Executives
Britta Carlson - Manager of IR
William D. Rogers - Corporate Sr. VP, CFO and Treasurer
Michael W. Yackira - President and CEO
Analysts
Dan Eggers - Credit Suisse
John Kiani - Deutsche Bank Securities Inc.
Robert Howard - Prospector Partner
Michael Lapides - Goldman Sachs
Clark Orsky - KDP Investment Advisors
Sierra Pacific Resources Corp. (SRP) Q4 FY07 Earnings Call February 11, 2008 10:00 AM ET
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Sierra Pacific Resources Full Year and Fourth Quarter Earnings Conference. At this time, all lines are in a listen-only mode. Later, there will an opportunity for questions and instructions will be given at that time. [Operator Instructions]. And as a reminder this conference is being recorded.
I will now turn the conference over to Britta Carlson, Manager of Investor and Shareholder Relations. Please go ahead ma'am.
Britta Carlson - Manager of Investor Relations
Good morning. This is Britta Carlson, the Manager of Investor and Shareholder Relations. Thank you for joining us this morning to review Sierra Pacific Resources' results for the full year 2007and fourth quarter 2007. In addition to the press release that was issued over the newswire earlier today, we expect to file our 2007 Form 10-K with the SEC on or about February 25, 2008. At that time, it will be available without charge on our company website at www.sierrapacificresources.com and by accessing the Investor link.
This morning's call will also be available for replay later today on our website or by telephone at 800-475-6701. International callers may use 320-365-3844. The conference call ID number is 907378. I would like to remind you that comments we make during this call may include forward-looking statements regarding the future performance of Sierra Pacific Resources 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-K for the year ended December 31, 2006 and the company's Form 10-Q for the quarter ended September 30, 2007. I would also like to mention that reconciliation of certain non-GAAP financial information presented during today's call can be found in our earnings press release which is posted on our company website at the same address I mentioned earlier.
With me this morning are Michael Yackira, President, Chief Executive Officer, and Bill Rogers, Corporate Senior Vice President and Chief Financial Officer. They will begin our call this morning by providing an overview of the full year and fourth quarter results, as well as other financial development. Michael will then provide a corporate update that will include regulatory and other matters that are important to the company.
I'll now turn the call over to Bill Rogers.
William D. Rogers - Corporate Senior Vice President, Chief Financial Officer and Treasurer
Thanks Britta and good morning everyone. I hope you have seen our earnings release and have had a chance to review it. As mentioned earlier, our 2007 Form 10-K is expected to be filed with the SEC on or about February 25. Soon thereafter we will also be making a supplemental informational filing with the SEC, on certain non-GAAP financial measures.
In our earnings release this morning, we included certain financial highlights from our company's income statements and balance sheets that I will now discuss.
I am pleased to report Sierra Pacific Resources earned $198 million or $0.89 per share in 2007. This compares with a $120 million or $0.58 per share in 2006 adjusted for non-recurring items in both years. The adjustments include the reinstatement of carrying charges for approximately $7 million, net of taxes in first quarter 2007 at Nevada Power and a deferred energy disallowance of approximately $8 million net of taxes related to the recovery of legal and settlement costs associated with the power supply contracts terminated during the Western Energy Crisis at Sierra Pacific Power in the fourth quarter of 2007.
In 2006, the adjustments included approximately $116 million net of taxes for the reinstatement of deferred energy reported in the third quarter of 2006 and a gain on the sale of our partnership interests in Tuscarora Gas Transportation Company for $41 million net of taxes.
Retail electric megawatt hour sales for 2007 were $30.4 million, up approximately 3% compared with 2006. The average annual growth rate in retail electric megawatt hour sales for the past three years was also approximately 3%. Although the local economy is not growing at the robust pace we enjoyed 2004 to 2006 period, the rate of growth continues to exceed the national average. Consolidated customer growth in 2007 was 2%, compared with a 3.8% growth in 2006. Our company now serves more than 1.3 million electric and gas customers.
Nevada Power ended the year with approximately 826,000 customers while Sierra Pacific Power's electric customers grew to some 366,000 and Sierra Pacific Power's natural gas customers grew to 148,000. Total operating revenues were $3.6 billion in 2007, up 7% from 2006. Operating revenues were higher in 2007 as a result of general rate case at Nevada Power. Customer growth at both Nevada Power and Sierra Pacific Power and hotter summer weather at Nevada Power.
Gross margin or revenue margin of the utilities increased approximately $116 million to $1.2 billion, an increase of 10% in 2007, compared with an increase of 3% for 2006 versus 2005. The 2007, 10% increase was driven by Nevada Power general rate case which went into affect on June 1st, continued customer growth of the utilities and hotter summer weather. Over the last three years, the consolidated gross margin grew approximately 22%, which translates into a compound annual growth rate of 7%, during the same time period. Due to the growth in our native loan and our investment plans, we anticipate continued strong growth rate of our gross margin.
2007, other operating and maintenance expenses were $478 million, were higher by $18 million or 4% compared to 2006. These higher operating and maintenance expenses were largely related to the increase investment in our fleet of power plants, higher regulatory amortizations and the timing of outages and maintenance at our power plants.
We remain focused on controlling the growth of our operating and maintenance expense cost structure, so that increases at a rate less than that of our low growth after accounting for additions to power plant and service. Depreciation and amortization expenses were higher by $7 million for the 2007 year, compared to 2006, primarily due to additions to plan and service included in rate base. These were partially offset by lower depreciation rates at Nevada Power and the retirement of plant assets at Sierra Pacific Power.
Allowance for funds used and borrowed during construction increased $22 million as a result the construction of the Clark Peaking Units in Las Vegas and the expansion of the Tracy Generating Station near Reno.
Other income in 2007 was lower by $13 million, compared to 2006 due to the sale of our interest in the Tuscarora Gas Pipeline in 2006, the expiration of the amortization gains associated with disposition of property of the utilities and lower interest income. Total interest expense was $280 million, 10% lower then last year. This is the result of lower holding company debt and various refinancing of debt at the utilities in both 2006 and 2007.
We invested $1.2 billion in generation transmission and distribution assets during 2007. This investment along with our investment and energy conservation programs was funded by cash from operations, $203 million in proceeds from a 12 million share common equity offering and a net increase of debt of approximately $200 million. We expect to exceed $1.2 billion in investment in each of the 2008, 2009 and 2010 fiscal years.
While this amount approximately 40% is expected to be spend on what we refer to as base capital, namely the infrastructure investments that meet the continuing growth in our state. This base capital, plus the completion of Tracy, the Clark Peaking Stations, major transmission projects and our expected Harry Allen combined cycle plant, account for approximately 90% of the projected capital investment over the next three years.
With respect to the fourth quarter, Sierra Pacific Resources earned $3.7 million or $0.02 per share, compared to $26 million or $0.12 per share in 2006. On a recurring basis, the 2007 fourth quarter net income was $0.06 per share compared to $0.02 in fourth quarter 2006. The significant non-recurring factors leading to the 2007 fourth quarter results when compared to the 2006 fourth quarter, included the 2007 deferred energy disallowance of $7.6 million, the 2006 true-up of terminated Enron contracts, debt tender costs and the $41 million after tax gain from the sale of the Tuscarora interest.
The 2007 disallowance related to an application to recover legal and settlement costs associated with the power supply contracts terminated during the Western Energy Crisis at Sierra Pacific Power Company. We have now put that chapter of our company's history behind us.
On a recurring basis, the improvement in earnings for the fourth quarter 2007 versus the first... fourth quarter 2006 was driven by general rates at Nevada Power, customer growth utilities, increased AFUDC and a decrease in interest expense.
Our balance sheet improved in 2007 with the equity to total capital of 41%, 48% and 46% for the parent company, Nevada Power and Sierra Pacific Power respectively. In December 2007, Sierra Pacific Resources issued 12 million shares of common stock for the net proceeds of $203 million. The entirety of the proceeds was contributed to the utilities as equity capital in December 2007 and January 2008. 118 million in capitals contributed in Nevada Power and $85 million in capital was contributed to Sierra Pacific Power.
Financial liquidity remained strong. Currently, Nevada Power, North Sierra Pacific Power has any direct borrowings under their revolving credit facilities. On a combined basis, the utilities borrowing availability under the revolving credit facilities is approximately $925 million.
In October, Moody's Investor Services recognized our improved financial strength and credit profile when it changes the rating of the utilities senior secured debt BAA3 investment great credit quality. Now three out of four rating agencies rate the utilities' debt as investment grade. Standard & Poor's, the fourth rating agency continues to rate the utilities' debt at DD+ for the positive outlook.
We remain focused on further upgrades to our credit quality through improving both the certainty and the strength of our cash flow, thereby providing for stronger coverage metrics. After providing for our $1.2 billion in capital investments, our improved cash generation and financial profile provide us with the opportunity to address our long stated goal of reinstating the common dividend. In September and December we paid a dividend of $0.08 per share and on February 7, 2008, our board declared a dividend of $0.08 per share payable on March 12th to shareholder of record as of February 22nd.
On an annualized basis, the dividend represented 36% of 2007 earnings. We also improved our funding levels and defined benefit plans and other post retirement benefits through $100 million contribution in September, well in excess of our planned funding of $30 million.
With that recap of our financials, I will now turn the call over to Michael Yackira, who will discuss other important matters that impact our company.
Michael W. Yackira - President and Chief Executive Officer
Thank you Bill and good morning. Thanks for joining us on this call. First I would like to echo Bill's remarks concerning how pleased we are with our 2007 financial performance. It's gratifying for us all to realize that the business strategies we have implemented are continuing to achieve positive results. As you know, our improved financial condition made it possible for the Board of Directors to reinstate the shareholder dividends during the third quarter of 2007 as Bill just mentioned. Our Board will continue to review the dividend payment relative to current and projected financial performance of our company.
Credit for this goes to all of our employees for their performance during the especially challenging years, earlier in this decade, during which they continue to provide reliable service in the fastest growing area of the country. While Nevada's economy is slowing along with the rest of the nation, our long term growth outlook remains positive.
In December, the Census Bureau announced the Nevada has regained its position as the fastest growing state of the nation, a position we've held for 20 of the past 21 years. The Las Vegas tourism industry remains healthy with passenger traffic at McCarran International Airport in Las Vegas, setting a new record in 2007 with nearly 48 million people arriving and departing.
There are approximately 40,000 new hotel rooms that are currently planned or under construction. The new Las Vegas sands property Palazzo located adjacent to the venation [ph] opened recently. The Wynn Resorts project called Encore is an addition to the hotel that opened in April of 2005 and is likely to be the next completed. Also the Fulton Blue [ph] and The Plaza are among the new major additions in the works along the Las Vegas strip and there are others to come.
The two largest developments under construction to nearly $8 billion MGM Mirage City Center project and Boyd Gaming's more than $4 billion Ashlon development are the most ambitious projects ever attempted in Las Vegas. Both will be mixed used projects with hotels, condominiums and retail.
Over the next three years, we expect that over 300 megawatts of new electric load will be added to the strip area alone. Peak demand is expected to grow statewide at an average rate of about 250 megawatts through at least the next several years and we are continuing to respond to that growing demand with the three point strategy I had mentioned to you previously.
First, we are increasing our energy efficiency in conservation programs. Second, we are expanding our renewable energy initiatives and investments. And finally, we are committed to building new, traditional generating plans they will use the best available technology to protect the environment and improve the efficiency of our generation fleet. With respect to our first initiatives, we expect to spend at least $135 million over the next three years on energy conservation initiatives.
In 2007, our program saved over 250 million kilowatt hours statewide and helped our customers reduce their power bills. We are also proud of the fact that we recently received an efficacy award from the Edison Electric Institute for promotion of conservation and energy efficiency for low income and fixed income customers. The past year also saw great strides in adding to our renewable energy portfolio. In December, North America's largest Solar Photovoltaic System was completed at the Nellis Air Force Base just north of Las Vegas. This 14 megawatt facility generates about 25% of the power required to operate the base and Nevada Power is purchasing renewable energy credits generated by the solar array.
Coupled with the 64 megawatt SolarOne project opened earlier last year, Nevada is now the number one state in solar power per capita. This adds to our state's renewable success since Nevada was already number one in geothermal power per capita. Also this past November, we announced plans to develop our first direct investment in renewable energy. Teamed with Renewable Energy Systems America, we plan to jointly develop and operate our state's first large scale wind energy project. This 200 megawatt project called China Mountain will be located in North Eastern Nevada near the Idaho border.
RES is an experienced wind developer and construction company and has an excellent track record. We look forward to working with them to bring this project to successful completion. During the fourth quarter of 2007 both of our utilities issued request for proposals for renewal energy resources. We are currently evaluating the project proposals and expect to submit contracts to the Public Utilities Commission in the not too distant future.
With respect to the third part of our energy supply strategy, construction is nearly complete on the Tracy combined cycle plant in Northern Nevada near Reno. This 541 megawatt plant is expected to be generating power for our customers by this summer. With the completion of the Tracy project our Northern Nevada service territory will be virtually energy self sufficient. In Southern Nevada, we expect the first 400 megawatt block of combustion turbine peaking units at our Clark station to be outlined by June of this year with the remaining 200 megawatt block to be finished later this summer.
Since our last call, we also announced plans to construct a 500 megawatt natural gas fired combined cycle power plant at our Harry Allen generating station north of Las Vegas. Subject to regulatory approval this project could be operational by the summer of 2011. The Harry Allen project will be more energy efficient than gas fire plant using older technologies and it will use very little water because it will be air cooled.
We decided to move ahead with the Harry Allen project because of uncertainties related to the timing of the in-service date for the Ely Energy Center, the 1500 megawatt coal fire power plant that we proposed in eastern Nevada. Because of changes to the permitting schedule our original plans to have the first 750 megawatt phase completed late in 2011 were no longer feasible.
We had expected to expand the energy generating capacity at the Harry Allen site after the Ely Energy project was completed but because we have it... because we found that the project was going to be delayed, we decided that it was in the best interest of our customers to accelerate the construction schedule at the Harry Allen site.
Let me now turn to the Ely Energy Center itself. The public comment period for the draft air permit which was issued by the Nevada Department of Environmental Protection ended on January 23rd and we expect a final decision shortly.
This project will enable us to diversify our fuel portfolio which is heavily relied on natural gas. The addition of this plant will ultimately make our state less susceptible to price volatility of the energy marketplace. This construction will be state-of-the-art and as a result the Ely Energy Center will be the cleanest coal plant of the Untied States. In addition, we will be able to shut down older coal-fired generating units to reduce carbon and other emissions.
Turning to regulatory matters, in December under our newly legislated hybrid test year, Sierra Pacific Power filed a $111 million general rate case with our commission. About $75 million of the proposed increase is attributable to investment in the new Tracy generating plant that I mentioned earlier and the balances for other infrastructure improvements in our Northern Nevada service area.
In this filing, we are requesting that the PUCN reduce the overall rate of return from 8.96% to 8.73% and to set a return on equity of 11.5%. Hearings on the case are set to begin on April 17th.
As we look ahead, in order to concentrate more fully on our rapidly growing Nevada Utilities business, we will explore strategic alternatives for our California assets. These assets include approximately 46,000 electric customers.
In summary, as our company's 2007 results indicate, Sierra Pacific Resources is achieving the financial goals that we set several years ago. I am confident that our current emphasis on energy efficiency, renewables and the expansion of our generating capacity will not only strengthen our utility infrastructure but prove beneficial to our customers, our employees, our state and our investors.
Now, Bill and I are ready to take your questions.
Question And Answer
Operator
[Operator Instructions]. Our first question is from the line of Dan Eggers with Credit Suisse, go ahead please.
Dan Eggers - Credit Suisse
Good morning, on the Harry Allen plant in the Ely Energy Center if things were to go well with Ely, are you at the point of no return to shift your focus on to that plant, or how should we think about timing the two projects since Ely isn't fully dead at this point?
Michael W. Yackira - President and Chief Executive Officer
Dan its Michael, Ely is surely not dead, as we mentioned in this call and as we mentioned earlier, the reason for moving the Harry Allen project ahead of Ely was because of delays in the permitting process for the Ely Energy Center. We saw that we couldn't have it on online by 2012 as we were expecting. So we had to move forward on the Harry Allen plant, that's really the whole essence of the issue, the issue is timing and reliability.
Dan Eggers - Credit Suisse
When could Ely get done if the approvals were to come at this point?
Michael W. Yackira - President and Chief Executive Officer
It's difficult to pinpoint at this point Dan, because we just don't know when the final decisions by the BLM on allowing for the access to the site will happen. We have to have the EIS completed; we have to have a recorded [ph] decision. We don't have firm timing on that, so it's impossible to tell at this point when we could start construction, let alone complete it.
Dan Eggers - Credit Suisse
Got it. And then on the housing fund obviously vacancies are high in the region, can you give a little color on kind of permitting activity from a new home perspective and you always have the jobs, if the jobs were created with the casinos, the people show up, what kind of timing should we be expecting at this point?
William D. Rogers - Corporate Senior Vice President, Chief Financial Officer and Treasurer
Dan its Bill Rogers. I don't have exact updates on permitting of homes with approximately 22,000 homes for sale on the market right now, that's down from a peak of 28,000. In Southern Nevada, we use the center of our business and economic research as a baseline for our forecast, that's also the forecast for what goes on at the state. Their population growth as for 2008 is approximately 2.8%. They and we take a view that the hotel room additions, that Michael reviewed in 2008 and the 40,000 rooms that are likely to come on the strip in the next five years will provide for significant increase and our population growth and therefore will may define places to house the people, we will be working on the strip and over come customers of our company.
Dan Eggers - Credit Suisse
Is there any good rule of thumb we should think about as far as a number of citizens required per new hotel room? I mean whether it be employees of the casino and then all support service associated there?
William D. Rogers - Corporate Senior Vice President, Chief Financial Officer and Treasurer
We think in terms of jobs and a good rule of thumb is 3.5 jobs created in Las Vegas for every hotel room.
Dan Eggers - Credit Suisse
Got it. Thank you, guys.
William D. Rogers - Corporate Senior Vice President, Chief Financial Officer and Treasurer
Thank you Dan.
Operator
We will go next to John Kiani with Deutsche Bank. Go ahead please.
John Kiani - Deutsche Bank Securities Inc.
Good morning.
William D. Rogers - Corporate Senior Vice President, Chief Financial Officer and Treasurer
Good morning John.
John Kiani - Deutsche Bank Securities Inc.
Michael or Bill, can you provide an update on the construction cost for Ely and what are you seeing there?
Michael W. Yackira - President and Chief Executive Officer
We don't have firm numbers John, but I can tell that you what we are seeing in construction costs across the board, construction costs are higher, whether it be for coal plants, for natural gas plants, for construction on the strip. And if you take a look at what the original estimation or estimates were for the MGM City Center and compare it to what it is today, they are significantly higher and that's because of commodity prices, labor prices, weak dollar or variety of things. So the construction costs throughout the United States whether it be for the electric industry or elsewhere are going up and the focus really is on what's happening overseas that's driving that.
John Kiani - Deutsche Bank Securities Inc.
Thanks, that helpful. And then can you walk through Michael your interest or ability perhaps in separating the transmission line from Ely would you ever consider something like that?
Michael W. Yackira - President and Chief Executive Officer
John that is part and parcel of our application to the BLM for the building of the Ely Energy Center. The Ely Energy Center and the transmission line are tied together.
John Kiani - Deutsche Bank Securities Inc.
Right.
Michael W. Yackira - President and Chief Executive Officer
In terms of the permitting process. So they will go forward and that, in that way. We certainly think the transmission line is importance for both the Ely Energy Center per se as well as what we have said in the past, and that is tying the two systems together will help ensuring of the resources and just as importantly will allow for renewable energy development in the Northern portion of the state and the Eastern portion of the state to happen or perhaps happened within the state of Nevada and that I think is renewable resources specially geothermal resources which are great resources for anybody who can tie end of them will be developed, the question is will we develop them or will California develop them, I think we will with our transmission line. So it's certainly important but the two are tied together right now.
John Kiani - Deutsche Bank Securities Inc.
Okay great, thanks Michael that's helpful.
Michael W. Yackira - President and Chief Executive Officer
Thank you John.
Operator
Next question is from Robert Howard with Prospector Partner. Go ahead please.
Robert Howard - Prospector Partner
Good morning.
Michael W. Yackira - President and Chief Executive Officer
Hi Rob.
Robert Howard - Prospector Partner
Just I guess with Ely with the permit issues, does that create a problem in terms of getting contractors or construction firms to commit to building and does that also run up cost?
Michael W. Yackira - President and Chief Executive Officer
As I mentioned I think the cost themselves have gone up for all forms of construction and if we don't have a firm date on when we expect to get the final permits to give us access to the land, its difficult to get firm numbers because we can't tell them when they can get access to the land. So I guess the answer is yes, it's difficult to pinpoint what those numbers are at this stage.
Robert Howard - Prospector Partner
Okay. And then with the Tracy plant, I think you said that it is been included in this FTT [ph] rate case and but if there is a delay, would that cause an issue in terms of getting that in these new rates when the case is completed or?
Michael W. Yackira - President and Chief Executive Officer
Well two things Rob, one is that the approval of our commission allow for us to include construction work in progress in our rate application and that was before the legislature last year past the new hybrid test case statuette. So, we expect that we will have the plan complete by the summer of 2008... before the summer of 2008. Now, that means that all capital cost associated with it will be in place before new rates go into effect and therefore all capital cost have been captured in this rate case.
Robert Howard - Prospector Partner
But, so... but if there is a delay you are at least getting the quip into the case, so someone putting problem wouldn't really throw things off...
Michael W. Yackira - President and Chief Executive Officer
But we don't... first of all we don't see it delay and secondly, you are right, quip was included but we included more than quip because of the way the hybrid test here works, and adjust for clarity, we also included the operating costs of the Tracy Power Plant in our rate case.
Robert Howard - Prospector Partner
And when is the rate case... when should it be completed?
Michael W. Yackira - President and Chief Executive Officer
Well, hearings are in April and rates will be effective, is it June 1, Bill?
William D. Rogers - Corporate Senior Vice President, Chief Financial Officer and Treasurer
Yes.
Michael W. Yackira - President and Chief Executive Officer
The rates will be effective June 1.
Robert Howard - Prospector Partner
And then you also mentioned about Tracy that, I guess when that's completed the north would basically be self-sufficient how... how long is that going to be... will that sort of last year and you are going to have to just kind of... just sort of maintain, just keep up with the growth there?
Michael W. Yackira - President and Chief Executive Officer
Well, the growth in Northern Nevada, Rob, is substantially less than the growth in Southern Nevada; we have been growing approximately 50 megawatts on peak per year. We have a higher load factor in Northern Nevada which is certainly good news and with the completion of the Ely Energy Center and the sharing of the Ely Energy Center that would be the next piece of base load capacity added to the northern system.
Robert Howard - Prospector Partner
And then the last thing I want to ask about in the back is the release during... in the financials you had some capital structure numbers and I just was wondering, are those pretty close to the capital structure that is implied in your latest rate cases? Which will be filed one and the one serving effect for Nevada Power or how much has that changed?
William D. Rogers - Corporate Senior Vice President, Chief Financial Officer and Treasurer
Rob, its Bill Rogers and our filing for Sierra Pacific Powers general rate case it's under the hybrid test here as we discuss and so we projected what we thought our capital structure would be on June 30, 2008. And in there we projected 45% equity to total cap. We are continuing to project that we will be at that capital structure for that company.
Robert Howard - Prospector Partner
Okay. And then what the current amount of equity that's in your latest Nevada power rates?
William D. Rogers - Corporate Senior Vice President, Chief Financial Officer and Treasurer
Slightly less than the equity capital structure that we have today at Nevada Power, which is 48%.
Robert Howard - Prospector Partner
Okay. Great thanks a lot guys.
Michael W. Yackira - President and Chief Executive Officer
Thanks Rob.
Operator
Michael Lapides with Goldman Sachs. Go ahead please.
Michael Lapides - Goldman Sachs
Hey guys, I actually have two questions and they're little bit separate from each other. First of all, when you think about supply needs longer term, if Ely keeps getting delayed or if there is just the permitting process with the BLM or the state environmental agency takes a little bit longer than expected. How much longer would you wait before you head to start seeking other new assets, until you get more certainty on the Ely permitting process?
Michael W. Yackira - President and Chief Executive Officer
Michael, it's Michael. I think I have reiterated our three part strategy, which is a very important element in serving the needs of Nevada. I think we are doing a really good job in reducing consumption. There is more to do and we have committed a significant amount to do that. Secondly, there is more renewable energy that can be had and for the benefit of our customers I think core geothermal capacity in the state is good because of the availability of that capacity vis-à-vis other forms of renewable energy not to say there are other forms of renewable energy are not part of our mix, they have to be important but reliability is key factor and geothermal is part of that key.
But as I said reliability is... since reliability is the key we have to look at what else is happening in the Desert Southwest and Ely in itself doesn't meet all of our needs in any event. So we have to look for other means of meeting those needs whether it by building or buying from others, from third parties power plants and our strategy has been very successful in Northern Nevada even though the short position was significant just as significant as it was in Southern Nevada because of the system is smaller. But we have added more than... we more than doubled the amount of own capacity in Southern Nevada since the beginning of 2006.
So we have made great headway but there is more to do with the addition of the clog peakers [ph] and the Harry Allen Plant will be virtually holding our own and Ely is expected to again keep us whole, but the point I think you are making is we need to continue to build in order to sustain that strategy of being more self sufficient in Southern Nevada and that is the case irrespective of Ely.
Michael Lapides - Goldman Sachs
Does that mean you are saying that if Ely takes another year or two or year so... before you get even certain to your granularity on the timing of permitting that you would want to have almost being forced to look at other new asset opportunities?
Michael W. Yackira - President and Chief Executive Officer
Well the forest [ph] is an interesting word Michael, I think we would be... we would want to and we would be in the best interest of our customers and our investors to do so.
Michael Lapides - Goldman Sachs
Got it. Second question little bit unrelated to the first, can you think about your ability to earn your ROEs at the two subsidiaries looking at kind of 2008-2009, can you talk about whether you believe you'll actually come closer hit your authorized levels and if not what are the kind of the hurdles that are keeping you from doing so?
William D. Rogers - Corporate Senior Vice President, Chief Financial Officer and Treasurer
Michael, it's Bill Rogers I think we will come closer to hitting those levels, but we remain largely in historic test year. The reasons we will come closer to hitting those levels is because we are now under a hybrid test year.
Michael Lapides - Goldman Sachs
Okay, and when you kind of say come closer, how far I mean should we think you are earning in the 7% to 8% ROE range or something little bit higher or little bit lower?
Michael W. Yackira - President and Chief Executive Officer
This is Michael again. Rather than predict that I think that the answer is our desire is to continue to strive to get closer and closer to our lab return, the hybrid test year will allow us to do that and that will be adjudicated in the Sierra Pacific case and then we will be filing a Nevada Power case of the end of this year that will include hybrid test year, so we will see.
Michael Lapides - Goldman Sachs
Got it, thanks guys, much appreciated.
Michael W. Yackira - President and Chief Executive Officer
Thank you.
Operator
Thank you. Next we have Edward Heyn [ph] with Catapult Capital Management. Go ahead please.
Unidentified Analyst
Good morning.
Michael W. Yackira - President and Chief Executive Officer
Good morning.
Unidentified Analyst
Just had a quick question on the timing of the Ely filing. When are you going to file your... or planning to file your revised IRP for Ely with the PUC?
Michael W. Yackira - President and Chief Executive Officer
Ed, the same thing is been in the case since the approval of Ely is still the case today and that is that the gaining factor is the final air permit and we haven't received a final air permit yet, once we do subsequent to that we will making a filing and we are expecting it will be in the spring.
Unidentified Analyst
Okay. And then just a quick question on the... are you going to do a cost benefit analysis of coal versus gas and I know we have seen a huge run up in eastern coal probably hasn't been as big in the west but do you think that that kind of dislocation between strength and coal prices versus kind of weak gas prices make the argument of gas versus coal, a tougher kind of a pitch?
Michael W. Yackira - President and Chief Executive Officer
I don't think it's a tougher pitch and that the volatility of natural gas prices is what we are trying to alleviate and we can certainly contract for coal longer than we can contract for natural gas and that's the key. The key is trying to have more predictability in our price for our customers because the volatility of our price is what hurts our customers more than anything. So that's what we are after.
Unidentified Analyst
Okay. Thank you very much.
Michael W. Yackira - President and Chief Executive Officer
And also one other thing and that is that the more we bring into our system, the more we own of efficient, natural gas plants, the lower the cost is for our customers because we are a natural gas based market and the natural gas based market based on a much higher heat rate in that market price than what we can achieve by having the capacity controlled within Nevada as well as a much lower heat rate that we're experiencing in the marketplace. So while natural gas might become more prevalent in terms of our ownership of natural gas assets, Harry Allen being an example and a 7200 heat rate, that's a far better outcome for our customers than buying the equivalent amount of energy on the market.
Unidentified Analyst
Okay, thank you.
Operator
Question from Ashar Khan with SAC Capital [ph]. Go ahead please.
Unidentified Analyst
Good morning.
Michael W. Yackira - President and Chief Executive Officer
Good morning Ashar.
Unidentified Analyst
I just wanted to get a sense of, you probably mentioned it in the beginning, I missed the numbers. What is the CapEx expected for this year and how is the funding going to happen?
William D. Rogers - Corporate Senior Vice President, Chief Financial Officer and Treasurer
Hi Ashar its Bill Rogers. Just I will share with you what we review in our presentation, I think constructive, we spent approximately $1.2 billion in 2007 and we are projecting that we will spend $1.2 billion or more in each of 2008, 09 and 10.
Unidentified Analyst
Okay, and then on the funding side for this year?
William D. Rogers - Corporate Senior Vice President, Chief Financial Officer and Treasurer
On the funding side for this year, it will require external financing and we haven't made in determination of the health that will be but given the strength and capital structure of our company here in 2007, we don't see at this point in time, the certainly of the need for a common equity offering.
Unidentified Analyst
Okay, thank you very much.
William D. Rogers - Corporate Senior Vice President, Chief Financial Officer and Treasurer
Thank you Ashar.
Operator
[Operator Instructions]. And we do have a question from Clark Orsky with KDP Investment Advisors. Please go ahead.
Clark Orsky - KDP Investment Advisors
Yes can you tell me what cash flow from operations was and cash at the end of the year?
William D. Rogers - Corporate Senior Vice President, Chief Financial Officer and Treasurer
This is Bill Rogers, we will be sharing that in our Form 10-K, but in these calls we have not been sharing our cash from operations.
Clark Orsky - KDP Investment Advisors
Okay, and then I guess the other question I have is on the CapEx going out for the next three years, you have given a number, is it baked in there anything for Ely being spent beyond '08?
William D. Rogers - Corporate Senior Vice President, Chief Financial Officer and Treasurer
Yes, we will be spending monies on continuing the development, permitting signing of Ely Energy Center in those years, but as I mentioned in our earlier prepared remarks, 90% of the funding over the next three years goes to base capital, Tracy, Clark major transmission projects Harry Allen.
Clark Orsky - KDP Investment Advisors
Okay good enough. Thank you.
William D. Rogers - Corporate Senior Vice President, Chief Financial Officer and Treasurer
Thank you.
Operator
And we do have a follow up for Michael Lapides. Please go ahead.
Michael Lapides - Goldman Sachs
Hey guys I just want to make sure, I understood the last question and you may have answered it clear. Of the $1.2 billion a year for '08, '09 and 2010, how much specifically, on a roughly is for Ely I mean or it is just the remaining 10% is for Ely or is there a bigger number?
Michael W. Yackira - President and Chief Executive Officer
Remaining 10% would include Ely investments and certain renewal projects and the number that I gave you $1.2 billion a year for each of those years, three years excuse me three each year would increase depending upon the timing of when we actually start construction of Ely.
Michael Lapides - Goldman Sachs
Got it. Okay. Thank you, guys. I appreciate the clarity.
Operator
And gentlemen we have no further questions, do you have any closing remarks?
Michael W. Yackira - President and Chief Executive Officer
Other than to say thank you for being on this call and thank you for your support, we continue to be focused on the things that are important to our customers and our investors, our employees and I'm sure that you will be hearing more from us at the May EEI meeting as well as other opportunities to speak with you at investor conferences. Thanks for joining us.
Operator
Thank you and ladies and gentlemen, this conference will be available for replay after 9.30 AM today through midnight Tuesday, March 11th. You may access the AT&T Executive Playback Service playback at any time by dialing 1-800-475-6701 and entering the access code 907378. International callers dial 320-365-3844 using the same access code 907378. That does conclude our conference for today, thank you for your participation and using AT&T Executive Teleconference. You may now disconnect.
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