Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

El Paso Electric Co. (NYSE:EE)

Q3 2007 Earnings Call

November 1, 2007 4.00 pm ET

Executives

Steven Busser - Vice President, Treasurer & Chief Risk Officer

Ershel ReddJr. - President & CEO, El Paso Electric

Scott Wilson - Executive Vice President & CFO

Analysts

Greg Gordon - Citigroup

Brian Russo - Ladenburg Thalmann

Unidentified Analyst – Zimmer Lucas Partners

Robert Howard - Prospector Partners

Maurice May - Power Insights

Michael Lapides - Goldman Sachs

Operator

Welcome and thank you for standing by. At this time all participants are in a listen only mode. After the presentation we will conduct a question-and-answer session. (Operator Instructions)

Today’s conference is being recorded. If you have any objections you may disconnect at this time. Now I will turn over the meeting to Mr. Steve Busser. Mr. Busser, you may begin.

Steve Busser

Thank you Kelly, good afternoon everyone and thank you for tuning in to the El Paso Electric Company third quarter 2007 earnings conference call. My name is Steve Busser and I’m the Vice President, Treasurer and Chief Risk Officer at El Paso Electric. Also on the call with me today are our President and CEO, Ershel Redd, and our CFO Scott Wilson.

Today we will provide an update on our third quarter 2007 financial performance including a discussion of our pertinent earnings drivers. We will also update our 2007 earnings guidance, discuss our initial 2008 earnings guidance and the assumptions and finally we will provide an update on our Texas and New Mexico regulatory developments. I would like to cover some items that will be pertinent to our call today before we get started. You should have a copy of our press release and if you do not you can obtain one from our website at www.epelectric.com on the industrial relations page.

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

We currently anticipate that our second quarter form 10Q will be filed with the Securities and Exchange Commission some time during the week of November 5th. As for upcoming IR events we’ll be attending EEI Annual Conference in Orlando on November 5th and 6th next week. We’ll provide further updates on any IR events in future conference calls. Please call our IR department if you have any inquiries or require further information. A replay of today’s call will be available shortly after our call ends at 866-380-8120 and will be available through November 15th 2007. A passcode is not required for the replay.

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

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

Now I’d like to turn the call over to our president and CEO, Ershel Redd.

Ershel Redd

Thanks Steve and welcome to all and good afternoon. I’m pleased to be able to announce excellent results for the quarter.

Third quarter 2007 earnings per share were $0.79 compared to the corresponding quarter of last year $0.57 and on a year-to-date basis the earnings per share were $1.33 compared to $1.07 in the corresponding period last year.

The major earnings drivers were really two. The first was Mother Nature and the second was the operational focus of our folks out in the field and also in the plants. They remained focused on keeping the lights on, the plants running throughout the quarter despite a number of storms and I thank them for the [common sense]. Mother Nature contributed as well to third quarter earnings. Cooling degree days were up 23% above the corresponding quarter of last year and 4% above normal. This lead to an over 6% increase in retail sales.

As you recall, last year, particularly here in El Paso, the weather was characterized by severe storms and cooler weather. Other significant earnings drivers were reduced, administrative and general, through an increased capitalized employee benefits, decreased workers comp expense and a 2007 sales tax refund. Earnings were also impacted by the re-pricing Palo Verde 3 in the Mexico [facilitative] new stipulation we signed in July. That re-pricing now allows us to recover our costs on sales from that unit to our New Mexico customers. In addition, higher capitalized interest and AFUDC in the quarter positively impacted our earnings. These gains were partially offset by higher O&M costs in Palo Verde which continues to be an issue, one that we are actively monitoring.

For the nine months ending September 30 earnings were positively impacted again by higher retail sales due to a 2.4% increase in customers and 32% higher heating degree days in the first quarter versus the corresponding quarter of 2006. We also had lower administrative and general costs, Palo Verde 3 re-pricing that I mentioned before was a contributor. Higher capitalized interest and AFUDC, lower fossil fuel O&M due to reduced maintenance and fewer outages at our plants this year. These gains were partially offset by higher Palo Verde O&M and a reduction in tax expense in 2006 due to a change in Texas franchise tax laws with no comparable change in 2007. Scott will go into more detail on these drivers following my additional brief comments.

Let me update you on some major issues impacting the company. We continue with the construction of Newman 5, the combined cycle scheduled to be built in stages between 2009 and completion in 2011. The initial phase will be 270 MW gas turbines that’ll be online for the peak season of 2009. We’ll add a steam generator [rehearsing] in 2011 and move into combined cycle mode. CCNs have been filed in Texas and New Mexico in July and hearings are set and we anticipate receiving approval in the second quarter of 2008 on these certificates. The need for this new plant is to meet later load growth and replace older less efficient units. This year our native peak increased 5.6% to 1,508 MW’s. Our Palo Verde operations, Palo Verde 3 steam generator that generates low pressure turbines are being replaced during the current refueling operation. That began September 29th and is expected to return to service in mid December with a 75 day outage.

On the regulatory front, Palo Verde remains in the multiple repetitive degraded

cornerstone column [the distinction there] in February of 2007. The NMPRC in June I think we reported last time but this year a confirmatory action letter. They’re currently undergoing a NRC 95003 inspection and we expect to revise the confirmatory action letter in early 2008. In addition we have a Texas fuel reconciliation case in Austin for about $540 million in purchase power in fuel.

On the customer growth front, the base realignment and closure plan will add 23,000 troops to Fort Bliss by 2012. That in fact will double the size of Fort Bliss. Fort Bliss is currently undergoing a $3.1 billion expansion which is expected to have about a $22 billion positive economic impact on the region over the next seven years. Presently they’re building about 900 new energy efficient homes on the base.

And finally [El Paso] is undergoing many changes designed to have a positive impact on our culture and our ability to generate quality earnings in the future. I appreciate the dedication and teamwork I have observed as we go about these changes. They are not always easy to do. I want to thank our employees who have embraced the concept of change and that are working hard to produce a bright future for this company.

Now I’ll turn it over to Scott Wilson, our CFO to provide additional granularity on the quarterly earnings, year-to-date earnings and then he will walk you through revised guidance for 2007 and new guidance for 2008.

Scott Wilson

Thanks Ershel. In this section of the presentation we will discuss third quarter 2007 and year-to-date earnings per share. We’ll spend a minute on the key earnings drivers. We’ll talk about our stock repurchase program, 2007 earnings guidance, 2008 earnings guidance and then we’ll provide you with regulatory updates. Following this section we’ll have our question-and-answer period.

Third quarter 2007 we earned $36.1 million compared to $27.1 million in the same quarter 2006. Earnings per share was $0.79 basic versus $0.57 basic in 2006. EPS drivers in the third quarter we had a 6.6% increase in retail base revenues that were primarily driven by a 6.1% increase in kWh sales.

We saw in this quarter a return to more normal weather than what we experienced in the third quarter of 2006 and also our revenues were helped by a 2.4% increase in the number of retail customers served. This was about $0.12 a share pickup year-over-year accounting for slightly more than 50% of the pickup in earnings in ’07 versus a comparable period in ’06. You will recall that in the third quarter of ’06, we had a very unusual weather quarter, record rains in El Paso in August and September so again we have featured a return to much more normal weather than what we saw in 2006 and that was a big driver for us.

A couple of other items that were earnings increases, relative earnings drivers for us. Decreased administrative and general expenses, we picked up about $0.04 a share there. That’s inclusive of capitalizing some overhead cost, A&G cost, also included the effects of some workman’s comp insurance refunds and also sales tax refund. We had, as Ershel mentioned, a re-pricing of our New Mexico Palo Verde Unit 3 energy. That contributed about $0.04 a share in the quarter. We now finally have a pricing regime in place that allows us to sell this energy at something that approximates our cost and we anticipate that again providing this same kind of help in future periods.

We also had an increased capitalized interest in AFUDC primarily due to two factors. One at the end of 2006 we reapplied SFAS 71 in Texas, our largest jurisdiction which allows us to capitalize among other things on equity return on our construction expenditures.

In addition to that we are now in the midst of an increasing infrastructure build out program, transmission distribution and generation, so our capital expenditures are accelerating. We’ll see this year are our capital expenditures about 50% higher than what we experienced in 2006 and when we get to 2008 guidance we’ll talk a little bit about expected construction expenditures will be up again another third in 2008. So the larger the construction program the more interest and equity returns that you will capitalize in so that will be a driver for us now and in future periods.

Relative earnings decreases in the quarter. Increased Palo Verde non-fuel O&M expenses in 2007 resulted in a decrease in earnings relative to ’06 up about $0.06 a share. As Ershel indicated this is a continuing challenge for us and again as we talk about 2008 guidance we’ll talk about what it looks like, non-fuel O&M will be in the future at Palo Verde but that cost is about $0.06 a share relative to ’06. Decreased retained margins from off-system sales primarily due to low market prices for power are for our economy sales costs us about $0.02 in the quarter relative to the third quarter of 2006.

As you can see on this next slide, a pictorial of retail MWhs sold up 6.1%. The absolute volumes there in customer growth at September 30th customer growth was 2.4%.

In this slide, the sixth slide this really demonstrates that weather tells the story here as Ershel indicated. Our cooling degree days are up relative to the same quarter in 2006 about 23% as you can see, 1,223 cooling degree days in 2006 versus 1,504 in the third quarter of ’07 and a ten year – which the third quarter of ’07 was very close to the ten year average of 1,451 but again a very favorable comparison to the third quarter of 2006 when we had those extraordinary weather events.

Off-system sales key earnings drivers gross margins were $3.9 million in the quarter compared to $5.5 million in the third quarter of 2006. Retained margins were $3 million versus $4.4 million in the third quarter of 2006. And finally MWhs sold did in fact increase in 2007 in the third quarter with softer prices more than offset the increased volumes that we saw in our off-system sales.

Palo Verde non-fuel O&M was also, as we indicated, cost us about $0.06 a share it was up about $4.7 million pre-tax primarily due to higher operating costs as a result of the enhanced NRC inspection regime that Ershel mentioned earlier in the call and also to increase maintenance costs at Palo Verde 1 and Palo Verde 3.

Third quarter 2007 taking a look at outage days, which gives you a sense for relative capacity factors as you can see here our outage days were essentially the same year-over-year implying that capacity factors were similar in the third quarters of 2007 versus the third quarter of 2006.

The next slide demonstrates that in the third quarter of 2007 Palo Verde operated at a capacity factor of 88.7% compared to a capacity factor in the third quarter of 2006 of 88.1%. Year-to-date, 2007, that income of $68 million versus $51.6 million year-to-date in 2006, on an earnings per share basis $1.33 versus $1.07 for the same period in 2006.

Relative earnings increases year to date a 2.9% increase in retail base revenues this was primarily the result of a 2.8% in retail kilowatt-hour sales. We also had a 2.4% increase in the number of customers served.

We had a couple of interesting weather quarters, first quarter was much cooler than normal and we saw sales driven higher than they normally would be in the first quarter. Second quarter, was much softer, the weather also happened to be cooler, but this is when we moved into our cooling season and so we found revenues were much less than they normally are. And then again we had in this quarter as we mentioned we had significantly more normal weather than we saw in the third quarter of 2007 so the first nine months of this year were sort of a tale of roller coaster weather events that at the end of the day tended to cancel each other out and what we’re left with is in fact in the increase in base revenues that were largely driven by an increase in customers.

Decreased O&M costs at our gas-fired generating plants primarily due to reduction in planned and unplanned maintenance resulted in about a $0.10 per share pickup year-to-date. On the previous point of revenues I failed to quantify the pick-up and earnings per share in ’07 nine months to date, versus the same period in ’06 was about $0.14 a share. Decreased O&M’s a dime a share and finally increased capitalized interest in AFUDC for the aforementioned reasons that has 71 in Texas and increased construction balances was about $0.09 a share year-to-date.

Also a couple of other relative earnings increases decreased A&G expenses resulting in pick-up of about $0.07 a share year-to-date and increased investment interest income about $0.04 increase pricing for Palo Verde unit three into Mexico about $0.04 and finally off-systems increased sale margins for year-to-date were up about $0.04 relative to the same period in ’06.

Relative earnings decreases for the first nine months for the year, a reduction in income tax expense in 2006, the franchise tax adjustment that we made was a $0.13 unfavorable comparison in 2007. We picked this up in 2006 and there was no comparable adjustment to the income tax expense in 2007 that again was $0.13. Increased Palo Verde non-fuel O&M expenses in 2007 due to the increased operating costs in all three units and the increased inspection regime was about $0.08 a share year-to-date. The decreased transmission wheeling revenues in 2007 cost us about $0.04 relative to the same period in 2006 and finally we had some purchase power capacity costs that we were able to record in New Mexico in the first quarter of 2006 that was a one time item that did not recur in 2007 so the year-to-date comparison suffered by about $0.03 because we did not have a comparable event in 2007.

Year-to-date Key earnings drivers, retail based revenues retail MWhs sold pictorially up 2.8% and a customer growth up 2.4%. The next slide you can see tells us weather story. You can see that heating degree days were up significantly year-to-date that primarily happened in the first quarter in 2007 and that helped drive the large increase that we saw in base revenues in 2007’s first quarter. Looking over at cooling degree days you’ll see that year-to-date cooling degree days are relatively flat to 2006, but we had that large discrepancy in the quarter where the cooling degree days were up significantly in the third quarter but year-to-date they’re relatively flat to 2006.

Year-to-date key earnings drivers off system sales gross margins were up, retained margins were up and a lot of more mega hours sold, pricing was better and when our margins are better our retaining margins are also better finally MWhs sold increase primarily due to the increased availability of Palo Verde output. You’ll recall that in the first half of 2006 Palo Verde one was down for most of that time period and de-rated for another part of that time period. So we had a lot less output from the Palo Verde units and that increased availability of Palo Verde power allowed us to sell more off-system sales in the first nine months of ’07 than we did in the first nine months of ’06.

Continuing on with year-to-date key earnings drivers, fossil fuel plant maintenance decreased by $7.4 million in the nine months ended September 30 2007 due to primarily to a couple things. We have reduced maintenance expenses compared to 2006. We had a major unplanned outage at Rio Grande fix in the first half of 2006 with no comparable activity in 2007 and finally we had a major planned outage at Newman 1 in the first quarter of 2006 with no comparable activity in 2007.

Palo Verde non fuel O&M also a key earnings driver in year-to-date 2007 Palo Verde non-fuel O&M is up $5.8 million relative to the first nine months of 2006 and this is due primarily to the increased operations costs at all three units due primarily to the enhanced NRC inspection regime.

Palo Verde operations update, year-to-date much better Palo Verde availability increased capacity factors as you can see on this particular slide planned, unplanned and equivalent outage days are significantly less year to date 2007 than they were in 2006. And increased availability does translate into typically into increased capacity factors, as we’ll see on this next slide.

Year-to-date Palo Verde’s capacity factors are about 85.7% and that’s compared to about 69% in the same period in 2006. So, we’re beginning to see capacity factors at Palo Verde return to levels that we would hope would be maintained and actually improved further in future periods.

Turning to earnings guidance for a moment, our 2007 earnings guidance we have revised our range to a $1.40 to a $1.60 from the previous range of $1.25 to $1.65 as basic shares.

Turning to 2008 earnings guidance for a moment our initial range is a $1.60 to $1.95 per share and we have a couple of primary drivers to our ’08 earnings guidance and the per share effects relative to 2007 expected projected levels include net base revenue growth. Low side we think we’ll pick up $0.19 to high side $0.33 a share. Economy margins retained in other revenues, low-side of pennies, high side a dime. The net effect of PV3 re-pricing $0.14 on the low side, $0.22 on the high side and that’s primarily effected by the fact that the new pricing regime went into place in July 2007, midway through the year and then starting in September or October we had the outage for Palo Verde 3 for steam generator replacement and refueling, so Palo Verde 3 is not available to provide power in under our pricing regime. In Mexico we only get paid for Palo Verde 3 output if in fact the unit operates. So, the year-over-year comparison ’08 to ’07 will benefit from a full year of Palo Verde 3 operations effected rather than effectively one quarter of the year, which is what we’re seeing in ’07.

Palo Verde non-fuel O&M expense changes is going to cost us we think in ’08 relative to ’07 on the low side $0.26 a share, on the high side $0.15 a share. We have seen a significant increase in the budge for Palo Verde non-fuel O&M in 2008 relative to 2007 and that has been reflected in our guidance. Non Palo Verde Non fuel O&M expense changes on the low side we think will cost us $0.20 a share, on the high side about $0.11 a share.

Finally, and I guess this is what you call a high class problem, the ROE sharing with the city of El Paso and customers in the rest of Texas on the low side of earnings guidance we do not believe that that will trigger any ROE sharing, but on the high side of guidance we think that we will be in doing some rather substantial earnings sharing with our Texas customers that could be up to $0.12 a share. Again that sharing is driven by a dead-band that was put in place in the 2005 rate agreement and we believe again at the high end of guidance we would begin to share with our Texas customers those earnings. And finally an increased AFUDC capitalization on the low side will pick up about $0.17 that will be the same thing on the high side.

I want to spend a minute here on share buy backs and theirs affect on sharing ’08 earnings guidance. Share buy backs, though they are preferred means of returning cash to our shareholders, are not meaningful drivers of earnings guidance in 2008. Accordingly, we’ve not attempted to quantify the amount of stock that we might repurchase in 2008 and any effect that it might have in earnings guidance in 2008.

Turning to our stock repurchase program in the third quarter of 2007, we repurchased approximately 800,000 shares at a total coast of $17.4 million. We completed the share repurchase program a previously authorized by the board of directors in September 2006. In 2007, we have repurchased 1.3 million shares at a total cost of $31.4 million. Cumulatively speaking since the inception of our share repurchase program we repurchased 19.3 million shares at a total cost $269 million. And management intends to seek authorization for additional re-share purchases at the next board meeting and our initial ’07 guidance as we indicated to everyone that we planned on about 3.1 million shares, 3.1 million share to repurchase in 2007. We have in fact completed 1.3 million shares of that repurchase. So we would intend to seek authorization to complete the amount of share buy back that we had contemplated in our ’07 guidance when we spoke to you at this time last year.

Regulatory update in Texas. We have a Texas fuel reconciliation ongoing right now. It was filed August 31, 2007. It covers the period March 1, 2004, through February 28, 2007. We’re seeking the recovery of approximately $548 million in eligible Texas fuel and purchase power expenses. The expected schedule for this case is hearings are scheduled for May 2008 and our final order is expected in the final quarter of 2008.

And finally we anticipate filing a request to implement a fuel surcharge in January of 2008 to recover our current under recovered fuel balance. As of September 30 2007 in Texas we were under recovered approximately $21 million.

And finally, turning to a regulatory update for New Mexico, the New Mexico PRC rate inquiry August 21, 2007 the NMPRC vacated its rate case request and ordered an expanded investigation into our fuel and purchase power cost recovery clause. We filed a response with the commission on September 7, 2007. The NMPRC has not identified other actions it's going to take or the scope of its inquiry into our fuel and purchase poser cost at this time.

And with that I would like to turn it back over to Steve.

Steve Busser

Kelly at this point we normally take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question is from Greg Gordon from Citigroup.

Greg Gordon - Citigroup

Good afternoon gentleman. A question on the earnings guidance, obviously these numbers are pretty attractive. Earnings gross rate, fundamentals sound good, But are you inferring by not including a share buy back in guidance that - to cut to the chase are you assuming, are you excluding, a buy back from guidance because you don't think you'll have any discretionary cash flow in 2008, is it too dynamic of a situation for you to commit to a buy back, or is there some other reason why you've chosen not to include a buy back in guidance?

Scott Wilson

I think it is probably fair to say the dynamic answer is we're looking , Greg at probably a slightly over $200 million construction program in 2008 given the [T and D] build out and given the work on Newman 5 really starts to pick up steam in 2008. And so we think with a construction program of that magnitude we're gonna play it by ear in 2008 and we fully intend to buy shares from time to time but we're just gonna be fluid in 2008.

It really isn't that material a driver for us in terms of improving earnings per share at this point in time. We do recognize its important means to return capital to shareholders.

Greg Gordon - Citigroup

All right, thanks guys.

Operator

Brian Russo of Ladenburg Thalmann

Brian Russo - Ladenburg Thalmann

Good Afternoon. Just quickly, when is the next board meeting where a decision on the incremental share buy back might be decided on?

Ershel Redd

Middle of November.

Brian Russo - Ladenburg Thalmann

Ok, and I think you mentioned earlier in the call that year-over-year Palo Verde prices were down in the third quarter?

Unidentified Company Representative

Yes

Brian Russo - Ladenburg Thalmann

Could you maybe just elaborate a little bit on that and then also what you are seeing in the fourth quarter in terms of pricing and how that is kind of baked in to your 2007 guidance?

Scott Wilson

Give me a minute here to pull something together on pricing in the third quarter. Clearly what we saw with I think a reduction of about $7 on average MWh in the pricing environment in both Palo Verde and Four Corner Hubs we don't see any change in the fourth quarter relative to what our estimates are. We're not projecting any difference in fourth quarter off-system sales relative to where we've been.

Brian Russo - Ladenburg Thalmann

Have you seen any strengthening in the fourth quarter pricing, relative to maybe three or six months ago?

Ershel Redd

We are seeing gas prices pick up marginally which will be a driver of the power prices.

Brian Russo - Ladenburg Thalmann

Ok, and secondly, on the incremental non fuel Palo Verde related O&M expense expected in 2008, is there any way for you to seek recovery of that, given that you already have a settlement in Texas on rates?

Steve Busser

No a this point and time we're really precluded from seeking any kind of rate recovery for increased expenses in 2008 in either jurisdiction. Brian the flip side of that though is that we are seeing, we believe that there will be significant increases in base revenues too so that's a positive that goes in the opposite direction.

Brian Russo - Ladenburg Thalmann

Ok, Thanks a lot guys.

Operator

(inaudible) of Zimmer Lucas Partners.

Unidentified Analyst

First of all with the share repurchases, given that the next board meeting is not until the middle of November, are you still confident that the 1.8 million shares will still get bought within that month and a half till year end?

Scott Wilson

Hard to say. We're gonna be smart buyers of stock and so assuming we get that authorization from our board we would certainly go out into the market place. I just can't speculate whether we'll get it all done within a six week period.

Unidentified Analyst

And skipping over to Palo Verde, you said that the revised confirmatory action letter would be due in the first quarter of 2008. Can you just kind of explain to me what this letter does lay out, like all the actions you have to take in order to get out of (inaudible).

Ershel Redd

Yes it’s really an evaluation of where you are today, and what you need to do to move away from that last part of their matrix.

Unidentified Analyst

Ok, so given that this letter is still pending, could there still be a swing in the projections of incremental Palo Verde non-fuel O&M?

Ershel Redd

Well my guess is they have a pretty good handle on it, we're close to the middle of the year. I assume you're talking about 2007?

Unidentified Analyst

Actually 2008.

Ershel Redd

I think we, in our estimates we've been fairly conservative. We've looked at their past projections and seen how much they have missed those and we've increased our projections accordingly.

Unidentified Analyst

And a final question, just have a minor issue. Looking at the other revenues for this quarter, it seems to have swung up a couple million dollars from the third quarter last year. I was just wondering what the driver with that. I was personally expecting a bit of a drop off. Last year you were recording the revenues from, that you were charging TEP?

Scott Wilson

Yeah, it’s primarily TEP stuff. We began to stop recording revenue for our TEP stuff last year at the end of the third quarter of 2006 and so at this point in time, this third quarter 2007 suffered in comparison to third quarter 2006 due to some of those wheeling effects surrounding TEP.

Steve Busser

In offsetting that you counted reprising for Palo Verde 3 is classified in that line item.

Unidentified Analyst

Ok, I see, I understand. Thank you so much.

Operator

Robert Howard of Prospector Partners

Robert Howard - Prospector Partners

Good afternoon. I just wanted to check you were talking for the 2008 guidance you were talking the increase AFUDC capitalization, that's just driven because you're gonna have a higher Cap-Ex , because you've had this AFUDC thing for all of this year, right? So its basically just being driven by Cap-Ex.

Scott Wilson

Yes, exactly.

Robert Howard - Prospector Partners

Ok, and have you guys talked about how much you are projecting to be Cap-Ex for this year, I guess you said 200 for next.

Scott Wilson

Yeah. I'd say around a range of 150-155.

Robert Howard - Prospector Partners

Ok great, I'll see you guys next week

Operator

Maurice May of Power Insights.

Maurice May - Power Insights

Good afternoon gentlemen, congratulations on the good quarter. Just want to talk about the sharing for a second. We've talked in the past about sharing kicking in around $1.56 or $1.57 in earnings. Given your 2008 guidance it looks like you think it could kick in at $1.60 or above, is that correct?

Scott Wilson

Certainly above that, and I think well above that.

Maurice May - Power Insights

What's your latest calculation Scott?

Scott Wilson

Um I'd say its some where in the high $1.70's.

Maurice May - Power Insights

Wow, ok. And I know it’s a 200 basis point above and below, 400 basis points above the moody utility bond index.

Scott Wilson

The sharing kicks in at 600 above the bond index.

Maurice May - Power Insights

Which is now where?

Scott Wilson

Remember, we are shooting at a moving target. We have to come up with what we think a reasonable estimate would be in 2008 and we just made a guess at 6 and a quarter with triple B's, credits in that time period and you add 600 to it and you're at 12 at a quarter, so we would begin to share under this assumption and any ROEs over 12 and a quarter.

Maurice May - Power Insights

Yeah that is a high class problem as you said. What exactly is the sharing? Is it 50-50, or above that?

Scott Wilson

In Texas it is. So roughly three quarters of our returns would be shared 50-50.

Maurice May - Power Insights

Ok, great. Thank you very much.

Operator

Michael Lapides of Goldman Sachs.

Michael Lapides - Goldman Sachs

Hey guys, Thinking a little bit longer time, even after Newman 5 is done, can you talk about the outlook for either adding new coal capacity or [uprate] a new unit at Palo Verde?

Ershel Redd

It might be a little to early to speculate. We're looking at the growth figures and we know we have a problem going forward. I think the environmentalists will weigh in on the coal issue there. I personally feel that is the right fuel source to use because we seem to be running short on gas these days. We're also gonna have to have an increment of renewables in our supply portfolio. The sun shines a lot here in El Paso and I think the technology in solar is advancing, the prices are coming down. So it's hard to tell. We're looking at all kinds of technology, all kinds of fuel sources, but we know we're gonna have a problem in the future.

Michael Lapides - Goldman Sachs

Got it, thank you.

Operator

No further questions at this time.

Scott Wilson

Thank you Kelly, and thank you everyone for joining us. Have a great 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: transcripts@seekingalpha.com. Thank you!

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: transcripts@seekingalpha.com. Thank you!

Source: El Paso Electric Co. Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts