle out?

Let me just make this comment. In our business, given where we exist, we're going to have, at any given time, an embedded number of homes that are vacant because there's so many second homes, retirement homes in the desert Southwest. So what we're talking about here is a number over and above that through the recession that occurred. And I think it's possible to move closer towards 0 if economic conditions will continue to gradually improve. And when we get there, the rapidity of that, I can't estimate. Really, I mean, I'm just telling you directionally based on what we saw, and what we saw on those the slides that we went over, we're moving in the right direction, and that number continues as you can see, each year to improve. Roy, do you have anything to add to that?

Yes. Chris, so the 20-ish thousand or so that are left is an increment. So there's, I would say, at any given point in time, dependent, there's some seasonality, but roughly 5% of our customer base is inactive homes. And right now, at the peak, we probably were up more in the 8% range. So that's what told us that there was just an abnormal number of vacant homes, and they weren't turning around seasonally like we would typically see. So we're moving back towards that 4% to 5% normal level, and that's how we'd sort of ballpark estimate that. It's not an exact science for us.

You have no other questions in queue. [Operator Instructions] We have a question from Matt Tucker with KeyBanc Capital Markets.

This is actually Grier Buchanan, on for Matt. Congratulations to both Jeff and John. First question is on NPL. Obviously, we've talked about the work that was pushed out from the first quarter. I was hoping you could give us some color on how much of the delayed work is in that second quarter revenue number.

Well, we saw about $9 million of incremental revenue are in the second quarter. They didn't pick up a lot of new customers this year, so I guess I would characterize the majority of that 9 work as -- or that $9 million of work with existing customers. Probably at least half of that was made up from the first quarter.

Okay. And to what extent, when you have extreme weather like this, does it -- when your crews are working so aggressively to catch up, is there any impact on bidding activity, that might be where it might preclude you from pursuing new work?

On bidding activity, did you say?

Right.

Yes, no. It might delay, for instance, when a customer releases the amount of work they're going to give, that they're going to bid some new projects, it could impact the timing of that bidding. But typically, we're out there bidding work in the first 4 months or so of the year anyway, and then you gear up to do the work. And the second and third quarters is when the vast majority of the work gets done. So I don't know that impacts so much the bidding process, maybe a little bit of timing.

Okay, that makes sense, and that's very helpful. Last one, and just a quick question on natural gas. Do you -- I saw the collectibles, do you see that some sort of emerging trend or is it one-off in nature? Just any insight you could add on that will be helpful.

Yes, the uncollectible expense over the last 12 months went up about $1 million. We did have one decent-sized customer that declared bankruptcy. It's one of our larger commercial customers. So I think, unfortunately, that kind of influenced the number. I wouldn't expect that we'd have a growing trend with our uncollectibles. We're still only about 3/10 of 1% of our gross revenues, so it's about where our uncollectible expense sits right now.

We have no other questions. At this time, I would like to turn the call back over to Ken Kenny.

Thank you, Esteban. This concludes our conference call, and we appreciate your participation and interest in Southwest Gas Corporation. Thank you very much.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.