Jeff Shaw – CEO
George Biehl – CFO
John Hester – SVP Regulatory Affairs
Ken Kenny – VP & Treasurer
Barry Klein - Citi
Unspecified Analyst – UBS
John Hanson – Unspecified Company
Southwest Gas Corporation (SWX) Q2 2009 Earnings Call August 5, 2009 1:00 PM ET
Good day ladies and gentleman and welcome to the second quarter 2009 Southwest Gas 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.
Welcome to Southwest Gas 2009 mid-year conference call. My name is Ken Kenny and I am the Vice President and Treasurer. Our conference call is being broadcast live over the internet. For those of you who would like to access the web cast, please visit the 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 an overview and update of the company’s operations for the 12 months ended June 30, 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 earnings in the company’s coming months. 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, and thank you all for joining our call today. There’s no doubt we are feeling the effects of the current recession and we’ll discuss some of those effects during the call. We will not dwell on the detailed numbers that are already included in the filed documents. Hopefully you’ve had a chance to look at our Form 10-Q.
We remain focused on our core strategies so we choose today to focus on the drivers of our performance. Our core strategy is basically, number one, is to work with our regulatory bodies to improve the level and stability of revenues and cash flows.
This is our most important focus. We have also have as part of our core strategies to pursue sensible cost controls to aggressively manage growth and yes granted growth is down for us at the present time, that has been a focus of ours.
And also to attract and retain a well trained and an efficient workforce. Those last three that I mentioned really all support our first and foremost strategy to work with the regulatory bodies. Any time we can do what we can to improve our operating efficiency and control those costs it strengthens our case as we file for rate adjustments.
So given the importance of this first core strategy, we’ve invited John Hester our Senior Vice President of Regulatory Affairs and Energy Resources, to provide discussion on our regulatory activities by state. I’ll turn the time over to John to proceed.
Thanks Jeff, the company has been involved in a variety rate and regulatory proceedings over the past year, I’d like to start with a brief recap on a couple of proceedings that have already concluded. The first one probably the most important one that’s concluded in the past year certainly is the Arizona rate case.
The company filed a general rate case application with the ACC back in August of 2007. The Commission reached a decision in December this past year, rates were effective December, 2008. That decision provided for incremental revenue to the company of $33.5 million and also provided an overall rate of return of 8.86%.
That includes a 10% return on equity which is applicable to a 43.44% equity component on the capital structure. So far this year Southwest has recognized $50 million of incremental margin in the first half of 2009. One of the components of the rate case application that we included was a request to move to a decoupled rate design.
That request was not approved by the Commission but more recently the Commission has convened a series of workshops in a generic proceeding to evaluate rate and regulatory incentives and to establish energy efficiency standards for both electric and gas utilities.
Interested parties including Southwest submitted proposed regulations to the ACC in that proceeding on June 3, 2009. Throughout the workshops revenue decoupling and performance incentives have been a topic of much discussion and those concepts have been incorporated in a number of the draft regulations that the various parties have submitted.
At the current time the ACC staff is reviewing the submittals of the parties and is tasked with coming up with a draft regulation of their own. We anticipate that this draft regulation will be circulated to the parties in the next few weeks.
Once that’s been circulated the Commission will likely convene some hearings and at this point we’re optimistic that a decision in the matter may be reached by year end. A second rate case proceeding that has concluded is our California general rate case application.
That’s an application that was submitted to the California Public Utilities Commission in December of 2007. Ultimately the parties in that proceeding reached a settlement which was approved by the CPC in October of 2008 and the new rates were effective January 1 of this year.
As part of the Commission’s settlement approval authorized increases of margin of $2.4 million were applicable to our Southern California service territory. The settlement authorized a decrease of $1 million for our Northern California service territory and then finally an incremental $1.8 million increase was approved for our South Lake Tahoe service territories.
The amount of $1.4 million of that amount is effective this year with an incremental $400,000 to be effected next year. The settlement provided for a 10.5% return on equity that was applicable to a 47% common equity component and it also returned our margin to a seasonal methodology.
Previously we realized margin on an equal monthly basis, now that margin will track the sales volumes as they vary over the course of the year. If you take a look at moving from the equal monthly margin to the seasonalized margin as well as the incremental increase in margin that we’re seeing in 2009, you will see that we will realize the combined effect of $12.8 million in the first quarter, a decrease of $2 million in the second quarter, a decrease of $9 million in the third quarter and an increase of $1 million in the fourth quarter.
In addition to the margin increases that the Commission approved they also authorized lower depreciation rates which should reduce our depreciation expense by approximately $3 million annually.
In addition to the 2009 test year margin increase, we also will realize four years of what we refer to as attrition increases. Those increases will be 2.95% effective for years 2010 through 2013 for both our Southern and Northern California service territories. In addition to that we will see $100,000 per year of incremental margin for our South Lake Tahoe properties.
So the combined effect for those attrition year increases will be approximately $2.2 to $2.7 million a year. Moving to a couple of proceedings that are still pending, first of all I’d like to briefly recap our Nevada rate case application.
The company filed a general rate case application with the Public Utilities Commission of Nevada on April 3 of this year. In that original application we requested an increase in operating revenues of $28.8 million or 5.9% for our Southern Nevada rate jurisdiction and $1.7 million or 1.4% for our Northern Nevada rate jurisdiction.
In addition to the margin rate increases that we are requesting we are also seeking to implement a decoupled rate structure based on recently established Public Utility Commission of Nevada regulations.
We think that implementing this rate structure will help stabilize our operating margin and also it will allow the company to more aggressively pursue customer conservation opportunities through the implementation of conservation and energy efficiency programs.
We have somewhat of a tandem application, our conservation and energy efficiency plan that was filed with the Commission that contains the substance of those programs and we anticipate an approval in that docket at about the same time or slightly prior to a resolution of our general rate case application.
The proceeding has been in the discovery phase over the past several weeks. Testimony from the Commission staff as well as the Bureau of Consumer Protection is due this month. That testimony will come in in phases depending on the topic and then hearings are scheduled for next month with an order and new rates expected to be realized in the fourth quarter of this year.
Recall that the company’s last general rate case in Nevada was filed on March 8 of 2004 so its been approximately five years in between rate cases in our Nevada service territories. The last general rate case application that is still pending is an application for our Paiute Pipeline [inaudible] regulated subsidiary. This application was filed on February 27 of this year and its requesting a $3.9 million or 12.6% increase in margin.
The filing fulfills and obligation from a settlement agreement that was reached in Paiute’s last general rate case application which was back in 2005. That proceeding is also currently in the discovery phase. New rates are anticipated to go into effect subject to refund later this month. A number of settlement conferences have been convened to date.
If a settlement is not reached in this filing then hearings will be convened in January. And then I’d like to close up with a few comments on our gas cost recoveries which have been very strong. If you look at where our balances were as of the end of last year, December 31, 2008, we had a collective over recovery of $33.1 million due to the precipitous drop in gas prices that we’ve realized over the past 12 months.
We’ve seen that balance increase to a level of $82.2 million as of June 30, 2009. Ultimately our gas cost rates to our customers will catch up and those balances will be refunded to customers however we have various mechanistic rate processes in place for each of our service territories in Arizona.
We have monthly rate changes based on 12 months of historic average cost data with a $0.15 per [theram] cap so as we see those lower prices work their way into that 12 month history we’ll see those rates continue to go down and refund some of those monies to customers.
In California we have monthly rate changes based on forecasted prices so as a result we don’t generally get any significant over or under recoveries of gas cost in California. The monthly adjustments in California are designed to provide a more timely recovery of gas cost as well as to send an appropriate price signal to customers.
And then finally in Nevada we use a quarterly gas cost adjustment. That too is based on a 12 month rolling average so the current rate is higher than our realized cost but that will trend down as we move forward and more of those lower cost gas prices are reflected in our rates.
The adjustments that are made in Nevada are effective immediately upon approval upon filing with the Commission but are subject to annual prudence reviews of the Commission.
With that I’d like to turn it back to Jeff.
Thank you John, I’d like to next turn to liquidity for the company, we have a $300 million credit facility that expires in May of 2012. We have designated $150 million of this facility as a long-term portion and the remaining for working capital purposes.
As of the end of June of this year we had $91 million outstanding under the long-term portion and none was outstanding under the short-term portion. Management believes that the company does have a solid liquidity position and we have not experienced any difficulty in obtaining any necessary financing.
The company’s next significant debt maturity is in 2011 in the amount of $200 million. In December of last year the company purchase $75 million of Clark County Nevada IDRBs through a tender offer resulting in a net deferred gain of approximately $14 million after expenses.
I’d like to talk a little bit about our capital expenditures, for the 12 months ended June of this year, capital expenditures were $258 million. More than half of that was new business related. That compares to $291 million for 2008. So we have seen our CapEx come down. That should be no surprise given the slowdown in the [growth].
Our cash flows from operating activities during that same 12 month period were $301 million and which provided sufficient funding for our construction expenditures and our dividend requirements. This puts us in a fairly solid position from a cash flow standpoint.
Our capital structure between the years June 30, 2008 to June 30, 2009 improved 45% equity to 47% equity during those time periods. So all of our financial metrics relative to our financial position improving led S&P in April of this year to upgrade the company from a BBB minus to a BBB flat with a stable [inaudible] outlook.
We were pleased to be able to see this especially in this environment. I’d like to talk a little bit about our operating efficiencies, again some of the drivers behind our numbers. Operating expenses which includes O&M, depreciation, and general taxes were up just under $16 million, $15.8 million or 3%, resulting principally from operating and maintenance expenses which increased $9 million or about 2.7%.
And that would include your general cost increases, federal law requirements that we have, code requirements that we have to comply with and we’ve also got in there as an offset, labor efficiencies principally from the conversion to electronic meter reading and other cost containment efforts that management has taken as far as operating initiatives.
Our depreciation expense increased $7.2 million or 4% as a result of additional plant and service which increased $223 million or 6% during that time period and those ongoing expenditures related to the upgrading of our existing facilities and expansion of the system.
If you take a look at our operations and maintenance expenses on several trailing 12 month periods you will see that our operation and maintenance expenses have been hovering somewhere between zero to less than 3%. In fact if you look at the trailing 12 ended September 30, 2008, we actually experienced a very minor decrease during that time period.
And that was generally as a result of some of these projects that we initiated with respect to electronic meter reading and also conversion to a virtualized call center and we expect that we’re going to be able to continue to keep that trend going forward in the near-term.
With respect to full time employees, the number of our full time employees has decreased from 2,524 at the end of June of 2007 to 2,432 at the end of June, 2009. Our customer to employee ratio improved from 706:1 at the end of June of 2007 to 740:1 at the of June, 2009.
That ratio we believe continues to be one of the best in the industry and at the same time we’ve been able to maintain customer satisfaction ratings based on third party surveys consistently in the mid 90% range. So we’re very proud of that statistic and proud of the efforts of our employees to maintain that satisfaction.
These improvements are attributable to initiatives that management has taken through the judicious use of technology and corresponding changes to operating practices. Again examples being all of our meter reading being converted to an electronic based system and also the consolidation and virtualization of our call centers.
I’d like to speak just a few moments to customer growth, this company historically has had significant growth, maybe one of the fastest growing utilities in the country. Well with the current recession we have seen that growth come to a very screeching halt. And while we still are seeing some growth, we’re also seeing foreclosure activity.
During the 12 months ended June 30, 2009 the company completed 25,000 first time meter sets but added 3,000 net new customers for a total of 1,809,000 customers. Now the difference between the first time meter sets and incremental active net new customers indicates a significant inventory of unoccupied homes continuing a trend that we first started experiencing in 2007.
Net growth is expected to continue at 1% or less for 2009 as high foreclosure rates and difficult economic conditions persist throughout our service territories. Once the housing supply and demand come back into balance, the company expects to experience a correction in which net customer additions will likely exceed first time meter sets.
We cannot predict the timing of this turnaround. It is likely however that it will occur over multiple years and maybe nothing immediate.
With that I’d like to turn some time over to George Biehl, our Chief Financial Officer, to discuss some of the expense line items that might be of interest to you.
Thanks Jeff, I want to address several things, in constructing our comments today one of our management team members came up with the term that I like, which are topical items and by that I mean I want to discuss a couple of items that don’t necessarily pertain just to us but we get a lot of questions and discussions with our various constituencies both on the equity and the credit side and other users of our financial statements.
So the three items that I’m going to address briefly are bad debt expense, pension expense, we have as many of you are aware a defined benefit plan and then company owned life insurance which I’m going to call COLI from here forward.
So let me start out by just offering a couple of comments relative to our experience with bad debt expense. Bad debt expense for the 12 months ended June 30, 2009 was approximately $6.4 million compared to $8.5 million for the prior 12 month period.
And that represents about 0.39% of our total revenues for the current 12 month period compared to about 0.46% of revenues for the prior period. We attribute the current period bad debt expense amount really a reduction in this case, is the result primarily of smaller customer bills and lower gas costs when compared to the previous period.
That’s certainly one if not the primary driver. But to sum up we, the company has not experienced significant increases in bad debt expense despite the current economic conditions. I can tell you as an aside a lot of our customer service people are working a lot with our customers who are feeling the recession. And finally I think we believe that the bad debt expense will remain fairly flat or constant, comparable is probably a better term to the historic amounts and if you go back into our Annual Report for 2008 you’ll see the last couple of years has been running in the $7 million to $7.5 million range.
Next I want to talk about pensions and I would describe this as somewhat of a mid year update but its based on pension disclosures included in the 2008 Annual Report. Our pension expense estimates are performed based on physical year data, in some cases right at the end of the year with some of the driving factors.
For example for us that would be the most recent would be 12/31/08. Pension expense for calendar year 2009 is estimated to be $19 million and that’s about $2 million greater than 2008. Negative asset returns is the primary reason for that increase. We expect the expense level to trend upward until favorable return years are experienced and/or additional fundings are made.
The estimated pension funding during 2009 is about $22 million and I think its important to note additional future funding requirements certainly are not anticipated to materially impact our liquidity or cash flows. The final comment on pensions is the company receives regulatory recovery of pension costs in each of its jurisdictions and given the aforementioned rate case postures that John Hester mentioned or addressed, summarized, pension expense has currently recovered in all material respects in our existing cost of service.
In other words we’re pretty current with the recovery of pension expense. Last topic that I want to address is company owned life insurance, COLI. I’m going to pause for just a second and reference you the readers to two pages of our most recently filed Form 10-Q which I think lay out fairly concisely yet completely the COLI.
The first page reference actually is page five and I’m going to summarize the data there but we have begun the last several quarters to break out the change in the valuation of the COLI policies really as a subcomponent of the separate line item so you can track that. And then secondly we have a section in the executive summary portion of our management’s discussion and analysis on page 15.
Having said that, and many of you have heard this before, but let me go through a couple of the highlights with respect to COLI. The company has life insurance policies on members of management and certain other key employees to indemnify itself against the loss of talent and knowledge etc. and underscore as well as to provide indirect funding for certain non qualified benefit plans.
So in short its really a funding vehicle. The net cash surrender value of the policies as of the most current reporting date June 30, is approximately $51 million and its in other property and investments rather on the balance sheet. Now more pertinently cash surrender values are directly influenced by the investment portfolio underlying these insurance policies.
And the portfolio includes both equity and fixed income investments. As a result the cash surrender value but not the net [death] benefit moves up and down consistent with movements in the broader stock and bond markets. And the other thing I want to emphasize, its current tax regulations provide for tax free treatment of the death proceeds.
Therefore changes in the cash surrender value are also recorded without tax consequences. So to sum up what these policies are and what you can see in the future we intend to hold these COLI policies for their duration, purchase additional policies as necessary and they provide a very tax and economically viable way to fund certain benefits.
It’s a funding vehicle. Now what does that do to our income statement, well in short it adds volatility because its related to the underlying values are based on market values. If you look, and I’m going to go through this quickly, because as I said at the outset we’ve broken it out in the document but to give you a sense of the volatility for all three periods provided in the second quarter 10-Q, in other words the three months ended June 30 on a comparable basis, the six months ended June 30 and the 12 months ended June 30, here are the numbers and that’s the way I’m going to conclude.
First I’m going to provide the dollar value of the change in the COLI policies, i.e. the valuations and then I’ve computed the EPS effects and you can see, it is adding volatility to an item that we considered it to be a funding vehicle.
But for three months ended June 30, 2009 the change was a positive 3.7 versus $500,000 the prior period. That translates into $0.08 a share for the current period versus a reduction of income of $0.01 a share in the prior period.
For the six months its about $2.1 million positive in 2009 versus $2.6 million negative reduction in 2008. So that’s an EPS impact this year of $0.05 positive, the prior year $0.06 negative. And for the 12 months ended given the market conditions etc. we had a valuation impact in terms of dollars of about $7.4 million for 2009, $3.2 million for 2008.
That’s a reduction in our reported earnings per share of about $0.17 in 2009 and $0.08 in 2008. And with that I’m going to turn it back to Jeff.
I just have a few concluding remarks, firstly with respect to our pipeline construction subsidiary which I will refer to as NPL, for the 12 months ended June 30, 2009 net income was $7.5 million versus $9.1 million for the same period in 2008. a decrease of $1.6 million.
This reduction basically relates to the slowdown in growth, work related to the new construction. And if you look historically at NPL they have expanded to meet the demand for growth and contracted accordingly as growth has subsided, but their balance of work is generally between the new construction and also the maintenance of systems.
And we believe that utilities will continue to have a means to maintain their systems so that portion of the business will continue to be there. I would think looking forward the trends that we’re seeing are reflective of the performance of NPL.
Next and finally with respect to the dividend, I think its important that we address that. In February, earlier this year the Board of Directors increased the quarterly dividend from $0.22.5 to $0.23.75 per share effective with the June, 2009 payment.
The Board will each year review dividend policy almost continuously considering the adequacy and sustainability of earnings and cash flows, the strength of the company’s capital structure, the sustainability of that dividend through all business cycles and whether the dividend is within a normal payout range for the industry.
So once again I expect the Board to review that. Certainly the intention is to try to address dividend policy but we will again review all of these factors as Board to determining what actions may be taken with respect to the dividend.
And finally we believe the strategies are very basic, the ones that I outlined at the beginning. We believe they’re working. We’re seeing some progress. Clearly the recession is a challenge for us but we remain optimistic with the progress we’re making and we are certainly appreciative of the cooperative nature of the interactions we’ve had with our regulatory bodies.
So with that I will now turn the time over to Ken to pursue any questions you may have.
That concludes our prepared presentation. We will now take your questions.
(Operator Instructions) Your first question comes from the line of Barry Klein - Citi
Barry Klein - Citi
Just wondering on the volumes, how did they come in this quarter versus last year by customer type, residential, industrial, so forth.
I think if you look at page, generally speaking we’re seeing that we have several different factors that are affecting the margin right now. First of all you have a contraction in margin related to under using customers I guess I’ll call them for lack of a better term. Those would be where the average usage has declined for a variety of reasons.
You may have homes that are active but no body is in them, an investor has purchased them, you’re getting a basic service charge but you’re not seeing any usage per say for water, heating or other uses.
So we have that type and in the documents on page 15 in the 10-Q we talk about for the quarter and the six months ended that the estimated impact of these non weather related volumetric declines was a reduction in operating margin of $2 million for the second quarter and $8 million for the six months ended.
We expect to see a similar trend to the end of the year. If you take a look at our customer count it is net of inactive meters and we have inactive meters, an excess number of inactive meters today that has built over the last little while but seems to have been holding relatively steady.
That’s probably about 50,000 excess inactive customers. So at the time that this starts to turn around and we see some progress towards those customers hooking up, we should start to see customer numbers that would exceed first time meter sets. With no investment you’ll see customer numbers come back.
Its just a question of when is the timing of that turnaround. We’re watching for that. I don’t necessarily today I don’t think anyone in this room has an answer nor do I see anybody in our communities that can give us a firm answer as to when that might turn.
So hopefully that addresses your question.
Barry Klein - Citi
And with regard to the decoupling study in Arizona, you got all the company’s work separately and submit their, everything, I guess their proposals separately or are you trying to get together with the other utilities and submit something as sort of a unified front.
Each of the entities submitted their own draft regulations. There were a lot of common discussions however, some of the workshops were fairly informal, electrics and gas companies have a little bit different perspective on their preferred type of decoupling.
But I think that a lot of the spirit of what went on and certainly what was incorporated into our regulation was some flexibility to allow companies to submit mechanisms that work best for them.
Barry Klein - Citi
And was your impression that when the Commission met and decided on something that it would sort of, they’d take it on a utility by utility basis or do you feel that they’re going to take a compilation of all the different ideas and try to set up one best practice that should apply to all the utilities.
First of all the Commission hasn’t met and decided anything in that exercise just yet but I think once they do I suspect the answer is going to be the latter, that they will come up with a regulation, it may have an electric part and a gas part within the same regulation. But again hopefully that regulation has the flexibility that allows companies to submit the type of decouple rate design that works best for them.
Your next question comes from the line of Unspecified Analyst – UBS
Unspecified Analyst – UBS
Just a couple of quick questions, I was wondering if you can sort of talk about the construction segment for a second and kind of guide us to where you think a normalized run rate on an operating basis would be. Obviously I’m not asking for timing because we don’t know but kind of where you think it would settle out, 11, 12, at some point where you think you return back to a more normalized level.
That’s a good question, I guess the best way to handle that is to go look back over the last five to seven years. I think that the run up in housing starts that occurred in the 2004, 2005, 2006 and started to slow down in 2007, it probably got to an unusually high number in that timeframe.
I think if you look to those prior years and you look to where we’ve come, you’re starting to see a trend that is probably more normalized. I would argue that maybe housing is a little light right now over what it might be once it returns to some level. But I would also argue that the 2004, 2005, 2006 timeframe, that ramp up was probably unusually high to look at on an ongoing basis.
So I’m giving you a general answer to your question but I believe that’s probably the best way to analyze it.
Unspecified Analyst – UBS
I was also wondering if you can sort of give us an update on the local economy with respect to both Phoenix and Las Vegas. Is employment starting to pick up at all, are there glimmers of hope, I hate to use the word green shoot but kind of if you can give us some color on where you think the economy is moving in both of those markets.
I’ll give you my perspective and most of it is what I read, and so its in the media print and otherwise. Generally speaking what we have seen is the purchase of existing homes has actually ticked up in recent months. The only question is are investors buying those with the expectation that someone will come and rent the homes or otherwise.
We have not seen anything dramatic in the numbers, historically thus far that suggest we’ve had that catalyst that’s going to bring people in to see the turnaround in customer numbers. So we’re waiting for that. I guess I would characterize it as we’re sort of in a wait and see mode.
We’re not seeing things getting tremendously worse, we’re not seeing things get tremendously better at this point. We’re sort of in a holding pattern and watching like everyone else is to see what that catalyst might be.
Unspecified Analyst – UBS
And I was wondering if I could just return to something that Barry asked you, you sort of highlighted conservation as kind of an issue but is it really conservation or is it really just the scenario that the investors own a house, they pay the basic service charge, and there’s just no volumes basically.
Its probably a combination of both because I think with our economic circumstances that we’re in I think people have to some degree tightened up as well. Honestly I don’t know that there’s any way to really put a precise number on that. We’ve analyzed it, we’ve looked at, we stratified usage an so forth but at the end of the day we don’t have any firm conclusions that give us any real guidance on that.
Other than to state that we look at the whole thing, we know that there are homes that are owned that they still have service turned on but we’re not seeing a lot of usage and we also know that there probably are people that are just tightening, just turning the thermostat up, not having it, whatever they’re doing, not cooking as much, not barbequing as much, I just think in this environment whatever it is, they’re doing whatever they can to save money.
So its, your guess is as good as ours in some ways with respect to customer behavior other than to look at the numbers at the end of the day and that’s why we’ve disclosed that $8 million for the six months ended and the $2 million for the quarter just to give the investor the opportunity to see what the impacts have been to margin in our estimation.
Unspecified Analyst – UBS
Just with respect to CapEx, obviously a lot of homes that need to be hooked up and so forth, there’s still a pretty much robust number that you through 2011, I understand that some of it is replacement of old pipe, I was wondering if you can break it down into what component is growth, what component is kind of replacement of existing infrastructure and how old the existing infrastructure is that you’re attempting to replace.
Historically we have run 60%/40% growth to what I would call code regulatory ongoing pipe replacement on an ongoing system upgrade and the things that you need to do so I would say that’s been the historical trend.
Its maybe moving a little more towards 50/50 but we have an ongoing amount of CapEx that we’re going to need to spend if we’re going to keep our system reliable and safe no matter what, whether there’s heavy growth or not. And we believe that its prudent to continue to make those capital investments to make sure that we keep up with that ongoing pipe replacement needs.
Unspecified Analyst – UBS
If you can just sort of address how old certain parts of the system are because I know you’ve had a lot of growth over the past 15 years, so I would assume a lot of it would be new.
We have obviously had a lot of new customer growth in then last 10 to 15 years, we also have legacy systems, the Tucson gas properties were purchased back in the last 70’s. The Phoenix properties were purchased in the mid 80’s and there have been other minor acquisitions up north.
There are needs throughout the service area. We do routine leak survey work. We do significant analytics to determine where the pipe, how the various types of pipe are performing and we based on those analytics for safety reasons we will definitely go and look at any pipe that we need to and generally that pipe is very, is old, its 40, 50 years old and we replace it.
And its necessary. We also have code and regulatory requirements. We have distribution integrity management laws that we have to contend with that require us to make certain capital outlays that we really don’t have a choice whether we do them or not.
We have transmission integrity management pipeline laws that we have to contend with. We don’t really have a choice as to whether to make those capital investments or not. So all of these safety requirements that are imposed upon us by the federal government also add to this non revenue producing growth related capital expenditure its in the other category, and its something we have to stay ahead of.
Your next question comes from the line of John Hanson – Unspecified Company
John Hanson – Unspecified Company
You mentioned on the meter set customer issue at the beginning about that it would take multiple years to work that off, is that the same 50,000 inactive ones that you were talking about.
The answer is yes. Multiple years, your guess frankly is as good as mine until we see the catalyst to change that but it’s a fairly large number and the market would have to come back in a very robust way in order to absorb that many in a very quick timeframe so that’s why we made the disclosure the way we did.
We think it will take some time.
John Hanson – Unspecified Company
Back on the pipeline construction business do you have any backlog kind of levels that you have now versus you had in the past or anything like that to kind of talk about.
Generally speaking there hasn’t been a great backlog for NPL even during robust time periods. The nature of the work is such that you don’t really have that. Its, when you’re doing housing developments you’re in there. They hire more crews, they expand and contract those crews to meet the growth needs. You take a look at the replacement work that various utilities need to do, maintenance work and so on throughout the country.
Its pretty predictable and there really isn’t what I would call a backlog. Its more relationship driven and I think that’s the focus of NPL is to continue to have those strong relationships so that they are the contractor of choice in terms of quality and price and that’s been their strategy and its been very successful.
John Hanson – Unspecified Company
You mentioned crews, has there been a cut back in the number of employees or the size, I remember in the past you’ve sold equipment at different times and all those kinds of—
The answer is yes, in fact there’s been a fairly dramatic drop off in the number of crews that are working. Their employee count is way down over what its been and they’re very effective at staying ahead of that and contracting and expanding the business with the work that’s out there. So absolutely.
John Hanson – Unspecified Company
Nevada rate case, when are we expecting a final order on rates on that.
The final decision, the hearings are presently scheduled for September. The Commission should render a decision in October and we should have new rates effective November 1, prior to the heating season.
There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.
On behalf of management of Southwest Gas, thank you for joining us today for our mid year update. We appreciate everyone listening in and have a good day.
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