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El Paso Electric Co. (NYSE:EE)

Q2 2010 Earnings Call

August 4, 2010 10:30 am ET

Executives

Steve Busser - VP, Treasurer & CRO

David Stevens - CEO

David Carpenter - SVP & CFO

Analysts

Brian Russo - Ladenburg Thalmann

Michael Lapides

José Garza

Igor Grinman - Zimmer Lucas Partners

Paul Fremont - Jefferies & Company

Peter Hark

Chris Shelton

David Stevens

Presentation

Operator

Good day ladies and gentlemen and welcome to the El Paso Electric Company Second Quarter Earnings conference call. At this time all participants are in listen only mode. Later we will conduct a question and answer session and instructions will follow at that time (Operator Instructions). As a remainder this conference call is being recorded.

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

Steve Busser

Thank you Melina and good morning everyone thank you for tuning into the El Paso Electric Company second quarter 2010 earnings conference call. I’m Steve Busser and also on the call with me today I have our CEO David Stevens and our CFO David Carpenter. Today we will provide an update on our second quarter 2010 financial performance including a discussion on our pertinent earnings drivers. We will also discuss our recently approved Texas rate case and our overall regulatory calendar.

Finally we will discuss our earnings guidance for 2010; I would first 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 don’t you can obtain from our website on the investor relations page.

We currently anticipate that our second quarter 2010 Form 10-Q will be filed with the SEC by the end of this week. As for upcoming IR events, we are currently scheduled to attend the Goldman Sachs Energy Conference on August 12th and we’ll also be joining Goldman Sachs on a investor tour in early October 2010. We are also currently planning to attend the EEI conference in late October 2010 in California. We will provide further update on any IR events and future conference calls please call our investor relations department if you have any inquires or require further information. A replay of this call will be available shortly after the call ends and we will run through August 18th. The details as it relates to the replay of this call are disclosed in our press release.

I’ll now 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 as qualified by reference to the risks and factors discussed in our SEC Act filings our 10-K and other SEC filings contain our forward-looking statements and also lay out the risk factors that should be considered.

These filings may be obtained upon request from the company on our website or from the SEC. The company cautious 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 or on behalf of the company. These statements, especially those made during the Q&A section of the call are subject to risks and uncertainties that are difficult to predict. Now I would like to turn the call over to our CEO David Stevens.

David Stevens

Thank you Steve, good morning and thank you to everybody for joining our call this morning, this is David Stevens the CEO of El Paso Electric Company.

If you’ll turn to page 3, I’m going to start by going over our second quarter 2010 highlights. I’m very pleased with our second quarter earnings of $0.49 for basic share which represents a $0.15 increase over the result of the second quarter of 2009 and which demonstrates the inherit organic growth we have in our core business. Overall every segment of our retail business posted growth and our large commercial and industrial customer base expanded 13.3% during the quarter compared to 2009. We believe this reflects the continued strength of our local economy.

The significant growth we had in retail kilowatt-hours sales resulted in us obtaining a new native record peak load of 1615 megawatts on July 19th of 2010. In 2009 our native record peak load was 1571 megawatts.

I’m also excited to announce that during the second quarter of 2010 we repurchased approximately 298,000 shares at a total cost of $5.9 million. And during the first six month of 2010 we have repurchased over 502,000 shares at a cost of $10 million.

We are strongly committed to finding ways to enhance value for our shareholders. Another important achievement for us during the quarter occurred when we reached a unanimous settlement with all parties in our Texas rate case and filed our final settlement agreement at the Public Utility Commission of Texas. On July 30th of 2010 the PUCT issued a final order in support of the settlement agreement.

Later in the call David Carpenter will discuss the specific provisions of our Texas rate case outcome. Finally I would like to briefly discuss the reinstatement of our earnings guidance. Previously we have suspended the issuance of a defined earnings guidance range due to the pendency of the Texas rate case. As you are aware this was our first rate case in 15 years in Texas and due to the length of time since our last case and the associated issues resulting from this significant length of time between case we decided to suspend guidance.

Now that we’ve obtained a reasonable outcome in our Texas rate case proceeding, we are able to provide a defined guidance range of $1.65 to $2.10 per share for 2010. This range of earnings guidance doesn’t include one time adjustments to regulatory assets and various other items that will be recorded in the third quarter as a result of the settlement of the Texas rate case.

Furthermore because we’ve been asked about our plans related to earnings guidance going forward I would like to let all of you know that our plan at this time is to continue with the disclosure of earnings guidance in the future. However to the extend that we’ve filed a rate case for which a final order hasn’t been issued, we will not include any effects of the rate case in our earnings guidance that we discussed.

Later in the call David Carpenter will provide additional details on our 2010 earnings guidance and on key earnings drivers. I would now like to take this opportunity to update you on the significant accomplishments that we’ve made on our 2010 report card on slide 4 of our presentation. We’ve completed the reengineering of our customer care and billing process and achieved the successful prosecution of our Texas rate case.

Another initiative that we’ve planned for 2010 is our New Mexico rate case filing reflecting the second phase of Newman 5. We are considering all options at this time and are closing monitoring the current PNM Resources rate case proceeding which involves a future test here.

Another initiative that we have for 2010 is to work towards successfully negotiating a new union contract as our current contract expires in September of this year. Currently we are in negotiating with the union and we are hopeful that we can reach a new agreement before the contract expires.

Finally Newman 5 Phase II the addition of the two heat recovery steam generators and the steam turbine remains under budget and is on schedule for completion near the end of the first quarter of 2011.

Now before turning the call over to David Carpenter, I want to personally thank the entire team of El Paso Electric employees for their dedication, their hard work and their contributions towards attaining our goals and for achieving our second quarter 2010 and year-to-date earnings results.

Now let me hand the call over to David.

David Carpenter

Thank you David, now turning to page 5 of our presentation for the second quarter of 2010 we reported net income of $21.5 million or $0.49 per basic share compared to our second quarter 2009 earnings of $15.4 million or $0.34 per basic share. For the six months ended June 30th 2010 we posted net income of $33 million or $0.75 per basic share compared to net income of $25 million or $0.56 per basic share for the six month ended June 30th 2009.

On page 6 of the presentation, we list the three main factors that affected our earnings in the second quarter of 2010 in comparison to the second quarter of 2009. First our retail non fuel based revenues increased by $6.7 million pre-tax or $0.10 per share during the second quarter of 2010 due to 4.2% increase in kilowatt-hours sales which reflected 1.7% growth in the average number of customer served.

In addition we had increased sales to our large commercial and industrial customers and implemented new rates that were effective in our New Mexico jurisdiction beginning in January 2010. Second, we had increased revenues from the deregulated portion of Palo Verde Unit 3 due to increased generation during 2010. In 2009 Palo Verde Unit 3 had a refueling outage from April 3 to May 28. Palo Verde Unit 3 operated throughout the second quarter of 2010. As a result Palo Verde Unit 3 generated approximately three times more energy in 2010 resulting in high deregulated Palo Verde Unit 3 revenues which contributed about $2.9 million to earnings pre-tax or $0.04 per share.

The third items that positively impacted earnings with lower Palo Verde operation and maintenance cost which increased earnings by $1.6 million pre-tax or $0.02 per share. The decline in Palo Verde operations and maintenance cost was due to decreased operating cost at each of the three units.

On page 7 of the presentation, for the six months ended June 30, 2010 our earnings were primarily impacted by three main factors. First, our retail non-fuel base revenues increased by $14.8 million pre-tax or $0.21 per share due to a 5.3% increase in kilowatt hour sales reflecting 1.8% growth in a number of customers served as well as the new rights that were implemented in our New Mexico jurisdiction in January 2010.

Retail kilowatt hour sales were positively impacted by colder winter weather in the first quarter of 2010 compared to the first quarter of 2009. Second, investment in interest income increased by $3.6 million pre-tax or $0.07 per share due to a decline in impairment losses on equity security in our nuclear decommissioning trust funds of $4.9 million in 2010 when compared to the same period in 2009.

The last factor that impacted our earnings on a year-to-date basis was a one time non-cash charge of $4.8 million or $0.11 per share in the first quarter of 2010 due to recognizing a change in tax law included in the healthcare reform legislation which eliminated the tax benefit of Medicare Part D subsidies. Under the new legislation Federal tax reimbursements for retiring drug benefits beginning in 2013 will be taxable to the company, prior to the change in tax law [several] reimbursement of retiring drug benefits was not taxable.

Now turning to page 8, we detailed our retail megawatt hour sales and the percentage increases over the second quarter and first six months of 2009. We continue to see good growth in both the number of customers served and kilowatt hour sales despite the current economic challenges facing the country.

In the second quarter of 2010, our residential sales increased by 2.5% which reflects 1.7% growth in the average number of customers served. We were pleased to see a 13.3% gain in sales to our large commercial and industrial customers in the second quarter of 2010 which reflects continued recovery from the recession for these customers. We also saw increases in sales to our small commercial and industrial customers and public authority customers during the quarter. In terms of cooling degree days, the second quarter of 2010 was fairly comparable to the second quarter of 2009 and the 10 year average.

Turning to the results for the first six months of 2010, our residential sales grew by 7.6% reflecting total winter weather in the first quarter of 2010 and our expanding customer base. In the first-half of 2010 heating degree days were 33% above the same period in 2009 and were 13% above the 10 year average. In contrast our cooling degree days for the first six months of 2010 are 4% below the comparable period in 2009 and are in-line with the 10 year average.

For the six months of 2010, sales to our large commercial and industrial customers grew at a 9.9% pace over the same time period in 2009. Revenues from our large commercial and industrial customers increased 25.7% due not only to the increase in megawatt hour sales but also as a result of higher rates in new contracts with several large customers, this contract had expired. We also realized increases in revenues and sales to small commercial and industrial customers and public authority customers going to first six months of 2010.

I would now like to provide an update on our Texas rate case which is slide 9 of our presentation. As David Stevens mentioned earlier in the call we are very pleased that we reached a settlement with all parties in our Texas rate case which was approved by the El Paso City Council on June 8, 2010 and the Public Utility Commission of Texas on July 30, 2010.

The approved settlement for an increase of $17.15 million is on fuel base rates effective July 1, 2010. In compliance with the settlement interim rates went into effect on July 1, 2010. It also provides that additions to electric plan and service since June 30, 1993 through June 30, 2009 are being reasonable and necessary with one limited exception.

In addition our new customer information system completed in April 2010 was also included in like base with a 10 year amortization period. The settlement was a black box and did not reflect a specific return on equity or overall capital structure. However we did agree to reflect a 10.125% return on equity in the cancellation of the Allowance for Funds Used During Construction or AFUDC.

Other important provisions of the settlement include the reconciliation of our fuel cost from March 1, 2007 through June 30, 2009 other than one issue related to the recovery of four corners coal mine reclamation cost after the plant seizes operation. The fuel reconciliation was bifurcated and is being litigated in a separate docket. We also obtained approval of our formula-based fuel factor which will result in more timely recovery of changes in fuel cost.

As previously agreed effective July 1, 2010 we will only retain 10% of off-system sales margins and we will credit 90% of off-system sales margins to customers through the fuel recovery factor. Finally we will establish an energy efficiency cost recovery factors to recover energy efficiency cost and deferred energy efficiency cost over a three year period.

I would now like to update you on our liquidity position on slide 10 of our presentation, as of June 30th 2010 we had a cash balance of $29.4 million. Our liquidity position is supplemented by $200 million revolving credit facility that we have available to finance nuclear fuel in working capital need. As of June 30th 2010, $122.8 million including interest and fee have been borrowed to finance nuclear fuel. Currently the [RCF] is scheduled to expire in April 2011, going forward we project having sufficient liquidity to meet our cash requirements through 2010 based on our current projection.

We’ve also obtained regulatory approval to refinance the revolving credit facility prior to its expiration in 2011 and to issue up to $110 million of private placement long term debt from the Rio Grande Resource Trust to finance nuclear fuel. On August 17th 2010 we expect to complete the issuance of $110 million of senior private placement notes issued by the Rio Grande Resource Trust which we use to finance nuclear fuel. The proceeds from this debt issuance will be used to pay down amounts currently drawn on the revolving credit facility. We anticipate completing the refinancing of our current revolving credit facility before the end of 2010.

On slide 11, as David Stevens has already discussed we are providing 2010 earnings guidance of $1.65 to $2.10 per share. This range of earnings doesn’t include the effects of any one time adjustments that we will record in the third quarter related to the Texas rate case settlement that was recently approved by the Public Utility Commission of Texas.

One of our main earnings drivers is retail customer and sales, we continue to forecast the kilowatt-hours sales growth in 2010 will be between approximately 1% and 3% which is dependent on whether and continued economic growth in our service territory. In addition to our expected kilowatt-hour sales growth, we expect to see revenue increases from the new base rates that were effective in Texas on July 1st 2010. The New Mexico rate case that was effective on January 1st 2010 and the expiration of certain special rate contracts with various large customers, the rate increase in both Texas and New Mexico are heavily titled to the summer peak months of May through October.

In order to encourage energy efficiency, right to our increase during the peak summer months and remained flat to slightly declining in off peak months. As a result the rate increase occurs during the summer months of May through October. We expect to see the vast majority of the rate case related revenue increases in the second half of this year.

Another key earnings driver is the deregulated Palo Verde Unit 3 sales which are affected by the unit output and by natural gas prices. Palo Verde Unit 3 will undergo a refueling outage this fall during which the reactor vessel head will be replaced and as a result Palo Verde Unit 3 deregulated sales will decline compared to the second half of 2009.

Off-system sales margins will be lesser than earnings driver during the second half of the 2010 since our share of off-system sales margins decreased from 75% to 10% effective July 1st 2010 in both our Texas and New Mexico jurisdiction. As for operation and maintenance expenses we expect our 2010 total operation and maintenance expense levels to be comparable to 2009 with Palo Verde operation and maintenance expenses being slightly down from last year and non Palo Verde operation and maintenance expense being slightly compared to 2009 due to primarily increased pension and benefits expenses.

Going forward we will seek to continue to manage our construction program in order to meet the growth in our service territory while seeking ways to content the overall amount of construction expenditures. In 2010 we have projected that our construction expenditures will be $189 million. At this point I would like to turn the call back to the operator to open up the question and answer portion of the call. Thank you

Question-and-Answer Session

Operator

(Operator Instructions) we have a question from Brian Russo.

Brian Russo - Ladenburg Thalmann

Just in terms of the better growth that you guys are experiencing both from usage and customer growth perspective. How does that kind of compare with what’s embedded in your existing rates and given the robust growth you are seeing is it safe to assume that you guys are going to earn fairly close to your ROE.

David Carpenter

The way you follow rate case here you really reflect the number of customers that you have as of the end of the test year period which in the Texas case was June 30 of 2009 so clearly the growth that you have in customers and sales from the end of your test year today will add to your revenues going forward. Based on that we think that we will be earning close to our regulated return going forward.

Brian Russo - Ladenburg Thalmann

Can you remind me when the next Texas rate case will be filed and what that test year will be?

David Carpenter

What we are looking at right now is the in Texas you really don’t have much of a opportunity to put a plant to seek a rate increase prior to a plant going in service. And we are looking at the Newman 5 Phase II going in service by the end of the first quarter of 2011. At that point of time we will evaluate whether we should follow rate case of what other options we have for looking at our rates going forward.

Brian Russo - Ladenburg Thalmann

Okay, so even if you would have filed a rate case sometime in maybe 1Q or 2Q ’11 and new rates don’t go to effect till looks like maybe early ’12. It looks like the favorable sensitivity of sales and load growth relative towards embedded in existing rates could extend through all of 2011?

David Carpenter

Yes, That’s correct.

Brian Russo - Ladenburg Thalmann

Okay, and also on the upcoming New Mexico rate case and I would mention you guys are going to file with forward test year. Is the forward test year necessary to capture New Mexico file Phase II or will that kind of continue manage the rate case that it could be captured in some sort of historical test year?

David Stevens

Brian this is David Stevens, let me kind of take that one. You can do it in either way in New Mexico as you speak today. You could file with using the future test year, obviously you can reach out forward doing that but you can also file using the historical test year and while Mexico didn’t have hardened fast rule they have a relatively reasonable practice of extending probably five to six months ballpark, say five months. You can reach out and capture something. So theoretically speaking you can file a historical test year toward the end of the third quarter or early in the fourth quarter of 2010 using that at the end of your test year and assuming we can get Newman 5 Phase II up and running by the end of the first quarter of 2011 which is our current plan, we could reach out and get back all back in the rates using that filing date for the test year. So we are actually evaluating all options at this time as we said earlier and have not really made a final determination as to how we are going to file that at this point.

Brian Russo

And then in weather in the second quarter, the presentation slide earlier mentioned cooling degree days are relatively flat versus 2Q ‘09 but was June favorable versus April and May that created kind of a flat quarter-over-quarter and so there is some positive sensitivity to weather in this second quarter or is it all organic growth?

David Carpenter

Certainly June was the hotter month than April and May. When we look at the cooling degree days they were pretty much flat compared to the 10 year average and June is always going to see a substantial hotter weather. So I really believe that what we have the second quarter is about as a normal quarter as you can expect and that the sales were driven by the customer growth and just the normal increase in sales for customer that we’ve being seeing over the last five years.

Brian Russo

And what’s the year-to-date impact on weather in terms of your earnings?

David Carpenter

It’s all in the first quarter. I don’t think we have absolutely quantified a impact of the weather in the first quarter. But I think realistically it was probably $2 million to $4 million impact in the first quarter of revenues.

Brian Russo

And just lastly if I could, how was July weather in your service territory?

David Carpenter

I think that July weather has been pretty normal so far.

Operator

(Operator Instructions) Our next question comes from Michael Lapides.

Michael Lapides

O&M, can you talk about what is based in your guidance for second-half 2010 total O&M including Palo Verde versus prior year levels?

David Carpenter

We are really kind of predicting as far as total O&M. It is probably anywhere from flat to declining a couple of million dollars in O&M for the second-half of the year. And what that really reflects is some decline in O&M at Palo Verde also we had some significant approvals in O&M expense in 2009 in the second-half of the year that we would not predict for this year.

Michael Lapides

What are you guys thinking lately kind of change the topic in terms of generation additions after Newman 5?

David Carpenter

Right after Newman 5 as far as generation addition we expect right now that we would add a aero derivative gas turbine in the 2013 timeframe and it’s about 87 megawatt unit at our altitude and then we are also looking at adding another combined cycle plant in the 2014-2015 timeframe.

Michael Lapides

Any changes to the CapEx guidance laid out in your 10-K from 2009 published during the first quarter of this year.

Steve Busser

It’s essentially unchanged at this point.

Operator

(Operator Instructions) Our next question comes from José Garza.

José Garza

I was just wondering if you could provide any more color on what you guys are thinking for the second-half of this year and maybe into next year as far as the off-systems sales sharing and then the effect on the guidance for this year and again going forward?

David Carpenter

Relative from sales sharing as we mentioned the sharing down to 10% that we were trying in 90% to the customers effective July 1st and so that pretty much takes out most of the margins that we would expect to incur and so for the second-half of this year we are really predicting off-system sales sharing of probably less than $1 million.

José Garza

And then current run rate for next year and going forward. I think that it was just about $0.20 to $0.30 a year. Just wondering if you had any kind of earnings perspective?

David Carpenter

Historically we’ve had off-system sales margins maybe average $20 million a year and it’s been below that the last couple of years because as market prices has been slow. So I think realistically if we only retain 10% of that then we are only looking at $1 million to $2 million of sharing the off-system sales margins going forward.

José Garza

And then secondarily, the new contracting that you guys mentioned for your large industrial customers. Is that just as a result of the New Mexico rates or is there some sort of other contracting with those customers.

David Carpenter

What we had is a number of contracts that had been entered into really doing rate freeze period in Texas where discounts were given off of the normal tariff rate. And we timed the expiration of those contracts that to around the time that we knew the rate freeze was going to end and so this is really contracts that were expiring with these customers and as we moved into tariff rates going forward.

Operator

Our next question comes from Brian Russo

Brian Russo - Ladenburg Thalmann

I am just curious Palo Verde Unit 3, is there some sort of outage schedule we could follow. Does that plant down for plant maintenance each tier?

David Carpenter

No, the plant is we generally will seek to have refueling outages every 18 months at each of the Palo Verde Units and so Palo Verde Unit 3 was refueled in the spring of 2009. It will be in the fall of 2010 and then there won’t another refuel outage until the spring of 2012.

Brian Russo - Ladenburg Thalmann

Okay, can you comment on your dividend policy please?

David Stevens

Dividend policy at this point Brian is that we are going to continue to buyback shares to the extent that we have adequate liquidity to do so.

Brian Russo - Ladenburg Thalmann

Okay, and then just remind us on the (bubble BRAC) initiatives, do you have any statistic as to up-to-date number of troops that have relocated to your territory and is that 2013 kind of goal still intact.

David Stevens

This is as of today the 2013 goal is intact on everything we’ve seen at least right now the last number I saw believe was around 23,000 troops is where we are today. There is a current plan to have approximately 2000 troops arrived before the balance of this year. They don’t usually give a lot of lead time no matter, I guess a lot of that has to do with security and other factors but we anticipate towards the end of this year we will be closer to the 25,000 troop range. And the goal is still to be at approximately 34,000 troop range by 2013 timeframe.

Operator

Our next question comes from Igor Grinman.

Igor Grinman - Zimmer Lucas Partners

Couple of my question have been answered but is that one time charge seen in the first quarter the tax item embedded in your guidance.

David Stevens

That is included within our guidance, yes Igor.

Igor Grinman - Zimmer Lucas Partners

That is, okay, that was $0.11 charge?

David Stevens

It was.

Igor Grinman - Zimmer Lucas Partners

The one with 3% sales growth forecast you gave is that above your weather normalized ’09 level or I’m misinterpreting it.

David Carpenter

No that would compared to 2009 actual on a weather normalized basis.

Igor Grinman - Zimmer Lucas Partners

And the year-to-date weather impact you said was about $2 million to $4 million roughly?

David Carpenter

Yes the weather impact in the first quarter.

Operator

Our next question comes from Paul Fremont.

Paul Fremont - Jefferies & Company

Really two questions, the first having to do with where you are tracking on O&M at Palo Verde looks to be slightly better than the 105 number that you put up. Is that a correct inference or do you still expect to come at that 105 level.

David Stevens

Paul we actually have George Williams on the call. And George why don’t you take that if you don’t mind.

George Williams

This is George Williams, the Chief Operating Officer, and right now at Palo Verde we are actually performing little bit than budget on the O&M cost and that’s because of slightly better performance on the outages and they are actually controlling headcount which has really been a great contributor. We do expect that at the end of the year to still come in under the published O&M budget at Palo Verde, we expect them to hold that and we are expecting to come in probably from our share about $1 million or so less than what we had purposed for budget.

Paul Fremont - Jefferies & Company

And then the second question that I have is on July 27th I guess in New Mexico Commission issued a preliminary decision I guess on the motion to dismiss in the public service company of New Mexico rate filing. They talked about certain presumption that they would make about how one would go about filing for a future test here. Is there anything in that order that you believe has a bearing on whether you would more likely file for a future test year or historic test year.

David Stevens

I would say the simple answer is probably no. The reality is that order just clarified some things that they believe that PNM was didn’t do appropriately related to their initial filing. And obviously that’s between those parties. I would say as a general statement our decision will be based upon looking at all the factors and determining to a degree that one factor I would say that ties to it is the overall consensus and feeling in the state of New Mexico as to whether or not a future test here makes sense. So I’m not going to say it hasn’t. I think the order itself has no bearing in our calculations or in our determination but such is the general feeling around the order in the general take by the commissions and other parties may have some bearing on whether we decide to use the historical test year or a future test year.

Paul Fremont - Jefferies & Company

And at this point would you expect that the various potential intervener parties are less depose to operate under a future test year and more likely to recommend in favor of historical.

David Stevens

Paul that would be a subdivision on my part since we actually haven’t filed one and obviously we are just peripheral party to the PNM case. I think anytime there is a new provision that gets put in place like the new law in the state of New Mexico there is going to be some concern about the fact that it’s changing. We tend to be as a general population they changed it first and by virtue of that I think there is always going to be some pushback on it. I think part of it is going to be getting used to it and then going forward from there. So I don’t think we could make this opposition that strongly but I would say that just because it’s new I think there’s going always be more of a pushback to it because it’s different.

Operator

Our next question comes from Peter Hark.

Peter Hark

First of all why is it a wide range still? Half year you got a pretty good vision on what you’ve gotten in terms of rate relief going forward kind of have a vision on where growth is and just wondering why it was such a big range?

David Stevens

I think the simple answer would be as follows: the third quarter for us in a nutshell normally tends to be our biggest quarter and now in as much as David talked earlier the fact that now the way the rate design is driven more and more of the recovery of our rates is tied to what happens in the third quarter and because of the fact that we don’t know what the weather is going to be yet in August and September it can have a pretty monumental impact and that’s why there is still a pretty wide range. I would anticipate that you would see from us on a normal basis where we are not going to tighten the range much until we have the end of third quarter results. So unfortunately that’s kind of where we sit today.

Peter Hark

But I think I heard David say that July is pretty normal and ready. So you have got July ready I doubt?

David Stevens

I know but you still got August and September which tend to be two awful large months for us.

Peter Hark

It reminds me, what’s the sensitivity to 1% change in sales growth?

Steve Busser

The 1% change in sales growth total company Peter is about $5 million of pre-tax revenues.

Peter Hark

Margins at Palo Verde 3, just trying to understand. You are controlling O&M and is running better. I am also trying to get an idea of what you are seeing in wholesale power markets in terms of pricing?

David Carpenter

The pricing in our wholesale power market is being pretty consistent all year and it still is very low because gas prices are pretty low. So we are not seeing great margins right now.

Peter Hark

David, when you listed to these drivers for this year, I didn’t hear you mention share repurchase. I know the other David in lieu of dividend payments. What’s the idea again executing on continued share repurchases?

David Carpenter

We don’t publish what kind of share repurchases we expect to make. Clearly to the extent that we make share repurchases in the second-half of the year it will help improve earnings per share or so. I don’t think it’s going to be a significant driver of earnings per share in the second-half of the year.

Peter Hark

Okay and then remind me again, you said you are going to get the bulk of the new Texas rates and New Mexico in the third quarter. What percentage of those dollar amounts do you factor in for 3Q?

David Carpenter

We will go into October because some of the summer rates, ex-rates stand on October but based on our analysis of the rights probably 80% to 90% of the right increase will be in the third quarter in October.

Peter Hark

Okay and that was 80% to 90% of the $5 million?

David Carpenter

Yes.

Peter Hark

And then the Texas fees or have it backwards and New Mexico was.

David Carpenter

It’s basically both.

Peter Hark

Is both, right, okay.

David Carpenter

One caveat there should make clear is the Texas case won’t be quite that much simply because that the rights were not effective. They are effective for usage on and after July 1 and so you only really get about half a month impact in July.

Operator

Thank you. Our next question comes from Chris Shelton.

Chris Shelton

Just wanted to share real quick on the guidance, you mentioned that the healthcare negative from the first quarter was included in the guidance?

Steven Busser

It is, yes, sir.

Chris Shelton

And that with the $0.11 and then weather was $2 million to $4 million in the first quarter, was that after tax or pre-tax?

David Carpenter

That’s pre-tax.

Chris Shelton

Pre-tax, okay. So a couple of [sounds] there. And are there any other kind of sort of normalized with the guidance I guess to see what carries forward in other future years. Are there any other items in guidance that we should be thinking about don’t carry forward in the next year?

David Carpenter

Clearly, as we discussed most of the revenues from New Mexico and Texas rate case are in the second-half of the year. And so as you go into 2011 we really won’t see any impact of the rate increases in the first-half of the year. The amount of the Texas rate increase that we don’t pickup in the second-half of this year will pick up in the second-half of 2011.

Chris Shelton

I guess you don’t see with the New Mexico case as well for full year or next year also?

David Carpenter

Well we will have full year of New Mexico this year. We are just getting ahead because of the rate is on. It didn’t have much of an impact in the first-half of the year.

Chris Shelton

And for Peter’s question how much of the Texas rate gives you the project yield achieve this share I guess, how much are we going to raise?

David Carpenter

We think that the Texas rate increase about 75% probably will be realized this year.

Chris Shelton

And then just one other follow-up on the buyback. How much do you guys have left on your authorization?

Steve Busser

It’s about 1.6 million shares. It’s like 1.59 million I believe is the number today.

Chris Shelton

As of 6.30.

Steve Busser

That is correct. This is being to the second quarter that is correct.

Chris Shelton

And so you have bought about 400,000 for the year so far?

Steve Busser

I maybe a fraction low because we actually have purchased 502,000 for the first-half of the year and added 2 million to the number for the year but we had a little bit left over from the previous authorization. And actually I am looking at a page right here Chris, I was wrong is about 1.7 million shares that we have outstanding that we could still purchase pursuant to board authorization as of June 30 or July 1 of this year.

Operator

(Operator Instructions) I am sorry no further questions at this time.

David Stevens

Well thanks Melina. Thanks everybody for joining us today and we look forward to talking to you again at the end of the third quarter. Thank you.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This concludes the conference. You may now disconnect.

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Source: El Paso Electric Co. Q2 2010 Earnings Call Transcript
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