Jeffrey Shaw – CEO
George Biehl – CFO
John Hester – SVP Regulatory Affairs
Ken Kenny – VP & Treasurer
Barry Klein – Citigroup
Daniel Fidell - Brean Murray, Carret & Co.
Southwest Gas Corporation (SWX) Q4 2008 Earnings Call March 3, 2009 1:00 PM ET
Good day ladies and gentleman and welcome to the 2008 Southwest Gas year end earning conference call. (Operator Instructions) I would now like to turn the presentation over to the host for today’s call, Mr. Ken Kenny, Vice President, and Treasurer, please proceed sir.
Welcome to Southwest Gas Corporation 2008 earnings conference call. My name is Ken Kenny and I’m the Vice President, 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.
Today we have Mr. Jeffrey W. Shaw, Southwest Chief Executive Officer, Mr. George C. Biehl, Executive Vice President and Chief Financial Officer and Corporate Secretary, Mr. John P. Hester, Senior Vice President, Regulatory Affairs and Energy Resources, and other members of senior management to provide a brief overview of 2008 earnings and an outlook for 2009.
Our general practice is not to provide earnings projections. Therefore no attempt will be made to project earnings for 2009. Rather the company will address those factors that may impact this coming 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 management’s assumptions which may or may not come true and you should refer to the language in press release 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 statements. With that said I would like to turn the time over to Jeff.
Thank you Ken, first let me thank you all for listening in on the call today. There’s no doubt that we are in some very challenging, interesting, if not curious times. Before we get started and delve into some of the details of 2008, I thought I might give an overview to set the stage.
We continue to remain focused on our core fundamental strategies. Those are generally speaking, these, first of all we work closely with regulatory bodies to improve the level and stability of revenues and cash flows. We pursue sensible cost control. We aggressively manage our growth and we focus on maintaining a highly trained, efficient, motivated work force.
What I’d like to do is take a couple of minutes for there’s no question we are a stronger company today then we were even five years ago. And I’m going to give some specific examples, first with respect to our efforts in the regulatory arena, you will note that we have completed general rate cases in Arizona which we received a $33.5 million increase to operating revenues effective December 1, 2008.
We also completed a general rate case in California, new rates effective the beginning of this year. We just last month filed a general rate case for [Paiu] Pipeline Company our [inaudible] regulated pipeline company. And we will file a general rate case in Nevada during the second quarter of this year.
A rule by the way is in place in Nevada that will permit us to file for decoupled rates. When we are able to receive those types of rates in Nevada we will in 45% of our business have decoupled rates. And the dialogue continues in Arizona. They did acknowledge on the record that there is a customer benefit from a conservation standpoint to having decoupled rates. They did not give it to us but they encouraged the dialogue to continue so we are encouraged and we intend to vigorously pursue that on a going forward basis.
Another part of our strategy, we have controlled costs. Its crucial as we go and make regulatory filings that we can demonstrate we’ve done our part. In 2008 our operations and maintenance expenses increased by only 2% notwithstanding increases in fuel, pension costs and other things that we had to contend with, we were able to hold labor cost to a minimum. In fact, the number of our full time employees dropped from 2,538 at the end of 2007 to 2,447 at the end of 2008.
And we did not layoff anyone. We planned for this attrition. We made key investments in technology which has helped us to control our operations and maintenance expenses. For instance, the electronic meter-reading project that we disclosed in our filings, we have just concluded. It was done ahead of schedule and under budget. Another key component of our strategy, we have aggressively managed our growth. We continue to require refundable advances and contributions from builders in those instances where the economics don’t pencil, in advance of any customers taking service, that way we are protected and the risk is mitigated from any momentum that may occur which we have just seen that has slowed.
Therefore if you take a look at the end of 2004 to the end of 2008 our balance in the advances from builders and developers has increased from $20 million during that time period to $90 million at the end of 2008. So we hold that money and that has protected us from that momentum risk. We’ve also had a very effective and efficient work force. Our customer to employee ratio for instance has increased from 714 to 1 last year to 743 to 1 in the current year.
We have had the same number of full time employees as we did in 1997 at the end of this year but we’ve served 668,000 more customers and we have maintained a customer satisfaction rating of 96%, on of the leading metrics in the industry. Other metrics also point to the success of our focus on the fundamentals. Our equity to total capital percentage has improved from 42% at the end of last year to 45% at the end of 2008.
Our cash flows have strengthened, for example in the natural gas portion of our business we had cash flows from operating activities of $261 million and construction expenditures of $279 million. Those numbers are converging. Our liquidity is solid based on our improved cash flows and we maintain significant credit capacity that is available to us under our $300 million bank credit facility.
Based on its review of all these factors, our Board reviewed dividend policy and determined that it would be in the best interest of shareholders to increase the annualized dividend by $0.05 per share, a 5.6% increase just this past February. This marks the third consecutive year the dividend has been increased. From our perspective there’s no doubt that we are a stronger company today then we were five years ago and we continue to be encouraged by the progress we’ve made in our strategies that I’ve just reiterated for you.
With that I’d like to turn some time over to George and then John to speak about the operations of the company, our operating results, our regulatory results, and then I’ll come back and have some concluding comments prior to our taking questions.
Thanks Jeff, I think that sets a good stage. Before I go through the financial review of 2008 I’d just like to say one thing. I think what you’ll hear today is some intentional redundancy on some of these major initiatives that we’re doing and it is intentional. In a single word I think its, that our story at this point in time is execution. Jeff has laid out the core strategies and we’re executing but some of the drivers, there’s probably going to be some overlap. We’ll try to be brief and concise yet not hurried.
So with that, I’m going to start and review 2008 in its entirety, in other words the full year. The annual consolidated basis EPS was $1.40 in 2008 versus $1.97 in 2007. Now consolidated net income in 2008 was $61 million versus $83.2 million the prior year. Consistent with our earnings release, what I want to do is break down the decreased earnings into the major components the way we see them.
And then cite some major factors underlying each of the components and then as well discuss pertinent trends and management initiatives that pertain to some of these drivers. So the major components of the decline in EPS from 2007 to 2008 which was $0.57 per share in total, I’m going to cite three components.
First is the decrease in the natural gas operations contribution and that’s primarily from a decline in operating income and operating income of course is a line item in all our financials on the gas op side, certainly in the MD&A. The second component is decrease in case surrender value of company owned life insurance which is attributable to financial market declines. And that was $0.30 a share of the $0.57.
Lastly we had a decrease from construction services segment, i.e. Northern Pipeline or NPL, which was $0.10 a share. So those three, $0.17, and decreased natural gas ops segment, COLI $0.30, and decrease from NPL of $0.10 is $0.57 a share. I’m going to start with the gas operations first. Operating margin in 2008 was $735 million versus $728 million in 2007 and that’s an increase of 1%, $7 million.
The first component is customer growth, and we’re going to address customer growth in more detail as we go through our comments. That was $6 million. Second component is rate relief of $4 million and John Hester will address rate activities, Jeff has referenced them already to some degree, but John will talk both in historic, i.e. 2008 as well as prospective terms in each of our jurisdictions in some detail.
The third component was weather variations between the periods resulted in a $1 million increase, now 2008 was negatively impacted by an estimated $11 million in 2007 negatively impacted by $12 million, so net improvement of $1 million. There again I just referenced John, Jeff has referenced broadly, John will get into some detail of the decoupling initiatives in each of our jurisdictions.
And then the last item is conservation, energy and impact of overall economic conditions was a $4 million decline. Operating expenses, total operating expenses increased $15.9 million or 3% and broadly that’s due to higher depreciation expenses which is our normal and customary upgrade of existing operating facilities and system expansion and those were mitigated, Jeff has referenced already to a degree by labor efficiencies including the conversion to the electronic meter reading and other cost containment efforts.
I’m going to address O&M related factors momentarily and give you some historic perspective as well as how we see things generally moving in the future. Last component is net financing costs, actually decreased $3.3 million, or 4% and that’s just due to lower average debt outstanding in concert with lower interest rates associated with the variable rate debt component.
Now other income decreased $18.3 million and throughout the financials you’ll see that’s due principally to impacts from company owned life insurance policies. And I want to take a minute and develop this, hopefully fairly comprehensively and just highlight what we’re doing and what these vehicles are. COLI, I’m going to call it corporate owned life insurance, the acronym COLI. We as a company have life insurance policies on certain members of management and other employees to really to indemnify us and provide funding against the loss of talent and knowledge and once again provide funding for certain of our nonqualified plans.
Fairly customary in corporate America. The COLI policies have a combined net debt benefit of approximately $137 million at year-end. The net case surrender values which of course is the amount we would receive if we voluntarily terminated the policies was about $47 million as of December 31 and if you’re looking, its included in the caption other property and investments on the balance sheet.
Now the case surrender values are directly influenced by the investment portfolio underlying the insurance policies. And this portfolio includes both equity and some fixed income i.e. mutual fund investments. As a result the case surrender value but not the net debt benefit moves up and down consistent with movements in the broader stock and bond markets. During 2008 we recognized a net decline in the case surrender values of COLI of $12 million which as I said was at least inferred, was reflected in other income and deductions on the income statement.
In 2007 positive returns resulted in a $1.2 million impact. Current tax regulations provide for tax retreatment of life insurance [death] proceeds therefore the changes in the case surrender value of the COLI policies as they progressed towards the death benefits are also recorded without tax consequences. Now currently we intend to hold the COLI policies for their duration so in summary its important to note that the short-term changes in COLI policy valuations are required to be reflected in reported earnings as we have. But they are non operating in nature and they do not directly impact our cash flows.
So hopefully that’s comprehensive and on point. Next I want to talk about NPL, NPL’s net income in 2008 was $7.2 million versus $10.7 million in 2007, it’s a decrease of $3.5 million. EPS impacts I’ve gone through before but EPS was $0.17 in 2008 versus $0.26 in 2007. Interestingly or one of the important things about NPL if you look at that segment information, the revenues actually increased $16 million in 2008 over the prior year.
And that’s the result of additional work under existing blanket contracts as well as some new bid work. Now construction expense rose $19.4 million due primarily to increase in labor cost, direct materials, fuel, fuel related products, in other words a series of items.
Now so what’s the, I think our takeaway with respect to NPL, I would state it as follows. The decrease in 2008 NPL profitability is attributable in part to a reduction in the volume of higher margin new construction work resulting from the slowdown nationwide in new housing markets because NPL serves primarily LDCs nationwide. That work has been replaced i.e. the higher revenue by infrastructure maintenance and improvement work which generally yields lower profit margins.
NPL management we believe continues to aggressively pursue all types of work in the area that it serves throughout the country. If anything, some of these safety initiatives should portend favorably for them in the future. Its our opinion or management’s expectation that NPL will continue to be a consistent contributor to our earnings albeit at a level more in line with 2008 as opposed to 2007 or 2006 due to the phenomena that I described.
Next I want to talk about and I referenced before customer growth and during 2008 we had 33,000 first time meter sets compared to about 58,000 plus or 59,000 in 2007. The meter sets led to 6,000 net new customers in 2008 and at the end of the year we had 1,819,000 customers. Now I think its important to focus on the relationship there. The difference between first time meter sets and net new customers indicates a significant inventory of unoccupied homes and that continues a trend that we first experienced and discussed during 2007.
We believe and are projecting a continued sluggish net growth, probably 1% or less in 2009 as high foreclosure rates and difficult economic conditions persist throughout our service territories. However once housing supply and demand come back into balance, we expect a correction in customer additions at some point will exceed first time meter sets. The timing of the turnaround really can’t be predicted. Certainly for a total turnaround however you define that its going to be probably a multiyear time horizon.
I can tell you we look at a number of the economic real estate services, here in Las Vegas for example in January there were short of 3,000 closings sales of resale homes. I think it was about 2,700 or 2,800, about two-thirds of those were bank owned homes at a median price of $150,000. Now that’s probably or is, less then 50% of what it was in the peak. The message here is we are still setting first time meters. We’ve got unoccupied homes at some point that they will become occupied and we’re going to have new customers without any incremental capital expenditures.
I would not say today that we have seen that turnaround yet necessarily in our service territory and I’m talking primarily here in southern Nevada as well as central Arizona however I would tell you that some of the resale activity, and frankly personally I think its due to the decrease in the prices, the banks and lenders are flushing through these foreclosures and as painful as that is, and we certainly are aware of the economic conditions for us, that’s a positive.
Operating efficiencies, Jeff referenced some of this so I’m going to be brief but the number of employees has decreased from 2,538 in 2007 to 2,447 at the end of 2008. Our customer to employee ratio has improved and continues to be one of the best in the industry. A remarkable statistic I think is the number of full time employees at year-end 2008 was similar to what it was at the end of 1997 but we added 668,000 more customers.
At the same time we’re serving our customers. Our customer independent customer satisfaction ratings for 2008 averaged 96% so we’re attentive to the customers. And Jeff mentioned some of these improvements are attributable to the use of technology and corresponding changes to our operating practices. For example conversion of meter reads to an electronic based system. I’m going to cite a couple of statistics that were derived from our 2008 Annual Report and I’m going to utilize the data to go compare three years, in other words 2008 versus 2007, 2007 versus 2006, and 2006 versus 2005.
Total operating expenses which includes operations and maintenance, depreciation and amortization, and taxes other then income taxes, general taxes, 2008 versus 2007 3%, 2007 versus 2006 4.7% and 2006 versus 2005 2.2%. If you look at the O&M component and that would be absent the depreciation and the general taxes for those same periods, 2008 versus 2007 was 2.3%, 2007 versus 2006 was 3.2% and 2006 versus 2005 was 2.0%. A couple of conclusions, we will remain focused on sensible cost controls firstly and secondly I think this recent trend is indicative of the future because we are focused.
And I’m sure Jeff will have some concluding remarks on cost controls and he’s also going to go into some of the CapEx impacts and future funding implications as part of the outlook as far as relating back to the growth.
Lastly liquidity, our liquidity disclosures in the Annual Report have been expanded. It’s a sign of the times but our liquidity we believe is strong. We have a $300 million credit facility that expires in May 2012. As many of you know we’ve designated 50% or $150 million of that as long-term and the remaining $150 million as working capital facility. The $150 million long-term portion and $55 million of the short-term portion were outstanding at year-end and we believe, management believes that the company currently has a very solid liquidity position.
And I would just expand on that, we have not had difficulty obtaining necessary financing and lastly our next debt maturity is 2011 actually. So with that I’m going to turn it over to John and he’s going to further develop some of the rate case and I think some of the gas supply things that we’re pursuing.
Thank you George, as Jeff mentioned at the outset of the call Southwest certainly saw a significant amount of rate case activity in the past year. First and foremost in that activity was the resolution of our pending Arizona rate case filing. That is an application that was filed with the Arizona Corporation Commission in August of 2007. Originally in that application we had requested a $50.2 million increase or approximately 4.81%. The basis for the request was our desire to recover our increased operating costs, the costs associated with investment infrastructure for customers, and then in addition an increase in the cost of capital to help continue to fund that investment.
In our last rate case decision that was effective March of 2006 the cost of capital we had had established was 9.5% return on equity that was applicable to a 40% common equity component of the capital structure. In this application that was just recently resolved, we were asking for an 11.25% return on equity which would have been applicable to a 45% common equity component. The net capital structure is in turn applicable to a $1.1 billion rate base.
In the application we were also seeking some changes in rate design, we wanted to increase the basic service charges for our customer classes and we wanted to implement the decoupled rate design. The Commission this past year issued a decision with rates effective December 1, 2008 and in that decision they authorized a $33.5 million increase or approximately 3.28%. That $33.5 million increase incorporates a 10% return on equity which is applicable to a 43.44% common equity component.
In addition we did see increases in our basic service charges, most notably the residential basic service charge was increased by $1.00 per month from $9.70 to $10.70 and that increase in the residential basic service charge along with other increases in fixed charges for other customer classes means that approximately 46% of the revenue that we got out of that increase will be recovered on a fixed charge basis with the remainder of that revenue being recovered through volume metric rates.
Now the Commission did not approve our decoupled rate design proposals however there was a significant amount of discussion both in the [evidencury] hearing as well as the Commission agenda session. Ultimately the Commission directed us to provide some additional empirical studies that we are currently working on. What the Commission asked us to do was take a look at how decoupled rate designs would impact our customers if we went back and looked at data for the past six years. Again we’re currently working on those studies and we will be filing those with the Commission next month.
In addition the ACC more generally has another docket that they opened in 2008 to look into energy efficiency and regulatory and rate consensus for utilities. This is a docket that Southwest is participating in. We most recently filed some comments this past month in February and we have a workshop that is scheduled for later this week. We are certainly going to be an active participant in that proceeding and we’re going to look at that as a vehicle to continue the discussion with the Commission on the benefits that decoupling has not only for the company but also for customers.
The next major rate case decision that we had resolved in 2008 was our California rate case application. This was an application that we filed in December of 2007. In California of course we use a future test year. The future test year for both the rates be effective January 1 of 2009. We had asked for a $9.1 million increase. That increase like our request in Arizona was requested to recover increased operating costs, the costs associated with investment for infrastructure for customers, as well as increased cost of capital.
We also were looking to re seasonalize our margin recovery in California. Prior to this last application we had received our margin in California on an equal monthly basis. This last application proposed that we receive that on a seasonal basis so we would be recovering more margin during the cooler periods of the year and less during the warmer periods of the year. And along with the base test period of 2009, we also were proposing a post test year rate making mechanism that would have provided additional margin increases for the four years following the base test period, namely 2010 through 2013.
The application requested an 11.5% return on equity applicable to the 47% common equity component. In October of 2008 we received a all party settlement in that proceeding and we took that settlement, filed it with the Commission, and the Commission approved it in November of 2008. Generally that settlement provides for $3 million of increased margin along with a decrease in depreciation costs of an additional $3 million. The settlement calls for a 10.5% return on equity applicable to the 47% to common equity component and it also authorized the seasonalization of our margin.
So that’s one of the things that you’ll see when you’re looking at our financial results going forward, specifically that seasonalization of the margin will result in approximately a $12.8 million increase in revenues in first quarter, $2 million decrease in the second quarter, a $9 million decrease in the third quarter and an increase of $1 million in the fourth quarter.
After the base test period of 2009 again we will have what we refer to as attrition revenue increases in the four subsequent years for our southern and northern California service territories, that will be 2.95% and for our south Lake Tahoe service territory that will be approximately $100,000 a year. So for that four year period year on year we’ll be seeing margin increases in excess of $2 million a year and that will mean that our next general rate case in California will use a base test period of 2014.
In Nevada as Jeff had mentioned at the outset of the call we are currently working on a Nevada general rate case application. We advised the Commission this past month that we will be submitting that filing in the second quarter of this year. Again as Jeff mentioned one of the key features of that filing will be a proposal to implement the decoupled rate design. Also we will be using a historic test period ended November, 2008. We will under Nevada rules be able to update that test period through the times when rates will be effective for any adjustments in costs that we see.
We have not determined what the final increase will be as part of that Nevada application, but again we’re working on that now and we will be submitting that in the near future to the Commission. And then fourthly we submitted an application for a rate case increase for our [Paiu] pipeline subsidiary. This application was submitted this past week. We are asking for approximately $4 million in increased revenues to bring our annual cost of service up to approximately $34.5 million annually. That uses a 13.83% return on equity which is applied to a 54.4% common equity structure and the rate base in that application is approximately $85 million.
Moving on to gas cost recoveries, we have seen our over [collected] gas cost balance increase on a year on year basis. At the end of 2007 we were over collected approximately $12.1 million. This past year that has increased to $33.1 million. Obviously gas costs are down substantially in the past several months, however we will see our gas cost rates that we charge our customers continue to vary to adjust to those new levels of gas prices.
In Arizona we have monthly rate changes which are based on 12 months of historic data with a prudence review that generally occurs as part of the rate case. That prudence review did in fact occur in our last Arizona rate case proceeding and we had a successful prudence review by the Commission for our gas costs for the periods September 2004 through April 2007.
In California we generally don’t accrue much in the way of over collected or under collected gas cost balances because those rates while they also change on a monthly basis, are based on a forecast of what gas prices are going to be for the coming month. The prudence measure in California is achieved through an annual filing that we make for our gas cost incentive mechanism. We submitted that filing at the end of January of this year and pursuant to that gas cost incentive mechanism we are not looking for any adjustments to our incurred costs.
And then finally in Nevada we have quarterly rate adjustments which also are based on 12 months of historic data and then once a year we go in and we take a look at what the gas cost balancing account is and clear that out with the surcharge that is generally effective in December. Our utility regulators are generally pretty happy with our gas cost acquisition activities. Over the past five years we have seen the weighted average cost of that natural gas range from a low of $5.70 per decatherm in 2004 to a high of $8.40 per decatherm this past year.
Again we are expecting to see continued volatility in 2009. At the current time that volatility is on the downside so that’s certainly good for our customers. Our regulators like the mitigation efforts that we take for our portfolios. Generally speaking we look to stabilize about half the portfolio for our customers with fixed price contracts or fixed or floating swaps. For 2008, 2009 heating season, the season that we’re just concluding, those fixed price contracts ranged from a low of approximately $6.00 to a high of $13.00 and then any additional gas supplies that we need to acquire other then those fixed supplies are going to be acquired at market prices, either through fixed price contracts that use either a monthly or daily indices or simply acquisitions that are made on the daily spot market.
With that I’ll turn it back to Jeff.
Thank you John, I’ll just give a few concluding comments here. First of all from a capital expenditure standpoint, looking forward, we expect over the next three years to incur approximately $720 million through 2009 through 2011. Some of that will be dependent upon the level of growth. However in 2009 we expect about $260 million that we will expend. Those expenditures are not necessarily directly correlated to customer growth. We do have franchise requirements, code and regulatory work, we have federal laws that we must comply with and so there is an embedded level of capital expenditures that we will need to incur each year.
We also have some cost to complete two operation centers in southern Nevada in the current year. Again I mentioned that we did collect builder contributions. We expect to continue to do that going forward. With respect to debt maturities we’ve covered that. We’re not until 2011 until we have any significant debt maturities. Our cash flows we expect over the next three years to cover on average 85% of our long-term capital needs including the capital expenditures and dividend requirements.
We expect approximately $40 to $50 million over that three years to be collected through issuance of stock under our customer stock purchase plans, our employee investment plans, and any remaining cash flow requirements will be provided by existing credit facilities and our other external financing sources.
I will mention our pension expense for calendar year 2008 was $17 million. We do expect that to increase in the year 2009 by $2 million to $19 million in 2009. We could expect to see a continuing upward trend depending on how the market performs. The minimum pension funding obligation during 2009 will be approximately $22 million.
I will state then to conclude we believe that the strategies that we have focused are indeed yielding benefits. I think the metrics, I think all of the statistics that we discussed in this call are pointing to the fact that we have seen success. We believe that continuing to focus on those fundamental strategies is what we want to do going forward and that will allow us to continue to build the value for the shareholder. We believe that this is right course for us to follow and we are not panicked but are focused and will continue to manage our business as we have because we believe it’s the right thing to do.
With that I’ll turn the call over for questions.
(Operator Instructions) Your first question comes from the line of Barry Klein – Citigroup
Barry Klein – Citigroup
On the O&M side, you mentioned numbers about 2 to 3% it sounded like over the last few years but that was in a higher volume growth environment, would you expect those numbers to come down or are those pretty much, you expect that to be a good run rate for the next year or two.
I think George as he was talking about the operations and maintenance expenses gave a historical sketch. Clearly we’re focused on those expenses. I do think it would be impractical for us to say that we would have no increase in expenses. There are many things that are unpredictable that we have to contend with. We do not know for instance what the cost of fuel might be. We don’t know where the market is going to go and how that might impact pension expense.
We don’t know specifically what might happen with bad debt expense although I will say fortunately our average customer bill in the southwest is much, much lower on a comparative basis then you would see anywhere else in the Midwest or the northeast or places where you have cold weather. So while bad debt expense is something yes we contend with, it is never the magnitude that some of the other utilities contend with.
So I think we do have employees, we do have employee benefits, we’ve been able to keep our healthcare costs under control. I think we will definitely be able to keep our expenses at a lower level as long as we don’t have anything that’s unexpected that comes along.
Barry Klein – Citigroup
You mentioned the number of growth expected to be 1% or less for 2009, is that what you’ve seen so far through the year if you exclude the impact of weather.
I guess we’re so early in the year, I would say yes but its just too early to tell. I guess I would answer it this way, we certainly haven’t seen so far any indication that has significantly deviated from that. Once again, and I don’t want to be too repetitive here but at some point in time we are going to see these structures, these single family homes, LDC basically, are going to be occupied and we’re going to see customer growth again. But we really haven’t seen it turn around but then again we only have data through January.
Barry Klein – Citigroup
With regard to a couple of the rate cases or actually just to California, there was a $3 million increase, $3 million decrease in depreciation so that, just to clarify that means basically $6 million assuming everything else is constant, $6 million down to the bottom line.
Yes, that’s correct.
Barry Klein – Citigroup
And then on, something else about over the next four years about $2 million per year increase, that was worked into the rate increase, is that correct.
Yes, yes for each of the four years following 2009 we will have margin increases of in excess of $2 million year on year.
Your next question comes from the line of Unspecified Analyst
On the COLI, as we look to indicators as to how that develops here in 2009 is that a case where if generally stock markets go up that number will be a favorable number for 2009.
You’re correct, it will fluctuate with the market. Again it will be a noncash benefit or charge depending on where the market moves. If you look at COLI historically thus far, we have had a few death benefits that we have brought in. They’ve been small but over time we fully intend to hold those policies and realize the cash under those policies. So net cash surrender value while its there and its available to us, if we ever chose to cash out the policies, that’s not our intention and for our purposes its almost irrelevant as we manage our business.
Just making sure that accounting that somehow or other defer that or something like that. So we’re not looking at that as a driver of the COLI line to be if markets stay the same that number is probably about zero but if markets recover then its going to be a positive.
I guess all I could tell you is, just for some historic perspective we’ve had these policies or this funding vehicle in place for well over a decade and it was fairly steady. I mean it was just, it was not really significant until of course the market downturn in 2008. Now I’m not using history necessarily as a predictor of the future as far as the accounting impacts for that, but we just underscore it’s a funding vehicle we’re required to follow the accounting guidelines or requirements. They’re more then guidelines. In 2008 certainly historically was an aberration.
I wasn’t sure whether in prior years when the markets were headed up whether it was a positive I don’t recall that. Maybe its just kind of buried in some deep—
Well that’s a good point. Actually it was a positive but it was fairly negligible.
On the construction services business, as I look at the 10-K here, the numbers for the net income on that business now have trailed down over the last couple of years and I remember in past years you would say the business was looking pretty good and that was probably not going to be necessarily representative for all years. Are we at a level now that as you look at backlogs and things like that that the business that we had here in 2008 is a bit more representative.
I would say that’s probably a reasonable assumption. If you see growth again pick up to a higher level throughout the country in terms of new customer construction, new housing construction, you might see NPL improve over and above what we are seeing. But its probably at a level that’s more sustainable now then what it was let’s say in the 2005, 2006 timeframe.
Your next question comes from the line of Daniel Fidell - Brean Murray, Carret & Co.
Daniel Fidell - Brean Murray, Carret & Co.
Just a quick question regarding decoupling in Arizona, you said that there’s some study, or you’re in the process I think you said of putting together some studies looking back a number of years and the impact on customers, how quickly could Arizona regulators sign off on a new decoupling mechanism or would it need to be couched in full general rate proceeding and then to the extent that a mandated form of decoupling was included in the stimulus Bill, what’s sort of your read on that and what’s, have they had any [comments] on that and how do you see that impacting the process.
I think that your characterization that once the Commission comes to a conclusion on what type of decoupling mechanism it might like to pursue going forward that that’s something that we would be looking to implement as part of the general rate case proceeding, and then secondly we have had quite a bit of question and discussion with the Commission and some of the individual Commissioners about what the impact of some of the stimulus funding is going to be.
Its something that we don’t have all the details analyzed just yet but certainly its something that we consider directionally positive and hope that that helps continue to prompt the discussion and identify the merits of decoupling going forward again not just for the company but for our customers as well.
Daniel Fidell - Brean Murray, Carret & Co.
Can you just give us what the next general time line would be with regard to decoupling in Arizona. You said you were engaged in a study now, is it, do you anticipate that will be done and under their review by spring, summer, just any kind of general time line.
Well two things, first of all with respect to the study that is something that we’re going to be filing next month. So that will be submitted to the Commission in April of 2009. And then secondly they have a more generic proceeding where they are having discussion with a number of parties including the gas and electric utilities, energy efficiency advocates, some of the cooperatives in Arizona, where they want to take a look at various regulatory and rate incentives that could be implemented for utilities. That’s something that’s going to be a little bit more of an ongoing discussion and something that I would imagine would occur at least throughout the balance of this year probably.
Daniel Fidell - Brean Murray, Carret & Co.
Just for clarity, you do not believe if they do feel comfortable either based on the stimulus Bill or any kind of data they get out of the study for the ability for you to implement decoupling in Arizona just on a one off basis perhaps as soon as the next 12 months, it would have to be couched in a general rate case proceeding.
That would be my expectation, yes.
There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.
Thank you very much for listening in on Southwest Gas 2008 earnings conference call and we appreciate it.
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