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NV Energy, Inc. (NYSE:NVE)

Q3 2012 Earnings Call

November 2, 2012 10:00 am ET

Executives

Max Kuniansky – Investor Relations

Jonathan S. Halkyard – Executive Vice President and Chief Financial Officer

Michael W. Yackira – President and Chief Executive Officer

Analysts

Kevin Cole – Credit Suisse

Neil Mehta – Goldman Sachs

Greg Gordon – ISI Group

Leslie Rich – JPMorgan

Kit Konolige – BGC Partners LP

Paul T. Ridzon – KeyBanc Capital Markets

Brian J. Russo – Ladenburg Thalmann Securities

James L. Dobson – Wunderlich Securities

Sarah E. Akers – Wells Fargo Advisors LLC

Andrew Bischof – Morningstar Research

Paul Patterson – Glenrock Associates LLC

John Alli – Decade Capital Management LLC

Operator

Ladies and gentlemen, thank you for standing by and welcome to the NV Energy’s Third Quarter 2012 Earnings Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-answer-session. Instructions will be given at that time. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Max Kuniansky. Please go ahead.

Max Kuniansky

Good morning, everyone, and thank you for joining us. By now you’ve probably seen the financial results we announced in the press release issued earlier today and the slides on our website.

Comments we make during this call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the future performance of the company and its subsidiaries, Nevada Power and Sierra Pacific Power Company.

Forward-looking statements include earnings guidance and statements or forecast of operating and financial metrics. These statements reflect current expectations of future conditions and events and as such are subject to a variety of risks, uncertainties and assumptions that could cause actual results to differ materially from current expectation.

Slide 2 gives you more information on the assumptions and factors we consider in making those forward-looking statements and where to go to get more information on our risk factors. You’ll also find reconciliations of certain non-GAAP financial information on our website at www.nvenergy.com.

With us this morning are Michael Yackira, President and Chief Executive Officer, and Jonathan Halkyard, Executive Vice President and Chief Financial Officer.

I will now turn the call over to Jonathan.

Jonathan S. Halkyard

Thanks very much, Max, and good morning, everyone. We had strong financial results in the third quarter. NV Energy earned $0.94 per diluted share in the three months ended September 30, 2012, compared to $0.73 per share in the same period a year ago.

If you look at Slide 3, you will see that our earnings growth was largely due to higher gross margin. The biggest contributor to higher margin was the general rate increase we’ve discuss previously, which became effective on January 1 of this year. It benefited quarterly earnings by $0.13 per share compared to the same period last year. Retail megawatt hour sales increased about 3% driven by increased usage, customer growth and weather. I’ll take a moment to discuss each of those components.

Higher usage by existing customers, independent of weather effects, together with growth in the number of customers increased earnings per share by $0.03 compared to last year. The increased usage by existing customers appears to be largely driven by expansion of operations and new facilities in Las Vegas such as a new passenger terminal at the Las Vegas airport and our New Performing Arts Center.

While we’re pleased with the increased sales, it’s probably too early to view this as a broad-based resurgence in the local economy. Generally the economy in Southern Nevada is on much the same course we described in our last earnings call, gradual and still slow recovery.

You can see this in our customer growth numbers, the number of accounts increased 1.1% in the third quarter, in line with the trend we’ve been reporting for some time. We’ve now have 10 consecutive quarters of growth in our customer base. The number of low-use customer accounts continues to decrease slowly, a favorable trend as shown in Slides 4 and 5. This metric, which is a proxy for Bacon Homes has now improved to levels we’ve not seen since 2008 throughout Nevada.

Favorable weather added about $0.01 per share to third quarter earnings compared to the same period last year. We had a hotter than normal weather in the third quarter, especially in Northern Nevada. However, the third quarter of last year was also hotter than normal.

As you can see in Slide 6 compared to historically normal conditions, weather benefited EPS by approximately $0.04 in the quarter just ended and by about $0.03 in the third of quarter last year. You’ll find cooling degree days in the operating specific section of our news release.

Turning now to items below the gross margin line, I’m pleased to report that our cost control efforts are on track. O&M expenses this quarter are down nearly $5 million from last year excluding an expense reversal in the third quarter of last year, which we previously disclosed. That reversal in 2011 benefited last year’s earnings by $0.02 per share and of course did not recur this year.

Lower interest expense added $0.02 to the third quarter earnings compared to the third quarter of 2011. This is the result of refinancing activities which reduced the rate on debt outstanding. A gain on the sale of telecommunications powers increased earnings by $0.02 per share in the third quarter and we also recorded a $0.01 benefit from trust investments in the quarter.

Clearly, our reported earnings of $0.94 per share are well above consensus expectation in third quarter. However, when you set aside the hotter than normal weather and the gain I just mentioned, which helped earnings by $0.04 and $0.02 per share respectively, the results we report today match the first call consensus expectation. Neither of those items was factored into our guidance, which as a reminder, was based on normal weather.

Free cash flow is an important feature of our investment story and very apparent in the results we released today. We define free cash flow with net cash from operations minus capital expenditures; you’ll find those figures in the non-GAAP financial measure section of our news release.

We generated significant positive free cash flow in the nine months ended September 2012, quite a turnaround from the negative free cash flow in the first nine months of last year.

Now let’s talk about the outlook, beginning with earnings guidance for 2012. On our last earnings conference call, we stated that we were comfortable with the upper end of our guidance range of $1.15 to $1.25 per share for 2012 assuming normal weather throughout the second half of the year. However, we had above normal temperatures in the third quarter and gains from the asset sale and trust investments I mentioned earlier.

As a result, we’re raising our earnings guidance for 2012. We now expect to earn between $1.30 and $1.40 per share for calendar year 2012. This guidance includes actual GAAP basis results for the first nine months of the year and assumes normal weather for the fourth quarter. Other assumptions regarding this updated 2012 guidance are listed on Slide 8.

The key factors driving the increase in earnings guidance since first initiated earlier this year are summarized in Slide 9. As you can see, the biggest factor is favorable weather which added about $0.09 to earnings per share compared to historically normal conditions through September 30. Increased usage independent of weather effects added $0.04, all other factors including the gain on the asset sales we reported today added a net $0.02.

Now, as you think about our earnings potential for 2013, here is some things to keep in mind. First, our ownership of Reid Gardner Generating Unit 4 increases to 100% in mid-2013 when we are required by contract to purchase the share currently owned by the California Department of Water Resources.

In the third quarter of 2013, we’ll begin recording incremental low M&N depreciation expense as result of this transaction. These increased costs should be at least partially offset by increased savings in 2013 from our NV Energize Smart Meter program. The benefit from NV Energize is linked to the number of smart meters in service which has grown each quarter for some time. So a portion of the savings is already in 2012 results with a smaller portion reflected last year in 2011.

Our overall goal remains unchanged, keep O&M expense flat. The capital expenditures projections shown on Slide 11 include the Reid Gardner transaction that I just mentioned as well as the estimated online transmission project cost.

This capital expenditure forecast reflects our view that megawatt hour sales will grow at an average of just over 1% per year for the next several years. Based on our forecast of demand growth, capital expenditures and other factors, we believe that NV Energy is now in a period of stable earnings and sustained free cash flow.

As we stated since May, this should enable us to deliver dividend growth of about 10% per year for the next few years while strengthening our capital structure and considering potential investment opportunities.

And with that, let me now turn the call over to Michael Yackira.

Michael W. Yackira

Thank you, Jonathan, and good morning, everyone. First of all, I hope everyone is recovering from the super storm. I know many of you are still without power, I’m proud of the work being accomplished by the members of the Edison Electric Institute and the efforts of the mutual assistance organizations throughout United States.

The industry has mustered more than 62,000 employees throughout the U.S. from as faraway as the West, Hawaii and Canada to help in restoration. Having lived through Hurricane Andrew in Florida in 1992, I’m personally aware of how our industry pull together to help all that are in need to accelerate restorations of this nature. This is one of the many reasons that I love and admire our industry.

Turning now to the NV Energy’s third quarter, we are pleased with the results which reinforce many of the strategic initiatives we’ve been executing over the past several years. As Jonathan noted, Nevada’s economy is continuing to make gradual improvement and we had managed our business operations accordingly.

With the exception the online transmission project and the completion of NV Energize, coupled with our load forecasts, we are not currently planning any major investments for the next two years.

As part of the integrated resource plan filing we made in June, we requested approval of the Public Utilities Commission of Nevada to the changes in the investment and timeframe for completion of online and we expect a decision by the PUC by year-end.

Online is important to Nevada’s energy future because it will electrically link our two utilities for the first time. $552 million project will also provide transmission access for renewable energy power generators throughout the state. As we discussed in the past, prior to the completion of online, we expect to submit a filing to the PUC for the legal merger of our utilities.

Earlier this year, we made the required annual differed energy filling with our commission and we are pleased with the outcome of the first phase of the commission’s review of energy costs. The second phase of that process related to so called lost revenues associated with conservation programs and those hearings were completed yesterday.

On October 31, we filed transaction rate cases with the Federal Energy Regulatory Commission for our two utilities to recover increases in operating costs and investments that are necessary to serve our wholesale electric customers. We requested a revenue increase of $14.5 million effective January 1, 2015.

Our customers are starting to see benefits from NV Energize, our Smart Meter Smart Grid project, we completed over 85% of the meter installations and we’re ramping our efforts to educate customers about the way they can use data from their smart meters in order to manage their energy use more efficiently.

Finally, as many of you know, the Edison Electric Institute and its members have been involved in a nationwide campaign to persuade Congress to extend the Jobs and Growth Tax Reconciliation Act of 2003 that reduce the maximum tax rate on dividend income. This is schedule to expire at the end of this year.

We’ve been urging our shareholders and others to contact their elected representatives to remind them that lower dividend tax rates make dividend paying companies like NV Energy more attractive to investors. We remind them as well as members of Congress that lower tax rates on dividends increase the value of utility stocks, thereby reducing the cost of capital for our customers.

Thank you for your time. We look forward to seeing you later this month at the EEI Finance Conference in Arizona. Jonathan and I are now ready to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instruction) Our first question is from Kevin Cole from Credit Suisse. Please go ahead.

Kevin Cole – Credit Suisse

Good morning, guys.

Michael W. Yackira

Good morning, Kevin.

Kevin Cole – Credit Suisse

On the online project, from recent testimony it seems that the tower issue is still not fully resolved and approved, is that correct?

Michael W. Yackira

Well, Kevin, we filled in the IRP for the Southern utility, revisions to both the timeframe for completion as well as the costs and we are going through that process right now. What you are reading is intervener testimony. I don’t believe we’ve put forward our rebuttal testimony yet, but hearings will take place this month and we expect the decisions by the end of December.

So I believe that intervener testimony is what it is, you can read it for what it is and we will put forward testimony accordingly and it will be deliberated before the PUC and we’re expecting to have the approval by the end of the year.

Kevin Cole – Credit Suisse

Okay. So the new design is fully tested by the engineers and so now you’re just waiting for final approval from the commission?

Michael W. Yackira

Yeah. We’ve been through the process of coming up with the engineering solution to fix the problem with the vibration in the towers. We submitted that information to the commission and we’re ready to go forward and they will review that information and come to their decision.

Kevin Cole – Credit Suisse

Is this impacting the timing at all of moving forward the project, is it – I guess is it standing still right now or is it continuing to move forward?

Michael W. Yackira

Well, we’ve completed everything that we can at this stage, we have put the foundations in throughout the 235-mile corridor, which will be completely lined and then we’ll start the construction once again by erecting the towers once we have finished the process with the PUC. But we’re still on track to complete by the end of ’13, nothing has changed there.

Kevin Cole – Credit Suisse

Okay. And then what are the update cost figures for online versus the original cost?

Michael W. Yackira

The original cost is $510 million and current cost is $552 million.

Kevin Cole – Credit Suisse

Great. Thank you, guys.

Jonathan S. Halkyard

Thank you.

Operator

Thank you. Our next question is from Neil Mehta from Goldman Sachs. Please go ahead.

Neil Mehta – Goldman Sachs

Good morning.

Michael W. Yackira

Good morning, Neil.

Neil Mehta – Goldman Sachs

How should we think about the timing of your next rate case both at NVE North, but then also the merge rate case?

Michael W. Yackira

Well, let me address the last first. The merger filing that we’re talking about is not specifically a rate case, in other words, we’re not going to be asking for a rate recovery, rate changes in that case. And we have been saying and if you look at the last slide on the deck, it’s a simplified slide, but the filing of the merger cases is predicated on the completion of the online.

With the completion of the online expected to be at the end of ’13, we expect to make a filing to legally merge the two utilities about midyear in 2013. The rate case is a statutorily required rate case at NV Energy North, which is to be filed in June of 2013. And our expectation is that the legislature will look at whether or not, especially considering a merger filing, whether or not the filing that rate case makes sense.

And that will be discussed in the next legislative sessions, we expect, which starts in February of 2013. So on the current schedule, we must file a rate case by statute for the North utility by the middle of next year, we are hoping that we can push that off to a later time and then have the merged companies file a rate case sometime later.

Neil Mehta – Goldman Sachs

Got it. And then on Reid Gardner, how much do you think is going to contribute to O&M and D&A, sorry I missed the timing on that and then in terms of when it impacts, if the view that you can still keep O&M relatively stable in ’13 versus ’12 even with that impact?

Jonathan S. Halkyard

It’s Jonathan, Neil. The O&M impact in 2013 will be less than $10 million in O&M and then of course that will just – and that will be about half of the year because I think I mentioned we’ll be closing that transaction in the early part of third quarter. And yes, we do expect that we can keep O&M flat in spite of that increase that’s going to be added from that transaction. And the depreciation, Neil, will be relatively small and material.

Neil Mehta – Goldman Sachs

Got it. And then my final question, at NV Energy North, we saw tick up sequentially in terms of changes in average customers and some stabilization at the NV Energy South, is that just North catching up or is there just something going on in the service territory that we should make note of?

Michael W. Yackira

I wouldn’t point out anything specifically that’s going on in the North that is driving that.

Neil Mehta – Goldman Sachs

Okay. Thank you very much.

Michael W. Yackira

Okay.

Operator

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

Greg Gordon – ISI Group

Thanks, good morning.

Michael W. Yackira

Hi, Greg.

Greg Gordon – ISI Group

So what’s the timeframe on which we would expect to get 2013 earnings guidance?

Michael W. Yackira

Greg, we plan to introduce that early in the year, so early in calendar 2013.

Greg Gordon – ISI Group

Okay. Because when I think about the drivers as you leave them out, if you’ve got to the modest top line growth, if you’re getting annual revenue increases associated with the different programs that you have in place and if you’re able to keep your costs in check, you’ve characterized your earnings as stable, but wouldn’t that mean that we’d see an opportunity for some modest level of earnings growth?

Michael W. Yackira

Like I said, we’re going to give earnings in the early part – guidance in the early part of 2013, but we expect going in next year that will we have some modest top line growth consistent with the usage trends that we’ve been seeing. We’ve talked a bit about O&M and of course we would caution all of those thinking about 2013 earnings, just to bear in mind the benefit that we’d experienced this year in the weather category and some of the unusual items I mentioned, but we’ll get of course more specific about 2013 guidance in a couple of months.

Greg Gordon – ISI Group

Fair enough. When we think about the your base case sales forecast though if we continue to see usage trends improve in homes that are not currently drawing large amounts of powers, would you characterize that as a sort of upside to your base case or does your base case sort of assume you continue to see people move back into those homes?

Michael W. Yackira

I think certainly a component of the usage growth we’ve experienced in the past year has been that dynamic of the continued decline in a low use accounts. We expect that to continue. However, as you can see, as we’ve laid it out graphically, it is now approaching levels that are kind of pre-crisis levels or a normal level. So I think that the amount of that upside is limited over the medium-term.

Greg Gordon – ISI Group

Okay. Thank you.

Michael W. Yackira

Thanks, Greg.

Operator

Thank you. Our next question is from Leslie Rich from JPMorgan. Please go ahead.

Leslie Rich – JPMorgan

Good morning. I wondered if you could talk about the CapEx slide and the changes relative to the second quarter call. It’s looks like some of the environmental spend got pushed out a little bit and that the overall level of CapEx increased somewhat in ’15 and ’16 and just wondering if you could sort of walk-through that? And then secondly, but related, do you have to pay to acquire the other 50% or whatever percent you don’t own of Reid Gardner in ’13?

Jonathan S. Halkyard

Sure, Leslie, it’s Jonathan, I’ll answer the second question first. Yes, we do. We expect to close that transaction, like I said, in the middle of 2013 and that amount is included in our CapEx forecast. As it relates to the increase in the CapEx forecast for 2015 and 2016, you’re right, it has increased since our last call. The main driver thus is environmental work for compliance with – at Reid Gardner or Churchill, Tracy, one of the Tracy units in Wyoming. So these are obviously investments that would need to approved ultimately, but we’ve included those in our longer term CapEx forecast now.

Leslie Rich – JPMorgan

And did they in fact get pushed out two years?

Jonathan S. Halkyard

Some of them are incremental and actually the majority of it is incremental that supposed to be pushed out.

Leslie Rich – JPMorgan

Okay. Thank you.

Operator

Thank you. Our next question is from Kit Konolige from BGC. Please go ahead.

Kit Konolige – BGC Partners LP

Hi, good morning guys. So just to follow of a little on sales and the economy, Jonathan, I think you mentioned you are seeing some uptick in usage, but that – it tend to like your communication is online. So this is some specific projects that were completed, but we should not necessarily expect what to follow through there.

Jonathan S. Halkyard

I think that’s right. Third-quarter is obviously the peak quarter for us and it is during that quarter, that we saw incremental usage associated with numbers the these large products we call them out the airport and the performing arts centre are two of those. So while we would expect to see those year-over-year benefits for the next couple of quarters that will be fairly modest just given the seasonality in our business. That being said, the underlining usage growth, independent of weather we thought continue to be strong, consistent with the last several quarters.

Kit Konolige – BGC Partners LP

And do the – statics on the economy look about as you have been describing before, some housing and employment numbers basically showing a little bit of hope, but nothing definite if I not to put orders (inaudible)?

Jonathan S. Halkyard

Yes, it’s a bit of a tale of two economics right now. It’s relates to the local market, the housing market, the dynamics continue to be encouraging well at steady growth and employment and the numbers of new residents, housing starts permits and housing sale. On the tourism side, I think it’s mixed, but as we’ve noted in prior calls and in our investor presentations our business is driven more by the local housing and employment market as opposed to the tourism market.

Kit Konolige – BGC Partners LP

Great. And then on the regulatory front, are you still thinking that you would like to see the Legislature Act to change the timing of that you’re required to file the North versus South rate cases?

Michael W. Yackira

Yeah, Kit, it’s Michael. I think, I mention in the first instance that our hope is that the legislature will look at the tendency of merger filing and suggest that perhaps we don’t have to make a separate filing for NV Energy North in June of next year, but instead make a filing of the merged entity sometimes after that. So I can’t comment on whether legislature will take action, but I think there are certainly reasons that they might want to consider that and we’re certainly hoping that they do, if not, we go forward with the case obviously because we have to statutorily, but it certainly would make it easier also for the commission not to have to be deliberating the merger filing and the general rate case filing, which will come almost on top of each other in 2013, it’s a current schedule, it continue to be the same.

Kit Konolige – BGC Partners LP

And Michael, has the commission indicated anything to the legislature about their preference on that matter.

Michael W. Yackira

Little early for that, Kit.

Kit Konolige – BGC Partners LP

Okay, thank you.

Operator

Our next question is from Paul Ridzon with KeyBanc. Please go ahead.

Paul T. Ridzon – KeyBanc Capital Markets

Just around the Reid Gardner plant, is this a case where we have to file a rate case to get in to rates to offset this O&M depreciation?

Jonathan S. Halkyard

Eventually, yes, Paul.

Paul T. Ridzon – KeyBanc Capital Markets

And what rate cases would that go into whatever that rate case is?

Unidentified Company Representative

While it’s Northern Nevada assets, excuse me Southern Nevada assets. So it certainly wouldn’t be in rate case that is associated with the Northern Nevada utility next year. So, again, if the current statute remains in place, the southern utility will be filing a general rate case the year following. So it would be 2014 that GRC will be filed for the Southern Nevada utility. So it could certainly be along that timeframe or whatever timeframe if the legislation is changed.

Paul T. Ridzon – KeyBanc Capital Markets

Then looking forward in to 2014, do you think you can offset that incremental $10 million of O&M, you will be inheriting?

Jonathan S. Halkyard

That’s obviously our challenge, but we are committed to running this business at flat O&M levels through that time period.

Paul T. Ridzon – KeyBanc Capital Markets

Thank you.

Jonathan S. Halkyard

Thank you.

Operator

Thank you. Our next question is come from Brian Russo from Ladenburg Thalmann. Please go head.

Brian J. Russo – Ladenburg Thalmann Securities

Hi, good morning.

Michael W. Yackira

Good morning Brian.

Brian J. Russo – Ladenburg Thalmann Securities

Could you just update us on the equity ratios at the utilities currently and the trends that you see in those equity ratios as we approach the next three cases?

Jonathan S. Halkyard

It’s Jonathan, Brain. So if the third quarter, at the end of the third quarter the equity ratio at Nevada Power was – the southern utility was about 47.2% and at Sierra Pacific it was about 46.4%. So those are up from the second quarter as you would expect them to be given that third quarter is such a large part of our business. So the trend right now is consistent with what we described in the past which is that we endeavor to bring those equity ratios to a level commensurate with our peers at about 50% over the next couple of rate cases.

Brian J. Russo – Ladenburg Thalmann Securities

Okay, great and then just lastly, when you look at you cash flow profile and CapEx profile and even with the 10% annual dividend increases looks like you guys are going to be building meaningful amount of cash, net of dividends and CapEx over the next couple years and what seems to be limited investment opportunities over the near term. Just curious what your thoughts are on the user or redeployment of that cash built?

Jonathan S. Halkyard

Well, thank you for pointing that out. That is obviously an important part of our story going forward. In terms of the uses of that free cash flow, we would expect to continue to de-lever the business principally by retiring debt as it comes due or at least a portion of that debt.

However, we continue to look at opportunities for investment of our free cash flow and we think it’s important to have dry powder to meet those investments as we evaluate them over the next couple of years. But I would say, you’ve laid out the first priority as of course meeting our dividend commitments in guidance that we’ve given. Second would be de-levering the business and strengthening the capital structure and of course, along with that giving sufficient funds available to invest in promising investment opportunities.

Brian J. Russo – Ladenburg Thalmann Securities

Okay, and one last question on the CapEx profile. If I recall in the IRP that you’re contemplating building a peaker plant, I think, is that included in the CapEx in this 2015, 2016 period or just remind us when the new capacity is needed.

Jonathan S. Halkyard

In our investor presentations and of course in the IRP, we’ve indicated new capacity is needed in 2017, 2018. There is no new peaker plant contemplated in our near-term CapEx forecast right now.

Brian J. Russo – Ladenburg Thalmann Securities

Okay. And how much capacity is needed.

Jonathan S. Halkyard

Let me just see if I can bring that up for a second.

Michael W. Yackira

I think that is 1,200 megawatts.

Jonathan S. Halkyard

And the majority of these are, the new needs are coming from the roll off of TPAs. I think the main one is about 570 megawatts with the Griffith facility in 2017.

Michael W. Yackira

As a reminder – Brian, it’s Michael. In the IRP that we filed in June, we asked for about $9 million of money is to expand on site study and starting permitting for building a new plant. We didn’t specify what kind of plant we’re talking about. But that assumes in this forecast, it is not assumed in this forecast, the way we have done this in the past is that IRP projects there independency overview before, our commission are not included in the forecast, but it’s not a lot of money it’s $9 million. If we found that we needed to build a plant sooner, we have a mechanism through amendments to the integrated resource plan to make a filing to spend more money’s, but in this IRP, we haven’t included any material expenditures for new plants.

Brian J. Russo – Ladenburg Thalmann Securities

Okay. Great, thank you very much.

Operator

Thank you. And our next question is from James Dobson from Wunderlich Securities. Please go ahead.

James L. Dobson – Wunderlich Securities

Hi, good morning Michael.

Michael W. Yackira

Hi. How are you?

James L. Dobson – Wunderlich Securities

Great, thank you. Continuing on legislation, just two questions, first you see anything else coming up in front of the legislature beyond the statutory requirement to file cases. And then, on that specific legislation, how do you envision it sort of working out. I know it’s hard to tell, that is a political process, but do you expect there will be still a statutory requirement to file cases or will the legislation leave that more nebulous so that it could be more need based rather than timing or schedule based.

Michael W. Yackira

As far as the first one is concerned Jay, every legislative session there were energy issues. And many of them are driven by us, I mean as examples, several years ago we worked to include in our portfolio standard conservation programs because we felt that they were certainly cost effective and our customers, could see them when we give them rebates. So that was passed by our Commission. That’s been very positive in terms of meeting the portfolio standard and its costs. Another one is the – I believe in the last legislative session that changed the DEAA filings, our fuel and purchase power filings to coincide with the changes to the base tier of energy rates or the future cost of fuel. And more properly, from a price – discovery of price transparency perspective for customers and from a cash flow perspective from the company, marriott, the more current cost of fuel and purchase power.

So every year there were several items that relate to the energy industry. I can’t predict what that will be, I can’t predict, there will be many. But there are many I that we’ll be talking about that are related to rate cases and again whether or not the legislature decides to take action, I can’t predict. But it certainly will be something that we’ll be discussing along with the PUC to see whether or not it can be part of the agenda if the legislature comes February next year.

James L. Dobson – Wunderlich Securities

Okay. But, you don’t have a view of at all include changes to…

Michael W. Yackira

Sorry, I didn’t answer the second part of the question. I can’t predict that, it certainly could be continuing a three year phase, maybe extending it beyond the three year phase. We also have to remember that the statutory requirement is a requirement to file, it does not prevent us from making filings in the interim.

So for example, if it was pushed to four or five years, it you wouldn’t say that we would only make filings every four or five years. I would say that, if we needed to file rate case, because we are under earning or we had some incremental capital that we haven’t been expecting, then we could make a filing that was outside of the timeframe of the statutory requirement, but I don’t necessarily see the statutory requirement in terms of years – certain periodic filing going away at this stage.

James L. Dobson – Wunderlich Securities

Okay, good, fair enough. And then maybe for both of you Michael and Jonathan, the sort of the O&M cost efforts, you talk about keeping O&M flat, and I guess the first question would be -- sort of how are those efforts sort of granular level or are we still sort of picking the easy fruit or is this getting incrementally more difficult sort of hinging on the comment regarding 2014, Jonathan maybe start there?

Jonathan S. Halkyard

Sure. I begin on that, Jay. I’ve had a lot of experience on cost management in my career, particularly in the last several years. And I can tell you that from my perspective, this company has done great work in the last couple of years in finding opportunities to improve efficiency and grow this business well, while reducing its cost of operation.

So, I certainly wouldn’t suggest that there is much low-hanging fruit at the business. But we do benefit though from the returns associated with some of the capital projects that are underway, NV Energize of course, is the most notable one and that provided us some tailwind this year and we expect it well next year as well. I do believe that there are opportunities for continued cost savings, in fact I know there are, and it is very granular.

Some of the larger areas of opportunity, I think are in the sourcing area. The Company has a highly evolved strategic sourcing capability, but there are certain categories of spend that have yet to be fully addressed by our sourcing capabilities, so there is opportunities there. I also think in information technology, the company will continue to find ways to improve its efficiency and in an area that’s very important, but also an area that has significant amount of spend associated with it. And I think, in fact NV Energize with the full deployment of that next year and continued discovery of benefits associated with that, the customer service organization will continue to find areas for improved efficiencies.

So, the work will be hard but I’m confident that we have the tools in place to continue to drive a lower cost of doing business trade.

Michael W. Yackira

Okay. Just an overall comment about that, the company has a mindset of continuous improvement. And I think we’ve said on many calls, many investor meetings that we can’t necessarily predict what next year or the year after or the year after process improvement initiatives are going to be, but they will be there.

And our objective is to keep our cost as low as possible, while improving our service levels operationally and assuring safety reliability in compliance with all regulations and laws that we have for our company. So, I’m confident that the well, the low hanging fruit might not be there. There’s still fruit on the tree. And we’ll find that, those pieces of fruit but it’s the innovativeness of our employees that will make that happen.

James L. Dobson – Wunderlich Securities

No, that’s great. And then last question is sort of as a follow-up to that, and I offer it with a premise that your business is more seasonal than most companies. But is there any opportunity, as you sort of look further out with the O&M cost reduction efforts to perhaps modulate the O&M cost management on an annual basis such that you could take advantage of warm weather years like we’ve had this year to accelerates some O&M spending and then sort of pull it back in years when it’s perhaps less than normal or more normal. Is the cost reduction efforts, better put to just simply, we’re going to have it flat, and weather is going to move or surround us as it will.

Michael W. Yackira

Jay, its Michael. I’d say that every year we have the ebbs and flows in our O&M. We have various schedules as examples for our fleet of generation, a fleet of generation that’s relatively new, but still requires overhauls and maintenance. So those ebbs and flows happen every year. They’re not necessarily related to weather. You’re not about to start planning your O&M based on weather, especially since most of the activity occurs prior to our strong summer peak.

So I believe that’s not the case. And we continue to look at ways to improve our operations and keep O&M flat, but don’t take into consideration anything but to what the requirements are, for example, I’d say that, if we had a very hot summer, we probably have to spend more money on transformers, which we experienced I think in 2007 when we had 117 degrees for several days in Las Vegas. But that’s a weather event that causes something in system requires additional money to be spent, but we don’t manage our O&M that way.

James L. Dobson – Wunderlich Securities

Okay, that’s fair enough. And then just one last, I apologize. The Griffith Energy Center, recognized that’s in Arizona, I assume wouldn’t make sense to acquire that plant. So, new capacity needs are new build

Michael W. Yackira

Let me take that one. That’s in 1917, that’s a long time ago, that’s a 2017 contract, it was a 10-year contract. As we get closer to that contracts coming to an end, we’ll assess what our opportunities are and we’ll likely look at perhaps continuing the contract for that plant, perhaps thinking about building, there are several things that we can think about to replace that 500 megawatts of capacity, but it’s way too early to determine how best to serve that and we’d have to make it showing before a PUC as to, well how best to serve that.

James L. Dobson – Wunderlich Securities

Okay, that’s great. Thanks very much.

Michael W. Yackira

Thanks, James.

Operator

Thank you. Our next question is from Sarah Akers from Wells Fargo. Please go head.

Sarah E. Akers – Wells Fargo Advisors LLC

Hey, good morning.

Michael W. Yackira

Good morning.

Sarah E. Akers – Wells Fargo Advisors LLC

How many megawatts are you acquiring in the Reid Gardner transaction?

Michael W. Yackira

Yeah, we actually – we’re going to have to look that up quickly and Sarah, do you have another question. Lets…

Sarah E. Akers – Wells Fargo Advisors LLC

Yeah, sure, no problem. Just curious what’s the latest on the longer-term transmission opportunities? Is there any momentum towards lines to export renewables and are there any data points we should watch for?

Michael W. Yackira

Sarah, its Michael. There is nothing new to report on the work that’s being done with the Cal Independent System Operator. As we said, I think in the last call, this is something that’s going to take a while for us to work on. We have several parties working on it together and when there is something to report we will, but my expectation is, it’s going to be well into 2013 before we have any answers as to if there are benefits from some working together at the two states.

Sarah E. Akers – Wells Fargo Advisors LLC

Got it. Thanks a lot. Congrats on the quarter.

Michael W. Yackira

Thank you. By the way just a quick answer on Reid Gardner. I think CDWR owns 90% of the plant. But in reality, we dispatch the plant in the summertime. It serves peak needs for us. So, irrespective of – it’s about 200 megawatts that we’ll be acquiring. Irrespective of the ownership, the dispatch rights were virtually ours anyhow. So the use of that plant won’t change materially. In other words in our loads and resources table, we included on the load and resources table the need or the use of that capacity in peak, in the summer.

Operator

Our next question is from Andy Bischof from Morningstar. Please go ahead.

Andrew Bischof – Morningstar Research

Hi, good morning. Most of questions have been asked and answered. But will you disclose dividend plans with your earnings guidance in 2013. And how in your view were dividend policy or a change given the dividend tax policy uncertainty?

Jonathan S. Halkyard

Well, I’ll take the first part. We don’t plan to introduce any kind of updated dividend guidance with earnings guidance. We’ll announce dividends as our Board approved them.

Michael W. Yackira

But our guidance on dividends really has changed, as Jonathan said, in his opening remarks. We expect to continue to grow dividends for the next two years by about 10%. As far as the dividend tax is concerned, this is an industry wide issue, it’s not an NVE issue obviously. The industry will be affected one way or the other by the tax policy of congress. So, I don’t see any change with respect to our dividend policy irrespective of what happens with tax policy.

Andrew Bischof – Morningstar Research

Thank you. I Appreciate the clarity and congrats on good third quarter.

Michael W. Yackira

Thank you.

Jonathan S. Halkyard

Thank you

Operator

Thank you. And our next question is from Paul Patterson from Glenrock Associates. Please go ahead.

Paul Patterson – Glenrock Associates LLC

Hey, one of my questions has been answered. But just on the dividend, within an outlook with these sort of tax policy. What do you guys see happening, I mean, I know it’s perhaps a difficult question. But I’m just wondering if you have any sense as to how you think the fiscal cliff dividend tax thing is ultimately going to work out. And I guess it appears to me at least that there is some growing desire on Capitol Hill for tax reform as appose to – did they make it down the road, but at least they probably will be looking at taxes or tax policy in a more comprehensive way perhaps. And I’m just wondering, what’s your sense or EI sense, would you expect to help people to use this dividend tax issue in general, in all (inaudible) things. If you have any sense of that, I mean you mentioned in your opening remarks, so just sort of a follow up on that?

Michael W. Yackira

Question is, do I have any sense at all. But I’ll be happy to address…

Paul Patterson – Glenrock Associates LLC

We hope so.

Michael W. Yackira

I’ll take the issue. We were encouraged as an industry to see the Senate propose the parity between capital gains tax and dividend taxes in a bill that wasn’t passed by congress. That is what we’ve been talking about. We believe it’s an industry that keeping dividends in parity with the capital gains rates is an imperative so that there isn’t a movement of capital away from high dividend paying, high capital-intensive industries and toward growth industries. If you take a different view on tax rates for capital gains visa-a-via dividends, you certainly could get there. We would prefer to see the capital gains rates and dividend rates stay at 15%. But as I said we were encouraged that while they went to 20% or certain individuals, it was parody between the two and that to us is very important. I cannot opine as to what’s going to happen in Congress. I do know in recent visits to Capitol Hill that there is a lot of movement or a lot of discussion at least on major tax reform. And the question I guess is whether or not there is continuing resolution to extend the tax cuts post the end of this year to have Congress address tax reform in the next session of Congress. That’s a daunting task, but it’s certainly encouraging that they’re planning or they’re at least thinking about doing that.

Paul Patterson – Glenrock Associates LLC

Okay, great. Thanks a lot.

Michael W. Yackira

Thank you.

Operator

Our next question is from (inaudible). Please go ahead.

Unidentified Analyst

Hi, I apologize, heard some of the calls that was not – if you just go from, I’m just trying to get a better sense of the base we should kind of used going forward. So if we assume that you are at the midpoint or slightly upper say 137 or something like that. For the year we should be what subtracting like a $0.11to $0.12 to bring it to a more normalized number for the year. So something like $1.25 and then kind of like bills, earnings for next year based on that. Am I thinking through this correctly, could I get some help?

Michael W. Yackira

Well, you generally are (inaudible). You may have missed the part of the call where I said that we were going to introduce guidance in early 2013. But we have included a slide that I think gets to the question you’re asking, which is on Slide 10, where we’ve attempted to call out those items that are unusual in 2012, at least through the first three quarters. And those are, of course, the weather effect, the settlement on the Harry Allen plant that we had in the second quarter and then this gain on the asset sales in the third quarter. We provided a range for the year of $1.32 to $1.40, but in terms of putting 2012 earnings in some kind of perspective or normalized earnings, that’s why we’ve used that Page 10 there, so that’s where I direct you.

Unidentified Analyst

Okay. Okay. That’s what I was using, but I shouldn’t be off from what I said.

Michael W. Yackira

Well, we were not going to play 20 questions on this, but we used those in that Page 10 that kind of help the folks understand 2012 on more of a recurring basis.

Unidentified Analyst

Okay, okay, fine. Thank you.

Michael W. Yackira

Alright. Thanks.

Operator

Next question is John Alli from Decade Capital. Please go ahead.

Michael W. Yackira

John, are you there?

John Alli – Decade Capital Management LLC

Yes, I’m sorry. My question is been already asked. Thank you.

Michael W. Yackira

Thank you.

Operator

(Operator Instruction) And there are no further questions at this time.

Michael W. Yackira

Thank you, operator and thanks very much for attending this morning’s call. We look forward to seeing you in the next couple weeks at Phoenix and again hope for god speed and quick recovery in the Northeast.

Operator

Thank you. And ladies and gentlemen, this conference will be made available for replay at 9 o’clock through December 2. You may access AT&T Replay system at 1800-470-6701 and entering the excess code 260407. International participants dial 320-365-3844. Again the numbers are 1800-475-6701 and 320-365-3844, with the access code 260407. That does conclude our conference for today, thank you for your participation for using AT&T Executive Teleconference. You may now disconnect.

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