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NV Energy, Inc. (NYSE:NVE)

Q2 2011 Earnings Call

August 1, 2011 10:00 am ET

Executives

Max Kuniansky – IR

Michael Yackira – President and CEO

Dilek Samil – SVP, CFO and Treasurer

Analysts

Daniel Eggers – Credit Suisse

Greg Gordon – ISI

Neil Mehta – Goldman Sachs

Steve Fleishman – BofA

Jay Dobson – Wunderlich Securities

Andrew Levi – Caris & Company

Paul Patterson – Glenrock Associates

Robert Howard – Prospector Partners

John Alley – Decade Capital

Operator

Ladies and gentlemen, thank you very much for standing by. And welcome to the NV Energy Second Quarter 2011 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 also as a reminder today’s conference is being recorded. I would now like to turn the call over to your first speaker, Mr. Max Kuniansky. Please go ahead.

Max Kuniansky

Good morning, everyone. Thank you for joining us to review NV Energy’s results for the second quarter of 2011. By now you’ve seen the press release issued earlier today and the slides on our website. We do expect to file our Form 10-Q with the SEC within this week.

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.

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-Q with period ended March 31, 2011 and the Form 10-K for the year ended December 31, 2010. Reconciliations of certain non-GAAP financial information can be found on our company website at www.nvenergy.com.

With me this morning are Michael Yackira, President and Chief Executive Officer; and Dilek Samil, Senior Vice President, Chief Financial Officer and Treasurer.

I’ll now turn the call over to Dilek.

Dilek Samil

Thank you, Max, and good morning, everyone. I’d like to officially welcome Max to NV Energy. Most if not all of you know Max and know that he’s the content professional. Max brings a wealth of utility and Investor Relations experience to our company and with Britta’s in depth knowledge of NV Energy they make a great team. I feel fortunate to work with them both.

With that, let me turn to our numbers. As we announced this morning, net income for the second quarter of 2011 was $12.9 million or $0.05 per diluted share, as compared with $36.9 million or $0.16 per share in the second quarter a year ago. For the first half of 2011, we earned $15.2 million or $0.06 per diluted share, compared with $35.2 million or $0.15 in 2010.

The key drivers of the decrease in second quarter earnings were lower gross margin, lower AFUDC, higher depreciation and two other items, which I’ll explain. Beginning with those two items, one was an adjustment related to our energy efficiency and conservation program, which reduced second quarter earnings by $8.6 million pre-tax.

We’ve been recording estimated loss revenues associated with these programs since August of last year. In the second quarter, the Public Utilities Commission issued a ruling which does in fact allow us to recover lost revenue but at a lower level than we had requested that ruling necessitated the adjustment.

The second item is a $7.6 million pre-tax gain on the sale of our independent Lake property, which we recorded in quarter two last year. Together these two adjustments account for nearly half the decline in pre-tax earnings for the quarter.

Gross margin was down nearly $15 million for the second quarter of 2011, compared to the same period a year ago. The single largest reason for the margin decline was decreased customer usage, primarily reflecting milder weather compared to last year.

The milder temperatures occurred in June which is typically a month of hot summer weather in the Las Vegas area accompanied by increased air conditioning rate. This year, cooling degree days for June were down 9% compared to last year. In total, megawatt hour sales in Nevada for the second quarter were down by 1.2% year-over-year.

Another factor contributing to lower gross margin was the sale of our California operations, which we completed on January 1st of this year.

Partially offsetting the declines were revenues related to energy efficiency and conservation programs, which we could not recognize in prior years and customer growth and Nevada customer base grew just under 1% for the quarter.

Turning to expenses, depreciation increased and AFUDC decreased in the second quarter. As expected, the Harry Allen Generation Plant which we placed in service in early May was the single largest factor driving both variances and also put pressure on operating and maintenance expense. As a result, completion of Harry Allen reduced pre-tax earnings by nearly $9 million for the quarter.

The total cost for the project came in at about $700 million including AFUDC. We expect the trend of higher depreciation and lower AFUDC to continue for the rest of the year and to remain dilutive to earnings until these amounts are reflected in rates.

Michael will provide an update on the Nevada economy in a few minutes but our conclusions and our outlook are unchanged. Our load forecast remains flat for next year, so we’re working hard to hold expenses flat.

The challenge for this year as we’ve discussed before and as we saw this quarter is a regulatory lag associated with placing the Harry Allen project in service.

The revenue requirement for Harry Allen is the single biggest component of the rate case we filed in the second quarter. We’re in the early stages of the process with hearings set to begin October 4th. We expect a final decision by the end of the year with new rates in effect beginning January of 2012.

Moving on to the balance sheet, we redeemed $350 million of 8.25 notes in the quarter just ended. We issued $250 million of new debt at 5.45%.

Consolidated liquidity as of the end of the second quarter was $785 million including about $110 million of cash. We use this cash to fund our capital expenditures which remain at about $500 million per year for the period 2011 through 2013.

As a reminder, this forecast includes about $100 million for our 25% ownership of the online transmission project, about $150 million for our smart grid project which we call NV Energize, as well as expenditures already made to complete the Harry Allen plant.

As we think about the outlook for the remainder of the year, let me remind you that the third quarter typically provides most of our earnings for the year and summer weather is a major driver. Last year, the third quarter was hotter than normal.

For this year, we have data for most of July and it may turn out to be the mildest July in the past decade with cooling degree days down about 15%, compared to last year in kilowatt hour sales down roughly 10% versus last year.

Before I turn the call over to Michael, I’d like to put this quarter's earnings and in fact the full year 2011 in context. While the quarter was challenging, the year-over-year decrease in earnings was primarily due to a combination of weather, the adjustment related to energy efficiency, last year's gain on an asset sale and the completion of Harry Allen.

On the positive side, we did bring Harry Allen into service ahead of budget and schedule. We’ve maintained discipline on both capital spending and O&M expense and we’ll continue to do so.

As we’ve discussed before, we expect the 2011 earnings to be challenged by the regulatory lag associated with Harry Allen and unless temperatures turn very warm in August, it appears that mild weather may further depress this year's earnings.

Neither of these factors, however, changed what is critical to NV Energy. We continue to expect 2012 to be a pivotal year. We will have new rates in effect. The new rates should allow us to recover our investment in Harry Allen, as well as make us whole on other investments since the last rate case. Our financial flexibility and financial profile should be much improved beginning in 2012.

With that, I will now turn the call over to Michael.

Michael Yackira

Thank you, Dilek. Good morning, everyone. This was a challenging quarter especially with the milder than normal weather, made even more difficult by the adjustment and prior year gain, Dilek mentioned.

Nevertheless, we are proceeding with our ongoing efforts to control costs, particularly with growth in Nevada expected to remain flat. The Nevada economy continues to show signs of stabilization. The state unemployment rate is still high at 12.4%, but it’s down significantly from its peak having dropped 2.5 percentage points since December.

We remain cautiously optimistic about this trend and about the modest growth in our customer base which we’ve now seen for several quarters. Job creation is critical for long-term growth of the state's economy. New jobs will motivate people to move to our state which should eventually translate into growth in our customer base.

A recent report by the Tax Foundation stated that Nevada is number two on the list of the 10 states with the lowest tax burden. So certainly hoping that such ranking will lead to job growth, but our planning does not take into account any material change in Nevada’s economy or the recent growth trajectory and as we’ve said previously, we believe the state's economy is set for slow recovery – recovery is likely to be measured in years as opposed to months. As a result, our employees continue to work hard to reduce costs and improve the efficiency of our operations.

For the past several years, we have made prudent investments in Nevada’s utility infrastructure to insure that our customers will continue to have reliable energy at reasonable prices. In May, we celebrated the completion of the new combined-cycle power plant at our Harry Allen Generating Station near Las Vegas that Dilek has mentioned. I’m proud that our employees and contractors completed the project ahead of schedule and under budget.

Harry Allen is a highly efficient natural gas fuel facility that is air cooled, requiring only a fraction of the water consumed by similar facilities and its emission rates are among the lowest in the industry. Harry Allen marks the completion of the building initiative to increase Nevada’s energy independence that we began in 2006 and we have met our goals. Over this five-year period, we have increased our company owned-generation portfolio by nearly 250%.

We’re also investing in new transmission. Construction is under way on the one Nevada Transmission project, most times referred to as ON Line. This is a 500 kilovolt transmission line that will extend 235 miles from the central and eastern portion of our state and terminate of the substation at Harry Allen.

It will for the first time interconnect our northern and southern utilities, providing the opportunity to use more cost effectively the expanded generating system-wide. It will also provide transmission capacity for renewable energy projects under development in rural Nevada and the line is expected to be in service by the end of 2012. ON Line will also provide a much needed boost to the local economy since as many as 400 workers will be employing the peak construction period.

Separately, in June, we announced NV Energy’s renewable transmission initiative. The first phase of this initiative is to assess market interest in the development and construction of new transmission, to deliver electricity from renewable energy zones in Nevada to markets in California and the desert southwest.

This is a long-term initiative that will be guided by expressions of interest that we expect to receive in September from renewable project developers. We’ll then determine next steps over the several months after receiving the expressions of interest including filings for necessary regulatory approvals before construction would begin.

Dilek briefly mentioned the rate case we’ve recently filed that is seeking a revenue increase of about $245 million. We’re also proposing to defer the collection of approximately $65 million to a future rate case. The remaining $180 million is equal to a reduction in fuel and purchase power costs, so if approved as filed our customers would see no change in rates at the conclusion of this case.

Finally, I want to provide an update on NV Energize, our smart home program. We have installed nearly 400,000 smart meters in southern Nevada and expect to complete the installation throughout the state by the end of next year.

NV Energize will play a key role in our energy efficiency efforts and is expected to transform the way we interact with our customers. Last week about a third of our customers that have received the smart meters began having access to online tools that give our customers information about bills and energy usage among other things. These tools are important parts of the new customer experience that NV Energize is beginning to provide.

Dilek and I are now ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Daniel Eggers with Credit Suisse. Please go ahead.

Daniel Eggers – Credit Suisse

Hi. Good morning, guys.

Michael Yackira

Hi, Dan.

Daniel Eggers – Credit Suisse

I just was thinking a little bit about, you had a transmission investment opportunities that’s something you guys have been focused on, but I was wondering if you could just give us an update on what projects you see out there and realistically, when you think you can start putting capital to work into projects beyond ON Line?

Michael Yackira

Dan, it’s Michael. I don’t think that we can give you a timeline of it and say that it’s probably quite a few years off. This initiative started with an announcement we made several months ago and as I’ve said, we are expecting to have expressions of interest in September. We are having meetings in this month both in northern and southern Nevada with potential developers, but we really don’t know the extent to which there will be an interest and the timing.

We certainly think there is an interest, I mean, everybody has been talking about Nevada being a major hub for renewable energy and the governor certainly would like to see it be for export and we agree with that, but the timeline will likely be some time mid part of this decade or perhaps even later than that depending upon what the expressions of interest are.

Daniel Eggers – Credit Suisse

And so Michael, I asked if we marry the kind of the transmission spending – a bit of a ways off and still slow economy in Nevada, how are you guys thinking about you will have a capital allocation beyond the next couple of years? It seems like you are going to be in a place where there’s going to be money to deploy to a dividend increase or paying down hold co. debtor or something else. How are you thinking about that and how should we think about prioritizing the use of proceeds?

Michael Yackira

Well I’ll take a first shot at that and maybe Dilek can follow up if I miss something, but I’d say, Dan, that if you look back to the last several years starting say 10 years ago with this company, we have not been in a position where we have cash flow in excess of our capital needs and it’s a nice situation to be in because it gives us opportunities to look at investments, to look at things like dividends, but we haven’t made any decisions yet because we are still anticipating what the outcome of for example, this initiative is, whether we see opportunities to invest an additional renewable plants. Perhaps, the economy will grow faster than what we are expecting right now, but it gives us a broader girth to look at options that we really haven’t had without having to go to capital markets before.

So I like having this position, and as again we’ve said in prior calls, as these things become more in focus and more real, we certainly will be talking to our investors about what those opportunities are, but we have not identified them specifically as of yet.

Daniel Eggers – Credit Suisse

I guess, Michael, with the September plan out there for transmission and renewable kind of seeming to move around a bit, is there a realistic timeline when you think you might have an idea on where that allocation goes? Is that –in the next six months or next 12 months or is it sometime beyond then before we are going to get more visibility on that allocation?

Michael Yackira

I think it’s closer to 12 months. Again, depending upon how many companies are out there, how many developers are out there who have an Expression of Interest for using a transmission line and my assumption is that there are going to be many and that will require a lot of analysis. So I would say it’s more like 12 months rather than six.

Daniel Eggers – Credit Suisse

Okay. Thank you.

Michael Yackira

Thank you.

Operator

Thank you. Our next question is from Greg Gordon with ISI. Please go ahead.

Greg Gordon – ISI

Thanks. Good morning.

Michael Yackira

Good morning, Greg.

Greg Gordon – ISI

Are we – is it fair to presume that sort of the cost of Harry Allen is running at a fairly consistent quarterly rate at this point? So is it all things equal last third quarter over this third quarter; is it going to be a $0.03 headwind like it was in the second quarter or is – am I not thinking about that correctly?

Dilek Samil

Greg, I think generally, that’s correct but I will remind you that the plant went into service in May and so we had, it was in the first week of May. So the numbers we show have a one month of depreciation. That’s about 2 million a month. Also, AFUDC – the AFUDC impact was for two months, May and June. So that needs to be extrapolated a bit as well. The AFUDC impact was about $5 million for the quarter.

Greg Gordon – ISI

Okay. So AFUDC was $5 million on a two-month impact and depreciation was $2 million on a one-month impact?

Dilek Samil

That’s right.

Greg Gordon – ISI

Got it. And then you said that July was very mild? So that’s another noted headwind with some – should we expect some marginal increase in energy efficiency revenues third Quarter this year versus last year?

Dilek Samil

On energy efficiency revenues, Greg, I’ll remind you that the PUCN approved $18 million for the full year 2011 and to date we’ve recorded $8 million after the adjustments that I mentioned.

Greg Gordon – ISI

Okay. And that compares to what was the – what was the amount being collected last year?

Dilek Samil

The amount – hang on a second while I get that; the amount that was in last year’ – we booked about $11 million August through December of last year.

Greg Gordon – ISI

August through December; got it. Okay. So it really looked – the story here is the revenue requirement decision in the rate case in terms of the structural earnings power of the Company but clearly the – we’ve gotten a soft patch here this year driven in part by weather and the regulatory lag associated with Harry Allen. Is that a fair synopsis?

Dilek Samil

I think that’s a very fair summary, Greg. You got it.

Greg Gordon – ISI

Thank you. Have a good morning.

Dilek Samil

You too.

Operator

Thank you. And our next question comes from the line of Neil Mehta with Goldman Sachs. Please go ahead.

Neil Mehta – Goldman Sachs

Good morning.

Michael Yackira

Good morning.

Neil Mehta – Goldman Sachs

What is your current pay-out ratio goal and when is the earliest you would communicate an updated dividend plan to investors?

Michael Yackira

I don’t – we don’t have and we’ve been saying this since we reinstated the dividend in 2007, you know, we don’t have a pay-out ratio goal. We have been saying that – and this has been the case every year since 2007, the third quarter is when the board reconsiders the dividend of the dividend payout and it’s done on an annual basis and it’s looking both backward and forward. So it’s looking at what our expectations are for the year and what our forward expectations are, but we have not set a specific pay-out ratio goal at this stage.

Neil Mehta – Goldman Sachs

Got it. And on the issue of parent – when you take a look at your leverage ratios at the parent, where do you think you need to get them to get to investment grade, and how much of a priority is it to be at investment grade of the parent given that most of your financing happens at the OpCo [ph] level?

Dilek Samil

I guess the way we think about that is generally, if you look at our consolidated leverage, it’s high compared to the industry. So, on a consolidated basis we would like to work that down. Having said that, like the dividend pay-out target, we don’t necessarily have a stated debt ratio target.

We – I would point out that the holding company debt is not recovered by either of the operating utilities so that is a drag on our earnings and our Return on Equity. So everything else being equal to the extent that we are generating cash, the retirement of that debt will be something that we take a look at, but as Michael mentioned earlier, we are going to always prioritize the use of our cash, the dividend, the debt reduction and potential investments are going to be on that list.

Neil Mehta – Goldman Sachs

How are you thinking, Dilek and Michael, about guidance for next year? Do you think you’ll give guidance on the back of the rate case once it’s resolved?

Michael Yackira

This is a question that we’ve answered several times and there is no definitive answer rather than to say that we don’t currently give guidance. We think about it and think about what it would mean, but it is something that we debate a lot but we have not come to a conclusion as to whether or not we are going to change from where we are right now.

Neil Mehta – Goldman Sachs

All right. And my last question is on tax rates. As I look back your tax rate historically over the last couple years anywhere from 29% to 33%. What’s the post 2011 run rate, especially given that AFUDC no longer is providing that depressing impact?

Dilek Samil

Yeah, well you nailed it. It’s the AFUDC primarily on Harry Allen, that’s been driving the tax rate lower in ‘11 and the years before ‘11. In ‘11, the tax rate was 33%. In ‘12 and going forward we expect it to be a more normalized 35%.

Neil Mehta – Goldman Sachs

Got it. Thank you, guys.

Michael Yackira

Thank you.

Operator

And our next question comes from the line of Steve Fleishman with BofA. Please go ahead.

Steve Fleishman – BofA

Yeah. Hi, good morning. Hi, Michael, Dilek.

Michael Yackira

Good morning, Steve.

Dilek Samil

Hi.

Steve Fleishman – BofA

Couple questions. Just on the weather impact, I know, June degree days was down but overall the degree days did not really look down much over the quarter, but it did seem to have a very large sales impact. So could you better maybe explain - is it because that June, people, degree days in April basically don’t cause anyone to put on the air conditioning?

Dilek Samil

That’s right, Steve and I’m sure you’ve taken a look at slide 3 of our supplemental slides that we posted, and you can see the relative impact of each month in our calculation of degree days. So April – while this year we had more cooling degree days than we did in April of last year – and by the way these numbers are for NV Energy South, which is what drives the weather related sales for our company. So, if you look at April and May, they are pretty small relative to June, and in June, we did see a 9% decline in cooling degree days.

Now having said that, I don’t think we all realize that cooling degree days doesn’t always tell the story either. For example, last year, I think that in the third quarter actually, but we had record number of consecutive days over a 100 degrees. So while that may not necessarily drive cooling degree days, just the continued warm weather has an impact on people’s usage of air conditioning. So cooling degree days, while it’s a good statistic, it doesn’t always tell the full story, and we do believe though that in this quarter, usage was primarily driven by weather and that was primarily in June.

Steve Fleishman – BofA

Okay. Separate question on the – I guess since it is your analyst day in New York that the Governor ended up vetoing the transmission legislation. Could you just give a little more flavor on how, if at all, that affected your plans to build transmission?

Michael Yackira

Well Steve, I had a good conversation with the governor last week. We met last Wednesday. We talked about a variety of things including our transmission initiative, and we agreed that going forward, we will communicate more often about how we can work together to assure that his desires, which are really very similar if not exactly the same as our desires to see Nevada be a focal point for renewable energy development and the necessary transmission to make export happen that we are on the same page and working together.

I don’t see that really being a detriment certainly not to our renewable transmission initiative, and again as I said earlier, will determine what kind of interest there is over the next few months, but I think the governor and I are certainly more in line than might appear to be as a result of the veto.

Steve Fleishman – BofA

Okay. One last question on the – as you mentioned in your base rate case, the proposal is to offset with the, you know, fuel deferral being given back in 2012 or overall recoveries. Is that part of the case following a separate track than the base rate case, and what would the dates be on that case?

Michael Yackira

The DAA [ph] case you are referring to does follow a separate track, and a decision on that will be made, I guess by September, if I am not mistaken because normally the change in rates associated with DAA case is effective October 1st.

So they will have to make a decision by September as to whether or not they will agree with our position to offset the GRC rates with the fuel and purchase power rates, or put a rate reduction into effect a couple of months earlier.

Dilek Samil

Steve, just to confirm – Michael was right. A decision would be in late September and hearings are scheduled for the 8 through the 10 on the deferred energy case.

Steve Fleishman – BofA

Of September?

Dilek Samil

August. I’m sorry.

Steve Fleishman – BofA

Oh, okay. Do you have positions on that case from parties yet?

Dilek Samil

My recollection is that staff did file their testimony on that case and there are no big dollar issues there.

Michael Yackira

There is question and this is public – this was public testimony. There is question from staff and the BCP as to whether or not we should be moving to January, that deferral will bring in the forward and I think most of the hearing, if not all of the hearing, will be focused on that issue. There are no issues as far as we can see in their testimony.

Steve Fleishman – BofA

Right. Okay. Thank you.

Michael Yackira

Thank you.

Operator

Thank you. And our next question comes from the line of Jay Dobson with Wunderlich Securities. Please go ahead.

Jay Dobson – Wunderlich Securities

Hey, good morning, Michael; Dilek.

Michael Yackira

Good morning, Jay.

Jay Dobson – Wunderlich Securities

Couple of questions. Dilek, if I can just start with a clarification, in an earlier question you indicated there was one month of DD&A in the quarter with a COD date of May 4th, I wanted to be sure that was proper. It would seem to me two months would have occurred, but maybe I’m missing something?

Dilek Samil

Jay, we didn’t record depreciation until the beginning of the following month.

Jay Dobson – Wunderlich Securities

Okay. Gotcha. Perfect. And then I was hoping if you could give us a little more insight into the customer growth. Now we’re a couple of quarters into it and probably agree with your conservatism but is there any way to look a little deeper into that and better understand what exactly is happening particularly at the residential level?

Dilek Samil

It does look like the growth is primarily coming from the residential side. And most of it from the Southern utility, that said, the numbers are still pretty small. So it’s tough to get real excited about it. But it is a positive trend. Just to give you some sense of the trend, in the first quarter of last year, we were still – we had a small decline in customers. That turned positive in the second quarter of last year but it was almost zero. And then in the third quarter, we saw about a half a percent and that’s now moved in this quarter to just under 1%, rounding to 1%, so it looks like a good trend but again, the numbers are still quite low.

Jay Dobson – Wunderlich Securities

Gotcha. That’s helpful. And then on the cost control efforts, you obviously did a good job relative to adding the costs associated with Harry Allen, but maybe if you could just give us an idea of what the operating costs are running for Harry Allen right now on a monthly basis. And it’s whether it’s matching with your expectations and then separately sort of what you’re seeing on the cost control side and how long these efforts can go on from basically a reduction point of view.

Dilek Samil

Sure. On Harry Allen, we had about $2 million in the quarters, so about a million a month and that’s consistent with our expectations and consistent with what we filed in our 8-K [ph]. And we do feel good about our ability to manage our costs. And as I’ve said before, Jay, I can’t give you line item by line item what we’re going to do in 12 and beyond but every time we’ve asked this organization to step up they’ve done so. We do have one biggie if you will that’s going to help us going forward – excuse me – and that’s our NV Energize project. There’s tangible operating savings associated with putting in the meters and we’re going to start seeing the impact of those savings as early as 12. So again, I can’t give you a specific laundry list of the cost reduction efforts that we’ve got underway, but we’ve got teams in each of our business units that are constantly looking at ways to get more efficient.

Michael Yackira

Jay, I’ll just jump into one second. I think you know and I’ve mentioned in our prior calls, that for several years we’ve had an initiative that we call achieving our full potential and that is basically a quality improvement initiative that takes a look at root cause, issues and comes up with process improvements and cost savings. Every year, we come up with new initiatives. Every year we find more innovation, thanks to our employees who were being very innovative in finding ways to reduce costs and improve processes. So while we can’t and I agree with Dilek, we can’t pinpoint, if we ask our employees to continue this work, they seem to come up with new ways of doing business and that’s what any good organization does.

Jay Dobson – Wunderlich Securities

No. That’s very helpful, thanks. And then last question just for absolute clarity, Dilek, $8.6 million of pre-tax impact for the energy efficiency decision, that’s the number we should focus on that will not be here this time next year so that the other ongoing energy efficiency impacts are in fact carved out of that 8.6? I guess, what I mean is the ongoing. There’s no ongoing impact in the 8.6 that would make it…?

Dilek Samil

That’s right, Jay. 8.6, which relates to the 2010, as well as correcting our first quarter 2011. So that 8.6 will not be in our 2012 number the 4.5 is what we recorded in the second quarter of this year, as the ‘11 amount approved the commission.

Jay Dobson – Wunderlich Securities

That is great. Thanks so very much.

Michael Yackira

Thanks, Jay.

Operator

Thank you. And our next question comes from the line of Andrew Levi with Caris & Company. Please go ahead.

Andrew Levi – Caris & Company

Hi guys. Actually I’m all set. All the questions were asked. Thank you very much.

Michael Yackira

Thanks, Andy.

Operator

Thank you. We’ll go to the line of Paul Patterson with Glenrock Associates. Please go ahead.

Paul Patterson – Glenrock Associates

Hi. Most of my questions were answered but just to clarify, weather versus normal, I’m sorry I didn’t really get that. What should we think as weather being versus normal?

Dilek Samil

Weather versus normal, 2011, this year was about 4% below normal.

Paul Patterson – Glenrock Associates

Okay. And….

Dilek Samil

Not only were we below last year, but we were also below normal. And just for context, last year was also at least in the second quarter a tad bit below normal as well.

Paul Patterson – Glenrock Associates

Okay. And then also, in your discussions with alternative energy providers and what have you. Is tax reform being discussed as a potential hindrance or at least a discussion of more clarity perhaps? We’re seeing so much about tax reform, tax expenditure simplification and the potential for less tax benefits going to certain industries and what have you. Is that something that has cropped up as an issue at all?

Michael Yackira

Paul, I think it’s an issue that has been in the industry for 15 years and that is what happens to the production tax credit, how long does it last, what is it attributed to, is there a need for a re-uping of it which always seems to be a drag on the capital that is deployed for these technologies. So I think that’s going to continue to be an issue in this industry until renewable energy becomes cost effective in comparison to other forms of energy production. So I don’t think that’s changed. I think maybe it becomes more and focus, because this congress is working at other forms of tax reform, but I don’t it, if really is any different renewable energy has experience over 15 years.

Paul Patterson – Glenrock Associates

Okay. So it’s pretty much what we see. You haven’t seen much more of a discussion focused on this, despite the sort of, budgetary focus that we’re seeing, I guess in Washington that hasn’t really change the discussion that you’ve been seeing over the many years that you’ve just mentioned.

Michael Yackira

Not really.

Paul Patterson – Glenrock Associates

Okay. Thanks a lot.

Michael Yackira

Thank you.

Operator

Thank you. And our next question comes from Robert Howard with Prospector Partners [ph 40:21]. Please go ahead.

Robert Howard – Prospector Partners

Good morning.

Michael Yackira

Good morning, Rob.

Dilek Samil

Good mornings.

Robert Howard – Prospector Partners

Just wanted to check back on the weather, you re-said that last year was also below normal, is that what you just said?

Dilek Samil

Yes. I did.

Robert Howard – Prospector Partners

Okay. And so what that mean that and I guess are you seeing that kind of on a quarter basis, or you would like last year's…

Dilek Samil

No, that’s on a quarter basis.

Robert Howard – Prospector Partners

Okay. So going back to the issue what Steve was talking about with the cooling degree days depending on the timing of then that’s still can be different thing.

Dilek Samil

But it does all point to the same trend. We had lower cooling degree days than we did last year. We had lower cooling degree days than was normal and we saw it in our usage.

Michael Yackira

And we also see it on our revenues, since our revenues from our large customers are affected by demand charges, then we certainly see the effect of lower peaks year-over-year and that’s difficult to truly observe or to quantify, but it certainly is part of a mix over and above the cooling degree days. I think what Dilek said is appropriate and needs to be reiterated that is one element, but it’s not completely correlated to where our revenues wind up in any quarter.

Robert Howard – Prospector Partners

And for the current rate cases underway, is that – is the test year based on normal weather or is it based on the 2010 sales?

Dilek Samil

It’s based on, by test year it’s 2010 but the billing determinants used for rate design will be weather normalized.

Robert Howard – Prospector Partners

Okay. So you’re not going to be getting penalized for having liked this June issue is it, shouldn’t hurt you in the rate case?

Dilek Samil

That’s right.

Robert Howard – Prospector Partners

Okay. Great. And then just with the chart that you had on the low use customer accounts, it’s showing that trend going down which I guess should be good but just wanted to check. Are those – does that decline mean that those customers in theory are becoming full use customer accounts as opposed to getting completely shut-off and they’ve given up? Do you see which way, what’s causing that decline people moving in?

Dilek Samil

I think that’s how we interpret is the homes that were empty and that had zero or very low usage, we see the number of those homes declining in the South in particular and so that’s a good trend. It suggests that people are moving into those homes. No, I don’t know that we can characterize it as a full usage but it’s certainly better than zero to low usage.

Michael Yackira

And it’s anecdotal only but there certainly has been a lot of turnover in the existing home market because of things that are particularly good for the owners for closures and short sales, but we’ve seen a pickup of that and that probably is one of the reasons that this trend, if it is a trend has taken place but it’s not significant. And if you look at what’s on page five, it is a trend downward but it’s not a significant trend downward.

Robert Howard – Prospector Partners

And can you remind us what kind of number would you have been seeing there unlike say ‘07 or something like that because it seems like you guys have said that there has always been a little bit of a number there, for just people who are seasonal users or something like that?

Michael Yackira

What we’ve said in the past is it’s probably about 7% but again that’s more anecdotal than anything. We look at what a normal customer in a sized home would have in kilowatt hour sales and if it’s lower than that we are assuming that that’s driven by second homes or vacated homes but it’s about 7%. So all-in-all, what we’ve seen is not even a peak to 9% so it’s not a significant, it’s never been particularly significant but I do agree that it’s nice to see the trend of that coming down.

Robert Howard – Prospector Partners

Okay. Great. Thanks, guys.

Michael Yackira

Thank you.

Operator

Thank you. And our next question comes from the line of John Alley with Decade Capital [ph]. Please go ahead.

John Alley – Decade Capital

Good morning.

Michael Yackira

Good morning.

Dilek Samil

Good morning.

John Alley – Decade Capital

In the past you guys have said flat – you expect flat load growth from 10 to 12. Is that still the case?

Dilek Samil

Yeah. If you look at our sales projections which we filed with our commission, if you look at the ‘11 actual and then ‘12, ‘13 and beyond, we’re looking at the pretty flat sales forecast in the outer years.

John Alley – Decade Capital

Is there anything changing among the residential demographic other than the lower usage customer’s maybe something with energy efficiency, that would cause the drop off this quarter or is it really just the weather?

Dilek Samil

Well, it’s always tough to take the usage numbers and determine what’s weather and what’s conservation. That’s why we talk about usage but we do think as I’ve said before that it’s primarily driven by weather.

John Alley – Decade Capital

Okay. Thank you.

Michael Yackira

Thank you.

Operator

Thank you. And currently, there are no further questions.

Michael Yackira

Well, thanks very much for joining us this morning and we’ll look forward to seeing you soon.

Operator

Thank you. Ladies and gentlemen, this conference will be available for replay starting today at 9:00 a.m. and will run until September 1st at midnight. You may access the replay service by dialing 1800-475-6701 and entering the access code of 208893. Service numbers again, 1800-475-6701 and entering the access code of 208893.

That does conclude your conference for today. Thank you very much for your participation and for using the AT&T executive teleconference. You may now disconnect.

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