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El Paso Electric (NYSE:EE)

Q3 2008 Earnings Call

November 5, 2008 4:00 pm ET

Executives

Steven P. Busser - Vice President, Treasurer, and Chief Risk Officer

Scott Wilson - Executive Vice President, Chief Financial and Administrative Officer

J. Frank Bates - Interim President and Chief Executive Officer

Analysts

Robert Howard - Prospector Partners

Maurice May - Power Insights

Eric McCarthy - [Persides]

Anthony Cordell - Jefferies & Co

Operator

Good day ladies and gentlemen and welcome to the El Paso Electric Third Quarter Conference Call. (Operator Instructions)

I would now like to turn the conference over to your host Steve Busser.

Steve Busser

Good afternoon and thank you for tuning in to the El Paso Electric Company’s Third Quarter of 2008 Earnings Conference Call. As Mathew mentioned I am Steve Busser, I am the Treasurer and Chief Risk Officer here at the company.

Also on the call with me today I have Frank Bates, our interim President and CEO and our Chief Financial Officer, Scott Wilson. Today we will provide an update on our third quarter 2008 financial performance including a discussion of our pertinent earnings drivers. We will also discuss our 2008 and 2009 earnings guidance and assumptions and our stock buyback program. Finally, we will provide on our Texas and New Mexico regulatory development.

I would like to cover some items that will be pertinent to our call today before we get started. You should have a copy of our press release and if you do not you can get one from our website on the Investor Relations page.

Along with our call today we have a webcast presentation available for your viewing as we progress through the call. Both the audio and video presentation will be done via the web. To log onto the webcast you can do so via our website at www.epelectric.com. In order to ask questions during the Q&A session however, you will need to be dialed in by a telephone.

We currently anticipate that we will file our 2008 third quarter Form 10-Q with the SEC tomorrow, November 6. As for upcoming IR events we will be attending EEI next week in Phoenix on November 10 and 11. We will provide further updates on any IR events on future conference calls. Please call our IR department if you have any inquiries or require further information.

A replay of today’s call will be available shortly after our call ends and will run through November 19th. The dial in number is 866-837-8032 and you need a conference ID of 1292534. The conference call can also be accessed via our website.

Now I would like to cover the Safe Harbor provisions before I turn the call over to Frank

Our comments and answers to your questions may include forward-looking statements. Be reminded that statements on this conference call other than statements of historical fact are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements as well as other forward-looking statements made by or on behalf of the company involve known and unknown risks and other factors which may cause the company’s actual results in the future periods to differ materially from those expressed here. Any such statement is qualified by reference to the risks and factors discussed in our SEC filings. Our 10-k and other SEC filings contain the forward-looking statements and also lay out the risk factors that should be considered in the context of the information that we will provide today.

The company cautions that the risk factors discussed in these filings are not exclusive and we do not undertake to update any forward-looking statement that may be made from time to time by on behalf of the company. These statements and especially those made during the Q&A section of the call are subject to risks and uncertainties that are difficult to predict. Please refer to our SEC act filings for a detailed discussion of these risks and uncertainties as actual results may vary from these statements.

Now I would like to turn the call over to Frank.

Frank Bates

Good afternoon, I want to thank everyone for joining us on the call today. First I will briefly discuss EPE’s third quarter and year-to-date 2008 earnings results and financial highlights. I will then discuss significant items that are impacting the company. Afterwards, Scott Wilson, our Executive Vice President and Chief Financial Officer will provide a more detailed discussion on the third quarter and year-to-date earnings results and key earnings drivers for the company for the quarter year-to-date. Scott will also provide, among other things, a liquidity update, a 2008 and 2009 earnings guidance update, and a regulatory update.

For the third quarter of 2008 we produced earnings of $0.74 per basic share and net income of $33.1 million which represents a $0.05 per basic share decrease or an 8.4% decline in earnings over the third quarter of 2007 when we earned $0.79 per basic share and our net income was $36.1 million. The primary driver behind the decrease was that during the third quarter of 2008 we had a $3.6 million decrease in retail non fuel based revenues as a result of a decline in retail coloring our sales due to cooler than normal summer weather.

Despite the lower third quarter earnings we were pleased with our solid overall financial results on a year-to-date basis. We continue to believe that the inherent fundamentals of our business remain strong and that we are pleased to report, for the nine months ended September 30, we earned $1.49 per basic share on net income of $66.8 million, which represents a $0.16 per basic share increase or a 10% increase in earnings from the results of the first nine months of 2007 when we earned $60.8 million or $1.33 per basic share.

Later in the call Scott will provide you with additional details regarding each of our earnings drivers for the third quarter and for the first nine months of 2008.

Now I would like to turn your attention to our new generation and provide you with an update on the status of the construction of Newman Unit 5. Previously we had advised you that the first phase of construction on the project began on July 25 2008. Currently the project is on time and on budget. We still expect that the combustion turban portion of the project, which consists of two 70-megawatt gas turbans will be operational by May 2009.

The second phase of the project, which will start in mid-2009, will be the construction of a combined cycle facility by installing two heat recovery steam generators to provide steam to a single steam turban. We anticipate the second phase of the project to be operational by the summer of 2011. The conversion of the unit into a combined cycle facility will add approximately 148-megawatts to the unit and will increase the total capacity of Newman 5 to 288-megawatts. Once completed Newman 5 will be the most efficient gas fired unit in the company’s fleet when operated in a combined cycle mode. The total cost of the unit, including allowance for funds used during construction, is projected to cost approximately $245 million.

Newman 5 will improve the overall reliability of our system, it will provide additional fuel savings to our customers due to increased efficiency, and it will enable us to have sufficient energy available to serve the growth we are experiencing in our service area. That growth is demonstrated by the new native system peak of 1,524-megawatts that was attained on June 17, which exceeded the previous system peak of 1,508-megawatts in 2007.

We will continue to need additional resources in order to meet our future load growth and to replace our older gas fired units. To that end we have issued a request for proposal for 100-megawatts of peaking capacity during the summer of 2011 in order to ensure we have sufficient energy available during the summer peak.

I would now like to provide you with an operational update on Palo Verde.

Currently Palo Verde Units 2 and 3 are operating at 100% power. Also I would like to mention that during the summer Palo Verde operated at a 100% capacity factor for 100 straight days from June 8 to September 16. This is a level of performance that Palo Verde has not attained since 1998. Currently Palo Verde Unit 1 is undergoing its refueling and maintenance outage which began on October 4 and that unit is expected to return to service in mid-November. The next refueling outage at Palo Verde is scheduled for Unit 3 and will begin in April of 2009.

Also, the Palo Verde operating agent Arizona Public Service Company or APS plans to file for a 20-year license extension with the Nuclear Regulatory Commission, the NRC, by the end of the fourth quarter of 2008 or in early 2009. The license extension process is anticipated to take approximately two years.

I would now like to update you on regulatory matters related to Palo Verde.

The resolution of the 12 open confirmatory action letter or CAL items is ongoing. Palo Verde Unit 3 will continue to be in the NRC’s multiple repetitive degraded cornerstone column of its action matrix until all 12 CAL action items are closed. APS continues to work on CAL action plans and key metrics.

In September the NRC conducted a CAL inspection and will issue a formal notification letter by December 2008. The NRC has publicly acknowledged the progress that APS has made on several of these items. As a result of this additional NRC oversight we continue to anticipate that our 2008 Palo Verde non-fuel O&M costs will increase by 15 to 20% relative to 2007 amounts and 2009 O&M costs are expected to increase by 6 to 8% over 2008 projected amounts. We will continue to work closely with the operating agent and other plant owners in order to enhance the operating performance at Palo Verde.

I would now like to briefly discuss the significant growth potential that we have in our service area as a result of the United States government’s base realignment and closure plan.

The military expansion at Fort Bliss is on track and the troop count at Fort Bliss is expected to more than double relative to the current levels. Currently the US Army anticipates that approximately 37,000 troops will be stationed at Fort Bliss by 2012, along with the addition of 53,000 family members. The US Army estimates that approximately 20,000 soldiers will utilize off-base housing. The increase in the current base population, along with additional family members, is expected to significantly add to our total customer base of approximately 363,000.

Currently Fort Bliss is under going a $4.4 billion expansion and the economic impact for the region is estimated to be approximately $5 billion over the next five years and $6.3 billion annually there after. In addition, approximately 5,000 new troops will be stationed at White Sands Missile Range by 2013.

We welcome the opportunities presented by this unprecedented military growth and we look forward to continuing our long-standing partnerships with both Fort Bliss and White Sands Missile Range.

Now before I turn the call over to Scott Wilson I would like to personally thank each of the employees at El Paso Electric for their continued support, hard work, dedication, and their contributions to these earnings results.

I will now turn the call over to Scott Wilson, our Executive Vice President and Chief Financial and Administrative Officer.

Scott Wilson

In this section of the call we want to talk about a couple of things related to the financial and regulatory items. First we will talk about third quarter 2008 and year-to-date earnings per share including key earnings drivers. We will also discuss Palo Verde operations, 2008 and 2009 earnings guidance, liquidity, debt ratings and pollution control bonds, our stock repurchase program and finally we will provide you a regulatory update.

In the third quarter 2008 we had net income of $33.1 million versus $36.1 million in 2007. EPS was $0.74 in the quarter relative to $0.79 in the same quarter in 2007. A couple of the key earnings drivers here were, on the positive side, all systems sales increased due to higher retained margins and those margins reflected a 66% increase in megawatt hour sales and also higher margins on those sales that contributed $0.03 per share in the quarter.

Higher proxy market prices for deregulated PV 3 power sold to retail customers also provided an uplift relative to ’07 of about $0.03 in the quarter.

Offsetting those two items were retail non-fuel based revenues declined by about $3.6 million or approximately 2.6% primarily due to much cooler than normal weather in the third quarter of 2008. That contributed about, relative to ’07, a reduction in earnings of about $0.05 per share.

Interest expense on long-term debt increased largely due to the issuance of $150 million of 7.5% senior notes that we issued in June of 2008. We obviously had not issued any debt in 2007, so this issuance obviously affected earnings in the quarter and will affect interest expense going forward; that was about $0.04 share in the quarter.

Interest and investment income decreased due to two things really, impairments of our equity investments at our Palo Verde nuclear decommissioning trust and also some write-downs and impairments of our auction rate securities, short-term debt securities that we have held.

Obviously the turmoil in the equity and credit markets has affected a wide variety of marketable assets and our assets in the decommissioning trust were no exception. That resulted in a reduction of earnings in the third quarter of about $0.04 a share relative to third quarter 2007.

Just to put not too fine a point on what happened in the weather in El Paso in the third quarter, you will see that cooling degree days decreased 24% from 2007 levels for the third quarter, relative to the third quarter of 2007 and also were 19% below the 10 year average of cooling degree days, so it was an extraordinarily mild summer in El Paso.

Turning to year-to-date earnings for a moment, net income year-to-date so far $66.8 million compared to $60.8 million in the same period of 2007; translated to earnings per share of $1.49 in 2008 year-to-date compared to $1.33 in 2007.

Turning to some of the earnings drivers, there were a couple of positive earnings drivers in the nine months ended September 2008; overall retail based revenues increased 2.8% primarily due to increased sales to small commercial and industrial customers and other public authorities. That contributed about $0.14 a share for the first nine months of the year relative to ‘07.

Also higher proxy market prices for deregulated Palo Verde 3 power sold to retail customers, also contributed $0.14 a share. We should point out that in the nine-month period of 2007 the Palo Verde 3 reprice, the new repricing convention was only in place for about ¼ of that nine-month period in 2007 and that also increased $0.14.

Transmission wheeling revenues increased due to greater wheeling volumes in southern New Mexico and in Arizona and that resulted in a pick up relative to ’07 year-to-date of about $0.07 a share.

We continue to see increasing levels of AFUDC and capitalized interest primarily due to higher balances of construction work in progress as we continue our infrastructure build out and those balances climb we will record larger amounts of AFUDC in capitalized interest.

The year-to-date earnings drivers, again looking at retail based revenues cooling degree days year-to-date, even though revenues are up about 2.8% year-over-year nine month period, we still had an 8 ½% decrease in cooling degree days in the first nine months of ’08 relative to the first nine months of ’07 and a 10% decrease relative to the ten year average of cooling degree days so not only in the third quarter, but generally speaking for the full year we have had cooler than normal weather when warmer weather would have positively impacted earnings.

Turning to a couple of negative earnings drivers in the nine month period, power plant operations, PV, non-fuel O&M increased maintenance expenses at PV 2 associated with the fueling outage and including some unscheduled preventive maintenance and increased operating costs at all three units resulted in a $0.13 reduction in EPS relative to the same period in 2007.

Non PV O&M increased due to the timing of planned major maintenance at Four Corners Unit 5 and Newman Unit 3 and we had some planned outages for those two units in 2008 and had no planned outages in 2007. That resulted in a $0.07 per share reduction in earnings in 2008 relative to the same period in 2007.

As we mentioned in the quarter interest expense increased on long-term debt primarily due to the issuance of that $150 million on senior notes that resulted in about an $0.08 reduction in earnings in 2008 relative to 2007. As we also mentioned in the quarter, the interest and investment income declined primarily due to those impairments of equity investments in the Palo Verde nuclear decommissioning trust and in the auction rate securities that we hold as short-term debt investments. That was about $0.07 a share reduction in ’08, year-to-date results relative to the same period in ’07.

Turning to Palo Verde operations for a moment, the next couple of slides we are going to talk a little bit about capacity factors and outage days both in the third quarter of 2008 and year-to-date. As Frank had indicated the unit certainly is running better than it has in awhile. As you can see in 2008 the third quarter our capacity factor was approximately 94 ½ % compared to 87 and 0.7% in 2007, so we are seeing higher capacity factors at Palo Verde.

Turning the page you can see the outage days. The manifest, that capacity factor calculation, we only had ten outage days planned/unplanned and equivalent outage days in the quarter compared to approximately 35 such days in the third quarter of 2007.

Year-to-date our capacity factor is 86.4% at Palo Verde compared to 84.8% same period 2007. Again, the trend is increasing and that’s obviously a real positive.

Year-to-date outage days planned/unplanned and equivalent about 108 outage days in 2008 compared to 131 outage days in 2007 again that is a trend that we like to see.

Turning to earnings guidance for a moment, 2008 earnings guidance we have revised earnings guidance range to $1.65 to 41.85 per basic share. The previous range was $1.60 to $1.95. A couple of things impacted the tightening of that range on the low end going from $1.60 to $1.65 that was primarily a function of expected improvements and where we are going to end up in non-fuel O&M both Palo Verde and non-Palo Verde non-fuel O&M that was primarily responsible for the $0.05 improvement in expected results on the low end of guidance.

On the high end of guidance we reduced guidance by about $0.10 and a couple things here; the biggest driver was a reduction in retail sales expectations on the high end of guidance. Obviously this much cooler weather has impacted our revenue forecast in 2008 so that probably 2/3 to ¾ of the change in that $0.10 going from $1.95 to $1.85 is revising downward our expected retail sales projections for the high end of guidance in 2008.

A couple of the key things that will affect earnings to the balance of the year, which is only about two months obviously, the county market prices in Palo Verde availability, Palo Verde operating costs, PV 3 operations and margins for PV 3 and customer growth and energy usage.

Turning to 2009 guidance, our initial guidance range is $1.55 to $1.95. Significant drivers in 2009 include expected softer 2009 power prices and PV 3 proxy market prices. We are seeing a weakening in expected power prices due to expected softer natural gas prices in 2009 relative to expectations of just a couple of months ago and those reduced natural gas prices flow through purchase power sales and so we are expecting our economy margin sales and our PV 3 re-price on the low end of guidance to be less than what we would have expected just a couple of months ago.

Increased Palo Verde non-fuel O&M as Frank had indicated earlier, we are expecting about a 6 to 8% increase in Palo Verde non-fuel O&M relative to projected ’08 levels. That will continue to be a drag on earnings.

Increased interest expense, in 2009 we will have a full year of the $150 million senior note issuance where in ’08 we had about seven months of that, so year-over-year one of the drivers will be we will have a full years interest expense on those senior notes.

Offsetting some of these things, increased retail sales; we are seeing that Fort Bliss is still going strong and we also expect a return to more normal weather. We had an extraordinarily cool summer and relatively cool year-to-date. We would expect, not necessarily a return to the ten-year average, but certainly we would expect warmer weather in 2009 than we experienced in 2008, so that would provide some measure of base revenue relief.

On the upper end of guidance, $1.95 reflects some power prices that would be what one might expect a couple of months ago, so no one knows for sure where natural gas prices are going in 2009, the best guesses are they are going to be softer, but the high end of guidance reflects assumptions on sales of wholesale power and PV 3 re-prices that correlate to a higher gas price than we would expect today in 2009, but certainly not a gas price that would be totally out of the question.

Turning to liquidity for a moment, as of September 30, 2008 we had a cash balance of approximately $104 million. All cash balances are invested in either treasury bills or 100% treasury money market funds. Some of that cash, when we did the $150 million senior note deal, we over borrowed at that point in time. We were concerned about the state of the credit markets and as we sit here today we are very happy that we did that. It provides us with more cash than we would normally keep, but in this day and age we are probably as focused on liquidity as we are focused on anything right now, so we have $100 million. We also have a revolving credit facility with a $200 million limit. We have drawn about $92 million on that facility for the financing nuclear fuel. The remaining facility is available for general corporate needs.

We believe as everything sits today our cash balances and internal cash generation in the balance of 2008 and 2009 should be sufficient to fund most if not all of our cash needs for construction and operations in 2009.

Debt ratings, we had a renew of our ratings both my S&P and Moody’s. S&P completed its review and confirmed our BBB rating, BBB minus unsecured with a stable outlook. S&P has assigned a BBB rating to the $150 million and $400 million senior note issuances, as we have no secured obligations outstanding. So these unsecured obligations, in effect, were assigned a secure rating by S&P.

Moody’s also affirmed its rating of BAA 1 for secured paper BAA 2 for unsecured and a stable outlook late in the summer of 2008.

Our pollution control bonds as we have discussed with you in the past we have about $100 million of weekly auction rate [indiscernible] control bonds outstanding. These bonds don’t mature for many years to come, but the auction interest rate re-set feature has resulted in unfavorable economics as of late. We intend to refinance these bonds into some kind of fixed maturity as soon as the credit market conditions improve. The tax-exempt market has affectively been closed for the last four to six weeks. We monitor that market every week and as soon as that market re-opens and some measure of liquidity returns, we intend to refinance these obligations.

We have received all necessary regulatory approvals, primarily that was comprised of New Mexico and the [Firk], we’ve received all approvals necessary to refinance these bonds so once the market re-open and liquidity is restored we think we can refinance these things rather quickly.

Turning to our stock re-purchase program, we currently have a $2 million share repurchase authorization by the board. It was authorized in November of 2007. No stock was repurchased during the third quarter of 2008. Approximately $1.5 million shares of the $2 million remain available for repurchase as of September 30, 2008. We are still very committed to stock buy-backs. Our near term stock buy-back activity will rightly consider our liquidity needs and the credit market economic conditions. We are very focused right now on liquidity as are a number of other utilities and frankly other folks in other industries and so we are going to balance the buy backs in the near-term against our liquidity needs and the state of the credit markets and the economic conditions.

Turning to a regulatory update, in Texas we filed a Texas fuel factor and surcharge in July 2008. A new fuel factor and surcharge were implemented in the October 2008 billing cycle. The new fuel factory flex, among other things, a natural gas price of $8.40 a million BTU, a surcharge of $39 million is also being collected, effective in October, over an 18-month period.

As of September 30, 2008 our Texas fuels under recoveries were approximately $63 million. On a monthly basis, given the two surcharges that we have in place, we are collecting about $5 million a month in surcharges. Those two surcharges include the aforementioned October 2008 surcharge of $39 million over an 18-month period and a May 2008 surcharge of $30 million which is being recovered over a 12-month period.

Turning to New Mexico, in October 2008 we began collecting our deferred fuel and purchase power costs that we had been deferring since March of 2008 via the imposition of a $0.02 per kilowatt-hour fuel and purchase power clause charge.

At September 30, 2008 New Mexico deferred fuel and purchased power costs were approximately $11 million. We expect, via this $0.02 per kilowatt-hour charge, we expect to recover this New Mexico fuel under recovery by the end of the first quarter 2009 all things considered.

The sum of the New Mexico fuel under recovery and the Texas fuel under recovery is about $74 million, so as of September 30, 2009 we have got $74 million tied up in under recovered fuel.

There is no new activity or any other open items on New Mexico dockets that we discussed with you in the past including fuels and rates, executive compensation, and the statewide fuel and purchase power clause investigation.

With that we will turn it over for questions and answers.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Robert Howard of Prospector Partners

Robert Howard - Prospector Partners

The Palo Verde extension, do you guys have any estimate in how much extra cost there might be for doing that?

Scott Wilson

We don’t have a precise number to give you right now, it is a couple million bucks our share, but I don’t have any precise numbers for you.

Robert Howard - Prospector Partners

With the decommissioning funds retreating when might you have to make some cash contributions to that and how big might that be?

Scott Wilson

Well at this point in time even with the fall back in the equities that we held in those funds we are somewhere between the minimum funding requirement and the expected funding requirement or suggested funding requirement, for lack of a better term. So right now even though we have seen this retreat in the equity markets we are not in a position where we actually have to do any extra funding, so what we are going to do is we will see how this plays out and see if and when the equity markets rebound to see whether or not we need to do any incremental funding. But right now it doesn’t appear we need to do any.

Robert Howard - Prospector Partners

The $0.05 impact that you guys were talking about fro weather, I guess that was compared to ’07 versus instead of being compared to normal, is that right?

Scott Wilson

Yes. That was compared to ’07, right.

Robert Howard - Prospector Partners

So if you were to compare it to normal weather, maybe I guess it would be a little better, a $0.03 impact or I don’t know if you have.

Scott Wilson

Yes, clearly in the quarter compared to ’07 it was a 24% cooling degree difference and 19% from the 10-year average, so the cooling degree difference, the ten-year average, is about 80%. I hesitate to do that linear of a calculation, but that would be more like 40.04.

Robert Howard - Prospector Partners

But it’s still significant. It should still be significant compared to normal as well as just ’07.

Scott Wilson

Yes it was extraordinarily mild here in El Paso in the summer and that’s just a fact.

Operator

Your next question comes from Maurice May of Power Insights.

Maurice May - Power Insights

I have a couple of quick questions. First of all on the auction rate PCBs outstanding what are you paying these days for those weekly rates?

Scott Wilson

Thanks for asking, we appreciate that, 14%. Now that rate has spiked in the last four to six weeks. Over the course of the year, on an average basis, we are still in pretty decent shape on these PCBs. Obviously it’s at a level now that’s painful and that’s whey we indicated that as soon as these markets reopen we will be refinancing these things quickly.

Maurice May - Power Insights

Is there any way you can use some of your cash instead of going weekly auctions, because the cash is probably earning 1%.

Scott Wilson

Yes absolutely and we have actually done a lot of work on that very prospect, going in and putting that money to work. The issue that you have is depending on what happens in that market, if it doesn’t reopen, the rules require that we buy a complete issue. Like either the $37 million issue or the $63 million issue.

The risk we run in putting our cash in here is if those markets don’t reopen, I can’t envision this, but if they don’t reopen for some extended period of time we wouldn’t have the ability to pull that money back out of those auction rate securities and hence we would be subject to credit markets and trying to borrow money to fund our construction.

We looked into that, but right now we are just a little bit concerned that we might get in there and not get out.

Maurice May - Power Insights

So basically what you do is you have cash right now, enough to finance through the end of ’09, and if you start paying off auction rate issues, or if you start buying back stock, you might not have it. Is that basically what you’re saying?

Scott Wilson

Yes, but not so much the stock. Certainly we are considering both liquidity needs and economic conditions on the stock buy back, but the minimum size on us doing something with the PCBs is $37 million. We don’t have a minimum size like that on the stock side, so we are either in for $37 million or $63 million in the other trounce and that’s what gives us pause.

Maurice May - Power Insights

Okay, but your stock price is quite low these days, so you could nibble if you wanted to.

Scott Wilson

Maury, thanks for that reminder. You’re two for two.

Operator

Your next question comes from Eric McCarthy of [Persides]

Eric McCarthy -[Persides]

Is there anything baked into that guidance that would reflect any further losses in the nuclear decommissioning or further losses there?

Scott Wilson

No the guidance assumes that there is no further reduction in that.

Eric McCarthy -[Persides]

What exactly was impaired? Were those mark-to-market losses on equities or were there auction rate securities in the trust?

Scott Wilson

No actually two things. In the nuclear decommissioning trust we have a variety of equity investments. For instance we had some exposure to a number of industries including financials and so we took some write downs on some financial stocks, just a basket of probably 10-12 equities in that ball park that we had to write down that were either – we have a policy in that if our equity investments in that trust are 20% less than what we paid for them for a nine-month period or 50% of what we paid for them than we have to go ahead and mark them down.

That’s what happened on the equity side and we have captured virtually all of those equities right now.

The auction rate securities that we’re talking about is at the end of last year we had about $20 million, we took some temporary cash and bought auction rate debt securities that we held as investments. Before the year ended we were able to liquidate $16 million of that as that market began to go south. We were left with $4 million; this is basically student loan paper. So we had $4 million of that left and that market has seized up and there is no getting out of that market at this point in time. So, those are two separate investment pools.

Eric McCarthy -[Persides]

It sounds like at some point the student loan paper may reverse itself, but the equities are gone.

Scott Wilson

Yes, I mean certainly some of these equities have an opportunity to come back. Some of them are less likely, but we have been pretty aggressive in marking these things down and we feel, at this point in time we haven’t reflected any further reduction in value in ’09 guidance, but obviously if the equity markets continue to head south, turn around and head south again, that is something that we are going to have to keep in mind.

Operator

Your next question comes from Anthony Cordell of Jefferies & Co.

Anthony Cordell - Jefferies & Co

One of my questions is following off of Maurice’s comments on the share repurchase. At these levels and would the company give it much more thought, it seems that the stock is at a low for three years; it’s trading at a very attractive PE ratio. It seems like it’s the best investment for the company right now. You guys can make up ample cash. I know you are concerned about maybe the liquidity market, but any more insight into accelerating that share repurchase or doing at least what’s on hold right now?

Scott Wilson

Well we are clearly focused on three things. We are committed to buy backs. We are clearly focused on the level of cash that we have and what we’re earning on it. And, we are also focused on liquidity and economic conditions. I can’t really say that we are going to do anything imminent, but we rethink and revisit buy backs on a frequent basis and given all the factors that you mentioned we certainly will be reviewing that, because we look at things much like you’ve described.

We are just very concerned about the state of the credit markets and given that next year our capital spends are about $250 million, we have got to make sure that we’ve got ample cash to fund this thing, if in fact there are any kind of hiccups in the credit market going forward. So, that is part of the calculus too.

Anthony Cordell - Jefferies & Co

The $250 million, just one other bulletin aside, you don’t have any new debt issuances forecasted for 2009 to cover this CapEx?

Scott Wilson

No we don’t because right now where we sit with cash and internally generated funds and some fuel under recoveries that we should recover in ’09 we think we’ve got ample cash to get through the year. So at this point we haven’t assumed any further leverage in 2009.

Anthony Cordell - Jefferies & Co

Then on the nuclear decommissioning, you had said earlier in one of the questions that at this time you don’t really see a need to make maybe some additional contributions. So it appears that the charge you guys took this quarter was more of a non-recurring in nature. I just want to know what the thought process was. It seems like you guys included this in like an on going earnings number, where some companies may include it as a non-recurring charge and not include it in operational earnings. What is the thought on that?

Scott Wilson

It is our understanding that FAS 115 requires us to take that as an operating item. I mean certainly one could, you know in thinking about the company, it is not unreasonable to separate those kinds of results from more pure operational results, but FAS 115 required us to book it the way we did.

Anthony Cordell - Jefferies & Co

Last, on your 2009 guidance you talked about the high end involved, a certain gas price a low end involved, another gas price, I want to know if you could give us more color on maybe are you looking at a 12-month strip or actually what is the gas price you are assuming at the high end?

Scott Wilson

Well I don’t have that number in front of me. We certainly do look at 12-month strips when we take a look at expectations for what prices might be coming into a period like 2009. There is one other thing too, we have also got the PV 3 re-price and one of the things that we move around is not just pricing, but we don’t get paid for PV 3 if it does not run, so part of our guidance from the low to high incorporates some assumptions on capacity factors, how much will the unit run. So there is two pieces to Palo Verde 3 and there is probably, on the economy margin side, that is more of a pure price thing.

Operator

I am showing no other questions from the phone lines.

Steve Busser

Thank you Mathew and thank you everybody for joining us. We appreciate your time; have a nice day.

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