Executives
Britta Carlson – Manager, Investor and Shareholder Relations
Bill Rogers – Corporate SVP, CFO and Corporate Treasurer
Michael Yackira – President and CEO
Analysts
Paul Patterson – Glenrock Associates
Steve Fleishman – Catapult
Emily Christie – RBC Capital Markets
Greg Gordon – Citigroup
Robert Howard – Prospector Partners
Amit Tagore [ph] – Deutsche Bank
Neil Mehta [ph] – Goldman Sachs
Brian Russo – Ladenburg Thalmann
Maurice May – Power Insights
Dan Eggers – Credit Suisse
Jonathan Arnold – Merrill Lynch
Chris Bassett [ph] – Decade [ph]
Chris Ellinghaus – Shields & Company
NV Energy, Inc. (NVE) Q1 2009 Earnings Call Transcript April 29, 2009 10:00 AM ET
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the NV Energy 2009 first quarter earnings call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session; instructions will be given to you at that time. (Operator instructions) And as a reminder, today’s conference call is being recorded.
I would now like to turn the conference over to Britta Carlson. Please go ahead.
Britta Carlson
Thank you, Cynthia. Good morning and thank you for joining us to review NV Energy’s results for the first quarter 2009. In addition to the press release that was issued over the Newswire this morning, we expect to file our first quarter 2009 Form 10-K with the SEC next week.
I would also like to remind you that 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 NV Energy, Inc. and its subsidiaries, Nevada Power Company and Sierra Pacific Power Company, both doing business as NV Energy.
These statements are current expectations and as such are subject to a variety of risks and uncertainties that could cause actual results to differ materially from current expectations. These risks and uncertainties include the factors discussed in the company's Form 10-K for the year ended December 31, 2008. I would also like to mention that reconciliations of certain non-GAAP financial information presented during today's call can be found in our earnings press release, which was posted on our company Web site at www.nvenergy.com.
With me this morning are Michael Yackira, President and Chief Executive Officer, and Bill Rogers, Corporate Senior Vice President and Chief Financial Officer. Bill will begin this morning by reviewing our 2009 results and discuss key financial drivers and trends. Michael will then provide an update on the corporate strategy, including recent industry developments.
I will now turn the call over to Bill Rogers.
Bill Rogers
Thanks, Britta. Good morning everyone and thank you for joining us.
In our earnings press release, we included certain financial highlights from our company's income statements and balance sheets. Rather than repeat our financials, I will discuss key drivers and trends that affect our earnings. As released this morning, NV Energy reported a loss $22 million or $0.09 per share in the first quarter of 2009 as compared with earnings of $24 million or $0.10 per share in the first quarter of 2008. The reduction in earnings in the first quarter of 2009 versus the first quarter of 2008 was in order due to; first, higher operating, maintenance, depreciation, and interest expenses largely associated with recent investments in power plants; second, reduced energy sales volume; and third, lower other income. I will discuss each of these in order in more detail.
As I just mentioned, the higher expenses are largely associated with the completed construction of the Clark Peakers and the purchase of the Walter M. Higgins generating station and are not currently in rates.
These assets and others are part of the general rate case that is currently before the Public Utilities Commission of Nevada and we are expecting decision in that case late in June. The impact of not recovering end rates increased capital, depreciation, operating and maintenance expenses associated with these capital additions was approximately $0.10 per share in the first quarter. As mentioned in prior calls, the near term earnings dilution of these investments will continue through the second quarter of this year. In addition, higher pension expenses reduced earnings by approximately $0.02 per share on a quarter to quarter basis. The higher pension expense will continue throughout 2009 and is not included in current general rate case.
With respect to our revenue, while we are pleased that the gross margin increased approximately $7 million or 3% our retail electric sales decreased throughout the state by 6% in the first quarter 2009 compared to 2008. The reduction in megawatt hour sales was primarily due to milder winter weather throughout our entire state and was most visible in residential sales volume. The quarter to quarter earnings impact of this volume sales reduction was approximately $0.05 per share.
Our NV Energy southern territory contributed 55% of consolidated gross margin and the electric and gas business as of NV Energy’s northern service territory contributed 40% and 5% respectively. Residential customer growth in the south for the first quarter of 2009 was approximately the same as we experienced in all of 2008 with a 0.6% increase in customers. In the north there was no material change in our customer count.
Within other income, we had the benefit of recognition of several one-time items in the first quarter of 2008, including a settlement with Calpine, the reinstatement of previously disallowed costs related to our Pinon Pine investment, and the reversal of previous provisions for bad debt allowance. In aggregate, these one-time items totaled approximately $7.5 million after tax or $0.03 per share in first quarter 2008.
Now, I would like to turn your attention to our investment in capital formation plans. As a result of management of our growth capital and deferral of some of our renewable investments we have reduced our 2009 estimated cash construction requirements from $920 million to $775 million to $800 million. The Harry Allen plant, the only major project currently under construction, accounts for approximately 40% of the 2009 investment. With a reduced investment plan and our completion of debt financings earlier in the first quarter we do not see a necessity to return to the capital markets in 2009.
With respect to other recent activities as announced on April 23, NV Energy through its northern utility entered into an agreement to sell its California Electric Distribution and Generation Assets the California Pacific Electric Company or Calpeco, a jointly owned entity newly formed by Algonquin Power Income Fund and Emera, both of which are publicly traded Canadian utility holding companies. We expect to close on the sale in the second quarter of 2010 for after tax proceeds of just over $100 million to NV Energy. We intend to use these proceeds to strengthen our balance sheet, first, with our northern utility, and then, if appropriate, with distributions to the holding company.
With that recap of our trends and our financials, I will now turn the call over to Michael Yackira who will discuss other important matters that impact our company.
Michael Yackira
Thank you Bill, and good morning everyone. As Bill’s comments have made clear, the regulatory lag as a result of the significant investments NV Energy completed in 2008 has had a meaningful impact on our earnings. Moreover, the national recession has affected the growth rate of our local economy and our company.
We have experienced a slowdown in growth in our state compared with prior years when we were experiencing very high growth, particularly in southern Nevada where its leading industries, mainly tourism and gaming, drove construction activity, the housing market and employment in the region. We therefore continue to closely monitor hotel room additions as well as occupancy rates in southern Nevada. Although hotel occupancy rates remain well above the national average, they have declined from the low 90% level to the mid-80% level in the last year.
Despite the postponements that have been announced for major hotel resort projects, four new resort properties have opened in Las Vegas since the beginning of 2008, including the 2,200 room Encore hotel casino built by Wynn Resorts. Further, MGM CityCenter and Fontainebleau remained committed to their scheduled late 2009, early 2010 openings adding over 10,000 rooms combined.
Of course we also know that many of the southern Nevada gaming properties are experiencing a variety of financial challenges. And delays in these projects could impact our company's near-term earnings growth.
The mining industry remains healthy in northeastern Nevada because of continued strong demand for gold. It is clear that the recession and volatility in financial markets have created tremendous uncertainty. I therefore have asked our management team to spend considerable time for the foreseeable future on reevaluation of our business from every perspective. It is simply not possible to predict how long our economic downturn will last. But we will be extremely focused on our costs and capital investments, while at the same time to continuing to implement our fundamental three-part energy supply strategy, which entails, first, energy efficiency and conservation programs, second, developing renewable projects, and third, adding traditional generating capacity in Nevada and the transmission capability to move energy throughout the state.
While the economic situation we all face is challenging, I now like to provide an update on some of NV Energy’s major developments and activities. As you know, in southern Nevada we are in the middle of the first general rate case we have filed in two years. We are seeking an increase in annual revenues of approximately $310 million and an increasing in the return on equity from 10.7% to 11%. The majority of the request comes from almost $1.5 billion in rate base additions since the last general rate case. These investments include the acquisition of 598 megawatts Walter M. Higgins generating station, construction of 600 megawatts of peaking units at the Clark generating station, and the ongoing construction of the plant expansion at the Harry Ellen generating station.
The Higgins and Clark plants add to the dramatic investment NV Energy has made over the past several years to more than double the own generating capacity within our state. The plants and service are highly efficient facilities that are providing benefits to our customers in the form of lower fuel costs and higher service reliability.
We recognize that many of our customers are experiencing the effects of the economic downturn. And we have included two proposals in the filing to reduce the impact of higher rates. We proposed to defer the rate increase during the months of July and August to avoid having our customers deal with higher bills in the middle of the summer cooling season in Las Vegas. We're also proposing a low income rate for customers who meet certain income qualifications.
Hearings on cost of capital were completed last week. The revenue requirements phase will be completed the second week of May and the PUC has stated that the commissioners decision will be announced on June 24. As Bill already mentioned, we announced last week that we've entered into an agreement to sell our California Electric Distribution and Generating assets to a newly-formed company jointly owned by the Algonquin Power Income Fund and Emera, Inc. We are proud to have served this area of California for more than 100 years. The sale is an important step in concentrating our activities in Nevada.
With regard to the three-part energy strategy I mentioned earlier, I’ve already discussed the traditional generating investments, and I’d now like to provide an update on the other two parts of our strategy. In 2008, we invested $55 million in energy efficiency and conservation programs, and we expect to invest a similar amount in 2009. Reduction in energy consumption through these programs can be applied toward one quarter of Nevada's portfolio standard, which requires that 20% of the state’s energy come from renewable sources by 2015. We expect to have approximately 500-megawatts of renewable energy projects online by 2011. The most recent addition to our portfolio occurred earlier this month when Enel Green Power dedicated two new geothermal plants in western Nevada that are now providing 65 megawatts of electricity to our customers.
Renewable energy has amazing and enormous potential to serve Nevada's power needs and NV Energy is tapping into that potential with investments in new projects. The permitting process has started in southern Nevada on a power plant that will convert waste heat from a gas pipeline compressor station into electricity. The 6-megawatt project, which is expected to be completed in 2010 is the result of an agreement between NV Energy, the Kern River Gas Transmission Company and Ormat, Nevada. We are also pursuing much larger projects. We are moving forward with China Mountain, a 200-megawatt wind energy project we proposed for northeastern Nevada with Renewable Energy Systems Americas. The BLM's Draft Environmental Impact Statement for the project is expected to be released in about a year.
Last month, we entered into a memorandum of understanding with Solar Millennium LLC and its joint venture partner MAN Ferrostaal, for the potential development of one or more large scale solar power facilities in southern Nevada. The initial project would be a 250-megawatt solar thermal plant that will include molten salt storage, a technology to enable the plant to continue producing electricity after the sun sets. This would be the first large scale solar thermal plant in the nation to use this technology. When we last spoke, we discussed the postponement of the Ely Energy Center due to increasing environmental and economic concerns. We also said that we plan to proceed with the construction of the electric transmission line that will, for the first time, link the northern and southern electrical systems in Nevada. This line will allow us to more efficiently use our fleet of generating plants throughout the state as well as provide an opportunity to expand renewable energy supplies more cost-effectively. We will seek our Public Utilities Commission’s approval of this project in the triennial Integrated Resource Plan filing that will be made by no later than July 1. We expect a decision from our commission before the end of this year, and if approved the project is expected to be in service by 2012.
As I mentioned earlier, NV Energy is adapting to the challenges of the current business environment. Our employees are focused on holding down costs, while providing our customers with safe, reliable supplies of electricity and natural gas. We have encouraged employees to identify savings opportunities and operating efficiencies where they can and they are succeeding in that effort. Bill has mentioned our diligence with respect to both operating costs as well as capital investment.
Over the past several years, our innovative work force has mastered techniques for doing more with less. They've kept up with the challenges of customer growth by using new technologies and working smarter. Since 2000, the total number of customers served by NV Energy has grown by over 30%. While our total number of full time employees has increased by only about 5%. In summary, we are taking the steps necessary to meet these economic challenges that Nevada and the nation is facing.
Finally, before I turn it over to questions, let me mention that since our last earnings call, Steven E. Frank a long time utility industry leader and past Chairman, President, and CEO of Southern California Edison was elected to NV Energy, Inc. 's Board of Directors. He also served as President and Chief Operating Officer of Florida Power & Light and a Director of FPL Group. We are delighted to have Steve on our Board.
Now, Bill and I are ready to take your questions.
Question-and-Answer Session
Operator
(Operator instructions) Our first question will come from Paul Patterson from Glenrock Associates. Please go ahead.
Paul Patterson – Glenrock Associates
Good morning.
Michael Yackira
Good morning, Paul.
Paul Patterson – Glenrock Associates
The access to the capital markets, you guys mentioned that you don't think – I believe I heard – if I heard it correctly that for 2009 you don’t think that you need to access the capital market. Is that correct?
Michael Yackira
That’s right. What I said is we don't see a necessity to access the capital markets. And in our forecast, we see neither of the utilities borrowing more than $250 million under its revolving credits at any point in time this year.
Paul Patterson – Glenrock Associates
Okay. When might you guys think of equity, I guess, past 2009? What is your outlook or what can you share with us with respect to that –?
Michael Yackira
Paul, I think we have been clear that we know that we have capital needs and we know we want to keep our balance sheets strong. But we are not projecting when our equity needs are, it will be dependent on what happens with the capital investments that we are going to be making as well as other things that we see as opportunities. But we are not projecting or predicting when we would be in markets for equity, other than to say that clearly we will be.
Paul Patterson – Glenrock Associates
Okay. Thank you very much.
Michael Yackira
Thanks, Paul.
Operator
Thank you. Our next question comes from Edward Hen [ph] from Catapult. Please go ahead. Please go ahead.
Steve Fleishman – Catapult
Hi, it’s actually Steve Fleishman. Hi, Michael.
Michael Yackira
The same thing it happened last time, Steve.
Steve Fleishman – Catapult
Did it really, sorry.
Michael Yackira
That's okay.
Steve Fleishman – Catapult
A couple of questions. I guess my main question is Bill has shown a slide that even though you guys don't give earnings guidance that kind of showed a rough range of earnings growth over the next few years. I'm wondering if you did that slide again today, would it roughly be the same?
Michael Yackira
Steve, it is Michael. Yes, it would be.
Steve Fleishman – Catapult
Okay. And then secondly, your tone on the growth sounds like a little bit more conservative than it had been last year or last call. Could you just talk a little bit about what has changed and what – or if I'm even reading you correctly at?
Michael Yackira
I don’t think it’s materially different Steve. I think in fact in some respects I wouldn’t say we are much more optimistic, but certainly watching what’s happened with the gaming companies, and the financial issues that they had and how the stocks had performed, and how they appear to be improving their financial position, give us some encouragement. We've seen a rebound in the housing market here. The prices of houses have been down over the past year over 30% in Las Vegas. And there is clearly a buying opportunity and people are coming into the market. So, I wouldn’t say we are anymore conservative. I think we're just being realistic and we're saying that the growth has slowed. The growth is approximately what it was for all of last year we were about 0.7, 0.8% last year. We were 0.6% quarter over quarter this year. So I think we're being realists in looking at what is happening.
Steve Fleishman – Catapult
Okay. Thank you.
Michael Yackira
Thank you, Steve.
Operator
Thank you. Our next question comes from Emily Christie from RBC Capital Markets. Please go ahead.
Emily Christie – RBC Capital Markets
Good morning. Just a follow-up question on the MGM project, CityCenter and Fontainebleau, have you started to see a migration of employees for those facilities into your service territory yet? Or is that still something that we could expect later in the year?
Michael Yackira
I don’t think we have the data, Cynthia, to – or excuse me Emily to really give attribution analysis of where employees are going. What we can say is we've had an increase in residential customer count. And we believe that one of the reasons that people are attracted to move to Las Vegas is the employment opportunities at projects like those two you mentioned offer.
Emily Christie – RBC Capital Markets
Okay. And then confidence there is still for last ’09, early 2010 when those will be actually be online?
Michael Yackira
That’s what those companies are saying.
Emily Christie – RBC Capital Markets
Okay. Thank you.
Michael Yackira
Thank you.
Operator
Thank you. Our next question comes from Greg Gordon from Citigroup. Please go ahead.
Greg Gordon – Citigroup
Thanks, good morning. Looking forward to seeing you guys in a few days.
Michael Yackira
Good to hear from you, Greg.
Greg Gordon – Citigroup
On the question of access to the capital markets, circle back to that, I apologize for pressing you on it, but when I look at the cap structure of the consolidated company, you’re 63.9% long term debt, when I look at the cap structure of Nevada Power Company, you're at about 58%, and then when I look at SPT, you're at 59%. I'm just quoting from the release, so is the reason that you don’t think that you need access to the equity markets this year because you presume that retained earnings are going to pick up, retained earnings growth will pick up as we move through the year because the economy gets better and because you will get a reasonable outcome in the rate case? Or can you just extrapolate a little bit more on the assumptions that go into your confidence that you can wait until there is a better appreciation of the value of the company, which is obviously achievable before you issue?
Bill Rogers
Greg, it is Bill Rogers. And thank you for the question. And to be clear, we said we don't see the necessity to access the capital markets. That’s both debt and equity.
Greg Gordon – Citigroup
Okay.
Bill Rogers
So we feel that we can be done with our capital raising activities as a result of actions in the first quarter of this year at the southern utility. The balance sheet will strengthen because there is a reduction this year and prospectively with respect to our capital investments, and the retention of earnings that we expect to have will lead to a strengthening balance sheet over the course of the balance of this year as well as in 2010. Having said that, as Michael pointed out, we recognize that our balance sheet is not where we would like it to be, over the longer course of time, and we think we have other investment opportunities in front of us in the years ahead, and therefore we are not dismissive of the opportunity to issue equity in the years ahead.
Greg Gordon – Citigroup
Thank you.
Michael Yackira
Thanks, Greg.
Operator
Thank you. Our next question comes from the line of Robert Howard from Prospector Partners. Please go ahead.
Robert Howard – Prospector Partners
Hi, good morning.
Michael Yackira
Good morning, Rob.
Robert Howard – Prospector Partners
I wanted to ask, first off, how much did you spend on CapEx during the first quarter? I have a rough number there. You mentioned that your year-end target was going down, but just wondering what the actual spend in Q1 was.
Bill Rogers
We're getting that number for you, Rob. Do you have a second question while we are looking that up?
Robert Howard – Prospector Partners
Yes, sure. You talked a little bit about I guess residential sales going down. How did industrial sales hold up? I was wondering about that sector.
Bill Rogers
Well, specifically, in our southern territory, which is a better comparison, because of some of the mines that have gone offline in the north. Residential sales volume was down 5% in the south. But industrial sales were down less than 2%. And based upon rate design, here in the south, the decline in residential sales had not only was greater but had an order of magnitude, greater impact on our company.
Robert Howard – Prospector Partners
And in the north?
Bill Rogers
And in the north, residential sales volume was down 4% and industry sales volume was down 14.5%. But again, that’s related to some of the mines going offline and the distribution-only customers for our company.
Michael Yackira
Which has happened since the first quarter of 2008, Rob.
Robert Howard – Prospector Partners
Right, right. Okay.
Bill Rogers
And Rob, just excuse me for interrupting you. But capital expenditures in the first quarter of 2009 were approximately $200 million.
Robert Howard – Prospector Partners
Okay. Great. And just reminding me, going back to the southern territory, for industrial sales, the casinos, you count their sales as industry, is that right?
Bill Rogers
Yes.
Michael Yackira
It’s correct.
Robert Howard – Prospector Partners
Okay. Great. And lastly with this slower pace of growth that you guys have been having, there has been a lot of – the last few years, there has been a lot catch-up, almost more running just to stay in place, and if this pace of growth were to continue, do you have a feel for when you might have infrastructure, generation, and everything in place that you would sort of say, “hey, we kind of caught up and we're where we want to be.”
Michael Yackira
Well, Rob, we are still – it’s Michael – we are still, if I'm correct, about 1,000 megawatts short with respect to own generation versus peak demand, and that’s not to say that we haven’t covered the positions. We have covered those positions. And that’s own generation versus peak demand, we’ve covered those positions through contracts. We're going to be completing the Harry Allen project, which I always think sounds like a rock band – the Harry Allen project by the summer of 2011. And there are some renewable projects that will be coming online as well. We will be assessing what our needs are relative to what the economic growth is in our state. And addressing through integrated resource plans what the future is for generation growth. With all that said, we don’t see anything on the near term horizon that causes us to believe that we will be building anything more than what has already been announced. There might be opportunities but right now the Harry Allen project is the one thing that we have under construction, and there is nothing right now on the horizon for additional construction other than our normal base capital.
Robert Howard – Prospector Partners
Okay. Great, guys. Thanks a lot.
Michael Yackira
Thanks, Rob.
Operator
Thank you. Our next question comes from the line of Amit Tagore [ph]. Please go ahead.
Amit Tagore – Deutsche Bank
Good morning, it’s Amit Tagore from Deutsche Bank. Just wanted to look at the longer term CapEx plan. I think on the last earnings call, you guys mentioned 3 billion over 2009 through 2013, obviously you are taking 2009 down a little bit. Is that a number we should be working with longer term or is that number a little bit in flux right now.
Bill Rogers
That number is from our SEC disclosure in the Form 10-K with respect to our capital expenditures. So that number has been reduced on the margin as a result of slower growth and less need for base capital investment this year. But that number has not changed materially at this point in time.
Amit Tagore – Deutsche Bank
Thank you. And then on the transmission project, has a route been selected, has the sighting study been completed or will that kind of be done in conjunction with the IRP [ph] filing?
Michael Yackira
Amit, this is Michael. All of that has been completed. What we're waiting on, and just a little bit of history here, this was the project that we had announced back in 2006 along with the Ely Energy Center, so this is a project that we've been contemplating for a long time. The corridors have been chosen, the BLM Environmental Impact Statement is being developed, we're expecting that we will get a record of decision sometime late this year. And we can move forward once we have the approval of our commission to construct, which we expect also late this year.
Amit Tagore – Deutsche Bank
Thank you.
Michael Yackira
Thanks.
Operator
Thank you. Our next question comes from the line of Neil Mehta [ph] from Goldman Sachs. Please go ahead.
Neil Mehta – Goldman Sachs
Hi, this is Neil Mehta in for Michael Lapides. Couple of questions on the NPC rate case. As we think about the rate case and we think about the staff response in terms of rate base, what really drives the difference between the rate base you requested, and what the staff came back with?
Michael Yackira
Neil, this is Michael. I'm working from memory here, so bear with me. I think most of the difference has to do, as far as rate base is concerned, the treatment of Harry Allen, in the so-called hybrid test year, as well as some, and this is again staff position, some belief that some of the transmission and substation investments that we have made should be held for future use because of the slowdown in growth. I think if you combine those that’s the preponderance of what they have suggested as far as not disallowance, mind you, but deferring the recovery of those investments to a later rate case.
Neil Mehta – Goldman Sachs
Got it. And how should we be thinking about the rate case filing cycle for the next two years at either sub? Can we expect to follow on filing in ’09 or ’10 at either sub or we more likely to see a filing in ‘11?
Michael Yackira
Well, first of all, I was reminded that the staff also took a position on some of the units at our Clark peaking station as well. Statutorily, we were required to file rate cases every three years. That doesn’t mean that we can’t or wouldn’t file rate case sooner if we found that our earnings were not where we expected them to be. But statutorily, for the southern utility, we’d be required to file a rate case in December of 2011 under current statute, and for the northern utility in December of 2010.
Neil Mehta – Goldman Sachs
All right. Very helpful. Thank you.
Michael Yackira
Thank you.
Operator
Thank you. Our next question will come from the line of Brian Russo with Ladenburg Thalmann. Please go ahead.
Brian Russo – Ladenburg Thalmann
Thank you. My questions have been asked and answered.
Operator
Thank you very much.
Michael Yackira
Thank you, Brian.
Operator
Our next question will come from the line of Maurice May from Power Insights. Please go ahead.
Maurice May – Power Insights
Yes, good morning folks. First question has to do with the general rate case and possible third quarter earnings. Obviously third quarter earnings are very important, and your rates in the third quarter, the new rates from the general rate case, were supposed to go in effect July 1. To give customers a break, you requested deferral to September 1. But there is some kind of sub-proceeding going on in the general rate case whereby participants have been asked to make comments on those two dates and I believe staff came back and said the rates should go into effect July 1. And I was wondering what other interveners had said, and I was wondering whether you call could make a projection as to whether it would be July 1 or September 1, because obviously, this would have a big impact on analysts third quarter estimates.
Michael Yackira
It is Michael. Not necessarily. And I will let Bill comment, but let me just comment on your last assumption. What we have asked for is a deferral of the rates to go on our customers’ bills but not a deferral with respect to the recognition of those rates in our income statement. It would be a cash recognition issue. What we have proposed is deferring for a two-month period of time the collection of those revenues in cash until the next general rate case when that would be adjudicated in terms of the collection and how much was actually deferred. But it is not meant to affect our income statement.
Maurice May – Power Insights
Okay, good.
Michael Yackira
And as far as the other positions are concerned, it is really all over place. There have been positions taken by the Bureau of Consumer Protection as well as other interveners in the case which are all different. So I would suggest that rather than comment on each of them, just say that that is still in question before our commission.
Maurice May – Power Insights
Okay. And my second question has to do with those five years of capital expenditures referred to earlier by one of the other analysts calling in, the $3 billion, because with the postponement of Ely, it looks to me like in 2010 and this is without the transmission line, but in 2010 it looks to me like your company turns cash flow positive. Is that correct?
Michael Yackira
You are correct, but just to be clear in the five years of capital expenditures it does not include investment in Ely Energy Center.
Maurice May – Power Insights
No, it don’t include Ely or the transmission, but without those two, and we can assume, I guess, that Ely has postponed indefinitely at this point, you actually do turn cash flow positive in 2010.
Michael Yackira
With those caveats, Maury, you're right.
Maurice May – Power Insights
Okay, great. Those are my questions. Thank you very much.
Operator
Thank you. (Operator instructions) Our next question will come from the line of Dan Eggers from Credit Suisse. Please go ahead.
Dan Eggers – Credit Suisse
Hi, good morning. If I could just track back to the comments earlier about volume trends on the residential side, the down five and the down four for the south and the north, could you help give a little bit more color on how much of that was weather and how much of that you are seeing as a usage event?
Bill Rogers
It’s largely weather. We had a 10% decrease in heating degree days in the first quarter in the south and an 8% decrease in the first quarter in the north.
Dan Eggers – Credit Suisse
What are you guys seeing as far as kind of more idle meters, or low usage customers on the system, particularly in the south? And then are you seeing vacant houses being populated at this point in time? Or we may not be seeing it show up in new customer count, but maybe people moving in and using electricity again, are you seeing these sort of signs that usage pattern has changed yet?
Bill Rogers
Not materially. We don’t have a good measure on vacant houses. What we can track to some degree is usage per customer. It is a little harder in the winter because those aren't our big consumption months for our residential customers, but there remains a higher than normal percentage of low use customers just as there was in 2007.
Dan Eggers – Credit Suisse
The number, you're not seeing any sort of substantive change, even with a pickup in house sales?
Bill Rogers
Not yet.
Dan Eggers – Credit Suisse
So it looks like people are maybe investing in these houses versus living in them?
Bill Rogers
That could be. But we don’t have that data.
Dan Eggers – Credit Suisse
Okay. Can you just remind kind of the gross margin breakdown for the north and the south between residential, commercial, and industrial customers?
Bill Rogers
We don’t provide it by customer class.
Dan Eggers – Credit Suisse
I guess what I was trying to think about is obviously there's very low margin in industrial, so giving back, big declines on industrial is not that big of a deal, but is there any kind of rule of thumb we should think about as far as residential volumes to gross margin impact?
Bill Rogers
Dan, I will just have to get back to you on that.
Dan Eggers – Credit Suisse
We will follow up next week. It's fine. All right. Thank you, guys.
Operator
Thank you. Our next question comes from the line of Jonathan Arnold from Merrill Lynch. Please go ahead.
Jonathan Arnold – Merrill Lynch
Yes, can you hear me?
Michael Yackira
Yes, Jonathan.
Jonathan Arnold – Merrill Lynch
Good morning. I just wanted to ask a question on dividend policy and I looked back on the fourth quarter call, you effectively handled that question by referring back to the statements in the third quarter. And at that point, you had said that you took a balanced view between retained earnings and substantial investment opportunities with more of a weighting to the investment opportunities, and given your comments today, about not having a lot of view beyond base CapEx, is it reasonable to assume that that weighting comment may have shifted a little?
Michael Yackira
I think – Jonathan, it’s Michael. I don’t think it’s really any different. Well, we have said – and I believe it was on the third quarter call, if I’m not mistaken – that that’s really the best time for us to assess what our year is like and what next year is going to look like, and that’s still the case. Our preponderance of earnings come in the third quarter and we believe that’s the best time for our board to analyze what our dividends are going forward in 200X, and then 200X plus 1.
Jonathan Arnold – Merrill Lynch
I mean – I think I heard you say today that you’re less focused on some of the growth opportunities, so I’m thinking of the balance of those two. There must be some dynamic that’s shifting around.
Michael Yackira
Again, that’s – I don’t think materially, Jonathan. I think we’d like to make sure that we have the ability to invest in opportunistic types of investments; and, therefore, if we were to change our dividend policy, which has helped somewhat open-end it, but I think it’s really clear that we address it in the third quarter, it might be giving the wrong signal and I think I’m satisfied with where we are today.
Bill, do you have any comments?
Bill Rogers
Well, as we’ve shared in the past, we don’t have a formal dividend policy per se. I think we have some guide post that Michael and our board think about, and it remains – given our current balance sheet and given our current investment opportunity, it appears that the retention ratio should be higher than the payout ratio, if that’s what you’re asking. But that is regularly evaluated as we take a look at current year and perspective year earnings after the close of the third quarter.
Jonathan Arnold – Merrill Lynch
And that’s helpful. Thank you very much, guys.
Michael Yackira
Thank you, Jonathan.
Operator
Thank you. (Operator instructions) We’ll go to the line of Chris Bassett [ph] from Decade [ph]. Please go ahead.
Chris Bassett – Decade
Good morning.
Michael Yackira
Good morning.
Chris Bassett – Decade
Can you speak about what portion of the 45% decline in residential load was due to weather and your expectations for the rest of the year assuming normal weather?
Bill Rogers
Of the 5% sales line decline, the majority of it was due to weather. I mentioned the decline in heating during rainy days in both the north and the south. We don’t have any expectations with respect to whether we’ll have a normal weather year in 2009. Having said that, the 2008 year was closer to a normal weather year and that the prior years had been abnormally hot. The first quarter is not that material with respect to overall sales volume. Clearly, the second, and then the third quarter most important.
Michael Yackira
And nor have we ever seen a correlation between first quarter weather and the rest of the year.
Chris Bassett – Decade
Okay. But would it be fair to take your guidance for low growth previously given and assume that’s the same going forward?
Bill Rogers
Yes. We haven’t changed our growth guidance, which is in the south. Adjusted per energy conservation program is approximately 1% in 2009 and 3% in 2010 and 2011.
Chris Bassett – Decade
Great. And then, also, it sounds like from the $0.02 of pension expense this quarter, you might have $0.08 of incremental expense this year. Am I right in thinking that? And –
Bill Rogers
Yes.
Chris Bassett – Decade
– that continuation toll, you get regulatory recovery in 2011?
Bill Rogers
Well, it – you’re right and it’s $0.08 for the year. And with respect to regulatory recovery, you’ll defend that at that point in time, what the various FAS 87 assumptions are and where the funding is with respect to those pension assets. So –
Chris Bassett – Decade
Okay.
Bill Rogers
looking forward at it won’t necessarily mean that we will recover the earnings drag that we have experienced in 2009. It’ll be whatever the pension expense was for the historic test year when we next file.
Chris Bassett – Decade
Great. Thanks.
Operator
Thank you. Our next question comes from the line of Chris Ellinghaus from Shields & Company. Please go ahead.
Chris Ellinghaus – Shields & Company
Hi, everybody. How are you?
Bill Rogers
Good morning, Chris.
Chris Ellinghaus – Shields & Company
A couple of questions. Vis-à-vis the reduction in CapEx, are you going to be giving us any longer-term revisions in the upcoming – next week or in the future?
Bill Rogers
Chris, it’s Bill. Good morning. With respect to the five-year outlook, it’s pretty immature at this time to make any longer-term revisions, but it would not be materially different from what it is today.
Chris Ellinghaus – Shields & Company
Okay. So, you don’t envision what you’ve done for this year making any major deferrals into later periods?
Bill Rogers
There is some deferral of investments and renewable projects, and then there’s some cancellation of investments with respect to this year; notably, reduction in what we’ll investment in Ely Energy Center, as well as some other base capital.
Chris Ellinghaus – Shields & Company
Okay. And relative to your eluding to the absence of some positive items in the first quarter last year, Bill, were there any new unusual items in the latest quarter?
Bill Rogers
No. There were not of significance.
Chris Ellinghaus – Shields & Company
Okay. Have you got any info for us vis-à-vis the Fountain Blue or city center projects in terms of what you’re hearing about their completion financing?
Bill Rogers
I think you’re likely to be better informed than we are as a general investment community just to your proximity to the other finance in New York. Having said that, the local press here certainly reports that both those projects are working to solution with their respective lenders or equity investors.
Chris Ellinghaus – Shields & Company
Okay. Like the first quarter, lastly, Bill, were there – can you eliminate any additional items for later in the year that we might have forgotten about that are going to affect the rest of the year’s earnings?
Bill Rogers
I don’t think so. I mean, the pension expense is really set at the beginning of the year based upon certain actuarial assumptions, as well as the funding levels, so that stays with us. We have not changed our reserves for bad debt expense. We look at that every month, but that hasn’t changed since we increased reserves in the second quarter last year for the southern utility and we decreased the reserves in the first quarter of last year for the northern utilities, so that hasn’t changed. That’s something that’s always out there and we continually look at it, but the actual reserves haven’t changed at this time.
Chris Ellinghaus – Shields & Company
Okay, great. Thanks. Look forward to seeing you next week.
Operator
Thank you. And at this time, speakers, I’m showing no further questions. Please continue.
Michael Yackira
Thank you very much for joining us. We appreciate your hanging in there for almost an hour and we look forward to seeing you soon. Thanks for your support.
Operator
Thank you. And, ladies and gentlemen, today’s conference call will be available for replay after 9:30 a.m. until May 29 at 11:59. You may access the AT&T teleconference replay system by dialing 1-800-4756701 and entering the access code of 995331. International participants, dial (320) 365-3844. Those numbers, once again, 1-800-4756701 or (320) 365-3844, entering the access code of 995331. That does conclude your conference call for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.
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