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NV Energy (NVE)

Q4 2012 Earnings Call

February 22, 2013 10:00 am ET

Executives

Max Kuniansky

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

Michael W. Yackira - Chief Executive Officer, President, Chief Executive Officer of Nevada Power, Chief Executive Officer of Sierra Pacific Power, President of Nevada Power Company, Director and Member of Finance Committee

Analysts

Kevin Cole - Crédit Suisse AG, Research Division

Neil Mehta - Goldman Sachs Group Inc., Research Division

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Andrew Levi

Andrew Levi - Caris & Company, Inc., Research Division

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Kit Konolige - BGC Partners, Inc., Research Division

Paul Patterson - Glenrock Associates LLC

Maurice E. May - Wellington Shields & Co., LLC, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the NV Energy Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to introduce your host, Max Kuniansky. Please go ahead, sir.

Max Kuniansky

Good morning, everyone, and thanks for joining us. By now, you've probably seen the financial results we announced in the news release issued earlier today, and you may have noticed that the financial details that used to be in the news release are now contained in the earnings report to the financial community, which we posted on our website. This consolidates material prepared for the financial community into a single package. We're always looking for ways to improve our investor communications, and we hope you find this new package useful.

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 forecasts 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 expectations.

Slide #3 in the earnings report gives you more information on the assumptions and factors we consider in making those forward-looking statements where to go to get more information on our risk factors. You will 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'll now turn the call over to Jonathan.

Jonathan S. Halkyard

Thanks very much, Max, and good morning, everyone. I'm pleased to report that NV Energy's earnings per share were up substantially for both the fourth quarter and the full year 2012. Our customer base and gross margin expanded in both periods. We met our goal of holding O&M expense virtually flat in the year, and we have strong free cash flow.

Last year, NV Energy laid out a plan for deploying free cash flow, specifically to increase dividends, strengthen our capital structure and consider potential investments. We also said our earnings and cash flow should be sufficient to increase dividends by about 10% per year until we reach a payout ratio that's more in line with our peers. We're satisfied with our progress on all of those fronts.

With higher cash from operations and lower capital expenditures, we generated nearly $380 million of free cash flow for the year 2012, quite an improvement from $38 million in the prior year. And earlier this month, the Board of Directors increased the quarterly dividend by 12% to $0.19 per share. This brings our payout ratio to 56% based upon trailing 12-month earnings. In the future, the Board intends to review the payout annually in the first quarter of the year.

Both our utilities strengthened their balance sheets in the past year. We reduced debt by more than $120 million year-over-year, and both utilities now have equity ratios of approximately 47%. And we continue to look for potential investments that meet our criteria for adding shareholder value.

As expected, return on equity improved in 2012. On a GAAP basis, we earned an ROE of 9.2% as compared to about 5% in the prior year. Earlier this week Standard & Poor's acknowledged our progress when it increased its corporate credit ratings for NV Energy and both utilities to investment grade BBB- with a stable outlook.

Regarding economic conditions in Nevada, recent data indicates that the state is continuing its slow steady recovery. As you can see from Slide 4, state-wide unemployment is now down to 10% and is closer to the national average. New housing permits were up modestly in December and low-use customer accounts, a proxy for vacant homes, continues to show a favorable trend.

Turning now to our financial results for the fourth quarter, NV Energy earned net income of $0.07 per diluted share in the 3 months ended December 31, 2012. These results are in line with our expectations and are a market improvement compared to the loss of $0.11 per share that we reported in the same period a year ago. About half of our earnings growth came from higher gross margin, as you'll see on Slide 7. The remainder came from lower interest expense, as well as adjustments a year ago that did not recur in the fourth quarter this year and some smaller offsetting items.

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