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NV Energy, Inc. (NYSE:NVE)

Q4 2011 Earnings Call

February 21, 2011 10:00 am ET

Executives

Max Kuniansky – Executive Investor Relations

Michael W. Yackira – President, Chief Executive Officer & Director

Dilek L. Samil – Chief Financial Officer, Senior Vice President Finance & Treasurer

Analyst

Shahriar Pourreza – Citigroup

[Leslie Rit] – JP Morgan

Neil Mehta – Goldman Sachs

James L. Dobson – Wunderlich Securities

Ashar Khan – Visium Asset Management

Brian Russo – Ladenburg Thalmann & Co.

[Nass Chunawala] – Bank of America

Andrew Levi – Caris & Company

Andy Bischoff – Moringstar

Maurice May – Power Insights

Paul Patterson – Glenrock Associates

Analyst for John Ali – Decade Capital

Carl Seligson – Utility Financial Experts

Operator

Welcome to the NV Energy fourth quarter 2011 earnings call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will be given to you at that time. (Operator Instructions) As a reminder, today’s conference call is being recorded. I would now like to turn the call over to Mr. Max Kuniansky, Executive Investor Relations. Please go ahead.

Max Kuniansky

Thank you for joining us to review NV Energy’s results for the fourth quarter of 2011. By now you’ve seen the press release we issued earlier today and the slides on our website and we expect to file our Form 10K with the Securities & Exchange Commission within a 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 the company 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 risk and uncertainties include the factors discussed in our Form 10Qs for periods ended March, June and September 2011 and the Form 10K for the year ended December 31, 2010.

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 Dilek Samil, Senior Vice President, Chief Financial Officer and Treasurer. I’ll now turn the call over to Dilek.

Dilek L. Samil

As we announced this morning, for the fourth quarter of 2011 we had a net loss of $25 million or $0.11 per diluted share as compared with net income of $14 million or $0.06 per share for the same period a year ago. This brings total earnings for the year 2011 to $0.69 per diluted share compared with $0.96 in 2010.

Major drivers of our fourth quarter results are shown on Slide Two. Gross margin was virtually unchanged for the fourth quarter. Weather and customer growth were slightly positive, megawatt hour sales increased about 1% driven by customer growth of just under 1% as well as colder weather compared to last year. Offsetting this increase was a decrease in margin due to the sale of our California operation which was completed in January 2011.

Turning to items below the gross margin line, you’ll recall that we completed the Harry Allen combined cycle plant in the second quarter. Placing this plant in service reduced AFUDC, increased depreciation and increased operating and maintenance expense. The total impact of Harry Allen was $0.05 negative for the fourth quarter compared to the same period last year.

Timing of outages at several of our power plants reduced EPS by $0.03 in the quarter. These were primarily planned maintenance outages. Finally regulatory adjustments and reserves reduced earnings per share by approximately $0.05. These adjustments were primarily related to the decision on the Southern Utility Rate case.

As a result of the PUCN’s order, earnings were reduced by approximately $16 million pre-tax or about $0.04 of EPS impact primarily related to the Clark peaking units, the Ely Energy Center and AFUDC for Harry Allen. The remaining $0.01 consisted of reserves recorded for potential future liability. In summary, our fourth quarter results were driven by Harry Allen, timing of plant outages and regulatory adjustments.

Turning now to earnings for the full year 2011 we knew going into ’11 that we would be challenged by regulatory lag and indeed that was the case. As I just mentioned, we reported full year earnings of $0.69 down $0.27 as compared to the prior year. Margin was down about $0.04 year-over-year, driven primarily by the sale of the California assets.

Excluding California, megawatt hour sales were essentially flat compared to the prior year. Customer growth of just under 1% was offset by slightly milder weather in comparison to the prior year and the effect of conservation programs. Below the gross margin line Harry Allen regulatory lag reduced EPS by about $0.12 year-over-year.

O&M expense excluding the impact of Harry Allen was an improvement of $0.02 compared to the prior year. Our goal was to hold O&M flat year-over-year and I’m pleased to report that we did achieve that goal. The full year impact of regulatory adjustments and reserves was $0.07 negative. This consists of the approximately $0.05 primarily rate case adjustments that we recorded in the fourth quarter that I just mentioned plus the $0.02 for the reversal of loss revenue that was recorded in 2010. As you will recall, that Commission Order that we received in ’11 resulted in this adjustment.

To recap 2011, the two primary factors impacting our results were the Harry Allen regulatory lag and regulatory adjustments. As we look forward to 2012 and beyond, we’re pleased that the new rates resulting from our recent rate case will allow us to recover the cost of Harry Allen. With the $159 million rate increase effective in 2012 and without the $0.07 of adjustments that were recorded in 2011 we should have an opportunity to earn a return that is much closer to our regulatory allowed return on equity. I should note that regulatory return on equity and accounting return on equity will continue to be impacted by those assets on which we do not earn a return such as goodwill.

Turning now to the balance sheet, consolidated liquidity was over $950 million as of yearend including cash of about $140 million. Our Year end debt ratio was about 55% at the operating utility and 60% on a consolidated basis. Looking ahead, lower capital spending, continued discipline on O&M and the December rate increase will allow us to continue to improve our financial profile and flexibility.

Slide Six shows projected capital expenditures through 2016. As you can see we expect significantly lower spending compared to 2011 and prior years. The forecast for the year 2012 includes about $40 million for our NV Energized SmartGrid project and about $60 million for our 25% ownership of the online transmission project.

So in conclusion, with new rates in place our financial condition is set to strengthen, declining capital expenditures, and no major projects on the horizon, I believe we’re entering a period of reduced regulatory risk. For the time being we’re not spacing the rapid load growth or need for new generation that makes large rate increases necessary. The next several years should be quite different from the past decade when our earnings trajectory was strongly linked to rate relief.

In contrast, I believe we’re entering a period of more stable earnings, sustained free cash flow and return of capital to shareholders. With that, I will now turn the call over to Michael.

Michael W. Yackira

Let me start by saying that while I’m disappointed with my results, as we discussed during our earnings call last year, we had expected that 2011 would not be a particularly good year in large part because of cost associated with the Harry Allen combined cycle plant were not yet in rates. Despite absorbing the cost of Harry Allen we kept our operating and maintenance expenses flat.

We also continue to keep in check our capital investments. But, it is important to recognize that in 2011 with the completion of Harry Allen, our company has delivered on its strategy to add significantly to our own generating position. Over the past several years we have added approximately 3,800 megawatts of capacity, more than doubling the size of our fleet with that capacity now included in rates.

As a result, 2012 represents a turning point and the start of an important new chapter in our company’s history, something which I will turn to in a moment once I comment on several other matters. First, we are pleased that the Public Utilities Commission of Nevada approved an annual general rate increase of about $159 million for our southern Nevada utility effective January 1st of this year.

With this rate adjustment, partially offset by a fuel and purchase power rate decrease in October, our residential customers in Las Vegas experienced an overall rate increase of only about 1%. While the Nevada economy continues to improve gradually, megawatt hour sales are expected to remain relatively flat through 2012 and we’re working hard to make sure our O&M continues to stay flat as well.

Turning to the One Nevada Transmission line you have likely seen an 8K we filed earlier this month about the strategy of this project so I’ll just recap that briefly. Winds caused some structural damage to certain transmission towers that had been recently installed and NV Energy and our partners Great Basin Transmission are working with contractors to determine what modifications may be necessary to ensure the project is constructed in a safe and reliable manner. We have suspended construction for at least three months to assess these potential modifications.

With regard to NV Energize, we have installed over 700,000 SmartMeters in Southern Nevada and late last month we began installing meters in Northern Nevada. We expect to have 1.4 million meters in place by the end of 2012. NV Energize will provide our customers with more information about their patterns of energy consumption and will help us reduce costs, among other benefits.

Similar to other states, our Commission is reviewing whether and under what circumstances we should provide certain customers with the option to not participate in NV Energize. A decision from the Commission is expected later this month.

Now, on to a discussion of 2012. Many of you have been asking and writing about our company’s direction forward especially, with regard to future cash flow position. Before I address this, I’d like to first review how far we have progressed as a company over the past 10 years.

As 2003 came to a close the effects of the Western energy crisis were evident to our stockholders, our customers, and our employees. Our company’s market capitalization was less than $900 million and we weren’t paying a dividend. Our pension plan then, was only 68% funded. The credit ratings of our utilities were below investment grade, and our cost of debt was approaching 10%. We had no credit lines.

Our own generation capacity stood at approximately 2,800 megawatts which represented only about 40% of our peak demand. Our price per kilowatt hour was about $0.10, three quarters of which was made up of fuel and purchase power costs, thus exposing our customers to the cost and reliability ups and downs of the Western energy markets and providing no profitability, only risk to our investors.

At the end of 2011 when compared to 2003, our market capitalization is up 350%, our stock price is up almost 125% and our utility assets have nearly doubled. We reinstated our dividend in 2007 and since then we have increased it by over 60%. Our pension plan today is almost fully funded at 96%. The credit ratings of our utilities are investment grade. Our cost of debt is down by a third and we have ample liquidity.

As I mentioned earlier, our own generation has more than doubled to about 6,000 megawatts and makes up more than 80% of our peak demand, thus reducing our customer’s reliance on purchased power. O&M per kilowatt hour is down almost 5% from 2003. Our price is about the same as it was at the end of 2003 but now less than 50% is made up of fuel and purchase power cost which reduces risks to our customers and our investors.

Clearly, NV Energy has evolved substantially and positively over the last decade. Our board, management team, and employees are proud of where we stand today. We believe we are now entering a period, as Dilek said, of more stable earnings and positive cash flow.

With regard to the use of cash flow, we have several paths open to us: changing dividend policy; strengthening our balance sheet through debt reduction; and continuing to look at investments in our core competencies. It is important to emphasize that these paths are not mutually exclusive. All three can be accomplished over the next several years.

As to investments, with the completion of Harry Allen we have executed successfully our plan to make Nevada more energy independent for the benefit of both customers and investors. Because of the slowdown in growth in Nevada, we do not expect to have a need for new generation to meet our customers’ energy demand until much later in this decade.

If we do find nearer term opportunities to invest in generation or transmission, we will describe a clear path towards earning fair returns for investors balanced with the needs of our customers. In short, we will be opportunistic, measured, and patient. In the meantime, we expect to use a portion of our cash flow to improve our capital structure. Indeed, given the currently identified capital program, we should be able to achieve a more balanced and stronger capital structure over the next five years.

Let me end with a comment about the recurring question of dividend policy. As you know, during NV Energy’s period of high capital investment and strong customer growth, we kept our dividend payout low relative to the industry and we did so for the right reasons. Now, as our company enters a period of what we believe will be positive cash flows, we expect our board over time will increase our dividend to a payout that is in line with the industry.

Our company’s history has been to make dividend changes in the fourth quarter. This year, I expect our board will have such discussions earlier in the year and our path to a higher payout will become clearer.

Now, Dilek and I will be happy to take your questions.

Question-and-Answer Sessions

Operator

(Operator Instructions) Your first question comes from Shahriar Pourreza – Citigroup.

Shahriar Pourreza – Citigroup

Just a little bit of housecleaning couple of questions, from an EPS standpoint how much did the various accounting adjustments and the planned outage impact your Q4 and full year results?

Dilek L. Samil

If we go to our Slide Two of our supplemental slides, the outage costs were $0.03 per share in the fourth quarter and the regulatory adjustments and reserves, and again, those were primarily driven by the Order related to our rate case, that was $0.05 per share.

Shahriar Pourreza – Citigroup

Now, that was a year-over-year impact right? But, how much did it impact just for this quarter?

Dilek L. Samil

Just for this quarter the regulatory adjustments and reserves were right around $0.05. For the year, and perhaps this is your question, for the year they were $0.07 because we took the $0.05 for the quarter and added the $0.02 related to the loss revenue adjustment that we made in the second quarter of this year, that was another $0.02 for a total of $0.07 for the year.

Shahriar Pourreza – Citigroup

Let me ask you, when we look at your updated cap ex guidance versus when you last updated us at EEI, spending in 2013 is modestly lower but actual spending in 2011 came in higher than you first thought. Is the lower cap ex profile in 2013 attributed to a shifting forward of spending or did you actually lower your outlook?

Dilek L. Samil

We did both. There was some timing in certain of our projects that moved into prior years but there was also real reductions in spending.

Shahriar Pourreza – Citigroup

Just lastly, I know in Michael’s prepared comments on capital deployment, but when can investors expect a little bit more color? I know the three avenues, you’ve been discussing that for a while now, when can we get I guess a little bit more color in the avenues you’re going to take as far as deleveraging, or higher payout, and keeping some powder dry?

Michael W. Yackira

I hope that I addressed that but let me just repeat, we will come forward if there are investment opportunities but we’re not looking for a timeframe for that. I think we will be opportunistic for those if they do occur. Debt reduction will occur over time again, based on opportunistic situations and also debt maturities I’m sure. The dividend payout I expect will be deliberated by our board and as I said, I expect we’ll have clearer color on that sooner in the year than we normally do. We normally look at these things in the fourth quarter and I expect that the board will look at it sooner than the fourth quarter this year.

Dilek L. Samil

Just to reiterate what Michael said, those three options are not mutually exclusive. We think we’re going to have reasons to address each of those issues.

Shahriar Pourreza – Citigroup

Let me ask you on the payout, do you expect a gradual increase in the payout over the next few years or more of a sizeable bump from the mid 40s that we’re looking at now to maybe like the mid 50s for instance?

Michael W. Yackira

I can’t answer that question. This is something that the board will discuss and when we come to a conclusion on that we will let you know. But, we are looking at all options.

Operator

Your next question comes from [Leslie Rit] – JP Morgan.

[Leslie Rit] – JP Morgan

Could you give an update on the regional transmission initiative?

Michael W. Yackira

There’s really not much more to report. We have had the indications of interest. We have now asked as we have said for the past several months, how the process will work. We have asked for those that have provided a decree of interest to let us know whether or not they want to fund studies for these plans. Again, nothing has changed with respect to the timing of this. We expect we’ll have a better since towards the end of the year as to whether or not there is an opportunity for us to build.

Just as a reminder, and I know you know this, we have no intention of building emergent transmission line. The studies would be funded by the participants and again, referring to what I said earlier about investments, there would be a clear path for earnings if indeed we decide to invest in this transmission line if there is an opportunity to do so.

Operator

Your next question comes from Neil Mehta – Goldman Sachs.

Neil Mehta – Goldman Sachs

On O&M I just want to make sure I got this right, you’re targeting flat O&M in ’12 versus ’11 and that includes the impact of the Harry Allen in the first half of ’12 which wasn’t comparable in the first half of ’11?

Dilek L. Samil

That’s right. Just like we absorbed about a half year of Harry Allen in ’11, we will do the same in ’12.

Neil Mehta – Goldman Sachs

’11 helped out a little bit because we got the California sale, right so it made it a little bit easier on the O&M side. For ’12 do we have incremental levers to get O&M flat?

Dilek L. Samil

We do, we do. We continue to work throughout the organization in finding ways to do our work more efficiently so that is part of it. Another part of it is, as we’ve talked about, our NV Energize project. We’ve said that we expect operating savings as we bring that project into service and while we’re not yet done, we expect to be done in ’12, with the progress we made in ’11 we expect to realize some portion of those benefits in ’12.

We also expect to have slightly lower pension expenses, for example, in ’12 relative to ’11 and that’s despite the fact that we’re using a slightly lower discount rate for example. We were fortunate there, our plan performed better than we had expected so unlike some other companies we’re looking at a little lower expense as opposed to higher pension. So with the combination of all of those items we fully expect to bring in ’12 O&M flat with ’11.

Neil Mehta – Goldman Sachs

Then on interest expenses 4Q looked like it ticked up a little bit from 3Q is there seasonality in the interest rate?

Dilek L. Samil

In the fourth quarter we did do a refinancing at the holding company and that is what led to the slight uptick. I would take the opportunity though to point out that interest expense is a very positive story for us. We continue to work on refinancing when we have the opportunity. We did the holding company refinancing in, I believe it was October of ’11, so that should help reduce interest expense in ’12. We also had a refinancing at our Southern utility in the middle of the year. We took out some $350 million of bonds and replaced it of $250 million of debt at a lower coupon. So those two refinancing ought to help in ’12.

Neil Mehta – Goldman Sachs

Then finally on the dividend, Michael you said the goal is to move towards a group payout. When you say a group payout who do you view as your per group? Small and mid cap utilities, regulated utilities?

Michael W. Yackira

I think the overall industry is what I’m referring to. Certainly we look to peer companies but the industry as a whole is pretty consistent and that’s part of our deliberation process.

Operator

Your next question comes from James L. Dobson – Wunderlich Securities.

James L. Dobson – Wunderlich Securities

Thanks for the comments on redeployment of cash, as you can tell by the questions, folks are pretty interested in what you’ll do there so we’ll look forward to additional clarity. Dilek, I was hoping to follow up on your comments, and I know you’ve alluded to these before, regarding the earned ROE and maybe flesh that out a little bit. Most of us on the phone here I think care most about accounting ROE understanding there is some disparity between that and the regulatory earned return but just talk to us about what we can expect in ’12 and maybe how close we can actually get to earning that return putting as much quantification on that understanding there’s some variables that are out of your control?

Dilek L. Samil

Let me start by reminding you, I know you know, that we don’t provide guidance so I’m not going to give you specifics on where we think we’ll come out from either a regulatory or accounting basis. But, as Michael has said and I’ve said, ’11 was a tough year and we earned significantly below our allowed return on equity. In ’12 again, as I said, we think that we’re going to have an opportunity to get a lot closer. So I think I’ll leave it at that.

The only other thing that I might add is what I added earlier that there is a difference between accounting and regulatory ROE. Those differences contribute to, depending how you look at it, about 125 to 140 basis points of difference between the regulatory and the accounting ROE. For example, if we were to earn 10% on a regulatory basis then we would earn say about 8.5%, a little higher, on an accounting basis.

James L. Dobson – Wunderlich Securities

Then on sales and customer growth, just particularly on the customer growth side, sort of what you’re seeing and I know you went past those slides pretty quickly, but it seems to be a continuing trend of slow improvement and just sort of what you’re seeing on the ground?

Dilek L. Samil

We’ve been talking about a 1% increase in customer count for the last year and that seems to be pretty consistent. We feel good about that. I will repeat what we’ve often said here, the recovery is going to be slow. But, we are pleased with the recent trends here.

Michael W. Yackira

As I’ve said to people on the call and to you, planning for slow growth is an imperative for us. If it turns out that we’re incorrect and growth is faster, that is good news. But, our plan is to continue to hold down our O&M, hold down our capital, under the assumption that this growth will be there but certainly in comparison to the prior decade, a lot slower than we’ve experienced probably, over the past two and a half to three decades in Nevada.

James L. Dobson – Wunderlich Securities

To online, I know it’s still early days but root cause analysis, I know these were new towers or new design towers, whether this was a manufacturing defect or a design defect?

Michael W. Yackira

We don’t know at this stage. Our 8K really describes exactly where we stand right now. We’re in the process of accessing what the issues are and what the fixes are and when we have more to disclose we will but we are diligently looking at how we can remediate the problems.

James L. Dobson – Wunderlich Securities

The last question, on the merger filing, you said in the 8K online or some of these issues would delay that, maybe just talk to us sort of how you envision that occurring even though understanding the implementation of that filing may be delayed.

Michael W. Yackira

I think you said it, we have tied the completion of online to the merger filing and the filing that we have to make at the FERC and the PUC. We will just continue to look at when the appropriate time to make the filing is relative to the completion of our assessment of online.

Operator

Your next question comes from Ashar Khan – Visium Asset Management.

Ashar Khan – Visium Asset Management

For the year, did the weather come out to be normal or was it below normal?

Dilek L. Samil

Let me point you to the data we’ve got on our press release. We point out cooling and heating degree days both for ’10, ’11 and normal. So if you compare the normal cooling degree days for example, to actual last year, you’ll see that the numbers are exactly the same. So you could conclude from that, that we had essentially normal weather in ’11. If you dig through the data a little bit and look at the pattern of the cooling degree days, our conclusion was that we were a little off normal in ’11 but not anything significant, maybe $0.01 or so.

Ashar Khan – Visium Asset Management

I’m going to your Slide Three, and trying to kind of rationalize the year for 2011, the Harry Allen plant you said was -$0.12 for the year, if I’m right the plant came online in May? Am I right? If I assume it had come online in January, would this number be something like $0.18 or $0.19? Can you guide us something towards that or no?

Dilek L. Samil

I think it’s pretty linear so that’s not an unfair number. But, I think the way I think about it is I look at our ’11 results, I look at the regulatory adjustments which again, were primarily driven by the rate case, and also the $0.02 of loss revenue, that adjustment that we made in the second quarter. If I add all that up that’s $0.07. I don’t expect that to happen again in ’12 so I would back that out of the $0.69 that we achieved in ’11 and then I would think about the impact of the rate increase, the $159 million rate increase.

Ashar Khan – Visium Asset Management

The way I’m doing it, and tell me if I’m doing this right or wrong, if I just take from Harry Allen and say if it’s like $0.19 or would have been for the year, and I subtract another $0.07 and then I add the $0.07 from the regulatory adjustments. Then I say hey that’s kind of breakeven and then I just add the earnings from the rate case, which if I’m right, I can take the revenue number and multiple it with your tax rate of 35%, is that a good number to use?

Dilek L. Samil

Yes.

Ashar Khan – Visium Asset Management

Then take the shares outstanding to say that’s the positive impact of earnings and then what you are also mentioning, if I’m right, is that the refinancing at the parent and at the utility also have impacts which had some partial year impacts in ’11.

Dilek L. Samil

I appreciate what you’re trying to do but let me remind you now that we really don’t provide guidance.

Ashar Khan – Visium Asset Management

I understand but is there anything else apart from that that helps? Like you mentioned financings, is there anything else that helps or hurts earnings in ’12 versus ’11?

Dilek L. Samil

I think we’ve commented on the changes between ’11 and ’12.

Operator

Your next question comes from Brian Russo – Ladenburg Thalmann & Co.

Brian Russo – Ladenburg Thalmann & Co.

Just a comment on the merging of the two utilities, can you just give us a sense of when the next legislature is scheduled for in Nevada? When you would look to time that for?

Dilek L. Samil

The next session is scheduled for February of 2013.

Brian Russo – Ladenburg Thalmann & Co.

And the project won’t be done by then so what’s the next one after February 13?

Michael W. Yackira

Our legislature meets every two years Brian, but what’s the question with respect to the legislature?

Brian Russo – Ladenburg Thalmann & Co.

I thought this needed legislature approval to merge the two utilities?

Michael W. Yackira

No, it doesn’t. It requires a filing with both our federal regulator as well as our state regulator but doesn’t require any legislative approval.

Brian Russo – Ladenburg Thalmann & Co.

You mentioned various usage of cash, would share buybacks also be an option?

Dilek L. Samil

We’ve thought about that but as Michael mentioned, the three primary options that we’re looking at right now is the dividend, the capital structure improvement, and opportunistic reinvestment in the business.

Michael W. Yackira

Our desire is to strengthen the balance sheet so we’re going to look at opportunities to do that.

Operator

Your next question comes from [Nass Chunawala] – Bank of America.

[Nass Chunawala] – Bank of America

I had a couple questions for you guys. Dilek, at some point I think you had said that the NV Energize savings are about $25 million pre-tax. Is that still a good assumption?

Dilek L. Samil

Let me drill down into that number a little bit. We have said that the ongoing annualized savings associated with NV Energize is $25 million so that’s right. But, of that $25 million about half is operating savings. So the remainder is in areas such as either capital, or revenues that we’re missing today that we’ll be able to better capture with the new system. So the $12 to $13 is what we’re expecting to benefit directly O&M expense and of that we’ll see it come in over time as we implement different parts of the system.

So as Michael said, as we’ve put in these new meters in the southern territory first, we start realizing those benefits in ’12 and then in ’13 once the entire project is up and running we’ll realize the full $25, half of which will be O&M.

[Nass Chunawala] – Bank of America

This is a question I guess related to the merger timing and then also next rate case timing, I think you guys have said that once you complete the merger you would like to then file a rate case for kind of the combined utility. Is that still how you’re thinking about this and so should I assume if you guys can get it done in 2013 then you file in 2013 for the new rates for the new utility in effect for 2014?

Dilek L. Samil

I imagine the Commission, once we finish the merger, will want to see what the combined companies will look like so that’s what the rate case filing subsequent to the merger will be, to show the combined rate base and the combined revenue requirements of the two entities. Given the delay in online, as Michael said, we’ll see what happens with that project and then schedule the merger filing accordingly. But, it’s a little too soon at this point to pinpoint exactly when the rate case will be, when the merger application will be. I will remind you, I think you know this already, but we do have a mandate to file rate cases for each of our two utilities and the next mandate is to file middle of next year for our northern utility.

[Nass Chunawala] – Bank of America

That was my next question is that would you guys go ahead and proceed with the Sierra Pacific filing?

Dilek L. Samil

We don’t have an option, that is a requirement.

[Nass Chunawala] – Bank of America

Then the last question is just on the California sale hit, I know in the quarter you guys break it out as a $0.01 but it wasn’t in the annual drivers. Should I just multiply that by four to get a $0.04 hit for the year?

Dilek L. Samil

For the year, the impact on margin alone of the California sale was about $0.06.

Operator

Your next question comes from Andrew Levi – Caris & Company.

Andrew Levi – Caris & Company

Can you give a breakdown of the cap ex north versus south based on the forecast that you gave?

Dilek L. Samil

The easiest way to answer your question is to check our K which will be filed late this week.

Andrew Levi – Caris & Company

Just back to the questions on online, I guess it’s about $140 million that you guys are investing in that, right?

Michael W. Yackira

Approximately.

Andrew Levi – Caris & Company

That’s your portion.

Dilek L. Samil

The total project is about $500 million Andy of which $125 is our share.

Andrew Levi – Caris & Company

The rest is Great Basin?

Michael W. Yackira

Right.

Andrew Levi – Caris & Company

I guess Thomas & Betts is the manufacturer of the towers, is that correct?

Dilek L. Samil

That’s right.

Andrew Levi – Caris & Company

The installer is Sturgeon, is that the name of it Sturgeon Electric?

Dilek L. Samil

Yes.

Andrew Levi – Caris & Company

Are they a division of anybody or are they kind of an independent company?

Michael W. Yackira

I’m not sure.

Andrew Levi – Caris & Company

The point of the question is trying to get a little extra color. Obviously, there’s an issue there but how will it work financially? Is there any impact financially from the delay and possible incremental cap ex that may be incurred? Would that be something that possibly Thomas & Betts would absorb? Can you give us any color on that?

Michael W. Yackira

Not at this time. We are still in the process of assessing it and when we have more information we’ll disclose it.

Andrew Levi – Caris & Company

Just also I guess on kind of retail sales, you showed some life in the fourth quarter which was nice to see, on the commercial side, you had nice growth there. Anything that you can tell us about that?

Dilek L. Samil

I’ll just go back to my comment earlier that that 1% growth in customer has been pretty consistent. We feel good about that but we try not to get too excited so we’re continuing to theme of plan for flat and hope for the best.

Andrew Levi – Caris & Company

Do you have any idea where that commercial growth came from? Was it from the casinos? Was it from somewhere else?

Dilek L. Samil

The casinos, those are generally grouped under our industrial customers so no, the commercial would be the smaller commercial.

Andrew Levi – Caris & Company

What do you consider Michael as industry payout ratio? Is there any kind of guidance?

Michael W. Yackira

What do you consider the industry payout ratio?

Andrew Levi – Caris & Company

Probably 60% to 70%, something like that.

Michael W. Yackira

That’s probably in a range, but that’s close enough.

Operator

Your next question comes from Andy Bischoff – Moringstar.

Andy Bischoff – Moringstar

Just kind of an add on question to your customer usage trends. If I look at your low use customer accounts, you are continuing to see gradual improvement. Can you remind me what a pre-crisis level of low use customer accounts what and what kind of continual gradual improvement we’ll see in that area?

Dilek L. Samil

I’m doing this by memory which is always a little dangerous. It’s in the neighborhood of about 7%.

Andy Bischoff – Moringstar

So we’re kind of approaching those normalized levels?

Dilek L. Samil

Yes.

Andy Bischoff – Moringstar

Then my remaining question is, I know you guys capacity is mostly gas, but can you speak to your capacity factors on coal and kind of how the trend is from year-over-year?

Michael W. Yackira

I don’t know if we have capacity factors. I can tell you that there were times during the year when we did not dispatch our coal plants because gas was so low. I’m sure that will continue to be a trend as long as gas is below $3 a dekatherm. But, our capacity factors have been strong for our natural gas plants obviously.

Operator

Your next question comes from Maurice May – Power Insights.

Maurice May – Power Insights

Yet another dividend question, I’m sorry there. But, last year your board declared dividends in early February, early May, early August, and late October and since you’ve taken the late October fourth quarter dividend declaration off and you’ve already done it in the first quarter, are we not looking at early May or early August for potential review of the dividend?

Michael W. Yackira

Sounds right.

Maurice May – Power Insights

Now, can you point us to one or the other of those two dates?

Michael W. Yackira

No. I’m not going to get ahead of our board on this.

Maurice May – Power Insights

So you can’t tell whether it’s going to be sooner or later then?

Michael W. Yackira

As you said, it will likely be sooner than the fourth quarter and it won’t be the first quarter so we’re left with the second and third and we will continue to look at when the appropriate time is and let you know.

Operator

Your next question comes from Paul Patterson – Glenrock Associates.

Paul Patterson – Glenrock Associates

Energy efficiency, there seems to be some discussion underway at the PUC about rolling those back in order to save customers money. Any thoughts about a change in energy efficiency policy and how that may or may not affect you guys?

Michael W. Yackira

I think it’s too early to tell at this stage. They’re in the process of deliberating what programs will be appropriate considering the flatness of our growth and the economic situation. But we certainly understand what their review is and what their position is and we’ll adjust accordingly if they believe it’s appropriate to adjust.

Paul Patterson – Glenrock Associates

Then customer growth, you guys are projecting about 1% but you also have some low usage accounts which are decreasing so how should we think about sales growth I guess, in the area? Obviously, with the impact of energy efficiency I presume as well, any thoughts about sort of longer term outlook with respect to that?

Dilek L. Samil

I think sales growth that’s consistent with customer growth is probably reasonable. Let me just add on your prior question with respect to energy efficiency and the Commission’s deliberations with respect to maybe reducing some of those programs. I just wanted to remind you of how we recover those program costs. On a going forward basis we’ve got more timely recovery so as we spend money on program costs we cover them over the next year from our customers. So program costs we spend them and we recover them and they don’t really impact the bottom line. I just wanted to make sure you were aware.

Paul Patterson – Glenrock Associates

Yes, I’m aware. I guess I was just sort of wondering if the discussions were perhaps sort of developing into new policies but it sounds like it’s too early to tell. I want to sort of touch base with you on the dividend tax situation. You guys obviously have a big dividend review coming up here, does the sort of volatility or potential volatility in terms of what might happen with the dividend tax really enter into it, or is it basically too hard to sort of predict and if you’re looking towards what the average of the industry with respect to all the other issues you mentioned, is that sort of how you look at it? I guess what I’m trying to ask is does the dividend tax issue is it a large focus or is it one that just simply is not?

Michael W. Yackira

Certainly a large focus of the industry. Edison Electric Institute has been diligently trying to assure that capital gains and dividends are taxed at the same rate and that makes a lot of sense for our industry. But, I don’t think that the decision that might come later this year on changes to our dividend policy is going to be necessarily affected by the taxes that are paid on dividends going forward because we would be in the same position as any other utility. So while it’s certainly part of the discussion and we’re hopeful that the Obama Administration and Congress decide not to raise the dividend tax as high as what the President is talking about now, I don’t believe it will have an effect on what our ultimate decision is.

Paul Patterson – Glenrock Associates

Then just finally, and I’m sorry if I missed this, what was the regulated ROE that you guys earned in 2011?

Dilek L. Samil

The regulated ROE in 2011, I’ve got it, I’m just trying to average the two utilities in my head. It’s in the neighborhood of about 7% if you look at the combined companies together.

Operator

Your next question comes from Analyst for John Ali – Decade Capital.

Analyst for John Ali – Decade Capital

Just a couple of follow ups, I guess there were some questions earlier about earnings drivers and so forth and rate case timing. Could you talk about earnings drivers I guess, over the next two to three years absent the rate case which I guess we’ll have to wait and see when the utilities combine? But, absent that what are the drivers coming up the next two or three years?

Dilek L. Samil

What we’re focusing on, as we’ve said before, is continued discipline in terms of both our capital and O&M spend. So if we can hold operating expenses flat and see the benefits of reduced cap ex and being able to earn on the capital investments that we’ve made to date, that’s going to result in positive cash flows as we’ve talked before. To the extent that we use a portion of that cash flow to make more balanced our capital structure, we’ll see improvements in interest expense, holding O&M flat. We’ve talked about very modest growth in sales but if you look at the combination of all those factors, we see the potential for continued growth in EPS even without rate cases.

Analyst for John Ali – Decade Capital

Could you remind us, was there any bonus D&A into 2011 and will there be any in 2012?

Dilek L. Samil

We had a big bonus depreciation year in ’11 driven primarily by 100% depreciation on Harry Allen. So that’s a good point actually and I should have said that in the discussion of cash flow, we increased our net operating loss carry forward, for example, significantly in ’11 relative to where it was in ’10 so that should continue to provide a tax benefit to us for a number of years longer than we had anticipated last year. Now, we’re looking at the ’15 or ’16 timeframe before we start becoming a cash tax payer.

Analyst for John Ali – Decade Capital

I guess because you depreciated all of Harry Allen, which if I recall, is a pretty big number like $600 or $700 million or something.

Dilek L. Samil

That’s right.

Analyst for John Ali – Decade Capital

I guess that reduces rate base so does that sort of push off your next rate case as a result of your rate base being lower and thus you’re going to be earning closer to your allowed ROEs if you hadn’t had this bonus D&A?

Dilek L. Samil

Certainly as that bonus depreciation works itself into deferred taxes, and it’s going to work itself in because we’re in an NOL situation right now, so when you think about the last rate case that we were just in we did have higher deferred taxes but they were offset to a degree by the net operating loss that we had. Looking forward, as that net operating loss is used up, deferred taxes will increase and as you noted they will decrease rate base.

Michael W. Yackira

As a reminder, we still have to file statutorily rate cases so that won’t change the filing dates of the rate cases. It might mitigate the effect of the rate cases but we still have to file the rate cases.

Analyst for John Ali – Decade Capital

Just to clarify what you just said, should we reduce rate base by this $600 or $700 million or we shouldn’t do that in one step because of your NOL situation?

Dilek L. Samil

That’s right, the latter.

Operator

(Operator Instructions) Your next question comes from Carl Seligson – Utility Financial Experts.

Carl Seligson – Utility Financial Experts

This may not be an appropriate question or it may be as you see fit. You compare yourselves or indicated you could compare yourselves to the average utilities or the utility average when it comes to dividend payout and thinking about that and the fact that you’re below their payout. However, most utilities or almost all utilities give earnings guidance, and you have not chosen to do so. I wonder if you could comment on your reasoning for not giving earnings guidance?

Michael W. Yackira

Rather than commenting on our reasoning for not giving earnings guidance and I realize we are an outlier with respect to that, we continue to look at the rational or reasons for giving earnings guidance and we believe there are enough indicators out there that we provide whether it be capital or O&M expectations, or maturities of debt, etc., that can give enough pointers to the investor community to come up with pretty reasonable estimates of what our earnings should be. It is something we continue to deliberate but I don’t know if we’ll be making any changes to that.

Operator

At this time I’m showing no further questions. I’ll turn it back over to you speakers.

Michael W. Yackira

Thank you for joining us. We appreciate your attention for this past hour and look forward to talking to you soon.

Operator

Ladies and gentlemen today’s conference call will be available for replay after 9:30 am today until Midnight, March 21st. You may access the AT&T Teleconference replay system by dialing 800-475-6701 and entering the access code of 234001. International participants dial 320-365-3844. Those numbers once again 800-475-6701 or 320-365-3844 and enter the access code of 234001. That does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.

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