PNM Resources Inc (PNM) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PNM Second Quarter 2006 Earnings Conference Call. My name is Onika and I'll be your operator for today.

At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference. [OPERATOR INSTRUCTIONS]. As a reminder ladies and gentlemen, this conference is being recorded for replay purposes. At this time, I would now like to turn the call over to Ms. Lisa Rister, Executive Director of Investor Relations. Please proceed, ma'am.

Good morning. Thanks for joining us. We're glad to have you. Joining me this morning are PNM Resources Chairman and President, and CEO, Mr. Jeff Sterba, and our Chief Financial Officer, Mr. Chuck Eldred. In addition, we have other members of PNM's management team.

Before I turn the call over to Jeff, I need to remind you that some of the information that we'll be providing this morning should be considered forward-looking statements, pursuant to the Private Securities Litigation Reform Act of 1995. I 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 the information. Please refer to our current and future Form 10K quarterly report, Form 10Q, and other current and future reports on Form 8K, that are filed with the SEC. And with that, I'll turn it over to Jeff.

Good morning, and thanks for joining us this morning. I think we had a good quarter for our second quarter of 2006, given the challenges that we had with the extended Palo Verde outage. Our GAAP reported earnings were up $0.21 quarter-over-quarter, and ongoing earnings are up 38.5% in terms of total earnings, compared to the second quarter, and 25% in terms of earnings per share.

Let me just touch on a couple of highlights, and I'm going to refer you to page three of the presentation that's attached to the web before I turn it over to Chuck. First, as you know, we filed a gas rate case in May. That's for about a $20.5, $20.7 million increase. The schedule is being put forward where we think we would have a decision in April. We would not put rates into effect until April. But we haven't really started much of a process on the rate case, as we're just in the discovery phase.

Second, we are still waiting for an order from the hearing examiner in Texas on the competitive transition charge, and the PTB rate reset. As you will recall, we entered into a stipulation with most of the parties, which was filed with the commission. The stipulation has a trigger date of October 1 for the PTB rate reset, and so the commission certainly has time still to act. We expect a decision out of the hearing examiner at any time, and then it'll go to the commission for full action.

Last regulatory update, let me just mention is Afton. You'll recall that we entered into a stipulation with the parties to the case for Afton, which has currently been an unregulated single cycle unit, to make it a one-on-one combined cycle facility and to place it into rates. It would be included in the rates that we would file, that would go into effect in early 2008.

At this time, the commission has not yet acted on that stipulation. They posed some additional questions and they are looking for some additional information. But it's at the stage for the commission to take action, and we remain confident that that process will go forward.

Let me also touch on power plant additions, because we've had a number in the first and second quarters that have come on. Obviously Luna went commercial in April, and it has run very, very well. Its availability is above 98%, I believe. Twin Oaks, we also closed that transaction, and it is performing well. You'll recall that with Twin Oaks, 100% of its power is sold under an agreement. And that contract goes through September of '07, and then 75% of the output is sold from October '07 and through 2010.

On Palo Verde, I'll show you some data on the next slide, but we're pleased to say that Palo Verde One is back online. It's running at full power. In fact, we had all three units running at full power in the month of July. The impact of the Palo Verde One outage was not insignificant, as you all know. There's information in the press release, and let me just clarify briefly on the numbers that are provided. For example, $16.8 million of consolidated gross margin impact is for all of the Palo Verde units, and as Chuck will talk about later, we show that in the second quarter of '06, compared to the second quarter of '05, there's a $0.19 per share negative impact because of Palo Verde. If we just looked at Palo Verde 1, it's $0.23 a share. What that means is that other Palo Verde units helped make up for some of the loss because they performed better in the second quarter than they did second quarter last year.

The last thing, let me mention on power plants, is we have signed an agreement for a new biomass facility. It's a 35-megawatt facility. It should be online by early 2009. They'll use wood waste pulled out of the forest and the like in New Mexico. This will expand our renewable energy portfolio, and will be used for jurisdictional purposes, and it'll be done under a power purchase contract.

Flipping to page four, you can see the performance, and I want to recognize the great performance we've had out of our coal units. San Juan has performed very, very well, even better than last year, which was kind of a record year for San Juan performance. Four Corners, which had no scheduled outages in the second quarter of '06, also performed very well. That's an improvement over the year prior. And you'll see that the Palo Verde units, the challenge that we had during the course of the year, Palo Verde 1 being not available at all; Palo Verde 2 doing quite well, and Palo Verde 3 having a refueling outage this - in the second quarter, and no refueling outage in the second quarter of last year. The low performance of Palo Verde 3, second quarter of last year was just bad, low performance.

One of the things that we talked about, and we also noted, as a big assist in our financial performance for the second quarter, was our competitive retail provider, First Choice Power. Page 5 gives a bit of information relative to First Choice. We're maintaining a real steady churn of about 3.7% for the traditional customer set of First Choice. I don't know that we would be able to drive it, or would want to drive it down much more than that. That's a pretty good number to have on churn; 3.7%. And then in our territories outside of the traditional territory, we've seen almost 30% growth year-over-year in customer accounts, so that on average, our total customer count is up around 10%, I believe, quarter-over-quarter.

One of the things that I think is helping this is our customer satisfaction. And if you remember the second quarter of '06, this was before the - I'm sorry, second quarter of '05, this was before the significant increases in natural gas prices. So when I look at customer sat indices, not only for customer service, but for total service, and see an increase from where prices were second quarter last year, to where prices are now, that's good. That's very good to see. It means that our folks are doing a good job in helping provide services to customers and meeting their needs.

So I remain confident about our ability to manage this business and provide consistent bottom line performance. You may have heard that the Texas Commission took some action to help customers during the course of this summer because of the very high heat that is being experienced in Texas, coupled with high energy prices. We don't really think that'll have too much impact on us. That's something we're very, very closely monitoring. And the reason we don't think it'll have much impact is the customers that would qualify for the deferred payment arrangement under the Texas plan are really almost totally customers that we have deposits on. So we've got a security element for them.

The last thing I'd mention is one of the things that we obviously focus on is for those customers that we have fixed-price obligations going into the future on, where it would be relative to hedges, and we're fully hedged for the - for the remaining contract duration, and so are well protected in terms of going forward for price risk on those customers.

With that, I'm going to turn it over to Chuck, who will go through more detail of Q2 and year-to-date performance.

Thank you, Jeff, and good morning to all of you, and thank you for joining us. I'm going to start on slide six and give you an overview of our earnings per share by segment. And let me just start be reiterating what Jeff says. We're pleased with the performance in the second quarter at $0.25 per share, which is a $0.05 pickup. And as we know, we had the challenges with Palo Verde, and certainly we've seen some offsets to this in order to step up to that challenge, and maybe some indication of our success and the diversification of earnings streams, as well as an overall execution of our strategy, as Jeff pointed out, adding the Luna and Twin Oaks facilities to the unregulated side of the business.

With that, let me just kind of walk through the regulated operations and give some indication of segment reporting on earnings per share basis. PNM Electric was down $0.02 to $0.10. This is a similar story we talked about the first quarter with the impact of Palo Verde, and also the 2.5% September rate cut, which is the last phase of the rate reductions of the global settlement, which was reached in 2003. We also had strong weather normalized load growth with 5.5%, which partially offset the impact of the rate decrease and plant outages.

On the PNM Gas, gas was down $0.04, compared with 2005, and finished the quarter losing $0.07. Again this is mainly the impact of reduced customer usage of warmer weather than 2005. Jeff talked about the gas rate filing and our efforts to better reflect the gas delivery operational costs though increased rates.

On TNMP, it contributed $0.04 to our earnings per share this quarter. That remained flat but this is from last year and this contribution was impacted by rate reductions in Texas and New Mexico and Synergy Savings paybacks or givebacks. Also as part of that acquisition approval, we implemented a $13 million annual rate cut in May of 2005, and $6 million synergy savings givebacks in June of '05 for the Texas customers. And then in January of 2006, we had a rate reduction in New Mexico of $9.6 million.

On the Wholesale segment, this is the first quarter that we included Twin Oaks in our wholesale reporting. In the past, this segment consisted entirely of wholesale operations within PNM. Now that we've expanded and added Twin Oaks, we've changed the name of the segment to Wholesale and we dropped the PNM reference. Obviously, the Wholesale was negatively impacted by Palo Verde by $0.06, which was partially mitigated by the additions of Twin Oaks and Luna, as I mentioned earlier.

Jeff pointed out some of the success of First Choice, which benefited from warm weather, reduced gas prices and increases in price margin, and it's a very successful quarter contributing the $0.19 for the quarter. We've talked about First Choice and some of their efforts to acquire and retain customers, and we see it consistently performing very well, as well as continuing to show some progress going forward and retaining and keeping our churn rates low.

Corporate and Other. Most of the $0.09 impact is the EPS is due to the TNP financing and other borrowing costs.

I'd like to turn to page 7 and talk about the year-to-date walk across slide. These of course are the key drivers that impact earnings during the first two quarters, and contributed to an decrease in ongoing earnings per share from $0.69 in 2005 to $0.64 for the first six months of the year. This, moving from left to right will start as expected, Palo Verde performance (and remind you this is all units) reduced ongoing earnings per share by $0.19, compared to last year. As most of you know, Jeff mentioned Palo Verde 1 is up and running and certainly just in time for the hottest time of the year.

We've been able to reduce the Palo Verde impact to some extent, but certainly it's been a drag and a challenge on earnings. You will remember last quarter we realized some forward sales that were entered into the previous September. This quarter, we added additions of Luna and Twin Oaks that helped us as well as the good performance of San Juan and Four Corners, and strong performance from First Choice Power, and as I mentioned, solid load growth with PNM electric side.

We're certainly excited about all units of Palo Verde being back on, and with strong performance for the rest of the year and returning to what we think will be historic performance levels.

On the financing primarily related to TNP acquisitions, as I pointed out earlier, and also dilution to the additional equity issue for TNP, that combined reduced earnings by $0.20. The acquisition of TNP Enterprises is a strong contributor to year-to-date results, exceeding our full year accretion expectation. In addition, we're on track to achieve synergy savings targets.

The next bar is the impact of PNM's 2.5% rate reduction. As I mentioned, this is the last phase of the global settlement that went into effect in September of '05. The rate impact cut earnings by $0.06, compared to year-to-date with 2005.

The effect of the reduced natural gas consumption at $0.05 continues into the second quarter. Most of this impact occurred in the first quarter. For the first six months of the year, warmer weather and lower per customer usage continues to reduce gas operations and margin.

Now, let's take a look at the better news and the upside of earnings. Start with TNMP, which added $0.02 year-to-date, compared with 2005. I already have mentioned the rate reductions and synergy savings givebacks that will have some impact of TNMP earnings going forth. The new plants in April, which we mentioned; Luna Energy and Twin Oaks, added to the generation fleet. Combined, those plants added $0.08 EPS, $0.07 attributed to Twin Oaks, which added $5.2 million to earnings on a GAAP basis and ongoing, which is net of financing charges. And I'll talk a little bit more about Twin Oaks as we discuss earnings guidance.

As far as Luna, we're pleased at the operation so far. We mentioned that the plant achieved a 98.9 equivalent availability factor, and a 54%b capacity factor in June.

PNM continues to have a strong retail growth, adding $0.09 EPS. This is the second consecutive quarter that we've seen strong load growth. It's weather adjusted. Year-to-date, PNM electric load growth, again, weather normalized, grew at 4.8%. It was 4.1% in the first quarter, and 5.5% in the second quarter. This also includes a 2.2% customer growth on the gas side of the business.

We continue to see strong growth in the numbers of housing permits issued in the state. In 2005, the number of housing permits grew 21%, compared with the national average of 6.3%. In addition, Albuquerque has been identified as the 39th fastest growing city in the US, and we also have seen employment growth of 2.7% in the city and 2.6% in New Mexico. This compares to a national average of 1.5%.

Our wholesale marketing activity year-to-date improved compared with 2005, mainly from the first quarter. Again, we had strong forward sales entered into last September, and executed those deliveries during the first quarter. The long term contracts and lower short-term purchase power prices also improved margins, and that resulted an increase of $0.12 to EPS year-over-year, which helped mitigate the impact the Palo Verde unit one outage.

Last bar is First Choice Power, which contributed $0.14 to earnings per share for the year. We talked about the performance of First Choice. But to summarize, First Choice has benefited from increased competition, an increase in number of customers, competitive customers, a low and stable churn rate, and warmer weather and reduced gas prices.

This is some of the key drivers for the year thus far. The appendix in the back of the presentation details a reconciliation of ongoing earnings and GAAP earnings. It also has the segment of EPS for the year; quarterly walk through, a walk across of margins by segments for the quarter and on a year-to-date basis. And I'd like to go ahead and turn to the slide 8, and talk about the earnings guidance. We are reaffirming 2006 ongoing earnings to be in a range of $1.65 to $1.90, and expect to improve from the lower end of that range. There are a number of factors that could impact the range. Obviously, Palo Verde negatively impacted us for the first half of the year, and our expectation is that we will perform at full power for the rest of the year, and certainly overall plant performance continues to be a critical factor driving our performance.

We've had First Choice for a full year now, and operations have exceeded our expectations. We believe that the business will continue to perform well. First Choice helped mitigate the impact of Palo Verde. Like I said, prices will be reset in October 1, pending regulatory approval.

Customer load growth continues to be strong in the retail operations, and continued growth and low churn at First Choice will also enhance earnings. Of course, Twin Oaks, let's talk about that. You may recall that we purchased Twin Oaks on April 18 for $480 million. The transaction qualifies under FAS 141 as a business combination, and the details of the purchase accounting can be discussed, and will be discussed on the 10Q, which we'll release next week. As many of you may know, the fundamental principle related to FAS 141, and since the date of acquisition, the acquiring party must measure all the assets acquired and liabilities and any incurred equity at fair market value.

When we announced the transaction, we expected the transaction would be neutral, to slightly accretive to earnings for the first 18 months of ownership. We also indicated the current contract through September 2007 was under market, and that it was expected to create non-cash earnings between 15 to 20% in 2006. We've done the purchase accounting that's been determined, and as I mentioned, will be out for 10Q next week. You can see the non-cash amortization will be closer to 25 to 30% of our earnings. In addition, the transaction we expect it to be 10 to 15% accretive in 2006 earnings.

This is also a contributing factor and improvement on a low end of earnings guidance range, as we look to the rest of the year.

For 2007, we expect less accretion from Twin Oaks, because of the improved earnings from Palo Verde, and also a full year of dilution from the issuance of equity from the acquisition.

I know you are interested in the details of the financing at Twin Oaks. We are continuing to finalize our plans, and as we stand today, we're likely to issue at least 50% equity in a public offering before year-end.

In addition, we do have capital construction projects related through the next 18 months, requiring about $570 million. Certainly, we can't fund all of that with internal cash, and so it's likely that we'll issue more equity to finance those expenditures. And we talked about before that we're committed to maintain our investment grade ratings. So the final amount will be issued based on making sure that we maintain the capital structure and the right financial ratios to meet that objective. And with that, this concludes my comments. So I'll turn it back over to you, Jeff, for final comments, and then we can start a Q & A session.

The only thing I'd close with is just that I think we did have a good quarter. I'm glad to see Palo Verde back up and running in a good and solid way. I think if you look at the performance of the other two units for the first half of this year, it's certainly an improvement over what happened last year. So I expect to see improvement in Palo Verde beyond just the end of extended outage on Palo Verde Unit 1.

With that, we'll open up for questions. Lisa?

Operator, we'll turn it over to you for questions.

Thank you. [OPERATOR INSTRUCTIONS]. Your first question comes from the line of Sam Brothwell with Wachovia Securities. Please proceed.

Hi, good morning, everybody.

Hi, Sam.

Hey, Jeff and Chuck, can you maybe give us a little more color around this non-cash amortization out of Twin Oaks, and how that ties in with Palo Verde? I - you lost me a little bit on that. And then I also wanted to just ask you for a little more detail on the gas side of the business in terms of what you're seeing in terms of declining customer use on kind of a percentage basis. And also, have you guys, in light of the increased focus on the electric side of the business in the need to raise equity; have you given any thought to possibly selling that gas business?

Well, let me take the second and third ones first, and then Chuck can come back to the first one.

On the gas business, we've seen use per customer, Sam, decline about - on a weather-adjusted basis about 15% to 17%. And I think a large piece of it is we did - I was very pleased with how our folks worked with our customers and the media to get information out about what was happening to prices, what they could do, etcetera. But, we then consequently suffered the downside of customers using less. That's why one of the major elements in the rate case that we filed is a decoupling mechanism. So that we decouple our revenue requirements from actual levels of consumption so we don't under-earn, or don't over-earn on the basis of either weather or energy efficiency, things done by customers.

So we saw the significant reductions on a weather-normalized basis. And of course, you know on a weather normalization, it's not - it's a science, and it's not accurate. I mean it's an art; it's not a science. It's not all that accurate, and I think with - we also experienced fairly warm weather through the first quarter in April, when we would typically see our gas loads. So we're doing that relative to the gas rate case to avoid this kind of a situation on a going forward basis.

Relative to the second piece, we don't comment on specifics about looking at sales, but I would tell you that the way we've integrated our gas and electric operations, I don't think there's that much that would be gained by selling the gas business. It's an integral part of our operations today. We've done an awful lot of reengineering in the service provision ranks to push the two together. Certainly, there's the potential you could retain all of those benefits for cost control and customers, even if you sold the business. But at this stage, I don't envision that. We're not looking at anything in specifics, Sam, and I have to leave it at that.

On the issue on the accretion side, Chuck?

Yes. Sam, what we're just trying to do: We want to be real clear that when we went ahead and closed the Twin Oaks, and pursued at that point the evaluation and the purchase accounting treatment; in looking at the contracts associated with Twin Oaks, at that point in time we knew there was a contract that was under market, and our best estimates at that point in time, and we announced the acquisition is that we thought the non-cash earnings piece of trying to amortize that would be 15 to 20% in 2006. And so what we're doing now that we've completed the purchase accounting aspects of that, we've gone back and updated the information so it's clear that rather than being 15% to 20% in 2006, we expect the non-cash amortization to be closer to 25% to 30% of our earnings.

Sam, I think what Chuck meant on the issue of what's a relationship to the equity we’re going to issue: It's just a question of dilution. So as we issue that percentage for '06, the first half of '06, is based on the shares obviously we have outstanding. Well, we haven't financed on an affirmative basis yet Twin Oaks. And so obviously that impact will go down.

Okay. And is it - is it - I think I also heard you say that you - overall, with this contract expiring at the end of '07, would this issue largely go away post '07?

There's a little bit left, but it's very minor. So it - yes. There's very little that would be going forward.

Okay. Well, thanks a lot.

As a reminder, ladies and gentlemen [OPERATOR INSTRUCTIONS]. Your next question comes from the line of Lasan Johong, with RBC Capital Markets. Please proceed.

Good morning. I'm showing churn on First Choice Power of 3.7%. Is that a per-quarter number, or is that being totaled to date?

Year-to-date.

Year-to-date, okay. What is it on a per-quarter basis? How many customers do you think you're losing? So is that about roughly less than one percent a quarter?

Lasan, I don't have a number for the quarter. It's fairly stable, yes.

Very stable.

Consistent and stable, yes. And we haven't seen any significant change, certainly no increase; a little bit of a reduction sometimes, but no significant increase.

Okay. And could you kind of give me a sense, on a weather-normalized basis, what First Choice Power did?

In terms of total sales?

Total sales, EPS, however you like to express that. I just need to know what the weather-normalized number looked like.

Well, we haven't weather normalized the earnings impact, Lasan. I'm trying to think of something that we've got that would give you some information. We are probably going to have to get back to you on that. We don't get the data out of the Texas system in the same way that we get the New Mexico data. So weather normalization has yet to be done on the Texas load, whereas we do have it on the PNM load. So I don't have a good number for you at this stage, but we'll get back to you, Lasan.

Your next question comes from the line of Steven Rountos, with Talon Capital. Please proceed.

Hi, guys. Congratulations on a good quarter.

Thank you, Steven.

I'm just curious, Chuck. I think you mentioned the impact of Twin Oaks on the quarter was $0.07. Is that right?

Yes.

And what was the non-cash amortization piece of that?

For the quarter, it was $16.8 million.

Which will show up in the 10Q next week.

Okay, great. And then I think if I understood you correctly, the non-cash amortization as a percent of total annual EPS in 2006 is going to be 25% to 30%?

That's correct.

Okay. I was just curious. You said that your - when you're finalizing plans to issue equity, you're looking to do maybe 50% of the purchase price of Twin Oaks and you're likely to raise some more equity to fund other cap-ex. Can you talk about what the amount of those other cap-ex spend is, and where it's going?

The other cap-ex spending is really supporting the core business and capital programs we have in place on electric and gas side. And I just wanted to be clear that we're finalizing the plans, and 50%, as we mentioned, is for Twin Oaks, to finalize the acquisition. And then as we go forward, we'll continue to maintain our investment grade and capital structure to support equity issuance along the lines of the capital programs that we have in place. So we don't have a specific number and haven't really settled on that number at this point.

Let me give you one other piece of information. If you think about this year, I think we've said that our construction budget is a little shy of $400 million. And our internal cash flow, we typically talked about being in the $200+ range. So obviously, there's a shortfall between our construction, our cap-ex, and internal cash. Next year looks to be about the same. Construction is in that same range, maybe a little less; $350 million. But it's that kind of delta that we see as needing external financing over time.

[OPERATOR INSTRUCTIONS]. Your next question comes from the line of Maurice May with Power Insights. Please proceed.

Good morning, folks.

Hi, Maury.

A couple of questions here. First of all, the two coal-fired plants, San Juan and Four Corners, ran pretty hard in the second quarter. Is one of the reasons why you ran them so hard the absence of Palo Verde 1 and the area? And if so, if you ran them hard in the second quarter, may that present operational problems in the third quarter?

No, Maury. We run those units to their full extent possible all the time, or at least any time we get a chance. So if they're capable of running at full load, they run at full load. That's the way you want to run the base load units. What really has happened is about three years ago, we started, Hugh Smith and John Myers, who run the power plants, started a fundamental change in the way in which we approach the maintenance practices on the units, and we also put some money in on some things that frankly needed to be done. This is four years ago, I guess really. And we're seeing the payoff of that.

We've seen continued improved performance of the units. Frankly, when they run solid out, you'll have less maintenance problems than you will if you try to cycle the units. So we have always had the belief that you want to get those units up to load and let them hum. And the only difference is they're humming a lot better right now.

Okay. Next question has to do with seasonality at First Choice. It seems like you've already made upwards of $10 million in the first half. But the third quarter in Texas is really the big quarter, is it not?

Yes, that would be the stronger quarter.

Yes. So the implication here is that all the things being equal, you could - you could earn more than $10 million in the second half. And is that correct?

Well, Maury, anything is possible.

Anything is possible.

I tell our folks anything is possible, particularly when we set our goals, anything is possible. But in seriousness, Maury, I think the biggest - we've had a lot of questions about First Choice and the ability to manage that and make money, and this is the fourth quarter in a row in which we've operated this plant, and I think made good money. I think we're demonstrating our focus is to demonstrate a consistent track record on its performance. Yes, there will be times when it goes up and times when it backs off a little bit.

Third quarter is the quarter that we really watch for First Choice, but our focus is on getting all of our PTB customers in a position where they really want to stay with us as we move forward and PTB ends at the first of the year. And we're doing a lot of conversion of those customers to fixed price contracts that have turns to them of 1 to 2 years, and then to grow the business on the competitive side through the addition of customers. And we've seen very good success in that marketing effort where we've seen about almost 30% increase. And so I think our total customer increase year-over-year is about 6%.

So, do I think we can have a good third quarter? Yes. I think First Choice will do well in the third quarter, but I also expect them to do well in the fourth quarter.

Your next question is a follow-up question from the line of Lasan Johong with RBC Capital Markets. Please proceed.

Thank you. On your guidance of $1.65 or $1.90; does that take into consideration the potential equity issue coming? Or is that needed to be adjusted for that?

Lasan, yes, it does take in consideration the plans I've indicated to issue equity by the end of the year.

Okay, thank you.

We're waiting. Operator, do you have another question?

Your next question is a follow-up question from the line of Maurice May with Power Insights. Please proceed.

Yes, Jeff, just to return to First Choice for a moment. The unit has earned $30 million per year, plus or minus, in the last couple of years. And so you're talking about a consistent track record and all. Can we infer here that First Choice may be on track for another $30 million year?

Well, Maury, I appreciate the question. I'm not going to give you a forecast for it directly, but if it - I would expect that First Choice will do better - will do as well this year as it did last year, and probably better.

Oh, okay. And then one other Texas question. El Paso Electric, this morning, is reporting that a change in the Texas franchise tax law in May of 2006 gave a one-time contribution to second quarter earnings. Do your TNMP utility operations in Texas benefit from this at all?

Yes, but the distribution property is reasonably small in Texas. I mean it's not insignificant, but it doesn't have the kind of impact on us as it does with El Paso. This is the issue of the change in the funding, and there is a minor impact on us, but it's small. I'm looking at Tommy. It's pretty small. Yes, it's negligible on our side.

I mean you're talking less than a penny a share?

Yes.

Okay, good. Thank you very much.

[OPERATOR INSTRUCTIONS]. Your next question is follow-up question from the line of Lasan Johong with RBC Capital Markets. Please proceed.

Hi, one final question I forgot to ask you. It is on Wholesale. Could you give us kind of the daily VaR and wholesale kind of what you see in terms of volatility and trading volumes in general?

Well, I think I can answer the VaR question. Hugh, do you want to just make some comments generally about - me? We're well within - let me do the VaR first, Lasan. We're well within our VaRvar limits, which for our wholesale trading business are $5 million. I think we have had - our daily high and low is in the $0.5 million to $2.5 million range. I don't think we've exceeded. I know we haven't exceeded $3 million on the VaR side for the wholesale business this year. Hugh, do you want to make some comments on the market itself?

We've seen some volatility, particularly with the hotter weather in southern California. A couple of weeks ago, there was some fairly significant shifts in the marketplace. Since that time, things have moderated quite a bit and as Jeff said, throughout that entire process, we've managed to stay well within our VaR limits throughout the entire time.

I know you all are melting in New York with 100 degrees. We are sitting - yesterday was 82 degrees, 82 or 83.

But generally speaking weather-adjusted, are you guys seeing high increased levels of volume on the trading and marketing side? Or, are you seeing kind of stable volumes year-over-year, weather-adjusted?

We're seeing a slight increase, and it's due in part to some of the availability of the base load units that we've had besides Palo Verde, and some increased activity due to some of the weather conditions. But in general, it hasn't been a sharp increase.

Your next question comes from the line of Dave Parker with Robert W. Baird. Please proceed.

Hi, good morning, and congratulations on a good quarter. My question, I guess maybe an obscure one. I thought I saw a headline about FERC doing some investigations into the past California deliveries; 2000-2001, maybe 2002 time frame. Do you have an exposure there or maybe can you provide a little color around that?

Well, here's another piece of the 2000-2001 thing that hasn't been investigated. I'm looking at our general counsel. We're not aware of anything that affects us specifically. We've pretty much, except for our dear friend in California, the Attorney General in California, we've pretty much resolved all of our issues. Certainly, FERC has given us clean bills of health on most things.

Okay.

So I'm not aware of anything, David, that has an affect on us.

All right. And maybe an update on just your natural gas rate case. I know you've been investigating for the whole usage decoupling activity. And if I missed your comment on that, maybe just a quick update on that if you wouldn't mind.

You bet. In the gas rate case that we filed in May, we did file for a decoupling mechanism that would separate the revenues that we received from the usage, so it would provide a balancing account for an adjustment on the basis of what happens to sales. We've got strong support that appears from a number of the environmental groups who believe this is an approach that makes sense, because one of the arguments, obviously, is we believe in pursuing on customer's behalves, strong energy efficiency programs. But if you're only being regulated on a rate of return basis, it doesn't make much sense to encourage customers to conserve because that just reduces the rate base in which you earn.

So before we worry about incentives, let's get rid of disincentives. So we're getting good support from a number of the interveners. Others interveners I'm sure will have difficulty with it because it's new. But we think it's the kind of thing that makes sense on a going forward basis. The alternative is obviously to look at filing gas rate cases every year to avoid the weather issue, and also to then focus on incentives, if in fact the regulators agree with us that energy efficiency makes sense. We just think it makes sense to get rid of the disincentives first.

At this time, there are no questions in the queue I would now like to turn the call over to Jeff Sterba for closing remarks.

Well, I want to thank you all again for joining us this morning. We look forward to seeing you all, those of you that make it to Las Vegas, for EEI, and look forward to a continued strong, good year. Thanks for joining us.