El Paso Electric Co. Q3 2007 Earnings Call Transcript

| About: El Paso (EE)

El Paso Electric Co. (NYSE:EE)

Q3 2007 Earnings Call

November 1, 2007 4.00 pm ET


Steven Busser - Vice President, Treasurer & Chief RiskOfficer

Ershel ReddJr. - President & CEO, El Paso Electric

Scott Wilson - Executive Vice President & CFO


Greg Gordon - Citigroup

Brian Russo - Ladenburg Thalmann

Unidentified Analyst – Zimmer Lucas Partners

Robert Howard - Prospector Partners

Maurice May - Power Insights

Michael Lapides - Goldman Sachs


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

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

Steve Busser

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

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

Along with our call today we have a web cast presentationavailable for your viewing as we progress through the call. Both the audio andvideo presentation will be done via the web. To log onto the web cast you cando 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 10Qwill be filed with the Securities and Exchange Commission some time during theweek of November 5th. As for upcoming IR events we’ll be attending EEI AnnualConference in Orlandoon November 5th and 6th next week. We’ll provide further updates on any IRevents in future conference calls. Please call our IR department if you haveany inquiries or require further information. A replay of today’s call will beavailable shortly after our call ends at 866-380-8120 and will be availablethrough November 15th 2007. A passcode is not required for the replay.

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

The company cautions that risk factors discussed in thesefilings are not exclusive. We do not undertake to update any forward-lookingstatements 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 sessionof the call are subject to risks and uncertainties that are difficult topredict. Please refer to our SEC Act filings for a detailed discussion of theserisks 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’mpleased to be able to announce excellent results for the quarter.

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

The major earnings drivers were really two. The first wasMother Nature and the second was the operational focus of our folks out in thefield 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 Ithank them for the [common sense]. Mother Nature contributed as well to thirdquarter earnings. Cooling degree days were up 23% above the correspondingquarter of last year and 4% above normal. This lead to an over 6% increase inretail sales.

As you recall, last year, particularly here in El Paso, the weather wascharacterized by severe storms and cooler weather. Other significant earningsdrivers were reduced, administrative and general, through an increasedcapitalized employee benefits, decreased workers comp expense and a 2007 salestax 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 usto recover our costs on sales from that unit to our New Mexico customers. In addition, highercapitalized interest and AFUDC in the quarter positively impacted our earnings.These gains were partially offset by higher O&M costs in Palo Verde whichcontinues to be an issue, one that we are actively monitoring.

For the nine months ending September 30 earnings werepositively impacted again by higher retail sales due to a 2.4% increase incustomers and 32% higher heating degree days in the first quarter versus thecorresponding quarter of 2006. We also had lower administrative and generalcosts, Palo Verde 3 re-pricing that I mentioned before was a contributor.Higher capitalized interest and AFUDC, lower fossil fuel O&M due to reducedmaintenance and fewer outages at our plants this year. These gains werepartially offset by higher Palo Verde O&M and a reduction in tax expense in2006 due to a change in Texasfranchise tax laws with no comparable change in 2007. Scott will go into moredetail on these drivers following my additional brief comments.

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

On the regulatory front, Palo Verde remains in the multiplerepetitive degraded

cornerstone column [the distinction there] in February of2007. The NMPRC in June I think we reported last time but this year aconfirmatory action letter. They’re currently undergoing a NRC 95003 inspectionand we expect to revise the confirmatory action letter in early 2008. Inaddition we have a Texas fuel reconciliationcase in Austinfor about $540 million in purchase power in fuel.

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

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

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

Scott Wilson

Thanks Ershel. In this section of the presentation we willdiscuss third quarter 2007 and year-to-date earnings per share. We’ll spend aminute on the key earnings drivers. We’ll talk about our stock repurchaseprogram, 2007 earnings guidance, 2008 earnings guidance and then we’ll provideyou with regulatory updates. Following this section we’ll have ourquestion-and-answer period.

Third quarter 2007 we earned $36.1 million compared to $27.1million 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 inretail base revenues that were primarily driven by a 6.1% increase in kWhsales.

We saw in this quarter a return to more normal weather thanwhat we experienced in the third quarter of 2006 and also our revenues werehelped by a 2.4% increase in the number of retail customers served. This wasabout $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 willrecall that in the third quarter of ’06, we had a very unusual weather quarter,record rains in El Pasoin August and September so again we have featured a return to much more normalweather 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 generalexpenses, we picked up about $0.04 a share there. That’s inclusive ofcapitalizing some overhead cost, A&G cost, also included the effects ofsome workman’s comp insurance refunds and also sales tax refund. We had, asErshel mentioned, a re-pricing of our New Mexico Palo Verde Unit 3 energy. Thatcontributed about $0.04 a share in the quarter. We now finally have a pricingregime in place that allows us to sell this energy at something thatapproximates our cost and we anticipate that again providing this same kind ofhelp in future periods.

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

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

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

As you can see on this next slide, a pictorial of retailMWhs sold up 6.1%. The absolute volumes there in customer growth at September30th customer growth was 2.4%.

In this slide, the sixth slide this really demonstrates thatweather tells the story here as Ershel indicated. Our cooling degree days areup relative to the same quarter in 2006 about 23% as you can see, 1,223 coolingdegree 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 1,451but again a very favorable comparison to the third quarter of 2006 when we hadthose 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 of2006. And finally MWhs sold did in fact increase in 2007 in the third quarterwith softer prices more than offset the increased volumes that we saw in ouroff-system sales.

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

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

The next slide demonstrates that in the third quarter of2007 Palo Verde operated at a capacity factor of 88.7% compared to a capacityfactor in the third quarter of 2006 of 88.1%. Year-to-date, 2007, that incomeof $68 million versus $51.6 million year-to-date in 2006, on an earnings pershare basis $1.33 versus $1.07 for the same period in 2006.

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

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

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

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

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

Year-to-date Key earnings drivers, retail based revenuesretail MWhs sold pictorially up 2.8% and a customer growth up 2.4%. The nextslide you can see tells us weather story. You can see that heating degree dayswere up significantly year-to-date that primarily happened in the first quarterin 2007 and that helped drive the large increase that we saw in base revenuesin 2007’s first quarter. Looking over at cooling degree days you’ll see thatyear-to-date cooling degree days are relatively flat to 2006, but we had thatlarge discrepancy in the quarter where the cooling degree days were upsignificantly in the third quarter but year-to-date they’re relatively flat to2006.

Year-to-date key earnings drivers off system sales grossmargins 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 arealso better finally MWhs sold increase primarily due to the increasedavailability of Palo Verde output. You’ll recall that in the first half of 2006Palo Verde one was down for most of that time period and de-rated for anotherpart of that time period. So we had a lot less output from the Palo Verde unitsand that increased availability of Palo Verde power allowed us to sell moreoff-system sales in the first nine months of ’07 than we did in the first ninemonths of ’06.

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

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

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

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’rebeginning to see capacity factors at Palo Verde return to levels that we wouldhope would be maintained and actually improved further in future periods.

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

Turning to 2008 earnings guidance for a moment our initialrange is a $1.60 to $1.95 per share and we have a couple of primary drivers toour ’08 earnings guidance and the per share effects relative to 2007 expectedprojected levels include net base revenue growth. Low side we think we’ll pickup $0.19 to high side $0.33 a share. Economy margins retained in otherrevenues, low-side of pennies, high side a dime. The net effect of PV3re-pricing $0.14 on the low side, $0.22 on the high side and that’s primarilyeffected 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 theoutage for Palo Verde 3 for steam generator replacement and refueling, so PaloVerde 3 is not available to provide power in under our pricing regime. In Mexico we onlyget paid for Palo Verde 3 output if in fact the unit operates. So, the year-over-yearcomparison ’08 to ’07 will benefit from a full year of Palo Verde 3 operationseffected rather than effectively one quarter of the year, which is what we’reseeing in ’07.

Palo Verde non-fuel O&M expense changes is going to costus we think in ’08 relative to ’07 on the low side $0.26 a share, on the highside $0.15 a share. We have seen a significant increase in the budge for PaloVerde non-fuel O&M in 2008 relative to 2007 and that has been reflected inour guidance. Non Palo Verde Non fuel O&M expense changes on the low sidewe 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 classproblem, the ROE sharing with the city of El Paso and customers in the rest ofTexas on the low side of earnings guidance we do not believe that that willtrigger any ROE sharing, but on the high side of guidance we think that we willbe in doing some rather substantial earnings sharing with our Texas customersthat could be up to $0.12 a share. Again that sharing is driven by a dead-bandthat was put in place in the 2005 rate agreement and we believe again at thehigh end of guidance we would begin to share with our Texas customers those earnings. And finallyan increased AFUDC capitalization on the low side will pick up about $0.17 thatwill be the same thing on the high side.

I want to spend a minute here on share buy backs and theirsaffect on sharing ’08 earnings guidance. Share buy backs, though they arepreferred means of returning cash to our shareholders, are not meaningfuldrivers of earnings guidance in 2008. Accordingly, we’ve not attempted toquantify the amount of stock that we might repurchase in 2008 and any effectthat it might have in earnings guidance in 2008.

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

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

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

And finally, turning to a regulatory update for New Mexico, the NewMexico PRC rate inquiry August 21, 2007 the NMPRC vacated its rate case requestand ordered an expanded investigation into our fuel and purchase power costrecovery clause. We filed a responsewith the commission on September 7, 2007. The NMPRC has not identified other actions it's going to take or thescope 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.



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

Greg Gordon -Citigroup

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

Scott Wilson

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

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

Greg Gordon -Citigroup

All right, thanks guys.


Brian Russo of Ladenburg Thalmann

Brian Russo -Ladenburg Thalmann

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

Ershel Redd

Middle of November.

Brian Russo - LadenburgThalmann

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

Unidentified CompanyRepresentative


Brian Russo -Ladenburg Thalmann

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

Scott Wilson

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

Brian Russo -Ladenburg Thalmann

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

Ershel Redd

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

Brian Russo -Ladenburg Thalmann

Ok, and secondly, on the incremental non fuel Palo Verderelated O&M expense expected in 2008, is there any way for you to seekrecovery 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 seekingany kind of rate recovery for increased expenses in 2008 in eitherjurisdiction. Brian the flip side ofthat though is that we are seeing, we believe that there will be significantincreases in base revenues too so that's a positive that goes in the oppositedirection.

Brian Russo -Ladenburg Thalmann

Ok, Thanks a lot guys.


(inaudible) of Zimmer Lucas Partners.

Unidentified Analyst

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

Scott Wilson

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

Unidentified Analyst

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

Ershel Redd

Yes it’s really an evaluation of where you are today, andwhat 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 therestill 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'reclose to the middle of the year. Iassume you're talking about 2007?

Unidentified Analyst

Actually 2008.

Ershel Redd

I think we, in our estimates we've been fairlyconservative. We've looked at their pastprojections and seen how much they have missed those and we've increased ourprojections accordingly.

Unidentified Analyst

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

Scott Wilson

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

Steve Busser

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

Unidentified Analyst

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


Robert Howard of Prospector Partners

Robert Howard -Prospector Partners

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

Scott Wilson

Yes, exactly.

Robert Howard -Prospector Partners

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

Scott Wilson

Yeah. I'd say arounda range of 150-155.

Robert Howard -Prospector Partners

Ok great, I'll see you guys next week


Maurice May of Power Insights.

Maurice May - PowerInsights

Good afternoon gentlemen, congratulations on the goodquarter. Just want to talk about the sharing for a second. We've talked in the past about sharingkicking 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 - PowerInsights

What's your latest calculation Scott?

Scott Wilson

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

Maurice May - PowerInsights

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 - PowerInsights

Which is now where?

Scott Wilson

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

Maurice May - PowerInsights

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 Texasit is. So roughly three quarters of ourreturns would be shared 50-50.

Maurice May - PowerInsights

Ok, great. Thank youvery much.


Michael Lapides of Goldman Sachs.

Michael Lapides -Goldman Sachs

Hey guys, Thinking a little bit longer time, even afterNewman 5 is done, can you talk about the outlook for either adding new coalcapacity 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 weknow we have a problem going forward. Ithink the environmentalists will weigh in on the coal issue there. I personallyfeel that is the right fuel source to use because we seem to be running shorton gas these days. We're also gonna have to have an increment of renewables inour supply portfolio. The sun shines alot here in El Pasoand I think the technology in solar is advancing, the prices are comingdown. So it's hard to tell. We'relooking at all kinds of technology, all kinds of fuel sources, but we knowwe're gonna have a problem in the future.

Michael Lapides -Goldman Sachs

Got it, thank you.


No further questions at this time.

Scott Wilson

Thank you Kelly, and thank you everyone for joining us. Havea great day.

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


If you have any additional questions about our onlinetranscripts, 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.


If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!