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PNM Resources, Inc. (NYSE:PNM)

Q1 2014 Earnings Conference Call

May 2, 2014 11:00 AM ET

Executives

Patricia K. Collawn - Chairman, President and CEO

Charles N. Eldred - EVP and CFO

Jimmie Blotter - Director of Investor Relations

Analysts

Paul Fremont - Jefferies & Company

Ali Agha - SunTrust Robinson Humphrey, Inc.

Paul Ridzon - Keybanc Capital Markets Inc.

Brian Russo - Ladenburg Thalmann & Co. Inc.

Kit Konolige - BGC Partners, Inc.

Operator

Good day, ladies and gentlemen, and welcome to the PNM Resources First Quarter Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I’d now like to turn the call over to Jimmie Blotter, Investor Relations Director. You may begin.

Jimmie Blotter

Thank you, Justinee, and thank you, everyone, for joining us this morning for the PNM Resources first quarter 2014 earnings conference call. Please note that the presentation for this conference call and other supporting documents are available on our website at pnmresources.com.

Joining me today are PNM Resources Chairman, President and CEO, Pat Vincent-Collawn; and Chuck Eldred, our CFO; as well as several other members of our executive management team.

Before I turn the call over to Pat, I need to remind you that some of the information provided this morning should be considered forward-looking statements pursuant to the Private Securities Litigation Reform Act of 1995. We caution you that all of the forward-looking statements are based upon current expectations and estimates, and that PNM Resources assumes no obligation to update this information. For a detailed discussion of factors affecting PNM Resources’ results, please refer to our current and future annual reports on Form 10-K, quarterly reports on Form 10-Q, as well as reports on Form 8-K filed with the SEC.

And with that, I will turn the call over to Pat.

Patricia K. Collawn

Thank you, Jimmie. Good morning, everyone and thank you for joining us on this beautiful sunny Spring New Mexico morning. We will begin in Slide 4 with the headlines from the first quarter.

GAAP earnings were up $0.03 per share compared to quarter one in 2013, while ongoing earnings were equal year-over-year. We are confident that the Company continues to be on the right track and we’re affirming our 2014 consolidated ongoing earning guidance range of $1.42 to $1.52 per diluted share.

On April 30th, the EPA gave us some good news and issued its proposed draft approval for our BART filing regarding the San Juan Generation Station. Final EPA approval is expected about the end of September and I will have a more detailed BART update in a few minutes.

I’m pleased to note that this last Wednesday Standard & Poor’s recognized the continued improvements in our business by changing the outlook for PNM Resources, PNM and TNMP to positive. Both S&P and Moody’s now have the outlook for all of our entities rated as positive.

On Slide 5, I’ll start with PNM. In the first quarter we saw a decline in load year-over-year. The industrial and commercial class have showed decreases and in each case it was due to a specific large customer looking to cut expenses. Residential load was also down this quarter.

We look at what’s driving the numbers. New Mexico still lags the nation in post recession recovery. The local economy continues to show signs of a rebound, but it has not been able to yet to build momentum. Employment growth for both the State and Albuquerque Metro is positive, although it is only 0.2%.

New Mexico’s unemployment rate has been declining in 2013, but increased in the first quarter and its now above the national average with New Mexico’s rate being at 7% and today as you saw the national rate drop to 6.3%.

PNM continues to seek customer growth as well as increasing peak demand levels, while at the same time use for customer has decreased. The customer growth we’ve seen has not yet been strong enough to offset the decreased usage, which we believe is the result of economic concerns as well as energy efficiency.

There are some encouraging signs regarding the economy. Economic development activity is up. The state is seeing significantly more serious inquiries from business considering locating here. We believe the renewed interest is the result of more aggressive recruitment efforts at both the state and local levels and because of recent tax reform measures that were implemented by the governor and improved by the legislature.

In fact, there was a recent update to an Ernst & Young tax study that shows New Mexico has the lowest effective tax rate in our region on most manufacturing segment, and is among the lowest in other industry segments. The word is spreading that New Mexico is open for business and is willing to compete.

And as we noted in our fourth quarter call, PNM has also increased its support of economic development and job training initiatives and we’re actively working with our community partners to find ways to jumpstart the local economy. So the bottom line here in New Mexico is that the economy continues to show signs of recovery, but we’ve not yet seen that in PNM’s load numbers.

Over in Texas, the economy keeps charging ahead, with consistent growth for TNMP. Residential was up 2.5%, while commercial showed an impressive gain of just under 16%. The areas in which TNMP service areas are located are all doing very well during the economic recovery.

Growing 12 months employment number show a 2.9% gain as of February and that growth is expected to continue forecasted at about 2.3% for 2014. Also the Texas unemployment rates has dropped to 5.5%.Chuck will cover the effects that we expect both PNM’s and TNMP’s loads to have on our 2014 results.

Turn to Slide 6 now for more details on our BART filing. The approval process for the Revised State Implementation Plan for San Juan continues to move forward on two tracks. With the EPA, as I mentioned and with the New Mexico Public Regulation Commission.

You can see the major components of our filings with the New Mexico Public Regulation Commission on the left side of the slide. The filing was made last December and it was deemed to complete on February 11th of this year. The Staff and Intervener testimony is due by July 7th with the hearing scheduled August 19th through 29. And the Commissions current schedule indicate a probable ruling by the end of this year, and of course settlement discussions can occur at any time in this process.

I want to turn to Slide 7 for a quick update on other pending regulatory filing. The first one Delta Person, as we’ve reported, the PRC granted PNM a CCN to own and operate the Delta Person peaking facility. We now expect to close on this transaction by June 30th.

The next one La Luz, we had an application to build the 40 megawatt La Luz gas fired peaker and it’s moving forward at the New Mexico Commission. In a very brief public hearing this past Tuesday the opposition to the stipulated agreement we reached with the Commission in March was withdrawn. The hearing examiner will be recommending approval of the agreement and we now anticipate the approval process to be finalized in late second quarter or in the third quarter.

On April 23, the Commission gave its final approval to the stipulation agreement regarding our fuel costs filing. The agreement provides with a continuation of the fuel costs including a quarterly reset of the fuel adjustment factor.

I want to update you quickly on the FERC Transmission Formula Rate case. On June 1st, we will file and implement the annual update based on 2013 information. This is expected to result in a slight increase to revenue subject to refund pending the outcome of the ongoing settlement discussions.

There is one item that’s not on the slide, I want to quickly mention. When it close the loop on our discussions regarding Gallup as we expected and mentioned in the fourth quarter earnings call. PNM was not selected in the RFP to provide power to the city of Gallup. As a result, our agreement with Gallup will expire at the end of June.

Just quickly in Texas, on January 21st, TNMP filed with the Texas Commission for a transmission cost of service increase. As expected, the Commission approved the request which will boost revenues by $2.9 million annually.

So now I’ll turn things over to Chuck for an in-depth look at the numbers.

Charles N. Eldred

Thank you, Pat, and good morning. Let’s begin with the financial review with the first quarter results, beginning on Slide 9 of the presentation. First quarter ongoing EPS was flat at $0.18 compared to the first quarter of 2013. TNMP was up $0.04 and Corporate and Other benefiting from reduced interest expense, was up $0.02. These were offset by PNM which was down $0.06.

Now I’ll into more detail on Slide 10. Starting with PNM’s positive drivers, rate relief added a $0.01. This includes both renewable rider and a temporary Gallup contract. Palo Verde 3 market prices contributed $0.01, as the gains from Palo Verde Nuclear Decommissioning Trust. Offsetting these were an increase in depreciation and property taxes of $0.01 and an increase in outage costs of $0.02.

During the first quarter, the weather in New Mexico was very mild compared to the severe weather or Polar Vortex that some may refer to, that most of you’ve experienced. As a result, weather was down $0.02. Heating degree days were down 14% compared to the first quarter of 2013 and 7% compared to normal. The continued softness in PNM’s load for the quarter represented a decrease in $0.03.

Moving to TNMP drivers in total, we’re up $0.04. Rate relief for TCOS volumes added $0.01. Load and weather was a combined improvement of $0.02. The strong Texas economy result in higher residential usage and higher demand charges from large commercial customers, causing TNMP’s load to be up $0.015.

Weather accounted for [ph] [$0.05]. Heating degree days were up 30% compared to Q1 of 2013 and 27% compared to normal. Offsetting this was 37% decline in cooling degree days compared to last year and 57% compared to normal.

Now turning to Slide 11. Before reviewing the guidance details, I want to announce that we’ve just signed a non-binding letter of intent for the purchase of the remaining 33 megawatts of Palo Verde Unit 2 lease system Cypress. The terms are set up so that upon receiving Board approval we have the option to close as early as this year on the transaction. We expect this will result in a rate based value of $82 million or 2,500 per KW in January 2016.

Now for guidance, as Pat mentioned, we’re affirming our guidance range of $1.42 to $1.52 for this year. We continue to expect PNM be a $1.15 to $1.21 and TNMP to be $0.38 to $0.40. Given the strength in TNMP’s load they will likely come in the upper end or even exceed their guidance range as we expect that PNM will be in the lower portion of their range for the year. In total, we expect to be at the midpoint of guidance.

The strength in the Texas economy is helping to offset the soft load at PNM. We’ve managed O&M savings by capturing process efficiencies. As a result, we’ve been able to keep our non-labor O&M basically flat for 2014 compared to last year. We continue to execute our plans to meet our total return goal of 10% to 13% by 2016. It’s important to note that we’re not depending on load growth to meet the total return.

Finally related to guidance, I want to remind you that we do provide a quarterly earnings distribution when we give guidance. The chart on the bottom half of Slide 11 is a distribution that we provided for you in December. Historically, first quarter has been about 13% of our earnings and as you can see we expect about 70% of the earnings to come in during the second and third quarters.

With that, I’ll turn it back over to Pat. Pat?

Patricia K. Collawn

Thank you, Chuck. I’m pleased with the Company’s performance and how we continue to effectively manage operations, especially during continued economic challenges in New Mexico. Going forward, we have a lot to do this year and we’re confident that with our rate base growth, fine tuning our businesses, and above average dividend growth, we will deliver our 10% to 13% total return proposition.

Operator, we will now open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Paul Fremont of Jefferies. Your line is open.

Paul Fremont - Jefferies & Company

Thank you very much. I guess, going back your 2014 earnings guidance presentation, the load that you were projecting for PNM was 0% to minus 1%. And I think you gave a sensitivity of a nickel for each percent. Are you sort of changing the annual expectation in terms of load for 2014, given sort of the 2.9% reduction in the first quarter?

Charles N. Eldred

Hi, Paul. This is Chuck. The answer is no. We’re going to keep with the guidance range of 0% to negative 1%. If you were to get into the details of our load, January and February were frankly right on target. It was March which is we consider a shoulder month as well as April, and so you would see some softness in the load that we feel will be rebounded as we go throughout the second and third quarters. We did have mild weather as we mentioned, which kept a lot of customers from heating and cooling systems to be used such that, that resulted in a decrease of $0.02 for the quarter. So we’re still confident that we will continue to see that range of 0% to 1%, but we stay very cautiously towards understanding the impact of that. And as a result, we continue to manage and mitigate any kind of exposure to load as I mentioned keeping O&M flat. We’ve had a very strong load growth at TNMP as I’ve said, could very well easily exceed the guidance of that and help to offset. Another example is the fuel continuation filing at PNM, which allows us to get 8% to 10% of our off-system sales which was really outside the guidance for this year, that’s at least another $0.01. So, we had some improvement in our pension and retired medical expenses, so the bottom line is we continue to manage the risk of the load degradation until we begin to see a stronger improvement but they don’t deal given the shoulder months and where we are first quarter that we feel we need to change the guidance of 0% to minus 1%.

Paul Fremont - Jefferies & Company

Because also in the assumptions for both for O&M, for both PNM and TNMP, your expectation -- that your builds and expectation I think was flat O&M. So, is there some other potential offset if the load growth does come in weaker?

Charles N. Eldred

We do have contingency plans that we have built into our managing of the business at P&M. And as I mentioned we expect to get 10% of off-system sales which is helping to offset some of that impact for this year which was outside the guidance. In the pension and medical retiree expenses, we’re picking up some additional returns based on the performance and assumptions built into the original guidance that we’ll continue to manage the risk of the load and keep a close eye on it as we go through the year, but still comfortable we can offset any impacts on load.

Paul Fremont - Jefferies & Company

Okay, and my other question I think relates to your planned GRC filing if that’s likely to occur later this year?

Patricia K. Collawn

We talked about filing in December of this year for rates that would go into effect on January 1, 2016.

Paul Fremont - Jefferies & Company

Okay. Thank you very much.

Patricia K. Collawn

Thanks, Paul.

Operator

Thank you. Our next question comes from Ali Agha of SunTrust. Your line is open.

Ali Agha - SunTrust Robinson Humphrey, Inc.

Thank you. Good morning.

Patricia K. Collawn

Good morning, Ali.

Charles N. Eldred

Good morning, Ali.

Ali Agha - SunTrust Robinson Humphrey, Inc.

Good morning. Just one quick bounding question on the quarter. I noticed that the effective tax rate looked a little lower if my math was right coming in at around 28% versus your normal 35%, 36%. Was there something going on, on the tax front?

Charles N. Eldred

Not that I’m aware of, it would be anything unusual or you may want to just follow-up with Jimmie on that to kind of see what your assumptions are. But nothing unusual had happened in the first quarter that would trigger any comment on that.

Ali Agha - SunTrust Robinson Humphrey, Inc.

And then separately, you talked about with regards to the BART filing at the Commission that settlements don’t happen, so that if you had any time, could you give us some insight just qualitatively to the receptivity of settlement and realistically from a timing perspective would we think that’s closer to the time of the hearings or when would be sort of the -- sort of obviously inflection point for a settlement to occur?

Patricia K. Collawn

I think everyone is very receptive to a settlement Ali, since it's a very complicated case, and I think that settling it would make everybody more comfortable because when you do settlement there’s a lot more ability to give and take. Usually there is two times that it's more likely to have a settlement. Sometimes you have them right before the staff and intervener testimony is due. So that the testimony gets filed it's that of the settlement. The other logical time you tend to get one is right before the hearings start that tends to focus the minds. So those are the two times historically we have settlement and I think either of those could be reasonable and there really is there very much an openness to settling. The staff has been pretty busy up until now.

Ali Agha - SunTrust Robinson Humphrey, Inc.

All right. And in terms of, even though there have been somewhat separate filings, the fact that you’re going through this complicated process right now and right after that you’re going to file your rate case, I mean how concerned are you by just the way the chronology or the timing is playing out in terms of putting a lot o stuff in front of staff and the Commission. Do you think that could have some negative implications for the rate case just from a timing perspective?

Patricia K. Collawn

Now if we look at what the, the staff and the Commission has on their plates, just holistically there is, the case won't go until the end of the year. I should say the BART stuff doesn’t hit the Commission until the end of the year itself. The TCOS hearings are done, SPS’s rate case is done, so they won't be back in front of the Commission for a while. El Paso won't be there for a while. So it's just kind of us and the way the Commission I scheduled is that, if we have a ruling on BART before the end of the year and then the rate case doesn’t, gets filed until the end of the year and usually there’s no action on that until the following year. So, we’ve made sure that, that’s not pancake things on them and it's that little breathing room in between the filings -- the work that needs to be done on the filings.

Ali Agha - SunTrust Robinson Humphrey, Inc.

Okay. Last question, it looks like Charles from your comments given some cost savings et cetera, you would still expect PNM to come in at the retail level to earn it's authorized ROE, do you think that still the case and, A: given that assumption, is the focus on the next rate case primarily going to be a Palo Verde lease acquisition or are you going to frame this rate case coming up?

Charles N. Eldred

Well Ali, the -- still lot of work Pat and I just referred to is the fact that we will have potential settlement discussions that involved San Juan and Palo Verde 3, that’s part of West, I think is a motivation in trying to work through the expectation that 2016 rate case of understanding why we settle with regarding things that will take a place 2018 rate case. So, we’re making good progress. We have had some short filings with the La Luz peaking station that was settled, that was put out of the way, continuing filing was settled that’s been put out of the way. So, the Palo Verde leases would be probably the new piece of information that they will deal with in 2016, but beyond that it's just the normal ROE, depreciations, schedules, CapEx for infrastructure investment just the core fundamental things that are necessary to get recovery in the business. So we don’t see any controversy there but it's just more of making sure there is lot of transparency and understanding around the BART and in 2018 Palo Verde 3 and the San Juan European shutdown. So that’s why we’re all motivated to begin to work through the potential settlements to clear the expectations and understanding for future rate increases.

Patricia K. Collawn

One of the key things in 2016 will also be resetting the volume. So, if growth stays flat or picks up slightly we get a chance to reset that and it's a future test year so that also helps with the next rate case.

Ali Agha - SunTrust Robinson Humphrey, Inc.

Got it. Thank you.

Operator

Thank you. Our next question comes from Paul Ridzon of Keybanc. Your line is open.

Paul Ridzon - Keybanc Capital Markets Inc.

Hello.

Charles N. Eldred

Hello.

Patricia K. Collawn

Good morning.

Paul Ridzon - Keybanc Capital Markets Inc.

Can you give a little more clarity on the Gallup contract, is that $0.03 impact to ’14 or is that an annual earnings number?

Charles N. Eldred

No, that’s $0.03 impact for ’14 in the last half of the year. The contract falls off at the end of June.

Paul Ridzon - Keybanc Capital Markets Inc.

So, into ’15 there should be another $0.03 impact as it gets to full-year?

Charles N. Eldred

Actually for full-year it's closer to $0.05 to $0.06.

Paul Ridzon - Keybanc Capital Markets Inc.

Okay. And is GRC the only way you could seek relief if you continue to have customer efficient?

Patricia K. Collawn

GRC is the only thing we have. We have an energy efficiency rider and we have renewable rider, but we don’t have any other mechanisms here in New Mexico. The one thing to remember that in 2015, the half price lease payment at Palo Verde go in there, so that provides relief for next year if there were to be continued volume erosion.

Paul Ridzon - Keybanc Capital Markets Inc.

Okay. And then, do you have any other large C&I to run the bubble that, there could be risk of loosing?

Patricia K. Collawn

No, we actually don’t -- we're not a very large business focused state here. Our industrial classes are only about 15% of our sales, it's pretty small. And the businesses we tend to have here tend to be more small and midsized businesses. So it’s more just they are fine tuning our operations as opposed to anyone leaving.

Paul Ridzon - Keybanc Capital Markets Inc.

Okay. Thank you very much.

Patricia K. Collawn

You are welcome.

Charles N. Eldred

Okay.

Operator

Thank you. Our next question comes from Brian Russo of Ladenburg Thalmann. Your line is open.

Brian Russo - Ladenburg Thalmann & Co. Inc.

Hi, good morning.

Charles N. Eldred

Hi, Brian.

Brian Russo - Ladenburg Thalmann & Co. Inc.

I am just curious, we heard from a number of other utilities that have expressed skepticism on their weather normalized load growth models given kind of the volatility we saw in the first quarter weather and I am just curious how confident are you in that negative 2.9% at PNM and whereas 8% weather normalized load growth at TNMP seems to be somewhat of an outlier.

Patricia K. Collawn

Well, Brian forecasters don’t like it when I saw this, but it's just as much of an art as it is of a science. Especially on a quarterly basis I think some times it's difficult to tell. We had very different weather, we didn’t get the full of vortex down here and personally we’re happy about that, corporately we would have liked it. So, I don’t get too upset about looking at the quarters like that because there is a lot of art in that weather normalization.

Charles N. Eldred

You can also see Brian, when you look at 5-year normalization versus 10-year normalization we see some differences relative to increased load on a 5 year basis. So, we look at all the sensitivities and we have done some updated analysis on our models, client survey has been done to get a better feel for what customer usage is. So we really are fine tuning things and it's just a lot of it is in the economy. And the economy being slow and sluggish in New Mexico and rebounding and so we’re just experiencing that but we are confident over time that will work itself back into being positive.

Brian Russo - Ladenburg Thalmann & Co. Inc.

Okay. And you mentioned one large industrial customer that, the load declined due to managing expenses. Is that viewed as kind of temporary or is that kind of the new level that the customer will operate at?

Patricia K. Collawn

I suspect Brian it's the new level the customer is going to operate at.

Brian Russo - Ladenburg Thalmann & Co. Inc.

Okay. And then lastly, I am not sure if you mentioned this earlier, but what was the impact of weather versus normal?

Patricia K. Collawn

It was minus $0.02.

Brian Russo - Ladenburg Thalmann & Co. Inc.

Okay, great. Thank you.

Operator

(Operator Instructions) Our next question comes from Kit Konolige of BGC. Your line is open.

Kit Konolige - BGC Partners, Inc.

Good morning, guys.

Patricia K. Collawn

Good morning, Kit.

Charles N. Eldred

Good morning, Kit.

Kit Konolige - BGC Partners, Inc.

So, just to explore the sales number a little bit more, I think Pat you mentioned in your comments at the beginning that it appeared that there was an issue with usage decline per customer that you attributed to a weak economy, have you guys done any work in trying to dig into that issue which obviously if that’s going to continue it could be a serious problem or on the other hand how confident are that if unemployment starts improving and the economy overall starts growing better that usage issues would decline or disappear and sales growth would resume.

Patricia K. Collawn

I think there is two things; one is that -- just in terms of the whole, customer growth picks up again. So even if your usage is flat, when your economy picks up and you get job, [ph] [virtually get] customer growth that offsets some declining usage. I think that, this year when we forecasted the 0% to 1% down we do see some of this decline being permanent, new lighting standards are in place for residential customers who can’t buy those incandescent bulbs anymore, and lighting is a big piece of our load here. But a lot, we just think and from talking to people is that they’re just kind of being conservative now because they’re a bit nervous about the economy, the restaurants are down, people are just kind of watching their pocket books. And when you get weather that’s different, people don’t turn on their air conditioners this early. Once people turn on their air conditioners for example they leave them on and we hit a new peak last summer, so we know people are using their air conditioners. It's a lot of this and I think it was Brian’s question, a lot of it's the weather normalization and the usage are kind of hard to pick apart. But actually we do see some permanent changes due to energy efficiency. But we think it will pick up again when the economy stars growing.

Kit Konolige - BGC Partners, Inc.

Great, and when it does, I mean what's your view of a five year sales growth rate, lets say.

Charles N. Eldred

Well, really I think as Pat mentioned earlier, the 2016 rate case will adjust for the impacts on load and whether we pursue decoupling or what methodology that ultimately is pursued in that 16-K, so then we will build off of a new base there. But we’re still seeing just around a -- roughly around 1% type of sales growth and we began to see that increase over a longer period of time, but as Pat said it's more of an art and it's more of when the economy in New Mexico begins to recover. And with the Governor pursuing some tax incentives and reductions we're beginning to see interest in inquiries in New Mexico and certainly those opportunities over the next few years to see some upward growth in New Mexico more than what we’re able to recognize right now. That would be our more opportunistic view in the future.

Patricia K. Collawn

And our commercial growth really follows very closely residential growth and the job growth, because much of it is small and medium size commercial. So, when that picks up commercial starts again.

Kit Konolige - BGC Partners, Inc.

Got it. Okay, thank you.

Patricia K. Collawn

Thanks Kit.

Operator

Thank you. We have a follow-up question from Paul Ridzon of Keybanc. Your line is open.

Paul Ridzon - Keybanc Capital Markets Inc.

Is there any sense of the appetite for decoupling in the state? Have you had any discussions?

Patricia K. Collawn

We have Paul and actually in the rate case a while back we did put it in. We took it out as part of the stipulation because staff and intravenous weren’t ready for it yet. But that is one of the things we’re looking very closely and we’ll probably file in the rate case. The nice thing about the decoupling is that it really encourages everyone to do energy efficiency which is very popular with customers and so I think that, that was becoming more and more of an appetite for it. And our neighboring state Arizona has gone there now and I think time is right for it here.

Paul Ridzon - Keybanc Capital Markets Inc.

Would you pursue weather decoupling or just more conservation decoupling?

Patricia K. Collawn

We’re still looking at that.

Paul Ridzon - Keybanc Capital Markets Inc.

Okay, thank you. Thanks again.

Operator

Thank you. And I’m not showing any further questions at the time. I’d like to turn it back to Patricia Collawn for closing remarks.

Patricia K. Collawn

Thank you. And thank you everybody for spending time with us on this Spring morning. If you have any questions please follow-up with us, and we look forward to seeing many of you in the months to come. Have a great weekend.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, you may all disconnect. Everyone have a great day.

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