NV Energy Management Discusses Q4 2012 Results - Earnings Call Transcript

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 |  About: NV Energy, Inc. (NVE)
by: SA Transcripts

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the NV Energy Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to introduce your host, Max Kuniansky. Please go ahead, sir.

Max Kuniansky

Good morning, everyone, and thanks for joining us. By now, you've probably seen the financial results we announced in the news release issued earlier today, and you may have noticed that the financial details that used to be in the news release are now contained in the earnings report to the financial community, which we posted on our website. This consolidates material prepared for the financial community into a single package. We're always looking for ways to improve our investor communications, and we hope you find this new package useful.

Comments we make during this call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the future performance of the company and its subsidiaries, Nevada Power and Sierra Pacific Power Company. Forward-looking statements include earnings guidance and statements or forecasts of operating and financial metrics. These statements reflect current expectations of future conditions and events and, as such, are subject to a variety of risks, uncertainties and assumptions that could cause actual results to differ materially from current expectations.

Slide #3 in the earnings report gives you more information on the assumptions and factors we consider in making those forward-looking statements where to go to get more information on our risk factors. You will also find reconciliations of certain non-GAAP financial information on our website at www.nvenergy.com.

With us this morning are Michael Yackira, President and Chief Executive Officer; and Jonathan Halkyard, Executive Vice President and Chief Financial Officer. I'll now turn the call over to Jonathan.

Jonathan S. Halkyard

Thanks very much, Max, and good morning, everyone. I'm pleased to report that NV Energy's earnings per share were up substantially for both the fourth quarter and the full year 2012. Our customer base and gross margin expanded in both periods. We met our goal of holding O&M expense virtually flat in the year, and we have strong free cash flow.

Last year, NV Energy laid out a plan for deploying free cash flow, specifically to increase dividends, strengthen our capital structure and consider potential investments. We also said our earnings and cash flow should be sufficient to increase dividends by about 10% per year until we reach a payout ratio that's more in line with our peers. We're satisfied with our progress on all of those fronts.

With higher cash from operations and lower capital expenditures, we generated nearly $380 million of free cash flow for the year 2012, quite an improvement from $38 million in the prior year. And earlier this month, the Board of Directors increased the quarterly dividend by 12% to $0.19 per share. This brings our payout ratio to 56% based upon trailing 12-month earnings. In the future, the Board intends to review the payout annually in the first quarter of the year.

Both our utilities strengthened their balance sheets in the past year. We reduced debt by more than $120 million year-over-year, and both utilities now have equity ratios of approximately 47%. And we continue to look for potential investments that meet our criteria for adding shareholder value.

As expected, return on equity improved in 2012. On a GAAP basis, we earned an ROE of 9.2% as compared to about 5% in the prior year. Earlier this week Standard & Poor's acknowledged our progress when it increased its corporate credit ratings for NV Energy and both utilities to investment grade BBB- with a stable outlook.

Regarding economic conditions in Nevada, recent data indicates that the state is continuing its slow steady recovery. As you can see from Slide 4, state-wide unemployment is now down to 10% and is closer to the national average. New housing permits were up modestly in December and low-use customer accounts, a proxy for vacant homes, continues to show a favorable trend.

Turning now to our financial results for the fourth quarter, NV Energy earned net income of $0.07 per diluted share in the 3 months ended December 31, 2012. These results are in line with our expectations and are a market improvement compared to the loss of $0.11 per share that we reported in the same period a year ago. About half of our earnings growth came from higher gross margin, as you'll see on Slide 7. The remainder came from lower interest expense, as well as adjustments a year ago that did not recur in the fourth quarter this year and some smaller offsetting items.

Looking first at the increase in gross margin. By far, the biggest contributor was the rate decision, which became effective on January 1, 2012. That rate decision, which enabled us to begin recovering the cost of the new Harry Allen generating unit, benefited quarterly earnings by $0.11 per share compared to the same period last year. Weather reduced earnings by about $0.03 per share in the fourth quarter of 2012 compared to the same period in 2011. We've included some quarterly weather data in Slide 8, and you'll find heating-degree days in the operating statistics section of our earnings report. The number of customer accounts increased 1.1% in the fourth quarter, in line with the trend we've been reporting for some time.

We've now had 11 consecutive quarters of growth in our customer base, as shown in Slide 9. In the quarter just ended, growth was strongest in the residential and commercial classes and slower but still positive in the industrial class. The expansion of our customer base, together with higher usage by existing customers independent of weather effects, increased earnings by $0.02 per share compared to last year. In total, retail megawatt hour sales decreased about 1% for the fourth quarter of 2012 as negative weather effects offset growth in customers and usage.

Looking now at items below the gross margin line. As I mentioned earlier, regulatory adjustments and reserves adversely affected earnings in the fourth quarter a year ago by $20.9 million pretax or about $0.05 per share. These adjustments in reserves, which were primarily related to the rate case decision for our southern utility, of course, did not recur in 2012.

Fourth quarter O&M expenses were close to flat, excluding contract termination costs this year and regulatory adjustments in the fourth quarter a year ago.

Lower interest expense improved EPS by $0.03 compared to the same period in 2011. We reduced debt by over $120 million, and our refinancing activities decreased the rate on debt outstanding. Tax rate true-ups benefited earnings by $0.01 per share in the fourth quarter.

Looking now at the full year 2012, we earned $1.35 per diluted share. This was in line with our latest earnings guidance of $1.30 to $1.40 per share and up substantially from $0.69 in the prior year.

Slide 10 summarizes the drivers of our 2012 full year performance. The biggest factor was the rate decision I mentioned previously. Also, weather benefited earnings by $0.07 per share for the entire year compared to the prior year. In Southern Nevada, it was the second hottest summer on record.

Cost control is an important focus for us, so I'm pleased to report that O&M expenses for the year 2012 were virtually flat compared to the prior year, excluding an $8 million expense reversal in 2011, which we previously disclosed, and we'll be working hard to hold these costs flat in 2013.

Now let's talk about earnings guidance for 2013. We can expect to earn between $1.25 and $1.35 per share for the calendar year 2013. This assumes normal weather. Last year, in 2012, hot weather aided our earnings by about $0.08 per share compared to historically-normal conditions. This and other items we've mentioned in the past are shown on Slide 12.

Our new guidance reflects projected customer growth of 1.2%. But because we assume normal weather, gross margins should be down slightly in 2013 as compared to 2012. We've listed our assumptions on Slide 13. And for 2013, we're assuming an effective tax rate of 35%.

I'll take a moment to explain the last item on Slide 13, interest expense on regulatory items. This is related to the over-collected balance of fuel and purchase power costs. When we over collect, we pay interest to customers and that created an earnings drag of about $8 million pretax in 2012. But that should diminish in 2013 because we expect to reduce the over-collected balance. Based on recent trends in gas prices, we expect to under collect in 2013. Nevertheless, we should still have strong free cash flow.

Our updated capital expenditures forecast is shown in Slide 14. It includes the Reid Gardner transaction, estimated ON Line cost and modest growth in megawatt hour sales for the next several years, assuming normal weather. Based on our forecast of demand growth, capital expenditures and other factors, we believe that NV Energy is now in a period of reduced need for major rate release, stable earnings and sustained free cash flow. This should enable us to continue growing our dividends, while further strengthening our utility's capital structure and considering potential investment opportunities. We expect to be able to deliver dividend growth of about 10% per year until we reach our target payout ratio of 60% to 65%. Thereafter, we expect to increase dividends in line with sustainable earnings growth.

It's been a while since we've seen many of you, and we have a number of investor events planned in the next few months, including a group meeting in New York on the evening of March 5. And we hope you'll join us here in Las Vegas for an Analyst Day planned for the last week of June. We hope to see all of you at some point during the year.

Let me now turn the call over to Michael Yackira.

Michael W. Yackira

Thank you, Jonathan, and good morning, everyone. Thanks for joining us on the call this morning. First, as Jonathan said, we are pleased with NV Energy's results. Our strategy of adding to our generating fleet is an example of balancing the needs of our customers and investors. And I am very proud of our employees who have done an excellent job of holding down operating costs and improving operating performance.

Late last year, we received approval from the Public Utilities Commission of Nevada to proceed with construction of the One Nevada Transmission Line, which will, for the first time, electrically interconnect our northern and southern systems. Construction of the tower structures had been delayed because of the need to mitigate wind-induced vibrations affecting some of the tower structures. The commission authorized the company to proceed, and modifications to the towers are underway. We expect to have the project completed and in-service by the end of this year.

Following the completion of the transmission line, we will have the capability to jointly dispatch our power plant throughout the state. In addition, ON Line will provide the ability to transmit renewable energy projects that are currently being developed.

In the middle of this year, we expect to request approval to merge the 2 utilities through filings with the PUCN, as well as the Federal Energy Regulatory Commission. We are timing these filings, so that the decisions will coincide with the completion of ON Line.

Customer service is very important to NV Energy, and we're improving it with NVEnergize, our smart meter initiative. I'm proud to say that our efforts are being nationally recognized. Last month, the NVEnergize was selected as the Project of the Year by POWERGRID International Magazine, and I was proud to accept an award in San Diego on behalf of our company and employees.

As of the end of 2012, we had installed approximately 1.3 million smart meters in Nevada, and we expect the project will be completed by the end of the second quarter. Customers with smart meters now have access to detailed information to help them efficiently manage their electric use. So far, over 450,000 customers have signed up to track their accounts and make payments online.

Before Jonathan and I take your questions, I want to thank you for your continued interest in our company. We've come a long way over the last decade, and I'm excited about our future and the opportunities we will have to serve our customers and provide a competitive return for our investors.

Thank you. And now, we're ready to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is going to come from the line of Kevin Cole with Crédit Suisse.

Kevin Cole - Crédit Suisse AG, Research Division

I guess -- so the question is on -- I guess, what are you expecting for the customer growth to load growth ratio? So I guess can you remind me what you do expect the -- that ratio to be, given Nevada's energy efficiency standards and the NVEnergize that you've mentioned?

Jonathan S. Halkyard

Well, Kevin, again, I'll have to qualify these answers, saying that they are weather-normalized because that ratio, of course, is influenced greatly by usage, influenced greatly by weather, of course. But going forward, we're assuming, essentially, a 1:1 ratio between customer growth and load growth. And that's -- these types of things are difficult to discern in the end, but we have seen usage growth in excess of customer growth and independent of weather effects during some quarters. Those are generally attributable to expansion of operations by some of our larger customers, and some of that will continue to roll through in 2013. But beyond that, I think it's a safe assumption that efficiency initiatives will offset those -- that dynamic. So I think you should assume that our 1.2% customer growth figure will be, I think, a good figure for load growth as well.

Kevin Cole - Crédit Suisse AG, Research Division

And so -- to make sure I understand, so given the customer growth is largely from industrial customers, that's going to be the source of near-term growth. But meanwhile, in the residential side, you expect growth there as well, but programs like NVEnergize should keep that flattish?

Jonathan S. Halkyard

Well, customer growth is overall in -- at both residential and industrial customers. And I think it's too early to tell the impact that the NVEnergize program will have on load growth or on the load -- customer growth to load growth ratio.

Kevin Cole - Crédit Suisse AG, Research Division

Okay. And then, I guess on the -- and the next question with regards to the PPAs. Why is the 2000 -- were you successful ending the 2013 PPA for I think was like 240 megawatts?

Michael W. Yackira

I think that -- I'm not sure exactly. This is Michael, Kevin. I'm not sure exactly when that expires. But when you say successful, the contract expires. So I think that hasn't occurred yet, if my memory's correct. But it will happen sometime this year.

Kevin Cole - Crédit Suisse AG, Research Division

So is there an approval process for that given that I see on your Slide 14 you show that. If I assume that Slide 13 indicates that PPA expiring given your short load in 2013? And so, is there an approval process that you need to do at the commission in order to end that?

Michael W. Yackira

If I'm not mistaken, we are still long in '13. We are short by, yes, 130 -- no, no. This slide is showing there's contract going away. And as this grows, we have a need. So this is showing we're still long in 2013 by 100...

Operator

And the next question is coming from the line of Neil Mehta with Goldman Sachs.

Neil Mehta - Goldman Sachs Group Inc., Research Division

And so, can you talk to the timing of your next general rate case, I guess, either at NVE North or as a merged entity? Do you expect to file in June, or do you need a legislative fix here?

Michael W. Yackira

It's Michael, Neil. In order for us to not make a filing for NV Energy North, we would need a legislative change. So assuming there is no legislative change in time for us to make that filing, which is the beginning of June, we would make that filing obviously. And the next filing after that, assuming that the PUCN approves our merger filing would be a combined filing of the 2 utilities in the middle of 2014. And again, that's assuming no legislative change.

Neil Mehta - Goldman Sachs Group Inc., Research Division

Got it. And can you talk to the regulatory appetite for a higher equity layer? We've talked about 50% as a goal long-term. What's the earliest we can get there?

Jonathan S. Halkyard

Well, that's a couple of questions, I certainly wouldn't want to speak for the utility commission in terms of their appetite for a higher equity layer, except to say that, in the past, the commission has supported the notion of a strengthening capital structure for the company. And indeed, we have strengthened our equity layer by about 200 basis points in the last year. And we stand at about 47% for both of the utilities. What is the earliest that we can get there? That's hard to say, of course. It depends upon the performance of the business. But we -- as we've said in the past, we'd expect to meet that goal of getting to a 50% equity layer within the next couple of rate cases. So beyond that, we really -- it's difficult to give more specificity.

Neil Mehta - Goldman Sachs Group Inc., Research Division

And the last question, we noticed there were some capital spending changes from the EEI slide deck. Anything of note there?

Jonathan S. Halkyard

Not really. It's really been just a fine-tuning of our capital expenditures forecast principally as a result of our 2013 planning season. So nothing material.

Operator

And Ali Agha with SunTrust is next.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

I wanted to come back on the legislative change required to not file the rate case in June. My understanding is that a bill has been introduced in the legislature for that purpose. However, I also believe the commission has come out in opposition to that. Could you give us a little more call and context on what's going on and how you see that play out?

Michael W. Yackira

I can't comment on -- this is Michael, Ali. I can't comment on the commission's position. I can say that we certainly are going to be ready to make a filing for the northern utility in accordance with the statutory requirement to do so. And if the legislature decides that it wants to change the timing of that, we'll address that appropriately. But our rationale was that filing a northern case in light of the fact that we're going to be filing a -- we expect to file a joint case of the northern and southern utilities post the merger. Again, that's assuming the commission approves the merger a year later, we could defer the filing of the smaller utility and just wait for a year. But again if that's something that the legislature doesn't want to do, we will be prepared to make our filings in accordance with the current statute. I don't see anything negative from that, particularly. We were looking to be a little more efficient and reduce the work burden of the Public Utilities Commission also. But if that's not what the legislature wants to do, we're ready to make our filings.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

And assuming, Mike, that you are successful and that you don't need to file this year but make the filing in mid-'14, presumably the new rates going into effect in '15, in that scenario, are you comfortable that for the calendar year '13 and '14 you can maintain the ROEs that you earned in '12? Or how should we be thinking about that trend assuming there's no rate increase coming for the next 2 years?

Michael W. Yackira

I think, with -- again, it's Michael, and I'm going to let Jonathan comment here too, obviously. But with the growth that we're expecting, coupled with continued diligence and vigilance on O&M cost control and not having capital to cause drag on earnings, I expect that the kind of growth that we're expecting in 2013 and the dividends that we have been talking about going forward will be able to be sustained without the need for rate relief. But we're not going to comment on an event that's going to be in '15, meaning that what the effect of a joint filing would have on our earnings in '15, we were just starting guidance in '13. So we're not going to give any further guidance at this stage.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Yes, fair enough. And last question, can you also remind us -- after the dividend increase, there's still free cash flow being generated at the company, a positive free cash flow. Can you just remind us again what your top 3 priorities are for the remaining free cash flow at this point?

Jonathan S. Halkyard

Well, the -- meeting our dividend commitment. Our dividend increase commitment was a top priority for the company. And of course, we've done that, at least the first stage of that, already. We believe we should continue to delever the capital structure, and we'll do that in the normal course with our refinancings later in the year or in connection with those refinancings. And then, it will be to review potential capital investments for the company that can earn a satisfactory return. Failing that and then return of capital to shareholders is the most important priority for the company.

Operator

And Andy Levi with Avon Capital is next.

Andrew Levi

Just a few very quick questions. Just on the sales growth, I just want to make sure I understood it correctly because, I guess, in the past, you guys were saying with energy efficiency, we should kind of assume flat sales growth, but now you're -- are you saying that we should grow it with customer growth after energy efficiency, or did I misunderstand?

Jonathan S. Halkyard

So you didn't misunderstand that. And it is true that energy efficiency, of course, has been an offset to customer growth. But we're seeing a couple of dynamics that have -- that changed that equation. One, as I've mentioned, is the rather strong usage growth that we've seen in a couple of quarters in 2012 associated with -- largely with our commercial and industrial customers. We've also seen this continued trend of the reduction in low-use accounts. Now I think we made it clear in our attachments that, that's not a trend that will continue forever if these are approaching historical levels. But that downward trend in low-use accounts has also helped usage growth exceed customer growth. These are customers, but their -- the number of those with low usage reduces the overall usage per customer growth. So if that dynamic, which I described in one of the earlier questions, which tends to offset the -- to a certain extent, the efficiency impact on usage growth, and that's why I think usage growth will be a bit closer to customer growth.

Andrew Levi

Okay, so weather normalized for 2012 and then grow at 1%, 1.2% or something like that, and that will all go to the bottom line. Is that kind of the way to think of it?

Jonathan S. Halkyard

Yes, but there are, of course, offsetting items on the P&L and...

Andrew Levi

Probably on expense side.

Jonathan S. Halkyard

And et cetera, where ever they get that.

Andrew Levi - Caris & Company, Inc., Research Division

And then the second question has to do with, I guess, Slide 14 back to kind of '15, '16, '17 time frame, and then particularly '18, when these PPAs roll off, and you become in some way short, I guess, for no better way to put it. What IRP would we begin to see some planning around this and where are you -- when do you make a decision on how you deal with this, whether it's through building an asset, buying an asset or doing another PPA?

Michael W. Yackira

Andy, it's Michael. Under the current time frame, if I'm not mistaken, we would be making the filing for the joint utility in '15. That would be the first time, and that's again assuming we're on the time frame of the Southern utility to continue to make filings under the IRP statute and that the merger takes place. So if we make those 2 assumptions, '15 would be the time. And the IRP focuses on a, what's called an action plan or an action period, and that's the time that is intervening between the 2 statutory filings. So it's that 3-year period of time in which we would be requesting some action on the part of the commission to allow us to shore up that short position. So I would expect that in the 2015 filing, we would be asking for some specificity around how to cover the short position. However, I'll remind you that the company has made many filings in the intervening 3-year period of time through amendments to the IRP. We use of that amendment process to have renewable contracts as an example approved. We use that amendment process to get the Silverhawk acquisition approved and Bighorn acquisition approved. So there's nothing that would prevent us if, for example, we saw customer growth happening more rapidly than we're currently projecting to make an intervening filing to let the commission know what our plans were to cover an increased short position or a short position that would become sooner than what we have on Slide 14. I was asking if that answers your question?

Andrew Levi

That definitely does. And I just have a follow-up to that. On the 280 megawatts that you show for '15, I get, we're in '13 already. So what are the plans or when do we hear what your plans are to deal with the 280 megawatts? And I don't know if that's just during peak season but...

Michael W. Yackira

This is looking at the peak demand, summer peak demand systemwide and the shortfall against that.

Andrew Levi

With a certain reserve margin or...

Michael W. Yackira

Yes, that includes the reserve margin. Exactly.

Andrew Levi

Of how much, I'm just curious.

Michael W. Yackira

Anywhere between 10% and 12%.

Andrew Levi

Okay, so I mean I would assume fairly shortly you're going to want to deal with the 280 if, if the option you choose is to kind of fill it yourself, is that fair?

Michael W. Yackira

If the option were to -- yes, if the option were, for us to build to take care of that shortfall, yes. We would likely make a filing soon. However, we're still -- go back to the IRP that was approved by the commission late last year. In that IRP, we asked for the opportunity to look at sites for building new generation. The commission asked us first to look at brownfield sites for building new generation, which we're in the process of doing. And I think that they're expecting some report back in the intervening time as to what we found. So all I can say is stay tuned. 280 megawatts could easily be covered through external purchases, perhaps some of it could be covered through demand response and increasing demand response, through our NVEnergize program, but we're still analyzing how best to meet that shortfall.

Andrew Levi

And then, this forecast you have is based on the new customer/sales growth numbers you're kind of sharing with us today?

Michael W. Yackira

Correct.

Operator

And Paul Ridzon with KeyBanc is next.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

You talked about delevering and you there would be -- some refinancing this year. Are those just going to be refinancing of debt, or going to take down the absolute level of debt this year?

Jonathan S. Halkyard

A little bit of both. We have 2 debt issues that we expect to refinance. I think it's -- we don't know at this point whether they will be refinanced in whole or redeemed, but I would imagine they will be redeemed in part. So I do expect the absolute level of debt to be reduced somewhat this year.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

And do you know when those maturities are?

Jonathan S. Halkyard

One is in September. It's a $250 million issue. And then there's a small piece of debt that will be redeemed in connection with the merger of the 2 utilities.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

And given the history in Nevada and with the energy crisis, is there a strong political will with regards to owned versus PPA?

Michael W. Yackira

Paul, let me take that. I think looking back -- and I alluded to this in my comments, looking back on the strategy that we have followed over the past 10 years, I think, our commission, our customers and our investors could see clearly the benefit of owned generation, especially because of the potential of market volatility, obviously, but also the fact that the plants that we build are highly-efficient plants. And with low natural gas prices, we've kept our overall rates in check over that period of time, which is quite remarkable considering the amount of rate base we've added. So again, I can't comment on what the commission's position is with respect to that issue going forward. But if history is any predicate for the future, I think, we will continue to look at what the best option for our customers are and assuming that, that is continuing to have the Public Utilities Commission be the one to oversee the returns and costs of power plants that are within Nevada under the auspices of our ownership, I think there is a compelling case that, that should continue. But obviously, we'd have to make that compelling case when the time comes and show what the comparisons would be to other options.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

It doesn't sound like you're really getting ready to do something material for the 280 shortfall. Should we be thinking more about the '18 shortfall where it really steps up?

Michael W. Yackira

I think that's probably appropriate. Again, we filed something called -- every year, called an energy supply plan. It's an adjunct to the IRP. And in that plant, we talk about what our strategies are for filling our fuel needs, as well as any short position that we might have. So there will be opportunities for us to address that need. And I as I said, too, I think it was Andy who asked the question, just stay tuned because we're still determining how to meet that need in '15. We have time to think about that.

Operator

And the next question is going to come from Brian Russo with Ladenburg Thalmann.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Most of my questions have been asked and answered. Just want to clarify on the debt maturity. That's the 5.45% Nevada North $250 million issue.

Jonathan S. Halkyard

That's correct, Brian.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Okay. And I may have misunderstood you earlier but is that going to be redeemed in full or maybe partly refinanced?

Jonathan S. Halkyard

I was deliberately vague on the answer to that question. We'll -- we obviously plan to meet that maturity. Whether it will be refinanced at the $250 million level or some level less than that, it's just a bit too early to tell.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

And I'm just curious, the recent refinancing that you've done at the utilities, what kind of rate have you gotten on that debt?

Jonathan S. Halkyard

We've -- I guess the most recent one was the term loan at the parent company, which is in the fall of 2011. That is -- it's a 3-year issue, but it's at about, I think, it's at about 2.8%. So we redid the revolver also earlier in 2012. So I think it's -- with interest rates staying where they are, it's safe to assume we'll be able to refinance that issue in September, and I take it this is where you're going, that we can refinance that at an improved rate versus the current issue.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Well, sure. And then, I'm sure that the credit upgrade should help as well, right?

Jonathan S. Halkyard

Yes, we would hope so, although rates being where they are, there are not huge credit spread benefits to ratings upgrades. But every little bit helps.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Okay. And just to clarify the CapEx forecast, that excludes any cash earmarked for newbuilds, correct?

Jonathan S. Halkyard

That is correct. Forecast that you see does not have newbuild.

Operator

And the next question is coming from Kit Konolige with BGC.

Kit Konolige - BGC Partners, Inc., Research Division

You've largely answered my questions. I'll just ask this sort of ever-hopeful question about whether there's any sign that California might have any eventual interest in importing renewables from Nevada.

Michael W. Yackira

Yes, it's Michael. It's -- I will just repeat what I have said before, that we are continuing to look at, with the Cal ISO, what benefits there might we for -- mutual benefits there might be for either newbuild or existing generation between the 2 states and sharing those. I don't see any answer to that before the end of this year. But we are hopeful -- I think, there really still needs, and I've said this before, there needs to be a policy review, a public policy review between the 2 states for any action to take place because both states believe that there is sufficient resources to meet the portfolio standards in those states. So as long as California continues to believe that, I think, the chances of exporting to California are slim, but time will tell. And we do know that there are more opportunities for renewable energy in this state than this state can possibly absorb itself. So we will look at those opportunities and see whether there are some beneficial outcomes for both the customers of our company, as well as investors. But it's still too early to tell, Kit.

Operator

Kevin Fallon with SIR Capital Management is next.

Unknown Analyst

Just a question on the FERC rate case. What are you assuming in guidance for revenues from that? Are you assuming the full $14.5 million is implemented on June 1 and -- or are you planning to take reserves or offset something against that?

Jonathan S. Halkyard

We're not assuming the full $14.5 million in our 2013 guidance. We're assuming an amount less than that.

Unknown Analyst

Could you give a little flavor of how much or?

Jonathan S. Halkyard

No, at this point, we really can't just because that case is still in process.

Unknown Analyst

Are there expense offsets to the ultimate amount that you get approved there? Or does the full whatever amount you get approved, does it all fall to the bottom line?

Jonathan S. Halkyard

Yes, it all falls to the bottom line.

Unknown Analyst

And in terms of the ROE on that business right now, what is its current authorized?

Jonathan S. Halkyard

About 11%.

Unknown Analyst

Okay. And to switch topics on the Cal ISO review, what's a reasonable time frame and when -- at which capital could actually be deployed, assuming you hear by year end?

Michael W. Yackira

I would not -- this is Michael. I would not want to surmise any capital deployment until we determine whether or not there are opportunities to invest. So I think it's still too early to tell whether or not there are opportunities, and certainly not factored into any of our numbers in '13 or in either capital that's shown on Slide 14. So when the time is appropriate, we will talk further about this study. But it's still too early.

Operator

Paul Patterson with Glenrock Associates is next.

Paul Patterson - Glenrock Associates LLC

Kevin asked my third question, but I wanted to ask you guys about just a few quick ones. Taxes other than income in the fourth quarter seemed to jump a bit versus the year. I'm just wondering if there was anything in particular that's noteworthy, the timing issue or...

Jonathan S. Halkyard

If you're talking about taxes, actually...

Paul Patterson - Glenrock Associates LLC

Taxes other than income.

Jonathan S. Halkyard

No, there wasn't really anything material that we would call out.

Paul Patterson - Glenrock Associates LLC

Okay. And then the sales growth number of 1.2%, I guess, it sounds like customer growth is actually sort of higher perhaps or is being masked by this vacancy issue, these low use customers in other words, becoming high use customers as people move into these homes or what have you. Could you give us a sense as to what the underlying sort of customer growth is, if you follow me, if one were to sort of -- do you guys have rough estimate of that?

Jonathan S. Halkyard

Paul, we've -- I think the way I would characterize it is, sometimes, usage growth is influenced, of course, by customer growth, as well as the usage of the existing customers. And we've done our best to break out and describe actual customer growth, which are new customers, and that's been very steady at just about 1% to 1.1% now for about 2 years. And that is one of the main sources of our forecast for 2013.

Paul Patterson - Glenrock Associates LLC

Right, but I guess -- I'm sorry, to be so unclear, but it sounds to me when you're discussing it with Andy, it sounds to me like there was a masking effect associated with basically low use customers becoming regular customers, so to speak, do you follow me? So I guess, what I was just trying to figure out was it sounds like your customer growth is actually -- if you didn't have this vacancy rate, you'd have a higher customer growth. Does that make sense?

Jonathan S. Halkyard

Yes, that's not the way -- that's not what we are communicating. When we talk about the low use customers becoming higher use customers, what that does is that has a higher than normal usage increase effect. And what I suggested was that, that dynamic and again, it's difficult to tease out all of these different contributors, but that dynamic we believe has offset somewhat the impact of efficiency on usage growth with respect to customer growth.

Paul Patterson - Glenrock Associates LLC

Okay. I'll follow up offline. I guess what I'm trying to figure out is it sounds like more people might be actually moving to your area. And I guess, I get -- and to serve my final question, which is it sounds like -- now maybe I'm reading too much into it, but it sounds like maybe, Michael, you guys are more optimistic about how the economy is developing there than perhaps you were -- and I don't mean to read too much into it, but I guess, the body language I'm sort of getting is that perhaps we see a better economy developing there. Is that -- am I -- what do you think actually is -- rather than me trying to characterize it?

Michael W. Yackira

It is Michael, Paul. There's certainly encouraging signs, but what we said all along is that for those encouraging signs, which are encouraging to the strip primarily, to translate into faster growth for the company, there has to be more employment and there has to be housing starts and more people moving to this community and to the state. We're not seeing that yet. We are seeing unemployment coming down, but our unemployment rates are still higher than the national average even though we're getting closer to the national average. We're seeing a decline in the inventory of houses, but there's still an inventory of houses. We're seeing some housing starts, but as I mentioned before, while this is somewhat anecdotal, I do have friends in the development community. Most of these housing starts are in-fill of existing developments that have been just sitting there for years, and I believe the developers are looking for opportunities to utilize that real estate to provide a return to them when just sitting on the land is not providing a return to then. So all of these things are positive, but how they translate into higher than 1.2% customer growth, we don't see it yet. When we do, it will be a happy day for all of us, and we'll be happy to report on that.

Operator

And Maury May with Wellington Shields is next.

Maurice E. May - Wellington Shields & Co., LLC, Research Division

I think I know the answer to this from previous questions, so my question is...

Michael W. Yackira

So what is it?

Maurice E. May - Wellington Shields & Co., LLC, Research Division

Going back to free cash flow and one of the uses of free cash flow, investment opportunities. Just to make it clear, you're not really looking at investment opportunities in either transmission or distribution. It's generation, is that correct?

Michael W. Yackira

I wouldn't assume that.

Maurice E. May - Wellington Shields & Co., LLC, Research Division

Okay, what kind of -- okay, well, I mean, in transmission, there is the possibility for California. I mean, that seems to be a pretty long-term thing. But given the discussion on this call, it seems like the focus would be more on generation.

Michael W. Yackira

What I'd say, Maury, rather than us talking specifics about what we might invest in, I would say the overarching tenet of our company is that if we are going to make any investments that they would be in our core competencies, and we would have a clear path to making reasonable returns for our investors. And that we would explain what those were when the time comes whether they're in the utility or outside of utility. My point is that, and again this is reiteration of past, but we're not planning on stepping outside of our comfort zone, either our comfort zone or your comfort zone regarding incremental investment. So I wouldn't eliminate -- and if you're saying distribution, yes, it probably -- we're not going to create distribution without growth. But I wouldn't necessarily suggest that transmission is not an option for us. It may be. But time will tell. I wish we had a clearer sense as to what those investment opportunities are. And perhaps we will in short order, but right now, there's nothing to report.

Maurice E. May - Wellington Shields & Co., LLC, Research Division

Okay, but sticking with generation just for a moment, can you review the remaining merchant plants in or near your service territory?

Michael W. Yackira

Yes, in or near our service territory, we are -- we have the Apex plant that was built by Mirant and completed, I think in 2002. And we have the Griffith plant that we're buying power from and several cogeneration plants.

Operator

[Operator Instructions] We have another question from Neil Mehta with Goldman Sachs.

Neil Mehta - Goldman Sachs Group Inc., Research Division

Just a quick clarification. Do you expect the net cash outflow in 2013 due to deferred fuel? And I know this one's a tricky one to quantify, but if so, how much?

Jonathan S. Halkyard

Just as it relates to the deferred energy, yes, I would expect a net cash outflow. Both the timing and the magnitude at this point is difficult to pin down.

Michael W. Yackira

So that means that, just reiterating what Jonathan said earlier, we expect to have a continued over collection that will be refunded over time to our customers because we're backward looking when it comes to setting our price for fuel and purchase power. And since we're seeing some slight increases in gas prices relative to the history, we expect to see some over collections this year and probably a little greater than last year.

Neil Mehta - Goldman Sachs Group Inc., Research Division

But sizing it is tough?

Michael W. Yackira

2

Sizing it is tough because that's predicting where gas prices will be.

Jonathan S. Halkyard

Right. It resets from time to time.

Operator

[Operator Instructions] We have no further questions. Please continue.

Michael W. Yackira

Thank you very much. As we said, we are looking forward to seeing some of you in less than a month, a couple of weeks, and hope that most of you can join us in Las Vegas at the end of June. Look forward to seeing you soon. Thanks for your attention.

Operator

That does conclude our call for today. Thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.

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