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Southwest Gas Corp. (NYSE:SWX)

Q4 2007 Earnings Call

March 4, 2008 1:00 pm ET

Executives

Ken Kenny – VP, Treasurer

Jeffrey Shaw – CEO

John Hester – SVP Regulatory Affairs and Energy Resources

George Biehl - CFO

Analysts

Travis Miller – Morningstar

Faisel Kahn – Citi

Brooke Mullin – JP Morgan Chase

Operator

Good day ladies and gentleman and welcome to the 2007 Southwest Gas Earning conference call. My name is Lisa and I will be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to the host for today’s call, Mr. Ken Kenny, Vice President and Treasurer, please proceed sir.

Ken Kenny

Thank you Lisa, welcome to Southwest Gas Corporation’s 2007 Earnings conference call. As Lisa said my name is Ken Kenny and I’m the Vice President, Treasurer. Our conference call is being broadcast live over the internet for those of you who would like to access the webcast, please visit our website at www.swgas.com and click on the conference call link. Today we have Mr. Jeffrey W. Shaw, Southwest Chief Executive Officer, Mr. John P. Hester, Sr. Vice President, Regulatory Affairs and Energy Resources, and other member of senior management to provide a brief overview of 2007 earnings and an outlook for 2008.

Our general practice is not to provide earnings projections. Therefore no attempt will be made to project earnings for 2008. Rather the company will address those factors that may impact this coming year’s earnings. Further our lawyers have asked me to remind you that some of the information that will be discussed contains forward looking statements. These statements are based management’s assumptions which may or may not come true and you should refer to the language in press release and also our SEC filings for a description of the factors that may cause actual results to differ from our forward looking statements.

All forward looking statements are made as of today and we assume no obligation to update any such statements. With that said I would like to turn the time over to Jeff to review 2007, Jeff.

Jeffrey Shaw

Thank you Ken, and welcome all who have joined us today for this call. I’d like to provide a review of 2007 focusing on the natural gas utilities segment and also making a few comments on the construction services segment and then I would like to address growth and what the impacts of that are on us. I’m going to invite John Hester who heads our regulatory area to discuss great cases that we have on file and then I’ll come back to discuss and outlook and conclude. First with respect to the natural gas utility segment, we are first on a consolidated basis we posted we believe very strong earnings at $1.97 per share in 2007, second only to the $2.07 posted in 2006. Our operating margin increased by $35 million in 2007, $18 million of which was related to rate relief and $14 million of which was related to customer growth.

The difference in weather between years gave us a positive $3 million in operating margin, $12 million or $0.18 per share was the negative impact of warmer than normal weather in 2007 as compared to $15 million negative impact in 2006. We have rate cases on file in both Arizona and California to address any deficiencies that we have experienced or are experiencing and also to address rate design improvements in Arizona and I will again have John Hester go into that in some detail in a few minutes.

Our operation and maintenance expense grew by only 3.2% in 2007, our objective is to be inside the rate of inflation plus growth, and we met that objective and surpassed. Nearly 2/3 of our operations and maintenance expenses are labor related, therefore we are focused on productivity. In the last five years, the number of full time employees has declined from 2,546 to 2,538 while we’ve added 358,000 customers. This is resulting in our customer to employee ratio improving from 571 to 1 in 2002 to 714 to 1 in 2007, and improvement of 25% and this one of the best ratios in the industry.

During the same period, our annualized operating cost per customer have increased by less that 1% per year and on an inflation adjusted basis on an annualized negative 2% per year and our customer satisfaction ratings have averaged 94% over that same time period. This is an industry leading statistic. These improvements we believe are attributed to our judicious use of technology in corresponding changes to operating practices. For an example, as you may read in our documents we are in the midst of a conversion to fully electronic meter reading a three year project which should conclude by the end of this year. As we speak we are ahead of schedule and under budget.

We also enjoyed strong cash flows in 2007. Our deferred purchase gas cost balance declined from a $77 million receivable balance at the end of last year to a $12.1 million payable balance at the end of this year, an increase in cash flows of over $89 million and we had no long term debt financings in 2007. 90% of our capital expenditures in 2007 were funded through internally generated cash. And our capital structure improved from 30% equity in 2005 to 40% at the end of 2007. We believe that this bodes well for our credit ratings as we go forward. If you take a look at the published metrics that Standard and Poor’s and Moody’s and Fitch have published, we our metrics match up very well and we’re encouraged and hopeful for the future.

We continue also to aggressively manage our growth. We have consistently maintained a system wide average market share of nearly 90% for new home construction versus and industry average of about 70%. We continue to seek contributions and refundable advances from builders to assist with our capital requirements. What I mean by that is as we analyze a project, if the economics do no work, we request a contribution from the builder, a non refundable contribution from the builder to make those economics work and of course the builder has the option to either build with natural gas or not. And again given our statistic of a nearly 90% market share, most builders choose to build with natural gas.

Also for most of the infrastructure that we develop we take refundable advances from builders. At the end of 2004 we had $20 million in refundable advances on the balance sheet. That improved by the end of 2007 to $80 million. A few comments on the construction services segment, the contribution net income from our construction services segment was the second highest ever. 2006 was the only year better. To explain the difference it’s probably best to focus on 2006. In 2006, throughout the country we experience much warmer than normal weather which allowed Northern Pipeline Construction Co. to spend a lot more time doing what they do. With the slowdown in 2007, they ran into some unexpected challenges. And the equipment re-sell markets change from year to year.

2006 was one of the best equipment resell markets that they had experienced. 2007 we turned to a more normalized level. We would characterize the earnings of 2007 as a more normalized level, yes they are affected by the slowdown in construction, but keep in mind that a principal focus of MPL is to be a, participate in the maintenance in pipe replacement efforts throughout the country for aging infrastructure utilities.

Lastly on an overview basis, as you recall in 2006 after nearly 13 years of not addressing dividend policy the board of directors approved a $0.04 annual increase of the dividend which moved the dividend from $0.82 per share to $0.86 per share annually. Again in February of this year the board also increased the dividend by $0.04 from $0.86 on an annualized basis to $0.90 per share on an annualized basis an increase of nearly 5%. The board will continue to monitor the performance of the company and the extent that the earnings versus sustainable cash flows are strong, the company’s capital structure remains adequate and appropriate and we believe that we can sustain the dividend through all business cycles and that the dividend is within some normal payout range, the board intends to continue to address dividend policy having reviewed those factors.

I’d like to turn our attention to customer growth and the slow down. Obviously much has been written about the slowdown in growth. During 2007, the company experienced 58,700 first time meter sets, compared to 86,500 in 2006 a decrease of 32%. We realized that 29,000 net new customers in 2007 for a total of 1,813,000 customers at year end. Now the difference between the first time meter sets and customer additions is normally minor. However the difference in 2007 was more pronounced due to a greater number of inactive meters caused by an unusually high inventory of unoccupied homes.

Throughout our service areas we are seeing record levels of existing homes for sale. That shouldn’t be a surprise as that’s been fairly consistent throughout the country. A portion of the home inventory is the result of an unusually high number of foreclosures stemming in part we believe from aggressive lending practices the inventory of these existing homes have had a dampening effect on new residential construction, although it hasn’t completely shut it down, there still is growth, but it’s at a much slower pace. Based on existing builder commitments, new meter sets may continue to decline in 2008 before rebounding in subsequent years. And we anticipate that growth will be in the range of 1.5% to 3% during this period, however we do believe that, we have reason to be optimistic over the next 2 year for a number of reasons.

First of all, Arizona and Nevada, excuse me Nevada and Arizona ranked first and second in percentage population growth in the country for 2007. Las Vegas currently has 25,000 hotel rooms under construction. And Las Vegas is currently projected to have greater than 45,000 hotel rooms operational within the next five years. These new hotel rooms are expected to generate thousands of new jobs in Las Vegas and should boost population growth and increase for housing. Commercial development remains strong in Phoenix with the number of job expected to increase by 2% in 2008, and they expect population growth in Phoenix in 2008 at approximately 2.7%. We believe these two factors in Phoenix should help the Phoenix market absorb existing homes at a quicker pace than the rest of the county. Recently I read from Chief Executive magazine that Nevada and Arizona are among the top 5 best states in which to do business and if you look at the recent US census data it suggests the population growth from the time period 2000 to 2030 would more than double in the Southwest. So we believe that growth is going to continue, we’re seeing it continue in just a large number of homes that need to be absorbed.

What I’d like to do now is, and I think it’s important is to have John Hester walk the rate cases on file currently in Arizona and California, the timing of those, when we expect to decisions and I’ll let John go ahead and proceed with that.

John Hester

Thank you Jeff, the first major filing that we wanted to run an overview on today is the Arizona rate case filing, Arizona we filed rate case application on August 31st of 2007 and in that application we requested a revenue increase of $52.2 million. The reasons for the revenue increase need is due to first of all increases in operating costs, secondly increased cost of capital to fund infrastructure investments and third provide an opportunity to true up our billing determinates to reflect changes in customer usage levels as well as weather.

The application request an overall rate of return of 9.45%, that overall rate of return incorporates a capital structure that includes a 45% common equity component and 11.25% return on that common equity component. The rate of return is applicable to the rate base of approximately $1.1 million. In addition to the need for increased revenues to recover our costs, we’re also looking to make some improvements to our residential rate design so that it continues to encourage energy efficiency while helping the company recover its costs and shielding customers from changes in using that are related to weather. The residential rate time proposal that we have made includes four components.

First of all we are looking to increase the basic service charge by $3.10, that would move the basic service charge from its current level of $9.70 to a proposed level of $12.80. We’re also looking to make some changes to the volume metric rates. Currently we have a volume metric rate design which includes margin bolt blocks of a two block rate structure. Under the proposal that we have before the Arizona commission we would look to recover all that margin in the first block as well as a portion of gas costs and then the remaining gas costs would be recovered in the second block rate. In addition we will be proposing a weather normalization mechanism, the adopted weather normalization mechanism is helpful in protecting customers from high bills during colder than normal weather while protecting the company’s cost recovery during warmer than normal weather.

And then finally, we’ve got a fourth component that we refer to as a revenue decoupling mechanism. The revenue decoupling mechanism would account for any recovery of cost variations that are not otherwise recovered by the other three components. In our application, we’re proposing that the rates become effective October 1 and currently hearings are scheduled to be convened in June. Moving on to California, we also have a general rate case filing that’s been submitted in California, that application was submitted in December of 2007 and requests a $9.1 million increase. The increase in revenues in California are needed to recover increase operating costs, increased infrastructure investments have been made to serve new customers as well as increased cost of capital to fund these investments.

The filing request at the authorized level margin revert to being recognized on a seasonally adjusted basis rather than an equal monthly amounts throughout the year. This will help better reflect the seasonal nature of the company’s revenue stream. The revenue increase of $9.1 million is applicable to calendar year 2009. In California we use a future test year which is 2009. In addition we are proposing what we refer to as attrition years or alternative a post test year rate making mechanism that will provide for us to come in annually to adjust our rates to account for increase cost for the four years subsequent the base test year.

In that application we are requesting an overall rate of return for Southern California jurisdiction of 8.49% and for the Northern California Jurisdiction of 9.5%, the difference in overall rates of return there attributable to the presence of IDRB in Southern California service territory. Those overall rates of return include a capital structure with a 47% common equity component and an 11.5% return on equity. Again with the future test year, those rates would be effective January 1 of 2009.

Aside from our pending rate case filing in California, our most recent revenue adjustment occurred earlier this year on January 1, 2008. That was a result of an application that we filed in October of 2007 again a attrition filing that helps us true up for our ongoing cost and provided increased revenues of approximately $2 million. In Nevada, we don’t currently have a general rate case application pending. We are however working with the commission on a rule making that is a follow up to some legislative activity that’s past legislative session, specifically that bill, that senate bill 437, also known as the omnibus energy bill. It was approved by the state legislature in June and it is designed to decouple gas utilities fixed cost recovery from the volume sold, specifically that statute removes financial disincentives which discourage gas utilities from supporting energy conservation.

This is going to be facilitated throughout a number of different components, one is the ability for gas utilities to propose and implement a revenue decoupling device as part of a general rate case application. The statute also provides for the commission to establish rules by which utilities can propose energy efficiency and conservation programs and recover those costs and then finally the stature requires that the commission considers part of its rules any change in risk that utility may incur because of adoption of revenue decoupling and conservation programs.

As a result of the legislation the commission opened a rule making in June of 2007 on a number of parties working together in that process including ourselves. The commission staff, the bureau of consumer protection and a number of energy efficiency advocate groups. And we are currently expect that that rule making may be expected to concluded in the third quarter of 2008. Once that rule making is concluded, we’ll then take a look at what our revenue deficiencies are in Nevada as well as the results of the rule making were in the term in when the next appropriate filing of our Nevada rate case would be.

Turning to the other major portion of our class gas cost as Jeff mentioned earlier in the call at the end of 2006, Southwest had a cumulative under recovery of gas costs of approximately $77 million in the past 12 months, we’ve seen that under recovery be reversed to a slight over recovery, we’re still looking to recover funds in Arizona and in our next Nevada filing, we’ll be looking to refund some dollars from gas costs recovery. But generally speaking, the ability to see that under recovery reverse in the past 12 months is indicative of the fact that the various purchase gas adjustment mechanisms that we have in our services territories are working well.

In Arizona and California, we change rates monthly, in Arizona, those rates are based on 12 months of historic cost and in California, it’s based on the coming months projected costs and in Nevada we change rates quarterly. Finally, concluding with the gas ply purchasing practices our purchasing practices have stayed relatively constant, they vary slightly by regulatory jurisdiction, but generally the company targets a 50/50 mix of fixed price contracts and index based contracts in an effort to mitigate commodity volatility for customers. That policy seems to be working pretty well and is accepted by our regulators. This current year, just this past month we augmented that process slightly by introducing the use of financial SWAPs, this will allow us to help stabilize those commodity prices using one more tool. We consider this to be a relatively minor evolution of our established utility mitigation program, but also considered an important tool by which we can continue to secure stable prices for our customers by the most economic means possible. With that I’ll turn in back to you Jeff.

Jeffrey Shaw

Thank you John, as an outlook, looking forward, from a capital expenditure standpoint, we expect over the next three years, capital expenditures to be at approximately $850 million. About $302 million are expected in 2008. Capital expenditures will not necessarily directly correlate to customer growth and that $302 million number is before any advances or contributions are collected from builder for the growth that we do experience. We have a significant commitment to operating a safe and reliable system. We have franchise requirements and code and regulatory work that must be completed annually as well as other general plant expenditures that we need to make. So we’re, those are the cap ex that we expect on a going forward basis. And we will again continue to collect contribution advance and refundable advances from builders on a going forward basis. We don’t see much in the way of maturities in long term debt over the next three years, about $25 million and we do not expect to refinance that.

Cash flows over the next three years, we expect on average to fund approximately 80% of our long term capital needs through internally generated cash. Of approximately $70-$80 million is expected to be raised over that time period through various common stock programs. And if any remaining cash flow requirements are expected to be provided by existing credit facilities and/or other external financing sources.

As I talk about our strategies, we do not expect the core strategies to change. Number one, we will continue to work closely with regulator to improve our returns and stability of our earnings and cash flows. I think that’s evidenced by the fact that we have rate cases on file in both Arizona and California and recall that our last Arizona rate decision was in early 2006, so it will be about 2 and a half years in between decision in Arizona. We will continue to aggressively manage growth, and we expect growth to continue in the Southwestern United States, however possibly at a slower pace for the next couple of years.

We will again continue to collect those advances, those refundable advances and that protects on the carry investment that we are making. And we also are going to continue to focus on the efficiency and productivity, through the sensible use of technology, we will continue to look for ways to improve our operating practices and also use technology to facilitate that. We are very proud of our work force. We want them to have the training that the tools they need to perform their respective jobs. I think you cannot maintain a customer satisfaction rating that we maintain on a year in, year out basis without employees who are treated well, so it’s incumbent upon management to continue to do so.

We’re pleased with the company’s strategies, I would just add as I conclude we believe our strategies are working that are employees are responded, we are in a difficult market but we believe our strategies are the exact strategies that we need to follow to get through 2008 and on into 2009 and beyond. And we believe that we have the strategy, we have the employees and the management team to accomplish our objectives. With that I’ll turn the time back to Ken.

Ken

Thanks Jeff, so at this point, Lisa if you could now please explain the process for question and answers we’ll move forward.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen if you wish to ask a question, press star followed by a one on your touch tone telephone. If a question has been answered or you wish to withdraw your question, please press star followed by a two. All questions must be submitted at this time in order to be registered. Question to be taken that were to receive please press star one to begin please. Our first question comes from Travis Miller from Morningstar, please proceed.

Travis Miller – Morningstar

Hi, Jeff question for you, on the meter inventory that you mentioned earlier that a number of about 29,700. What kind of success rate have you guys had in the past in converting those to new customers? Is there a percentage success rate and then what kind of time lag time does it typically take to convert those.

Jeffrey Shaw

Well, let me explain it this way, hopefully it will help. Normally our new net customers in a year is very close to our first time meter sets. What we’ve experienced and we’re kind of in new territory. We have some vacant homes as a result of foreclosures. And with the growing services area like we have we expect over time and I can’t predict with certainty how long that time period is going to be, but we expect over time that those homes will be absorbed in the market. Right now, new home construction in both Phoenix and Las Vegas is at a much slower pace than we saw let’s say in the 2004, 5 and 6 time periods, much slower. Housing prices have declined significantly in our markets as well. We are starting to see auctions for some of these homes and it’s going to take some time for them to be absorbed.

But the good news with respect to that number of homes that are sitting vacant right now which probably let our service territories somewhere between 20-30,000, I’ll pick 25,000 as the midpoint. We have already made the capital investment in those homes, so it’s going to be pure margin with no cost associated with those when we absorb them so it’s just a time, it’s a period of time we have to get through with is unusual, something we haven’t necessarily experienced before that being said, in 2007, we still had a, I believe a very strong performance, and so we’ll continue to, again to focus on our strategies to get us through 2008. There are a lot of opinions as to when that may turn around probably not in 2008 but one cannot fully tell until you start to see what happens in the market.

Travis Miller – Morningstar

Okay. And those are booked to the inventory account?

Jeffrey Shaw

No, well.

Travis Miller – Morningstar

Or cap ex?

Jeffrey Shaw

Yeah, they’re, it’s basically in plant. It’s in rate base. All of those customers.

Travis Miller – Morningstar

Great. Thank you.

Jeffrey Shaw

You bet.

Operator

And our next question comes from Faisel Khan from Citi, please proceed.

Faisel Kahn – Citi

Good afternoon.

Jeffrey Shaw

How are you?

Faisel Kahn – Citi

Alright, what would you say the margin that would be related to those 20,000 to 30,000 customers or house that haven’t been set yet or have been set?

Jeffrey Shaw

You know let me give George Biehl our Chief Financial officer an opportunity to respond to that, I know we’ve looked at that.

George Biehl

Faisel, I think I’m going to give you sort of a longer winded answer that maybe you, that what you want. What, as Jeff said when we look at it we think that it’s a timing difference we don’t know the timing. When you talk about margin, it’s, some of that is seasonal, in other words the sooner that, if they come on during the heating season for example, we’re going to get more margin sooner. I think the average margin system wide per customer, I think if you compute if from the financials is what 253,000 a year. So I think was you have to, [it multi variate]. What you have to sort of forecast and what we’ve grappling with internally is that going to grow worse, in other words we’re looking more foreclosures because remember in our service territory, if a home in unoccupied, and there’s a number of them that are, here and in Arizona, they probably just shut off the gas, they probably keep the electricity on because of climatic conditions.

When they turn them back on, or when they sell the house, say via auction or otherwise, then for us it’s just a matter of turning that customer back on. But there’s some seasonality there. I think the key thing to be repetitive of what Jeff said is how quick the turnaround is, in other words how soon do we really sort of flush through this unprecedented high number of for sale homes here and primarily in central Arizona, the other service territories to a much lesser degree.

Faisel Kahn – Citi

What about I mean the current deposits you reported at the end of the year for ’07, is that related to the 20,000 or 20-25,000 houses that have not been connected yet, the meters are set?

George Biehl

You’re talking about the advances?

Faisel Kahn – Citi

The advances, right. Because the advances you refund once the customer goes live, right?

George Biehl

Typically yes.

Faisel Kahn – Citi

So I’m saying is the current advances you’re holding related to that inventory of.

George Biehl

Generally no. in other those homes have already, the problem is we can, to understand your, to fully understand I think your question now. Once that home closes for example, then it’s no longer the builders home and there’s no advance basically, that may be an over simplification but not much.

Faisel Kahn – Citi

So the advances that you guys are holding are for homes that have not been sold yet.

George Biehl

Correct.

Faisel Kahn – Citi

Great, I understand. Now in January and February did you see any, were there any net additions to those deposits because of new construction?

George Biehl

You know we’re looking along another, I don’t think significant. No, I would think too I would deposit that as the slow down up kick continues, we’ll probably hold on to those deposits longer than we would have in a more vibrant market.

Faisel Kahn – Citi

Okay, fair enough.

George Biehl

Which is our philosophy of taking them in the first place of course.

Faisel Kahn – Citi

Of course, it makes sense.

Jeffrey Shaw

Michael, this is Jeff, we are seeing growth continually. It’s just you’re not seeing a phase of a development build out at the pace that we saw in the past three years let’s say so they’re building slower a few houses at a time, they’re pre-sold, they have contracts and that’s what we’re seeing and so we’re not seeing advances build at the level that we have in the past.

Faisel Kahn – Citi

Okay, I understand. And then on the Arizona rate case the $50.2 million, I think the filing, you said it was about $20 million is related to the increase in capital in respect over the last few years and in terms of the rest. How much is broken down between return on equity and a larger equity component?

Jeffrey Shaw

John would you like to.

John Hester

The amount of the $50 that’s attributable to the higher equity component and the higher return on equity is also approximately $20 million.

Faisel Kahn – Citi

Is it fair to say that the higher equity component is about half of that amount?

John Hester

I’d have to check.

Faisel Kahn – Citi

Okay.

John Hester

I would have to look at the filing. I’m not sure if we broke that out in the application part of it.

Faisel Kahn – Citi

And you said at the hearings the public hearings are set for June?

John Hester

That’s correct.

Faisel Kahn – Citi

And the effective rates for this is essentially going into effect at the end of October or beginning of October.

John Hester

Our application requested that the rates become effective October 1st, the actual implementation of the rates is going to be a function of the schedule that the commissioner adheres to in processing the filing so we would like to see the rate effective October 1st but we’ll have to see how the procedural schedule plays out.

Faisel Kahn – Citi

Now is there, are you guys also looking at a potential settlement or how would that work, you have to approach [Ruco] first of have you guys already had discussion?

Jeffrey Shaw

No we have not done anything in that regard, no.

Faisel Kahn – Citi

So you expect to fully litigate this case basically all the way to the end?

Jeffrey Shaw

We don’t know at this point we don’t have any information other than the default application that we’ve made and the procedural schedule that’s been established.

Faisel Kahn – Citi

Okay.

Jeffrey Shaw

Our last rate case went through the fully litigated process.

Faisel Kahn – Citi

Okay and then the omnibus kind of state legislation you were talking about decoupling, you said that is was approved by the senate and wasn’t enacted into law yet or was it signed by the governor?

Jeffrey Shaw

Yes it was signed by the Governor in July of 2007.

Faisel Kahn – Citi

Okay. So effectively the commission has to look at decoupling as a potential rate mechanism.

Jeffrey Shaw

Right the commission is now charged with implementing the direction of the legislature.

Faisel Kahn – Citi

Alright. And last question. On, in terms of the in the past the ACC has talked about how the utilities in Arizona don’t own any storage capability, have you looking into that at all in terms of what kind of opportunities you might have to own storage or if it makes sense for the gas utility to own storage in the state?

Jeffrey Shaw

Yes, we’re in somewhat fairly regular discussions with anyone who is considering developing a project. It certainly something, as indicated that the commission is interesting and we’re interested in and to the extent that a project becomes available that fits well with our portfolio it’s certainly something we’d like to explore further.

Faisel Kahn – Citi

Okay, thanks for the time.

Operator

Our next question come from Brooke Mullin from JP Morgan, please proceed.

Brooke Mullin - JP Morgan Chase

Thank you. Can you give us a sense of some of on the construction services side if we look at 2007, just on a sort of a broad percentage, how much of their business is in the utility maintenance replacement work versus you know adding new customer growth work?

Jeffrey Shaw

That’s fluctuates but there is a significant component, I’m going to have to guess right now Brooke but I probably put at better than half is probably the more routine maintenance and the type work code related work and so forth. They’re in about 18 markets throughout the country so it’s not located in one particular place, and when you go to some of the markets, there’s very little growth. And therefore it’s the, their work is more concentrated in maintenance, pipe replacement infrastructure related type work.

George Biehl

For purposes the only thing that I would say, I’m not even sure internally that NPL breaks it down that way, and the reason it’s picking up on what Jeff just said they look at each of their 20 or so 15 or so operation areas and then they look at individual customers and some of those contracts or many of those contracts I would view are sort of blended. In other words they do both types of work depending on a lot of factors within that geographic area.

Brooke Mullin - JP Morgan Chase

How much of their business is now comprised of, is from the gas utility.

George Biehl

Last year, it was 21% of revenues the trend actually has been less because they’ve developed some new areas. They’re still doing significant work for us but on a percentage basis it’s below 20 year in and year out it’s been in the high 20%.

Brooke Mullin - JP Morgan Chase

Okay and this lastly, could you give us a rate base in the California cases?

George Biehl

Sure, for Southern California, the rate base is approximately $165 million and for Northern California, it’s approximately $55 million.

Brooke Mullin - JP Morgan Chase

Great, thank you.

Operator

Once again to ask a question, please star one to begin please. Press star one please. At this time there are no further questions this concludes the presentation you may now disconnect, have a great day, thank you.

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