Executives
Britta Carlson - Manager of Investor and Shareholder Relations
Analysts
Daniel Eggers - Credit Suisse
Lasan Johong - RBC Capital Markets
Gregory Gordon - Citigroup
Brian Russo - Ladenburg Thalmann & Company Inc.
Robert Howard - Prospector Partners
Michael Lapides - Goldman Sachs
John Kiani - Deutsche Bank
Paul Patterson - Glenrock Associates
Clark Orsky - KDP Investment Advisors Inc.
Edward Heyn - Catapult Partners
William D. Rogers
- Corporate Sr. VP, CFO and Treasurer
Michael W. Yackira - President and CEO
Sierra Pacific Resources (SRP) Q2 FY08 Earnings Call July 25, 2008 10:00 PM ET
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Sierra Pacific Resources Second Quarter 2008 Earnings Conference Call. At this time all participants are in a listen-only mode, later we will connect a question and answer session. Instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.
And I would now like to turn the call over to our host Ms. Britta Carlson. Please go ahead.
Britta Carlson - Manager of Investor and Shareholder Relation
Good morning, this is Britta Carlson, Manager of Investor and Shareholder Relations. Thank you for joining us this morning to review the results of Sierra Pacific's second quarter 2008. In addition to the press release that was issued on the newswire earlier today, we expect to file our 2008 second quarter Form 10-Q with the SEC on or about August 2008. At that time it will be available to you 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 of our website or by telephone at 800-475-6701. International callers may use 320-365-3844. The conference call ID number is 953877. 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-Q for the quarter ended March 31st, 2008 and the Form 10-K for the year ended December 31st, 2007. I would 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 web 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.
Bill will begin our call this morning by discussing key drivers and trends. Michael will then provide an update on the corporate strategy, including an update on recent industry developments.
I'll now turn the call over to Bill Rogers.
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
Thank you, Britta and good morning, everyone. I hope you've seen our earnings release and have had a chance to review it. As mentioned earlier, our 2008 second quarter Form 10-Q is expected to be filed with the SEC on or about August 6. Soon thereafter we will also be making a supplemental informational filing with the SEC on certain non-GAAP financial measures. In our earnings press release, we included certain financial highlights from our company's income statements and balance sheet. So rather than repeat our financials, I will discuss key drivers and trends that affect our earnings. As released this morning, Sierra Pacific Resources earned $36.1 million or $0.15 per share, a 25% increase in the second quarter of 2008, compared with a $25.8 million, or $0.12 per share in the same 2007 quarter. We are very pleased with our second quarter 2008 consolidated earnings. In the first six months of 2008, Sierra Pacific earned $60.2 million, or $0.26 per share, an increase of 37% compared with the $41.4 million, or $0.19 per share in the same period last year. The first half of the year is traditionally a small part of the total annual earnings of the company, with the third quarter representing the majority of our annual earnings. Although it remains early and subject to many factors, including weather, we are pleased with our financial performance so far this year. With respect to our top line revenue value drivers, our retail electric sales decreased for the second quarter throughout the state. Megawatt hour sales dipped at Nevada Power 6.1% in the second quarter of 2008 when compared to the 2007 period. Sierra Pacific Power's retail electric sales were down 2%, while gas sales in thousands of decatherms were up 10%. The reduction in sales was primarily due to decreased usage in 2008 caused by cooler weather in Southern Nevada.
In the second quarter of 2008, cooling degree days were down approximately 21% in Southern Nevada. And although cooling degree days were down in Northern Nevada, they were largely offset by an increase in heating degree days earlier in the quarter.
For the first six months of the year, Nevada Power's average residential, commercial and industrial customer count increased 1.1%, 3.1% and 3.4% respectively when compared to the average customer counts for the same period last year. Sierra Pacific Power's average residential, commercial and industrial electrical customer count increased 0.9%, 2.4% and 2% during the first six months of 2008 compared to the average customer counts in the first six months 2007. The cyclical nature of the Las Vegas home building market has resulted in lower than projected residential customer growth, just as we experienced above projected customer growth in 2005. According to our local demographers in mid 2009 with our current population growth and forecast of employment opportunities Southern Nevada is likely to work through its current excess housing and apartment inventory.
In turn, our company should return to its historic growth rate in residential customers. Population growth remains strong and employment opportunities remain healthy in Southern Nevada. As cited by the Center for Business and Economic Research at the University of Nevada, Las Vegas in its mid-2008 economic outlook, population projections of 2.6% to 3.6% a year in 2008 indicate a slower rate of growth. But that compares to the National projection of approximately 1%. In June, year-over-year total employment increased 2.9% in the state of Nevada and 2.7% in Las Vegas.
Many gaining properties are in the process of hiring for openings later this year, including Wynn's Encore [ph] which is hiring 5300 people for approximately 2000 hotel rooms in the Aliante Station by Station Casino's requiring 1200 employees for its 202 suite hotel. This growth rate in population and employment opportunity is expected to increase in 2009 and then remained strong over the next several years as a result of substantial hotel room inventory growth from the construction currently underway on the Las Vegas strip.
Having reviewed our historical and prospective revenue drivers, it is important that we focus on our key value driver, gross margin or revenue margin. Gross margin increased from $288 million in the second quarter 2007 to $304 million in the second quarter of 2008. We achieved the 6% increase in growth despite the mild weather. The rate of growth in our gross margin compares to an increase of 6% for the same quarterly periods in 2007 versus 2006.
Nevada Power contributed 67% of the consolidated gross margin in our... at electric and gas businesses of Sierra Pacific Power contributed 30% and 3% respectively. Over the last two year period, the consolidated gross margin grew approximately 15%, which translates into a compound annual growth rate of 7.2%. Due to the growth in our native loan and our investment plans, we anticipate the trend of a strong growth rate in gross margin to continue.
On the expense side, our consolidated operations and maintenance expenses decreased 2% in the second quarter of 2008 when compared with 2007. This helped drive revenue margin improvements to our bottom line. This example of our continued cost discipline is a result of both process redesign and the investments we have made in personnel, our power plant fleet and transmission and distribution assets.
I would now like to turn your attention to our investment and capital formation plans. As a result of the completion of projects under budget and slower than historical growth in our residential market, we are reducing our 2008 estimated cash construction requirements by approximately $100 million to $150 million for the remainder of the year. Pending regulatory approval of the Bighorn Generating Station, cash requirements for 2008 will increase by another $510 million for a net total of approximately $1.6 billion in 2008.
We expect that the 2009 estimated cash construction requirements will also be reduced by $100 million to $150 million. As a result, our estimated cash requirement for the years 2008 to 2012 will be reduced from approximately $7.4 billion as disclosed in our Form 10-K to $7.2 billion. The acquisition of the Bighorn power plant will be added to this estimate.
The investments in the Clark Peaking Units and the announced acquisition of Bighorn, if approved by the PUCN, will be included in Nevada Power's general rate case filing later this year with a view to be in rate base in mid-2009. On the capital formation side, our balance sheet remained strong as evidenced by the equity to total cap of 40%, 48.7% and 44% for the parent company, Nevada Power and Sierra Pacific Power respectively. The 48.7% at Nevada power on June 30th, 2008, will be included in Nevada Power's general rate case test year filing.
We are pleased that Standard Poor's recognized our financial improvement when they upgraded our utilities mortgage bonds two notches to BBB in May of this year. Now, all four rating agencies rate our utility's mortgage bonds as investment grade. As we progress on our strategy to increase our own generation capacity in Nevada to include our announced agreement to purchase Bighorn, we intend to maintain the integrity of our balance sheet, although reduced capital spending will reduce our equity capital formation requirements. As reviewed in our first quarter 2008 earnings call, we expect to have a secondary offering of common equity by the end of second quarter 2009.
With that recap of our trends and our financials, I will now turn the call over to Michael Yackira, who will discuss other important matters that impact our company. Michael?
Michael W. Yackira - President and Chief Executive Officer
Thanks, Bill and good morning, everyone. Thanks for joining us this morning. As Bill said, we're pleased with our company's second quarter and year-to-date financial results. They demonstrate that our strategy of focusing on the energy needs in Nevada is effective, although we're certainly not without our challenges. As we all know, our nation's economy is going through a difficult period and Nevada is no exception.
However, our state has been growing at a greater pace than the rest of the country. As Bill mentioned earlier, Wynn's new hotel, Encore, will be opening later this year and the two mega projects that we mentioned before, the MGM MIRAGE CityCenter and Boyd Gaming's Echelon Place are still slated for opening during the next two years. These projects will likely attract new visitors to the Las Vegas strip, as well as add new jobs to the community.
Nevada's mining industry, which is dominant in the Northern Nevada economy remains quite healthy because of the strength of the gold market. As I've mentioned in previous calls, we have a three-part energy supply strategy to assure that our customers continue to experience reliable energy supplies. We are increasing our focus on investments in energy efficiency and conservation programs, renewable energy initiatives and investments and building or adding new traditional generating facilities that use the cleanest, most efficient available technologies. Energy efficiency and conservation are in everyone's minds, especially with high gasoline, as well as other energy prices. We are making sure that our customers understand that the price of natural gas has nearly doubled during the past year and to that end, we started immediate campaign, including a public service announcement that we will begin airing shortly with Nevada Senators Reid and Anson [ph] joining me to remind customers that we provide programs and tips to be more energy efficient.
Just last week, we launched a newly designed website in Southern Nevada that will provide more information on energy use within the individual's households, thereby informing customers how they can take better control of their energy bills. Our energy efficiency and conservation efforts are focused on both residential and commercial customers.
For example, on the residential side, our programs emphasize higher efficiency air-conditioning units, air conditioning loads management, high efficiency pool pump replacements and encouraging the use of compact fluorescent light bulbs. In fact, this summer, we've been running a television and print advertising campaign, emphasizing the positive effects of these actions.
Nevada treats these programs as rate based investments on which we can earn a return. Our current expected investment in 2008 is $55 million for these programs, all of which have been approved by our Commission. And the Commission has also improved an enhanced return for these investments. Turning to the second part of our strategy, earlier this week, we dedicated a new solar project at one of Nevada State energies... Nevada state agencies located in our capital Carson City. It's one of over 300 such projects we've constructed statewide over the past four years, and these customer installed solar projects totaled 1.7 megawatts, and they are helping our customers reduce their monthly bills.
During the coming months, the program will be expanded to include customer installed wind turbines and small hydroelectric generators. We are continuing to invest in large-scale renewable energy projects. Nevada is the number one state in the nation for geothermal and solar energy per capita, and we are working on a partnership with Renewable Energy Systems Americas to develop the largest wind project to date in our state. This 200-megawatt project in Northeastern Nevada at the Idaho border could be generating power by 2011 pending regulatory approval.
And just yesterday, we were pleased to learn that the Solar Electric Power Association ranked our company among the top utilities of the nation with respect to solar energy initiatives. I'll now turn to the third part of our energy supply strategy. Although energy needs in the Western United States are continuing to increase albeit at a slower pace than in recent years, the development of new generating plants has fallen behind. This underscores the importance of owning power plants in Nevada for the benefit of Nevadans. Examples of our progress include last week's dedication of the new gas-fired Tracey Combined Cycle Plant near Reno. With the completion of this 541-megawatt generating plant, our company's Northern Nevada generating capacity has increased by about 50%, thereby making the area virtually energy self-sufficient. In the Southern Nevada, since the beginning of 2006 through the end of last year, we added 1700-megawatts, more than doubling our own generating capacity. And over the next four years, we plan to increase our generating capacity by nearly the same amount. At Nevada Power's Clark Generation Station in Las Vegas we are adding 600 megawatts of gas-fired combustion turbines this summer to serve peak load demand in Southern Nevada. The first 200-megawatt block is now operational, the second is expected to be commercial before the end of this month and the last 200-megawatt block is scheduled to be operational by the end of August.
Nevada Power also plans to construct a 500 megawatt gas-fired combined cycle plant at the area at the Harry Allen generating station, North of Las Vegas, which should be operational by the summer of 2011. We also have pending the acquisition of the Bighorn Generating Station, a 598-megawatt gas-fired combines cycle facility located South of Las Vegas. Both Harry Allen and Bighorn are awaiting approval from the Public Utilities Commission of Nevada, in an amendment that Nevada Power filed to its resource plan. Hearings before the Commission are scheduled for early September with a decision expected in October.
With respect to Bighorn, we expect the acquisition to close by year-end after the anticipated approvals by both state and federal regulators. Bighorn, the Harry Allen expansion and the now... now the new Tracy plant are all highly efficient combined cycle generating plants producing fewer emissions and using less natural gas and water than older plants in our system. Of course, all of these projects I've just listed are fuelled by natural gas as are most of the company's generating plants, which is why we proposed in 2006 to diversify our fuel mix with the 1,500 megawatt coal-fired Ely Energy Center in Eastern Nevada.
The Nevada Division of Environmental Protection has issued a preliminary air permit for the Ely project and we expect that the final year permit will be issued later this summer. We also expect that the Draft Environmental Impact Statement will be released this year by the Bureau of Land Management in the final EIS in the record of decision are expected in 2009. One regulatory matter to mention is the decision on the general rate case that was filed late last year by Sierra Pacific Power.
Last month, the Public Utilities Commission of Nevada approved an annual increase in general revenues of $87 million, most of which resulting from the inclusion of the Tracy plant under the so-called hybrid test year legislation that was passed in 2007. The P.U.C.N. set an overall rate of return for the company at 8.41% and a return on equity of 10.6%. Nevada Power Company will be filing its next general rate case with the P.U.C.N. as Bill mentioned in December of 2008 in accordance with our statutory requirement to file general rate cases every three years.
Before we open this morning's call to questions, let me mention that since our last call, we've announced two changes affecting our Board of Directors. In May, we announced that Walt Higgins will be retiring as Chairman and as a member of the Board of Directors effective July 31st. We would like to again commend Walt for his forward leadership during our most difficult times. Effective on August 1st, Walt would be succeeded as Chairman by Philip Satre. The company's lead, current lead Independent Director and he has been a member of the Sierra Pacific Board since 2005.
Phil was formerly Chairman of Board at Harrah's Entertainment Inc. before retiring in 2005. In addition, in April, Maureen Mullarkey, former Executive Vice President and Chief Financial Officer of IGT, a gaming technology company was elected to our Board. She brings extensive financial experience to our Board and she is active in civic and community organizations in Northern Nevada.
Now Bill and I will entertain your questions.
Question and Answer
Operator
[Operator Instructions]. We do have a question from the line of Dan Eggers with Credit Suisse. Please go ahead.
Daniel Eggers - Credit Suisse
Yes. Good morning. I wondered if you guys could just expand a little bit more on the customer trend, customer consumption level is kind of breaking out a little more between weather and the impact you have in either conservation, or people doing some little tightening and how we should think about that going forward?
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
Dan, this is Bill Rogers. As I mentioned on the call, relative to second quarter 2008, cooling degree days were down 21% in Southern Nevada, specifically we had 1,142 cooling degree days this year and 1,442 last year. And with respect to weather versus customer usage, I would say it is balanced on those two factors.
Daniel Eggers - Credit Suisse
So even with the customer growth then you are seeing a minus 6%, half of that was consumption decisions and half of that was weather driven then?
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
Yes.
Daniel Eggers - Credit Suisse
Okay.
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
And it wasn't the half... excuse me, Dan. Within the half, there is consumption decisions and part, it's our own investment energy conservation on behalf of our customers.
Daniel Eggers - Credit Suisse
And then if I were to... do you have any... I guess, any data on the number of your metered customers that are vacant properties versus ones where people are living full-time?
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
We did not and that would be considered a low-use customer, and would not... every meter is not a customer without going into that. But do we have... the number of those types of customers is actually going down as we are clearing out the housing inventory.
Daniel Eggers - Credit Suisse
Do you see any positive demographic trends as far as body is showing up, so we should actually be thinking about intensity of meter use going up looking forward, or is it going to... or is the second quarter trend the right one to watch?
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
The trend should be to clear out the excess housing and apartment inventory by mid-2009 and that has been the trend throughout this year. So, I think you put it as meter usage and we agree with your statement there.
Daniel Eggers - Credit Suisse
Okay. O&M costs were down in the second quarter. How should we think about that going forward with population growth, with load growth, should we assume any normal inflationary pressures or are you guys seeing enough [inaudible] to keep O&M costs flat?
Michael W. Yackira - President and Chief Executive Officer
Well, Dan, it's Michael. Keeping O&M costs flat is always difficult, but we've done several things as Bill mentioned over the past few years to improve our discipline, to improve of processes, to make investments so that our O&M costs are not as... or are more predictable as a result of those investments. An example of that would be increasing our cable injections, which are very cost effecting. But in the times when we were struck for cash quite frankly, we were not making a lot of investments along those lines, but now that we are able to do a better job of projecting our budgets over a number of years, our employees are able to do a better of scheduling. The same is true with our power plant fleet. We are able to look the power plant fleet across all of these units, especially we're adding these units that look a lot alike. In other words, there are similarities, inventory can be shared etcetera, maintenance schedules work out much better when you're owning more of your fleet. So I think not only are we disciplined, but we made right investments to be able to control O&M.
Daniel Eggers - Credit Suisse
Okay. Thank you, guys.
Michael W. Yackira - President and Chief Executive Officer
Yes.
Operator
You have a question from the line of Lasan Johong, RBC Capital Markets. Please go a head.
Lasan Johong - RBC Capital Markets
Thank you. Couple of questions. It's looks like Northern Nevada is doing well because of the gold... in terms of the industry and commercial stuff, because of the gold mining business. But I also noticed that in Southern Nevada, the industrial and commercial consumption was not as down as much as residential? Is that because the casino businesses are still doing very well? And is it a reflection... is there a dichotomy developing between the residential markets and the commercial industrial markets?
Michael W. Yackira - President and Chief Executive Officer
Lasan, it's Michael. With the construction that's going, the commercial construction going on, that is ahead of the employment increase. The numbers that Bill mentioned in the script are numbers that are already out there in terms of what Encore and Aliante is looking for. With additional construction, especially those two mega projects that are scheduled to be completed in 2009 and 2010, we're expecting that the population growth will be buoyed by the employment growth. In other words, they're not going to be cannibalizing their employees by taking employees away from other properties. They're going to be adding employees to support those new properties. So commercial development has not been as reduced, even though it has been somewhat reduced, but hasn't been reduced as much as the residential growth has affected our economy.
Lasan Johong - RBC Capital Markets
But then if that's the case, as construction workers stop projects on these mega projects, are we going to see a trade-off between casino employment going up, but construction employment going down?
Michael W. Yackira - President and Chief Executive Officer
Well, certainly and that's the typical cycle of any construction cycle. But my supposition is, and again I've only been here for 5.5 years, but I see it time and time again that the Las Vegas Strip keeps recreating itself and there are more projects on the table. So whether or not that transpires as quickly as some people might like, who knows, but we certainly expect that the residential housing market is going to be cleared out, the excess will be cleared out and we'll start seeing new residential growth happen probably in 2009.
Lasan Johong - RBC Capital Markets
Okay. And Bill, you mentioned maybe second quarter '09 or so, there might be an equity issue. Any kind of estimates of what that would be in terms of dollars?
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
We have not disclosed prospective dollar amount or number of share offering for an equity, and what we continue to say is given the investment we're making on behalf of our customers, which is approximately 1.6 billion this year and another 1.1 billion in 2009, we are likely to issue common equity prior to the end of second quarter of 2009.
Lasan Johong - RBC Capital Markets
Okay. Are you finding your project backlog of pipeline changing in any way, is it accelerating, is it decelerating, is it the same and the big mega projects seem to be fine, but I am sure there is a whole bunch of smaller projects that don't grab headlines, is that project pipeline still very healthy?
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
If you are referring to projects like substations and acquisitions of land and...
Lasan Johong - RBC Capital Markets
Exactly...
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
Data cables....that, with respect to the $100 million and $150 million to $250 million [ph] in capital expenditures, it will be reduced in 2008 and 2009, so each of those years. Now half of that is the type of projects you just referred to and the other half is a result of our discipline and our construction budgets on the larger projects.
Lasan Johong - RBC Capital Markets
I see...I see. Are you finding cost escalations getting in the way of projects?
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
Not materially on those projects.
Lasan Johong - RBC Capital Markets
Okay. Great. Thank you very much.
Operator
We have a question from the line of Greg Gordon with Citigroup. Please go ahead.
Gregory Gordon - Citigroup
Thanks. Thanks. My supposition here from your comments is that the underlying projection for [inaudible] energy supply capacity and infrastructure isn't going to change dramatically because of the current economic slowdown. So despite the fact that we're sort of tracing 3% on demand, you are not expecting to go back to the Commission or have the Commission bring you in to... review your capital budget plans for the next several years or if we continue to see weakness in the economy, would that cause you to rethink your supply needs and your infrastructure needs?
Michael W. Yackira - President and Chief Executive Officer
Greg. it's Michael. You know that we have to file with our Commission every three years for each company an integrated resource plan, and we make many amendments in the intervening periods, examples we have amendments seven and eight for Nevada Power Company and we filed our IRP in 2006. So we're before our Commission not usually to change plans, but to put more specifics around plans. For example, when we have a renewable energy project as we do now before our Commission, we will make a filing to ask for their approval to do that. But to answer your question in a grander scheme taking a look at what we own today, we still are short by more than 2,000 megawatts against our this year's peak demand so far. So the need for additional generation in Southern Nevada especially in light of something that I said in the script which is that nobody else seems to be building, we have to make sure that we are as self-sufficient as we can possibly be and I would love to get to a point where we're similarly positioned as we are in Northern Nevada today with the addition of the Tracy Plant, that we have the capability to produce power when our customers needed and if there is something more economic for us to buy for the benefit of our customers in the market, we will do that too, but, at least, we won't have to count on that market to be there to assure the liability. So with that said, we really don't see much in terms of a change to that strategy irrespective of a little bit of a slowdown at this point in time.
Gregory Gordon - Citigroup
Thanks.
Operator
We have a question from the line of Brian Russo with Ladenburg Thalmann. Please go ahead.
Brian Russo - Ladenburg Thalmann & Company Inc.
Yes. Good morning.
Michael W. Yackira - President and Chief Executive Officer
Good morning, Brian.
Brian Russo - Ladenburg Thalmann & Company Inc.
Could you tell us what the say historical customer growth rates were for the various customer classes, say over the last several years?
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
Yes, this is Bill. The commercial and industrial accounts about what it has been this year. In fact this year it might even be higher, and I think the residential customer account, and we do this on average throughout the year has been closer to 3%.
Brian Russo - Ladenburg Thalmann & Company Inc.
Okay. And you expect that resumption of may be 3% residential growth in late 2009, more or less?
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
Yes. Let me just speak to it in terms of housing and population growth. CDR which we shared with you predicts that this year population growth will be 2.6% to 3.6% in Southern Nevada. Now, that is very healthy compared to the United States, but in Southern Nevada that will be the lowest growth rate since the mid-1980s. They expect that population growth rate to pick back up 24% or greater in 2009 in advance of these major projects coming online and providing even greater employment opportunities in Southern Nevada.
Second, the housing inventory which was our existing meters and customers both at homes and apartments needs to be cleared out before we can get a pick up in traditional growth rates in residential customers. So, those two things coming together somewhere in mid to late 2009, we should see an upward trend and relative to our current growth in residential customers.
Brian Russo - Ladenburg Thalmann & Company Inc.
Okay. Thank you. And it looks like the Nevada Power, you are showing a 48.7% equity ratio, is that your target going into next this general rate case?
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
Well, in the Sierra Pacific Power general rate case, they use the historic test year with respect to the capital structure and that was June 30, 2007 at 43.5%. The historic test year for Nevada Power is June 30, 2008 and the equity and the capital structure is 48.7%. So it's not a target capital structure, it is an actual capital structure on a historic test year for rate case purposes.
Brian Russo - Ladenburg Thalmann & Company Inc.
And then one last question. Any trends you're seeing in bad debt expense?
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
We are seeing an increase in the aging or days on hand of receivables, but in our regularly scheduled quarterly reviews where we are reserved, we are adequately reserved for bad debt expense.
Brian Russo - Ladenburg Thalmann & Company Inc.
Okay. But you're seeing a pickup?
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
We are seeing an increase in the aging of the receivables based on hand.
Brian Russo - Ladenburg Thalmann & Company Inc.
Okay.
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
Not necessarily a pick up in bad debt expenses.
Brian Russo - Ladenburg Thalmann & Company Inc.
Okay. Thank you very much.
Operator
We have a question from the line of Robert Howard of Prospector Partners. Please go ahead.
Robert Howard - Prospector Partners
Good morning.
Michael W. Yackira - President and Chief Executive Officer
Good morning Rob.
Robert Howard - Prospector Partners
With my understanding that a couple of weeks ago you guys might have called some of the auction rate securities, I'd assume, I can verify that and may be if you had any thoughts about any reasoning on that?
Michael W. Yackira - President and Chief Executive Officer
We have won that $15 million security that was matured within a year. So, we went ahead and redeemed that early and then what we've done on other securities is to convert them from auction rate to variable rate demand notes and use letter of credits to bring down the interest expense.
Robert Howard - Prospector Partners
So, does that mean you got... you got rid of all the auction rates [inaudible] or just... not more than just the one, but... ?
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
There are three of them, but it's by far the minority of our auction rate securities.
Robert Howard - Prospector Partners
Okay. All right. And just you were able to get a... there was a big enough savings on that that you thought it was worthwhile, because I remember on the last call, you were saying that it really wasn't... you weren't that concerned about this... all of them having pegged up at their math?
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
I think it's fair to say that the interest rates haven't worked as planned, but we don't view them as punitive. Having said that, given where we can borrow under our revolving credit facility and given where LIBOR is today, we can save some money through converting them to the variable rate demand mode.
Robert Howard - Prospector Partners
Okay.
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
That's what we are talking.
Robert Howard - Prospector Partners
And one... jumping back to the weather issue a little bit, I guess I know you were saying that the cooling degree days decreased by 21% over last year, but what is... what's normal, was last year closer to normal, or this year closer to be normal?
Michael W. Yackira - President and Chief Executive Officer
It's difficult to say what normal is. We certainly had... we had fewer cooling degree days this year than last year that's a fact, but we have experienced higher-than-normal weather trends over the past several years. And if you look at 20-year trends, we are probably closer to normal this year than we've been in the past several years. So, it's... we always debate when we are sitting, when we are talking about our forecast, what is normal. But this year, it is close to what our... what our 20-year normal projections are achieving 20 year past history is.
Robert Howard - Prospector Partners
And, if you... if you [inaudible] the weather had been warmer. Just in terms of what the impact would have been to income, would there... I just kind of look okay, your revenues would have gone up from your... obviously fuel expenses would have gone up at that end. Would there have been a substantial movement in O&M or any other expenses or really would those be the two kind of drivers that if I were to be making any assumptions on how to adjust for weather that I should look at?
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
Robert, one way to think about it is our gross margin and what it would have been if we had last year's weather. It would have been $8 million higher pre-tax.
Robert Howard - Prospector Partners
Okay.
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
And gross margin would have obviously gone to the bottom line.
Robert Howard - Prospector Partners
Right, right. Okay. Great. That's it from me. Thanks a lot guys.
Michael W. Yackira - President and Chief Executive Officer
Thanks, Rob.
Operator
I have a question from the line of Michael Lapides with Goldman Sachs. Please go ahead.
Michael Lapides - Goldman Sachs
Hi, guys. Congrats on a good quarter. Handful of questions, one, when we think about your generation needs over the next five years considering that you lose a little bit off schedule, how... and that's something you've talked about a number of times, outside of the Harry Allen unit, outside of Bighorn, what else do you think you're likely to need to meet your demand requirements in terms of generation that currently you are not building or permitting right now or buying right now? I am just trying to think about it in terms of megawatts, between now and about 2012, 2013?
Michael W. Yackira - President and Chief Executive Officer
Well, we don't... we don't have anything Michael, at this point other than the Bighorn acquisition and the Harry Allen construction project. We do have to file our IRP on Nevada Power in July of 2009 and we'll be likely addressing what our needs are going forward and what our expectations... our continued short position going forward but we have not developed at this point any specifics with respect to what those next. Other than to say that our strategy has been as hard. Our commission has supported and our State government has supported... [inaudible] be less self-sufficient than we are today, we're far less self-sufficient, we're far more self-sufficient than we were three years ago at the Southern Nevada. But we expect to continue to be less and less dependent on those markets. So, while we haven't developed firms, how we are going to close that position, that's our desire.
Michael Lapides - Goldman Sachs
And based on your last IRP sometime you just think about data that's in the public realm already. And if Ely continues to face some delays, how much incremental generation would you need just to fill that pocket, meaning , your last IRP had a Ely in it. That's 1500 megawatts. It didn't have the Harry Allen expansion in it , it didn't have Big Horn that would assumed there is a $400 million to $500 million kind of short between the two unless I am missing something?
Michael W. Yackira - President and Chief Executive Officer
I'm not sure, what that $4 million to $500 million you are talking about.
Michael Lapides - Goldman Sachs
1500 megs at Ely minus, Big Horn minus, the Harry Allen combined cycle ?
Michael W. Yackira - President and Chief Executive Officer
Right. Yes, the math would work what if we were expecting to have 1500 megawatts from Ely in 2012 in the last IRP and we are replacing it with a 1000 megawatts approximately or 11,000 megawatts at Big Horn and Harry Allen we will be about 400 megawatt short. That's correct.
Michael Lapides - Goldman Sachs
Right.
Michael W. Yackira - President and Chief Executive Officer
But, we are still looking at the ways to cover that short position and some of that will be with renewable energy and our desire is to get as much for example, geothermal power as we can to serve our customer's needs and we know that there is more geothermal power [inaudible] issue with geothermal that it takes a long time and it's in 20 megawatt and 30 megawatt and 40 megawatt clumps. So, that will certainly won't be sufficient for us but it will be part of the mix, as will the other forms of renewable energy but we just have not yet addressed, what or how we're going to cover that short position going forward, but your numbers are right.
Michael Lapides - Goldman Sachs
Last question. We saw the announcement from another utility about building solar generation on one of their existing sites, where they've got a combined cycle. Just curious, do you have acreage on your existing combined cycles or existing units regardless of time, where opportunities for solar generation exist?
Unidentified Company Representative
That's a great question. Sampra [ph] just announced a 10 megawatt solar project near the Eldorado Station for Boulder City and yes there is... there is acreage around our power plants and we are investigating that as we speak Michael.
Michael Lapides - Goldman Sachs
Okay. Thank you guys.
Michael W. Yackira - President and Chief Executive Officer
Thank you.
Operator
You have a question from the line of Tom Wolf from Tube Investment Management [ph]. Please go ahead.
Unidentified Analyst
All my question has been covered. Thank you for your efforts.
Operator
Thanks, Tom. All right. And we have a question from the line of Matthew Lagas, Scopia Capital [ph]. Please go ahead.
Unidentified Analyst
Hi guys, my questions have also been answered. Thanks.
Operator
And we have a question from the line of John Kiani with Deutsche Bank. Please go ahead.
John Kiani - Deutsche Bank
Good morning.
Michael W. Yackira - President and Chief Executive Officer
Good morning, John.
John Kiani - Deutsche Bank
Can you talk about any interest or potential for separating out the transmission line from Ely and pursuing it on a standalone basis and also how that would impact or play into the RPS standards between the two utilities that you own in the north and the south?
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
John, the EIS that we have... have been working on with the BLM as you mentioned includes both Ely Energy Center and the transmission line. If Ely were delayed further, we certainly would consider separating that and pursuing a transmission line, but that's too early to tell. I think we certainly do want to see that happen for the development of renewable energy in our state for us to be able to make the portfolio standard, I think that's important for us and also it's important for the state as state policy and that I believe that our state wants to see these resources that we have in our state, stay with our state. So that's certainly a possibility but at this point it's too early to determine.
John Kiani - Deutsche Bank
Do you think the state would consider netting the RPS standards between Nevada Power and Sierra Pacific Power and looking at them on a consolidated basis?
Michael W. Yackira - President and Chief Executive Officer
I think that's certainly possible. I believe you'd find some testimony excuse me, some not testimony but some comments by our Public Utilities Commission along those lines, especially because right now the statute requires for example Northern Nevada to have the same amount of solar in its mix as Southern Nevada and the solar incidents in Northern Nevada just is not as plentiful as Southern Nevada. So that's certainly a possibility.
John Kiani - Deutsche Bank
All right, thank you very much.
Michael W. Yackira - President and Chief Executive Officer
Thanks John.
Operator
We have a question from the line of Paul Patterson, Glenrock Association. Please go ahead.
Paul Patterson - Glenrock Associates
Hi, guys can you here me?
Michael W. Yackira - President and Chief Executive Officer
Yes Paul. How are you?
Paul Patterson - Glenrock Associates
All right. I'm sorry just a follow-up your... I am not sure I got the answer, I heard it correctly. There is a decrease of 6% in usage and about half of that's where they in the other hands of customer usage patterns, is that right?
Michael W. Yackira - President and Chief Executive Officer
That's right.
Paul Patterson - Glenrock Associates
And you mention that some of that is conservation and some of that I guess is conservation efforts on your part in terms of your investments on conservation and others are basically what... elasticity or economy, could you just given me a little bit more of a flavor for that?
Michael W. Yackira - President and Chief Executive Officer
Well, its difficult to tell Paul how much is the effect of the conservation programs but we certainly believe that the conservation programs that we have in place and the ones that we want to expand, will help our customers manage through the energy issues that they have and allow them to have more control of your bills. But again I'll remind you that Nevada, as far as we know, Nevada is the only state in the United States that allows for investment in these projects to be included as rate based investments and allows a return on it. So it's another nice balance between our customers' needs and our investors' needs and we are going to continue to pursue that with the support of our Commission.
Paul Patterson - Glenrock Associates
Okay. That's sounds great. But what's causing do you think the sort of the average customers or whatever to... what do you think is causing the sort of the other element of the decrease in usage? What is it that that's driving that? Is that the economy or is it price elasticity or any sense as to what it is?
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
Paul, it's Bill Rogers. It's not price elasticity with respect to our price because the prices for second-quarter in 2008 were largely the same as the prices in second-quarter 2007 for our customers.
Paul Patterson - Glenrock Associates
Right.
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
So I think in the same way the customers are managing their check book for gasoline and other aspects of the economy. They are manage... they are managing their total budget and that very well could include their consumption of electricity, and we've been giving them the message that there are ways to conserve electricity.
Paul Patterson - Glenrock Associates
And do you feel this is sort of a temporary thing, I mean it did sound that you were mentioning these... this vacancy rate decrease is going to help the customer usage but do you feel that these patterns that you are seeing are sort of a... sort of a one-time which will sort of catch up and then we will get back to more normalized growth with customers, or do you think this is something that might continue?
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
Well, the vacancy rate is a little bit more customer growth, but I can't really speak to customer usage and I think customers are going to get more efficient with respect to their consumption of electricity and Michael along with our Senators have been giving them that message.
Paul Patterson - Glenrock Associates
Okay, I appreciate it.
Operator
We have a question from the line of Clark Orsky, KDP Investment Advisors. Please go ahead.
Clark Orsky - KDP Investment Advisors Inc.
Yes. Can you just update the cash and revolver availability at end of the quarter?
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
Bill Rogers. At the end of the quarter at Nevada Power, we had $40 million... excuse me, $140 million borrowed and that would make the revolver availability at the end of the quarter approximately $455 million and Sierra Pacific Power at the revolver availability, at the end of the quarter would have been approximately $200 million.
Clark Orsky - KDP Investment Advisors Inc.
Okay. And do you think based on kind of what you see now that's sufficient for... for the near term?
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
Yes.
Clark Orsky - KDP Investment Advisors Inc.
Okay. And on the customer usage patterns, can you say what you are seeing going into July, I mean weather aside... is it pretty similar trend?
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
We don't have any numbers for July.
Clark Orsky - KDP Investment Advisors Inc.
Okay. Thank you.
Operator
[Operator Instructions]. We do have a question from the line of Edward Heyn with Catapult. Please go ahead.
Edward Heyn - Catapult Partners
Good morning. Can you hear me?
Michael W. Yackira - President and Chief Executive Officer
Yes, Ted.
Edward Heyn - Catapult Partners
I just had a quick question on your recent investor presentation, you had a slide that was the key drivers in net income, it talked growth rates and I think the gross margin CAGR through 2010 was kind of indicated in like the 7.2% range. Just wanted to see if there was... with the kind of the data points you are getting from the second quarter with a softening economy, is that kind of still a good boggy [ph] to look at, or is that going to be kind of under some pressure?
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
That was also the CAGR for the last two years and that remains a good boggy, because we've been investing in plants on behalf of our customers and bringing it on to our balance sheet.
Edward Heyn - Catapult Partners
Okay. So it's really more a function of the investment. I guess you did... you have a slightly less of a base... base case CapEx investment of a $100 million or $150 million, but that shouldn't really move the needle that much?
William D. Rogers - Corporate Senior Vice President and Chief Financial Officer
That's correct, again, that $100 million to $150 million was... still means investment this year of $1.6 billion and $1.1 million... billion next year.
Edward Heyn - Catapult Partners
Gotcha. Okay. Thank you very much.
Operator
There are no further questions at this time.
Michael W. Yackira - President and Chief Executive Officer
Well, thank you very much for joining us. We appreciate your interest and your questions, and we look forward to seeing you soon.
Operator
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