El Paso Electric Company Q4 2008 Earnings Call Transcript

El Paso Electric Company (EE)

Q4 2008 Earnings Call

February 25, 2009; 10:30 am ET

Executives

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

David Stephens - Chief Executive Officer

Scott Wilson - Chief Financial and Administrative Officer

Analysts

Paul Fremont - Jefferies & Company

Brian Russo - Ladenburg Thalmann

Michael Lapides - Goldman Sachs

Jeff Cavallo - Duquesne Capital

Phyllis Gray - Dwight Asset Management

Adam Whiteman - Unidentified Company

Presentation

Operator

Good day, ladies and gentlemen. Welcome to the El Paso Electric Company Fourth Quarter 2008 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) I would now like to turn the call over to Steve Busser.

Steven Busser

Thank you, Jamie and good morning, everyone. Thank you for tuning in, rough start to the day, to the El Paso Electric Company fourth quarter 2008 earnings conference call. I’m Steve Busser and on the call with me today, I have our CEO, David Stephens and our CFO, Scott Wilson.

We will provide an update on our fourth quarter 2008 financial performance including a discussion of our pertinent earnings drivers. We will also discuss updates to our 2009 earnings guidance and assumptions, the status of our Newman 5 construction, our upcoming rate filings and provide an update on the status of Palo Verde.

I will first, however, 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 Investor Relations page on our website.

We currently anticipate our 2008 Form 10-K will be filed with the SEC by the end of this week. As for our upcoming IR events, we will be attending the EI Conference in New York on May 20, 21. We will provide further updates on any IR events on future conference calls. Please call our investor relations department if you have any further questions or require further information.

A replay of today’s call will be made available shortly after our call ends and will run through March 11. The details as it relates to the replay are disclosed in our press release. Let me cover the Safe Harbor provisions, before I turn the call over to David. On page 2 of our presentation, you will see our Safe Harbor statement.

In summary, our comments and answers to your questions may include forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks and other factors, which may cause the company’s actual results in 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 all of the forward-looking statements and also lay out the risk factors that should be considered. These filings may be obtained [inaudible] from the company on our website or from the SEC. The company cautions that risk factors 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 or on behalf of the company.

These statements especially those made during the Q&A session of the call are subject to risks and uncertainties that are difficult to predict. Now I’d like to turn the call over to David.

David Stephens

Thanks Steve. Good morning everyone. First of all, I want to thank everyone for joining us on the call today. I would like to take this opportunity to formally introduce myself. I am David Stephens, the CEO of El Paso Electric. Today, I am going to provide an overview of my personal background and then focus on some key areas that will impact the company during 2009.

Afterwards, Scott Wilson, our Executive Vice President and CFO will provide a more detailed discussion on our financial results, the revised 2009 earnings guidance, liquidity update and an overview of our current regulatory matters in Texas and New Mexico.

Now, first turning to my background on Slide 3. I have over 25 years of energy industry experience, which has been primarily concentrated in the natural gas distribution business. However, I’m quickly coming up to speed on all facets of the company as well as the electric utility industry.

In my career, I have demonstrated a strong record of leadership and I have extensive regulatory and operational knowledge, which I believe will greatly benefit us as we file rate cases in Texas and New Mexico.

I’m really excited to be here guiding this company during this critical time in our history. I look forward to personally meeting with each of the members in the financial community during the EEI conference in May.

Now, for the major issues of 2009. There are several key issues facing us this year, among these are the re-financing of the pollution control bonds for PCBs, timely completion of Newman 5 Phase1. Filing a New Mexico rate case by May 29.

Filing a Texas rate case toward the end of the year and what I’ll term as successful Palo Verde operations, which includes closing the outstanding confirmatory action letters or CALS with the Nuclear Regulatory Commission. Continuing the 20-year license extension process, which began in December and working with Arizona Public Service, the operating agent to minimize any unplanned outages.

Let’s first discuss the PCBs. Currently, we have 100.6 million in PCBs outstanding and the auction rate interest reset feature has at times yielded rates in excess of 14%. As a result of these unfavorable economics, we are evaluating several options and monitoring conditions in the credit market in order to refinance these bonds.

We anticipate that we will refinance the PCBs by the end of the first quarter of 2009 assuming the credit market conditions allow us to do so. Now I want to talk about Newman 5. Currently the addition of this new generation, Newman 5 is on-time and on-budget.

The first phase of the project is the installation of two 70-megawatt gas turbines in simple cycle mode and we anticipate this portion of the project to begin producing power in May.

The second phase of the project is the addition of a heat recovery steam generator, which will capture the heated exhaust gases from the gas turbines and will make steam that will drive the steam turbine generator.

The steam turbine generator is currently expected to be generating power before the summer of 2011. The conversion of Newman 5 into a combined cycle facility will add approximately 148 megawatts to the unit and will increase the total capacity to 288 megawatts.

When Newman 5 is completed in the combined cycle mode, it will be the most fuel efficient gas-fired unit in our generation fleet and it will provide additional fuel savings to our customers due to this increased efficiency.

Now let’s talk about our upcoming rate cases. Currently, we are undertaking steps to prepare for the rate cases we will file in 2009 in both Texas and New Mexico jurisdictions. Pursuant to the 2007 New Mexico stipulation, El Paso Electric will file a rate case in New Mexico by May 29 of this year, using a test year ending December 31, 2008. It is anticipated that new rates will be effective no later than July of 2010.

In our Texas jurisdiction, the current rate freeze agreement with the city of El Paso and public utility commission of Texas is scheduled to end on June 30 of 2010. In order for new rates to be effective by approximately that date, we plan to file a rate case by late 2009. Going forward, we will work diligently with our regulators to provide them the most comprehensive and accurate information possible in order for them to evaluate our rate request and hopefully grant us the appropriate level of rate relief, so we can continue to invest in our systems and provide safe and reliable service for our customers.

I would now like to provide you with an operational update on Palo Verde, which is obviously our largest single source of generation. Currently, each of the three units at Palo Verde is operating at 100% power. During the fourth quarter of 2008, Palo Verde Unit 1 underwent a planned refueling and maintenance outage that lasted 46 days and the unit was brought back online on November 19 of 2008.

In addition, Palo Verde II had a 23-day unscheduled outage during December of 2008 as a result of a hydrogen leak in the electric generator. Another important event that recently occurred at Palo Verde was the plant operating agent APS filed a request for a 20-year license extension with the NRC in late December of 2008.

The license extension review process is expected to take approximately two years. Now turning to the regulatory issues at Palo Verde. In 2008, Palo Verde improved its operating performance and took significant steps towards closing the 12 confirmatory letters or CALS that have been identified by the NRC when it placed Unit 3 in the multiple repetitive degraded cornerstone column of its action matrix back in February of 2007.

During the year, we continued to work closely with APS and the other plant owners in order to address these outstanding issues. The NRC has publicly recognized the progress that has been made at Palo Verde and we are hopeful that CAL items will be closed mid-2009.

As a result of the improvement at Palo Verde, the plant attained a capacity factor of 83% in 2008 compared to 78% in 2007. In the future, we will continue to monitor activities at the plant and we will work in conjunction with the operating agent and the other plant owners in order to enhance the operational performance at Palo Verde.

Now, before I turn the call over to Scott Wilson, I want to personally thank each of the employees at El Paso Electric for their exceptional work, dedication and further contributions to our year-to-date 2008 earnings results.

At this time I’ll turn the call over to Scott, our Executive Vice President and CFO, Scott?

Scott Wilson

Thank you, David. In this part of the call, we will cover fourth quarter 2008 and year-to-date 2008 results. We will talk about key earnings drivers for the quarter and year-to-date. We will cover 2009 earnings guidance including our revision to the guidance we put out in the fall of 2008 for 2009. We will discuss our liquidity. We will discuss our stock repurchase program and finally, we will have a regulatory update.

Fourth quarter 2008, basic earnings per share and net income. Net income for the quarter was $10.8 million compared to $13.9 million in the fourth quarter of 2007. Earnings per share 2008 fourth quarter $0.24 versus $0.31 in 2007. A couple of positive earnings drivers in the fourth quarter, both were revenue related. The first was deregulated PV 3 sales; increased power sold to retail customers in the fourth quarter of 2008 contributed a pick up of $0.12 a share.

It should be noted that Unit 3 was down in the fourth quarter of 2007 for steam generator replacement and refueling. So this comparison quarter-over-quarter the unit ran flat out in 2008 and was down in 2007. So that obviously played a big part of the $0.12 per share pick up quarter-over-quarter.

Off system sales, we saw some higher retained margins and a large increase in megawatt hour sales. This contributed $0.04 to the quarter-over-quarter positive comparison and this sales pick up was primarily arbitrage sales.

Turning for a moment to some things that had a negative effect on earnings quarter-over-quarter. First item was increased interest expense from the issuance of 150 million of senior notes in June of 2008 and also we had, as David mentioned, higher rates on our auction rate pollution control bonds. That cost us $0.07 in the quarter relative to the same period in 2007.

In addition, our retail non-fuel base revenues declined by about $4.2 million pretax or 3.7%. That was a function two different factors affected that, that affected our quarter-over-quarter net income by $0.06 per share. The two primary factors were a non-recurring revenue adjustment in the fourth quarter of 2007 associated with sales to a public authority customer with no recurring adjustment in 2008 and decreased kilowatt hour sales to large commercial and industrial customers.

We will talk a little bit more about the sales decline to large CNI as it will impact our 2009 guidance revision along with several other factors. PV non-fuel O&M higher operating costs at all three units decreased net income and EPS $0.04 a share relative to the same period in 2007.

Year-to-date, our net income was $77.6 million for 2008 compared to $74.8 million in 2007. On an earnings per share basis in 2008, we earned $1.73 compared to $1.64 in 2007.

Turning for a moment to the positive earnings drivers, in 2008, compared to 2007, de-regulated PV 3 sales contributed $0.26 per share. Pick up relative to year-to-date 2007 and there are a couple of things that contributed to that large pick up. One, as we mentioned for the quarter, Unit 3 was down in the fourth quarter of 2007 and did not operate, hence we had significantly more output from the unit in 2008 than we did in 2007.

In addition, as part of a rate agreement, our pricing formula for Palo Verde 3 deregulated power change in July of 2007 and gave us an opportunity to recover our costs. So the combination of better availability in 2008 and a new pricing regime that was in effect for all of 2008 were the primary contributors to the $0.26 per share pick up.

Off-system sales increased $0.09 year-over-year, primarily a function of higher retained margins and also increased sales to a wholesale customer. We also of those increased sales, a large increase in arbitrage sales. In addition, retail non-fuel based revenues for the year, were up $0.08 a share year-over-year, primarily due to increased kilowatt hour sales to C&I and public authority customers.

And the last positive revenue earnings driver, transmission wheeling revenues, greater wheeler volumes for the year were partially offset by the reversal of $2.5 million of revenues we booked in 2006 from Tucson Electric Power. This was pursuant to a FERC order. The net pick up in transmission wheeling revenues year-over-year was $0.06 a share.

And finally, the last positive earnings driver for calendar year ‘08 relative to ‘07 is allowance for funds used during construction and capitalized interest, up $0.08 in 2008, $0.08 per share relative to 2007 and that’s a function of higher balances for construction work in progress due to our increasing capital expenditure program.

Turning for a moment to primary negative earnings drivers for earnings in 2008, relative to 2007, two power plant operation items here. One PV non-fuel O&M, we had higher operating costs at all three units and increased maintenance costs during refuelage outages. That was $0.17 a share reduction in earnings in ‘08 relative to ‘07. This was certainly not unexpected as we spoke to everyone when we gave guidance for ‘08.

We expected a large increase in Palo Verde non-fuel O&M and in fact PV non-fuel O&M actually came in under our expectations for 2008, but that was primarily a function of an accounting adjustment and accounting true-up in 2007 that was booked in 2008. So the $0.17 was not unexpected at all. Non-Palo Verde non-fuel O&M increased $0.08 a share relative to 2007 and that was a function of increased planned major maintenance at our fossil units.

We had no comparable activity in 2007. We have major planned outages at our fossil units on a periodic basis, but not every year, so 2008 we had several planned outages and we had no comparable activity in 2007. Also as we mentioned in the quarter, increased interest expense full year due to the issuance of the 7.5% senior notes in June of 2008, $150 million worth. And also the higher rates on the auction rate pollution control bonds, this cost us $0.15 per share in 2008 relative to 2007.

Increased depreciation and amortization, as a result of higher depreciable plant balances cost us $0.09 a share in 2008 relative to 2007. And we will certainly see increasing depreciation and amortization over time, as we continue to build out our infrastructure and close our capital expenditures to the plant and service.

Decline in interest and investment income due to increased impairments of equity securities and the Palo Verde decommissioning trust cost us $0.08 a share in 2008 relative to 2007. This is a continuing theme for 2009. We will discuss this in some detail when we talk about 2009 guidance.

Turning to 2009 guidance, our original guidance that we put out in the fall of 2008 had a range of $1.55 to $1.95. Today, we are revising that range to $1 to $1.60 a share. The revisions, there are several things that drove this revision in 2009 earnings guidance. Two assumptions, however, drove 65% to 75% of the change in our earnings guidance depending whether you are looking at the low end or the high end of guidance.

The first item is; actually base revenues changed and they have two pieces. Lower 2008 actual base revenues, when we put guidance out in the fall of 2008, we had an assumption about full year 2008 base revenues. In the fourth quarter of 2008, we saw revenues drop almost 4% relative to our expectation for 2008. So that carries through to 2009 guidance.

We assumed a higher base for 2008 guidance that we then drove 2009 earnings assumptions off of. So we had a revision true-up to actual revenues and we are also seeing some weakness in sales primarily to our large C&I customers. That was rather dramatic in the fourth quarter of 2008 and so what we have done, our original assumptions for guidance for base revenues from the fall of ‘08 we expected growth of 2 to 4% over our 2008 base revenues.

Our revised assumptions for base revenues for 2009 include on the low end of guidance a reduction of 1% in base revenues relative to 2008 actual and an increase in base revenues relative to 2008 actual of 2%. So, we reduced that range, that expectation again a significant piece of that was a true-up to 2008 and the rest was our estimate of what may be happening in the economy in 2009.

And this is something we hadn’t talked about before because, frankly it wasn’t an issue and in 2008 original guidance, we had no provision in 2009 for impairments in our equity investments in our nuclear decommissioning trust. Obviously, in the fourth quarter of 2008, we saw significant reductions in the equity markets. We continue to see that in 2009. So we made a provision for impairments in 2009 guidance for the fair value of our equity securities and our decommissioning trust.

On the low end of guidance, $0.17 per share, relative to our original estimate of 2009 guidance. On the high end, we assumed $0.05 reduction in guidance relative to our original guidance. Right now, as we sit here our expectations or what we are seeing today are closer to what we built into the low end of guidance, but certainly no one can predict what’s going to happen in the equity markets and that’s why we have constructed a range that we have constructed.

There are a couple other assumptions that make up the other 25% to 35% of the change in guidance. We decreased our economy margins, expectations mainly due to lower expected market prices, which are obviously tied very closely to natural gas prices and as everyone has seen there has been a softening in natural gas prices.

And also, we lowered deregulated PV 3 revenues, primarily due to that same lower market price expectation. That resulted in about $0.05 to $0.08 per share respective change in guidance relative to original guidance.

And finally, O&M expense primarily a change in our pensions and OPEB assumptions as we got to year-end and got a better feel for 2009 expected pension and OPEB and there was a couple of other miscellaneous items and that resulted in a change to guidance from the fall of $0.08 to $0.06 per share respectively.

Turning to liquidity for a moment, at December 31, 2008, we had approximately $92 million of cash on hand. We also have additional liquidity provided by a $200 million revolving credit facility. We used that revolving credit facility to finance nuclear fuel and working capital needs. We had drawn approximately $94 million on that facility at year-end 2008, which leaves us approximately $106 million undrawn for liquidity purposes in 2009.

We believe that cash balances and internal cash generation should provide us sufficient liquidity for most of 2009. By the way, turning back the guidance for a moment, we do not anticipate in our 2009 guidance issuing any incremental debt and we have no expectations of having to issue equity not only in 2009, but 2010 as well.

Turning to our stock repurchase program for a moment, we have a current 2 million share repurchase program authorized by the board in November of 2007. In 2008, we repurchased half a million shares at a total cost of $9.9 million. There was no stock repurchased during the fourth quarter of 2008.

We have approximately 1.5 shares remaining available for repurchase at December 31, 2008. We are still very committed to stock buy backs. Near-term buy back activity, however, will consider our liquidity needs and credit market and economic conditions.

Lastly, we are going to turn to our regulatory update. At December 31, 2008, we had Texas fuel under-recoveries of approximately $39 million. We are currently collecting via surcharges, May 2008 surcharge of $30 million, which was being recovered over a 12-month period and will be completed in April of 2009. And in October of 2008, we instituted $39 million surcharge, which is being recovered over an 18-month period and we should recover that surcharge in March of 2010.

Turning to New Mexico, in October 2008, we began collecting a deferred fuel and purchase power cost factor of $0.02 per kilowatt hour to compensate us for freezing the fuel factor in New Mexico for the summer of 2008. At December 31, 2008, our New Mexico deferred fuel and purchase power costs were approximately $7.7 million.

New Mexico fuel under-recoveries however, are expected to be recovered by the end of the first quarter of 2009. There has been no new activity on any of the New Mexico dockets that we have spoken to you about in the past. So the sum at 12/31/08, the sum of our deferred fuel in Texas and New Mexico is approximately $47 million.

And with that I will turn it over to Steve Busser.

Steven Busser

Jamie, at this point we normally take questions. So we can open it up for questions at this point.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Adam Whiteman – [Unidentified Company].

Adam Whiteman – Unidentified Company

Just had one question about the impairment and guidance, is that based on your current market values for those equities or is it based on where you see the market evolving over the next 12 months?

David Stephens

It’s on a market value that we saw rather than on an expectation of where the market may go in the balance of the year.

Adam Whiteman – Unidentified Company

So if 2009 ended today, what would be the impairment?

David Stephens

We haven’t recalculated that number. The most recent number that we have is approximately two weeks old. And that resulted on about $12.5 million impairment in the NDT, but we have not updated that number.

Operator

The next question comes from the Paul Fremont - Jefferies & Company.

Paul Fremont - Jefferies & Company

I guess one is a housekeeping question. There is I guess a tax credit for the fourth quarter versus tax expense for the fourth quarter of 2007. What’s the explanation there?

David Stephens

I’m not following you. Did you say a tax credit in the fourth quarter? Are you saying a negative tax provision?

Paul Fremont - Jefferies & Company

Yeah. In other words, what’s the change in tax expense fourth quarter 2008 versus 2007, what’s driving that?

David Stephens

This is David Carpenter, our Controller.

David Carpenter

In 2007, we had a number of adjustments that reduced tax expense, a couple of them were related to prior periods and a couple of them were true-ups for the 2007 taxes. And we did not have those same adjustments in 2008.

David Stephens

So what you saw was, really, some one-time adjustments in 2007 that didn’t replicate in 2008?

Paul Fremont - Jefferies & Company

And for 2009, I mean what type of a tax rate should we be looking at?

David Stephens

Thirty-three percent to 34%, somewhere in that ballpark.

Scott Wilson

Effective tax rate, Paul.

Steven Busser

It is a little less than statutory because of AFUDC equity.

Paul Fremont - Jefferies & Company

And with the large drop in C&I, can you give us a little bit of flavor as to what type of load is dropping off and whether that is likely to start up again if the economy improves?

David Stephens

We have seen a couple things. We saw a large customer in the fourth quarter shutter their operations in early October, but actually restart them in the second week in January. Now, they restarted them instead of running three shifts flat out they are on a reduced shift basis.

And there are one or two other customers that we are aware of that are planning on ceasing their operations based on what we know today. So it’s difficult to tell whether we will see further degradation, it will stay where it is at and that is one of the reasons we adjusted our revenue expectations for ‘09.

Paul Fremont - Jefferies & Company

The last question for me is the Texas rate-making process, can you explain to us what the historical role of the city of El Paso has been and do you need to reach a settlement with the city of El Paso in order to go before the Public Utility Commission of Texas?

David Stephens

Yeah, the short answer is, municipalities like the city of El Paso have original jurisdiction in Texas. So you always file a rate case with them first and the PUCT really has appellate jurisdiction. Practically speaking, the ways these things work is you wind up in front of the PUCT most of the time. Now we are very hopeful that we can reach a settlement with the City that we can all agree on what we are doing is fair and reasonable and we could go to the PUCT with all the parties and reach settlement, but only time will tell there.

Paul Fremont - Jefferies & Company

And have you gone to the PUCT without a settlement in the past and how long ago was that?

Steven Busser

Boy, we haven’t had a rate case in Texas since 1995 and that was ultimately settled at the PUCT, but that was not one of those deals where we got a settlement first with the city with everybody else and then showed up at the PUCT. That was a litigated proceeding.

Operator

Your next question comes from Brian Russo - Ladenburg Thalmann.

Brian Russo - Ladenburg Thalmann

In terms of your 2009 guidance, should we assume similar increases in Palo Verde O&M expense consolidated depreciation and amortization expense like we saw from ‘07 to ‘08?

Scott Wilson

Well, let me start with Palo Verde first. We have not changed our expectation for Palo Verde non-fuel O&M from what we discussed in the fall of 2008. So, Brian, I don’t know if you already had that number in mind, but I’m kind of thinking about this on the fly. The increase that we expect in ‘09 relative to ‘08 is close to 9% and it’s a little more than half of what we saw from ‘07 to ‘08.

Brian Russo - Ladenburg Thalmann

And then the depreciation and amortization, we saw about a $19 million increase in ‘08 versus ‘07.

Scott Wilson

Nineteen million dollars.

Steven Busser

Depreciation and amortization, 6.2, Brian.

Brian Russo - Ladenburg Thalmann

I might be looking at the wrong chart here. Could we see a similar increase?

Steven Busser

Yeah, I think we should expect to see a similar increase in depreciation and amortization in ‘09 than we saw in ‘08.

Brian Russo - Ladenburg Thalmann

Then in terms of the share repurchase program. Are there any assumptions in the guidance range for share repurchases?

Scott Wilson

No, they are not, Brian. Given how uncertain the economic environment is right now and how uncertain frankly access to credit markets can be, I think everybody is marshalling liquidity and we are going to keep our head down, until we see the environment improve a little bit.

Brian Russo - Ladenburg Thalmann

Do you have any fossil plant outages in 2009?

David Stephens

Yeah, Brian, we have two local planned outages in 2009 and four corners will also have a major, they are on an eight-year cycle up there. So our ‘09 O&M from a local O&M perspective should be comparable to our ‘08 O&M from a local perspective.

Brian Russo - Ladenburg Thalmann

Okay. So the difference would just be the four corners outage?

David Stephens

Yes, sir.

Brian Russo - Ladenburg Thalmann

And the upcoming rate cases, I realize you haven’t filed the rate case in Texas in quite a long time, but I was wondering if you could just kind of discuss kind of the major components of both the New Mexico and the Texas rate cases?

Scott Wilson

Well, we think that the major component right now would certainly be the infrastructure build-out. Our rate base is increasing significantly relative to where we were just a couple years ago. And so, we would certainly anticipate that being the major driver. We have also seen cost increases on a non-fuel O&M side for Palo Verde, but right now I’d characterize this as probably the biggest single issue as the infrastructure build-out.

Brian Russo - Ladenburg Thalmann

And then just lastly. Any thoughts on Senate Bill 747 that’s being proposed in New Mexico?

David Stephens

This is David, Brian. Obviously, if I’m correct, Senate Bill 747 is the bill that has to do with the forward test year, be with etcetera. I call it cautiously optimistic that it is something they will consider with the amount of investment we are making. Obviously, having a forward test year would be a very good thing for us from the standpoint of the amount of capital we are having to outlay in the current regulatory lag, which is pretty significant. Therefore, we are going to support it strongly, we just don’t know at this point, it is purely in the process, it has received some favorable review at this point. But it obviously still got a ways to go before it gets to be law.

Brian Russo - Ladenburg Thalmann

If it does hypothetically does become law after you file your rate case in May. Could you revise that to include a forward test year versus the year end ‘08 that you’re considering now?

David Stephens

It is a great question, a same one I ask and unfortunately, the simple answer is no. As I understand it, New Mexico laws do not come effective for 90 days following approval and they do not allow for a, if you will, a back dating. I guess theoretically, you could probably withdraw the case and re-file it, but then you’ve got additional delays and things like that.

I am not sure that works and we can’t really do that because we have a requirement under the past arrangement with the state in 2007 where we have to file by May 29. So, we really don’t have that ability unfortunately.

Brian Russo - Ladenburg Thalmann

And then also you commented that there is no new activity on the open New Mexico dockets regarding rates, executive comp, and so forth. Do you think that’s something they might look to roll-up into this upcoming case?

Steven Busser

Yeah, I think it’s fair to say that at a minimum, executive comp gets rolled up in this case and whether or not the other issues do, it’s hard to say. We are watching, there are other dockets active in New Mexico and we are obviously watching those.

Operator

The next question comes from Michael Lapides - Goldman Sachs.

Michael Lapides - Goldman Sachs

A handful of questions, one very high level. Thinking about the city of El Paso leadership, am I right that Mayor Cook will likely still be in office when your rate case is heard and how much turnover have you had on the City Council that are approved? I think it was your May or August 2005 agreement?

David Stephens

Starting with Mayor Cook, obviously he is running for Mayor again. Today, I mean like any political office change you never know. I can’t remember the numbers, like seven or eight people already announced to run against him at this point in time. Obviously, I think he still enjoys strong support. It is too early to tell on that.

From the standpoint of the City Council, it is my understanding that there have been two changes to the City Council, since the last time we were in front them and so the majority of the council were involved last time. Secondly, obviously us being a fairly large company in the city of El Paso, everybody is well aware of us and what we do and all of that. So I don’t see that as a major hurdle.

Michael Lapides - Goldman Sachs

Am I right Mayor Cook won a bunch of awards as elected official or something along that line in El Paso recently?

David Stephens

That is correct.

Michael Lapides - Goldman Sachs

A follow up question, but this is a more modeling housekeeping item. What is your assumed in the fiscal 2008 rate base total?

Scott Wilson

We could dig up a planned service number for you, but hang on one second, Michael. I’d say somewhere between $1.2 million and $1.3 billion is net plant service.

Michael Lapides - Goldman Sachs

And how much equipped do you have outstanding? A plant that is still under construction whether it is in the equipped category or another category?

Scott Wilson

Give us a second. We are going to take a peek at the K, which will be filed tomorrow or Friday, about $205 million.

Michael Lapides - Goldman Sachs

And how much left, what do you expect for Cap-Ex for 2009?

Scott Wilson

About $270 million.

Michael Lapides - Goldman Sachs

And how much of that $270 million would be included in your rate case filing when you make your filings?

Scott Wilson

Newman Unit 5, when we make our filings. In New Mexico, all we are going to be able to do is because that case is filed May 29 of this year, is that combustion, which total company is around $60 million. In Texas, that’s part of what gets pushed around. The [inaudible] not expected to come online until 2011 sometime. So at this point, if we file a case in Texas at the end of 2009 it’s not likely that there is any way to get Phase II of Newman 5 into any kind of rate. So, right now, you would anticipate that Phase I is about $60 million total company would be what we would see in rate base for Newman 5 in the first round of rate cases.

Michael Lapides - Goldman Sachs

But when we think about normalized earnings, I mean, the best way is to take the 1/2, 1/3 billion rate base, the 205 million of equip on the books. Take your ‘09 Cap-Ex minus expected D&A and we can kind of back into that number and that gives us roughly what a hypothetical future rate base would be and you may be under or over that a little bit in ‘10 and ‘11, but kind of normalized beyond that if you assume a follow-up rate case, I bet you are getting closer to earning on that rate base.

Scott Wilson

That’s a good way to think about rate base in a 2010-ish kind of way.

Michael Lapides - Goldman Sachs

So if I take that and that’s getting me close to right around $1.7 billion or so and rate base. I mean it depends where the starting point, $1.7 billion, $1.8 billion. What are companies who are similar to you in Texas getting in terms of equity layers and ROEs when they have rate cases?

Scott Wilson

Well, that is starting to change, that dynamic is starting to change. A couple of things, in New Mexico, we have only seen one ROE, official ROE lately and that’s 10.1. Capital markets have changed since then with a reduction in equity values. One would expect all other things equal ROEs to go up, but I’m not predicting in fact that will happen. And so, that’s really hard to kind of predict.

In Texas, the last time that there was a rate case it was a wires case and that ROE I think it was an AEP company, it was just under 10, like 9.96. So, it’s going to be very interesting, Michael to see how commissions react to the drop in equity values, which all other things equal should affect cost equity models and should drive higher ROEs, but we shall see how this all plays out.

Michael Lapides - Goldman Sachs

I guess the last question, when we kind of think about this. What are your peers in Texas? Meaning who do you think your peers are in terms of other utilities, in terms of kind of what are the, I mean, obviously the guys that are in the peer maybe aren’t because they don’t own generation. So who else, is it Gulf States of the world are your peers or are there really not any?

David Stephens

Probably a couple; SPS, Entergy, SWEPCO, although they are all, the problem with Entergy and SWEPCO is they are part of a larger organization. So, if we were talking about stand-alone companies, I mean SPS is the one that probably, although they are part of a larger outfit as well. But those would sort of be our peer groups I think. So if you’re thinking about them from a rate case perspective I’d suggest those three.

Operator

The next question comes from Jeff Cavallo - Duquesne Capital.

Jeff Cavallo - Duquesne Capital

I’m just going to go more into the El Paso rate case. But as far as determining ROEs for your utility in the rate case, is that determined by the City Council or is that something that’s left to the PUCT?

David Stephens

Well, in a case in front of the city certainly that’s one of the elements that the city would be involved in, but if we weren’t comfortable with what came out of that, then ultimately the PUCT would decide that.

Jeff Cavallo - Duquesne Capital

And as far as timing goes, just as maybe some rules of thumb. When do you think it would be appropriate to file with the City Council and based on that when do you think that you could be in front of the PUCT and get a final decision, if things move well?

David Stephens

Well, I mean, what we have discussed publicly is a case towards the end of 2009 with a rate change, sometime in the summer, past July or later in 2010.

Jeff Cavallo - Duquesne Capital

And right now, as far as the buy backs, are you just keeping your liquidity at a premier given the market and I guess if the market stabilizes, you will decide?

David Stephens

Yeah, absolutely, on one hand obviously everybody knows what our stocks are trading at. We would love to buy it, we think it is a hell of a value and we have got cash to do it, but the problem we have got is just the outlook is so uncertain, I think the prudent thing to do right now is monitor events and participate when it makes sense.

Operator

The next question comes from Phyllis Gray - Dwight Asset Management.

Phyllis Gray - Dwight Asset Management

I had a question about the decommissioning trust for Palo Verde. Do you have a separate trust or is there a single trust for the nuclear plant that is shared by all of the owners?

Steven Busser

We have six individual trusts. Three of which are qualified and three of which are non-qualified. And so we have a qualified and non-qualified trust for each unit.

David Stephens

And they are separate from --

Steven Busser

Just for us.

David Stephens

They are separate from APS and the other participants.

Phyllis Gray - Dwight Asset Management

So they are managed separately?

Steven Busser

Yes.

Phyllis Gray - Dwight Asset Management

And also, I was wondering if you could share a little bit of your view of how things are going at Palo Verde operationally?

David Stephens

This is David Stephens. I think overall we are happy that things are starting to improve. We are happy that the NRC publicly recognized the progress that they have made, which makes us, I guess I would say, cautiously optimistic that the CALS will get closed hopefully sometime this summer, but you never know how that is going to play out. Saying that, I think they have a good plan. I went over and toured the plant recently and met with some of the senior management and I believe their plans are very detailed, very well thought out and overall I think they have got a good handle on what’s going on.

Phyllis Gray - Dwight Asset Management

And what is the role of the minority owners at this point?

Steven Busser

That’s an interesting question. I mean, basically what we do is we are more in a support role than anything else and we give input and provide hopefully advice and suggestions anytime we can that will help the plant and I think all the minority owners try to partner to do that and to assist APS any way we can to make it work better for all of us.

Operator

The next question comes from the Michael Lapides - Goldman Sachs.

Michael Lapides - Goldman Sachs

Just a follow-up question. Real quick, can you give timing on the Palo Verde and four corners outage schedule for ‘09 and beyond?

Scott Wilson

It is the same for Palo Verde. It is the same spring/fall kind of thing. And I think that the spring outage is a 45-dayer and fall is a 60-dayer.

Steven Busser

Unit 3 is scheduled 44 to 45 days from April to mid-may for the refuel and Unit 2 is 59 days scheduled in October to around December 1 of next year.

Operator

There are no further questions.

Steven Busser

Thanks, everyone, for joining us today and we look forward to seeing everyone that is available in New York when we come up to the EI Conference. Thanks for your time.

Operator

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may now disconnect. Have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!