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Executives

Max Kuniansky

Jonathan S. Halkyard - Chief Financial Officer and Executive Vice President

Michael W. Yackira - Chief Executive Officer, President, Director, Member of Finance Committee, Chief Executive Officer of Nevada Power, Chief Executive Officer of Sierra Pacific Power and President of Nevada Power Company

Analysts

Kevin Cole - Crédit Suisse AG, Research Division

Neil Mehta - Goldman Sachs Group Inc., Research Division

David A. Paz - Wolfe Research, LLC

Sarah Akers - Wells Fargo Securities, LLC, Research Division

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

NV Energy (NVE) Q1 2013 Earnings Call May 3, 2013 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the NV Energy First Quarter 2013 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded.

I'd now like to turn the conference over to Mr. Max Kuniansky. Please go ahead.

Max Kuniansky

Good morning, everyone, and thank you for joining us.

By now, you've seen the press release issued earlier today along with the earnings report to the financial community posted on our website.

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 Company and Sierra Pacific Power. Forward-looking statements may 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 and where to go to get more information on our risk factors. You'll 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 will now turn the call over to Jonathan.

Jonathan S. Halkyard

Thanks very much, Max, and good morning, everyone. Before we talk about the quarter, I'd like to begin by briefly revisiting our company's operational mission and financial policy.

First and foremost, our mission is to deliver safe, reliable and affordable energy to our customers. Of course, to keep our product affordable it's essential that we maintain strict control over our operating costs and invest our shareholders capital prudently. It's particularly important when top line growth is slow as it is now. Our priorities for free cash flow are increasing dividends to shareholders, strengthening the balance sheet through debt retirement and capital investments that will drive earnings growth in the future.

These themes are evident in the financial results we announced earlier today. During the first quarter of 2013, retail megawatt hour sales increased modestly. Against this backdrop, we managed our operating costs closely and made significant progress on our major capital projects. We returned a growing share of our earnings to shareholders through a 12% increase in the dividend. And earlier this week, Fitch acknowledged our improved financial position when it increased its corporate ratings for NV Energy and both of our utilities.

We are pleased with our operating results this quarter as well. NV Energy's earnings increased to $0.09 per diluted share in the 3 months ended March 31, 2013, compared to $0.05 in the same period a year ago. Higher gross margin, lower O&M and reduced interest expense were major drivers of our improved results as we have shown on Slide 4.

The increase in gross margin was primarily due to the impact of weather compared to last year. This year, weather was near normal in the first quarter compared with milder than normal weather in the same period last year. Heating-degree days in Southern Nevada were up nearly 14% in the first quarter of 2013 over last year but were only about 2% above normal. We saw the same dynamic to a lesser extent in Northern Nevada.

On a year-over-year basis, normal weather added $0.02 per share to consolidated earnings for the first quarter as you can see in Slide 7. You'll find heating-degree days in the operating statistics section of our earnings report.

Retail megawatt hour sales grew about 1% for this quarter. Customer accounts increased 0.6% in the quarter with growth in all customer classes. This marks the 12th consecutive quarter of growth in our customer base shown in Slide 5.

However, the benefit of customer growth was largely offset by lower usage independent of weather and by other factors affecting gross margin. The favorable trend in low-use customer accounts continued in the first quarter. Low-use accounts are now at about 7% in both of our jurisdictions reaching levels not seen since 2008. Low-use accounts are a proxy for vacant homes, which brings me to the topic of the Nevada economy.

The most recent data supports a view that the state's economy is continuing its slow steady recovery. State unemployment has dropped to 9.7%, down from 11.6% a year ago and is gradually moving closer to the national average. The data in Slides 8 and 9 show real strength in the Southern Nevada housing market, but we urge caution in interpreting these figures. The nearly 500,000 housing starts shown on Slide 8 are up substantially in absolute terms, but represent less than 1/10 of 1% of the total number of households in Southern Nevada. The trend is certainly positive, but the level is still fairly weak.

Turning to items below the gross margin line. O&M expense decreased year-over-year largely due to the timing of power plant outages. Setting that factor aside, O&M was virtually flat in the quarter. Reduced interest expense improved earnings by $0.02 compared to the same period a year ago due to lower rates which is a result of refinancing activities and a slightly lower debt balance.

On a GAAP basis, we earned an ROE of 9.6% for the 12 months ended March 31, 2013, compared to 5.2% for the same period a year ago. We have significantly narrowed the difference between our allowed and our earned ROE relative to prior years.

Free cash flow for the first quarter was negative $9 million significantly better than negative $49 million in the same period a year ago. In the first quarter, we underrecovered fuel and purchased power costs. This impacts cash flow but should not affect earnings over the long term. As you know, the Public Utilities Commission in Nevada adjusts our recovery of these costs quarterly.

As of March 31, our utilities have equity ratios in the range of 46% to 47%, which is below the industry average. As I mentioned at the start of the call, strengthening our balance sheet of the utilities remains a priority for the use of free cash flow.

Now let's talk about the outlook for 2013. Our first quarter results were in line with our expectations and we are reaffirming our earnings guidance for the year. We still expect to earn between $1.25 and $1.35 per share in 2013. Our guidance assumes normal weather for the remainder of the year and customer growth of about 1.2%. Other assumptions are shown on Slide 10.

I would like to remind you that our ownership of the Reid Gardner Generating Unit 4 will increase to 100% in mid-2013 pending approval of the Federal Energy Regulatory Commission. Our capital expenditures forecast on Slide 11 includes the cost of this transaction which is about $50 million.

In summary, 2013 is on track and demonstrates that NV Energy is now in a period of stable earnings and sustained free cash flow. This should enable us to continue growing our dividend and further strengthen our utilities capital structure while considering potential investment opportunities.

We expect to be able to deliver dividend growth of about 10% until we reach our target payout ratio of 60% to 65%. Thereafter we expect to increase dividends in line with sustainable earnings growth.

We recently sent out invitations to our Investor Day in Las Vegas, which is planned for June 26 and 27, and we hope that you can join us. Let me now turn the call over to Michael Yackira.

Michael W. Yackira

Thank you, Jonathan, and good morning, everyone. I'm pleased with our first quarter results and our ability to affirm our 2013 guidance that Jonathan mentioned earlier. Many of you have been following the NVision bill that was introduced last month in our state legislature. NVision is a comprehensive plan with a reduction of emissions to early retirement of about 800 megawatts of coal-fired capacity, coupled with increasing capacity for renewables and gas-fired plants, as well as demand response programs.

As with most pieces of legislation, we expect that it would evolve over the remainder of the session. We have worked with key stakeholders to find common ground for NVision. As an example, recent changes were made to the proposal to reduce the amount of company-owned replacement capacity from 2,000 megawatts to 750 megawatts to more closely match the capacity replaced with the capacity retired.

The NVision plan is a substantial shift in public policy for both NV Energy and the state of Nevada. As such, we anticipated many comments both in support, as well as opposition as the concept is fully examined. We remain committed to working with all parties to reach consensus. In summary, we believe that NVision is important for Nevada's energy future, as well as our state's economy.

Turning to regulatory matters. We're preparing to submit 2 filings to the Public Utilities Commission of Nevada during the second quarter. We're scheduled to file a general rate case for our Northern Nevada utility by early June and we expect to file our merger application with both the PUC and the Federal Energy Regulatory Commission at about the same time.

The merger filing of the 2 utilities is anticipated to be made about 6 months before our expected completion of the company's One Nevada transmission project. The ON Line project is currently on scheduled to be completed and placed in service by the end of the year. In addition to electrically interconnecting our 2 service areas for the first time and enhancing the efficiency of our electric system, ON Line will enable the development of renewable energy projects in some of the more remote parts of Nevada.

Another major project that is virtually complete is NVEnergize, our smart grid, smart meter project. Since the fall of 2010, we have installed about 1.4 million new meters providing our customers with the tools to manage their energy use more efficiently.

Finally, as Jonathan mentioned, we are hosting an Investor Conference in Las Vegas in late June. We hope many of you will be able to attend and we look forward to seeing you there.

We'd be happy to take your questions at this time.

Question-and-Answer Session

Operator

[Operator Instructions] And now we'll go to the line of Dan Eggers from Crédit Suisse.

Kevin Cole - Crédit Suisse AG, Research Division

Hey, this is Kevin Cole. Michael, I guess we have seen some -- I guess the local press reports that have basically indicated that your legislative push to extend the rate cycles to 5 years and to early retire the coal plants early were a complete surprise to the commission and subsequently has resulted in a level of frustration at the commission, but knowing you and your normal respectful approach to that matter that this doesn't seem right, can you add any level of perspective to that?

Michael W. Yackira

Well, Kevin, I appreciate that. And you are right, we certainly have talked to the commission and commission staff about both matters. It's their prerogative to take positions that they take very often on matters of public policy and this is no exception. I think if you balance the commission's comments on NVision with some of the other comments made by others, you'll see that there is a balanced discussion and dialogue going on. And indeed we began talking with commission staff before the conversation I guess about 2 weeks ago, in an agenda hearing that the commission had, we have incorporated some changes into the legislation to reflect some of the concerns that the commission did have. For example, the process for retiring the plants or replacing the plants is now within the Integrated Resource Plan, albeit, a changed Integrated Resource Plan because we see this being a longer-term plan than the current statute provides for it. I think we've discussed this in New York but the current statute has a 3-year action plan, meaning you're bringing forward what actions you'll take over a 3-year period of time. This is a much more comprehensive and longer-term plan so it doesn't fit within the confines of the IRP as it exists today, but the changes to the legislation still brings into the IRP process, the deliberation of the commission and the ultimate decision of the commission in prudency. So we have listened to the commission staff and we've incorporated those things but I assume the commission still has some issues with the legislation as it exists.

Kevin Cole - Crédit Suisse AG, Research Division

And then I guess if we think about building new generation, do you have existing like transmission capacity at the Ely Center or do you have any spots in mind for the new generation?

Michael W. Yackira

I'm sorry, Kevin, I thought you said transmission?

Kevin Cole - Crédit Suisse AG, Research Division

It's on new generation, I guess, do have sort of at the Ely Energy Center, do you have additional like transmission capacity to take away additional generation so if you were to put new gas plant at the Ely Center, would you require a lot of new transmission infrastructure because of that or do you have -- because of the old coal plant? As to other...

Michael W. Yackira

Yes. Well, the ON Line is the transmission line that was being built. It was named something different when we were pursuing the Ely Energy Center, but it is the same transmission line corridor, same transmission line, same capacity that we were planning. And that capacity, with renewable energy projects being completed, has almost been filled up. There is some room for it. But when we're looking at generation, we really want to look to site the generation as close to load as possible. So the middle of the state wouldn't necessarily be the best place to site that load. And the commission did express an interest in the last IRP of us pursuing brown field sites first before we look to green field sites. And the Ely Energy Center site would certainly be a green field site and fairly far away from gas pipeline. So I think while that's a possibility, we'd prefer to build closer to load.

Operator

[Operator Instructions] And now we'll go to the line of Neil Mehta from Goldman Sachs.

Neil Mehta - Goldman Sachs Group Inc., Research Division

How quickly do you think you can get to that 50% equity layer? And how are you thinking about the $250 million maturity later this year? Is the plan there to refinance that or to retire the debt?

Jonathan S. Halkyard

In terms of the equity layer, we've said in the past that we would be able -- we would expect to be able to achieve that target in the next couple of rate cases. As it stands right now, of course, we'll be filing a rate case for the Northern utility this summer and we will use the equity ratio at the time of filing. And as I mentioned in the prepared remarks, that equity ratio right now is approximately 47%. It would be our plan to file a combined rate case in the summer of 2014 for 2015. So I think that the path will be the same as it is right now, which is to file, of course, with the current equity ratio at that time. It's hard to know whether it will be a 50% by that point. That will depend of course on the performance of the business. And as it relates to the $250 million maturity this fall, I think, Neil, you asked me this question on the last quarterly call too. And our plan is to refinance that maturity in whole or in part in advance, of course, of September.

Neil Mehta - Goldman Sachs Group Inc., Research Division

All right. And then on maintenance, clearly it was down in the first quarter. It sounds like it's just a timing issue, is it fair to still assume O&M is flat over the course of the year and that maintenance will pick up in one of the upcoming quarters?

Jonathan S. Halkyard

That's right, Neil. We had a number of planned outages in the first quarter of 2012 which affected our O&M expense -- elevated O&M expense during the first quarter of 2012. So on a year-over-year basis, it was down. But for the balance of 2013, 2013 taken as a whole, we would expect our O&M expenses to be approximately flat.

Operator

And next we'll go to the line of David Paz from Wolfe Research.

David A. Paz - Wolfe Research, LLC

Just returning back to NVision or I guess SB 123. Can you just lay out the key milestones to get that passed like -- essentially what's the process from here till the end of the session?

Michael W. Yackira

It's Michael, David. It sits in Senate's Finance now and there's similar processes to what goes on in Congress with bills like this. If it passes out of Senate Commerce, it would likely go back -- excuse me, Senate Finance, it would likely go back to Senate Commerce who referred this bill to Senate Finance. Senate Commerce, assuming it passes in the committee, it would then go to the floor of the Senate. If the Senate passes the bill as written, then it would go to the Assembly. Assembly Commerce, same kind of process, Assembly Commerce would review it and if they pass the bill as it's written, it would then go to the Assembly floor. If they pass the bill as written, then there's no further deliberation necessary by the legislative body and it would go to the governor. If there are changes made in either house then there'd be a conference to discuss those changes and hopefully reconcile those changes. And then pass the bill and send it to the governor. As a reminder, there's only a month left in the session so we expect some serious activity over the next several weeks.

David A. Paz - Wolfe Research, LLC

Okay, great. And can you say of the key stakeholders there in the state, which ones have expressed support for your plan?

Michael W. Yackira

I really would prefer not to speak about anybody's position. Only to say that we continue to work with the key stakeholders. Every stakeholder in the state is key. So we're working with all of our stakeholders and all interested parties to try to build consensus. As a point of reference, the governor's staff a couple of weeks ago testified in support of the bill, so we're certainly happy about that. But we're continuing to work with others to ensure that we have common ground in trying to get this bill passed.

David A. Paz - Wolfe Research, LLC

Great, I appreciate that. And just a separate question, I noticed in the South on your usage, the commercial segment was about 4.3% down -- it was down 4.3% versus last year. Any reason why that is? What's the key driver there?

Jonathan S. Halkyard

There are a couple of drivers. None of them taken individually are all that material. One driver, believe it or not, is just the loss of a day year-over-year in the quarter, that will account for about 1% of that. But otherwise, nothing in particular that we can tease out as a major contributor to that.

Operator

And next we'll go to the line of Sarah Akers from Wells Fargo.

Sarah Akers - Wells Fargo Securities, LLC, Research Division

With the FERC rate case, is the ROE up for review in that case and if so has there been any FERC staff recommendations or any ROE data points there?

Jonathan S. Halkyard

It is up for review and at this point, no, there have not been any -- there hasn't been any new information offered.

Sarah Akers - Wells Fargo Securities, LLC, Research Division

And what is your current FERC ROE?

Jonathan S. Halkyard

It was kind of a blended agreement. So that's not something that we disclosed.

Sarah Akers - Wells Fargo Securities, LLC, Research Division

Got it. And then I know it hasn't been too long since the last update, but anything new to report on renewable-related transmission opportunities?

Michael W. Yackira

Sarah, this is Michael. There's nothing new to report. We're continuing to work with the CaliCell [ph] on looking at opportunities. But nothing new.

Operator

And now we'll go to the line of Kevin Fallon [ph] from SIR Capital Management.

Unknown Analyst

Just -- could you provide some clarification on the NVision situation whereby you have the governor clearly supporting the legislation but appointees on the commission apparently not. How does this play out? Does the governor's view ultimately prevail in terms of the regulatory paradigm, maybe not that in legislation I think it passed, but in terms of how the commission deals with things? Or is the commission a completely separate body from the governor?

Michael W. Yackira

The governor appoints the commission, each commissioner appoints the chairman of the commission. The commissioner's term is 4 years and they are an independent judicial body. So they get to opine on filings that people make, including filings NV Energy makes obviously, based on the fact, record and the testimony being made and submitted. So they're certainly independent. They are like a judicial body. And they voice their opinions. The governor voices his opinion, but I'm not exactly sure what to make of the question other than to say that they're independent voices.

Unknown Analyst

I see. So beyond just selecting the members of the commission, the fact that they don't appear to agree with him on his energy policy, it has no bearing?

Michael W. Yackira

I think that's too broad a statement, Kevin. I think that the energy policy of the state has been implemented very exquisitely by our Public Utilities Commission and filings that we've made over the past more than half a dozen years. The -- Governor Guinn in 2000 set a stage for -- or set us on a path for being energy independent, meaning not having generation needs coming from outside of the state that we, as you probably know, we follow that path for several decades. And in 2000 when the energy crisis happened, it turned out the to be a failed path. So we went on a different strategy. We've added 4,500 megawatts of capacity over the past 5 or 6 years, all of which is in rates. So I certainly wouldn't say that the commission is not in line with public policy and energy policy in the state. They happen to have a disagreement with this piece of legislation and we're continuing to work with commission staff in trying to assuage their issues. But again, I don't think that, that statement is an accurate statement with respect to a disagreement on energy policy between the governor and the commission.

Operator

[Operator Instructions] And we'll go to the line of Paul Ridzon from KeyBanc.

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

I'm just hoping to get an update on any activity you're seeing with regards to increased precious metals mining and the potential load opportunity there?

Michael W. Yackira

There's not much of an update, Paul. We still are anticipating and have experienced some strong load growth in the North from our mining customers. And we expect that to continue into 2013. And that's factored into our guidance for this year.

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

Is this opening new facilities or more expansion of existing?

Jonathan S. Halkyard

It's both.

Operator

Thank you. At this time, we have no further questions. Please continue.

Michael W. Yackira

Well, thank you very much, everybody, for your attention. And we look forward to seeing you in June for those of you who can attend or before that if we see you in other sessions. Thanks very much.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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