TXNM Energy Inc (TXNM) 2006 Q3 法說會逐字稿

Welcome to the third-quarter 2006 PNM Resources earnings conference call. My name is Cheryl and I will be your audio coordinator for today. At this time all participants are in listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). I would now like to turn our presentation over to your host for today's call, Mr. Frederick Bermudez of Investor Relations. Please proceed, sir.

Thank you, everyone, for joining us this morning for a discussion of the Company's third-quarter 2006 earnings and the formation of a new company with Cascade Investment. Please note that the presentation and accompanying materials for this conference call and supporting documents are available on the PNM Resources website at www.PNMResources.com.

Joining me today are PNM Resources' Chairman, President and CEO, Jeff Sterba, and our Chief Financial Officer, Chuck Eldred, as well as several members of our executive management team.

Before I turn the call over to Jeff I need to remind you that some of the information provided this morning should be considered forward-looking statements pursuant to the Private Securities Litigation Reform Act of 1995. We caution you that all of the forward-looking statements are based upon current expectations and estimates and that PNM Resources assumes no obligation to update the information.

For a detailed discussion of factors affecting PNM Resources' results, please refer to our current and future annual reports on Form 10-K and the quarterly reports on Form 10-Q as well as other current and future reports on Form 8-K filed with the SEC. With that I'll turn the call over to Jeff.

Thanks, Frederick, and good morning and welcome to all of you. Thanks for joining us this morning. As Frederick mentioned, we want to discuss our third-quarter earnings which we released last night, as well as the strategic alliance with Cascade Investment that we announced earlier today with its focus being to pursue opportunities in competitive Western markets.

First, let's talk about earnings. Flipping to page 4 of the presentation -- we had a good quarter, a strong quarter for the third quarter of '06 with GAAP earnings up about 54% and ongoing earnings up almost 40%. And this was in spite of a warmer -- I'm sorry, a milder than typical third quarter and certainly a lot milder than last year, probably 18% in degree days measured milder '06 over '05. And partially caused by that mild weather, much lower wholesale prices. Wholesale prices were probably down about 20% across the board in the Western markets; Texas markets not nearly as much. Texas markets held up fairly well.

There are a number of drivers, which Chuck will talk about, that helped moved these earnings, but let me just touch on one that we continue to be pleased with and that's plant performance. All of our coal units have operated in excess of 90% on average -- capacity factors, equivalent availability factors, I'm sorry,. and that's very strong performance. This is about the third year in a row where we've seen that kind of performance out of our coal units. Certainly the return of Palo Verde Unit One from the vibration-related outage was very good news for us. And while I do not believe Palo Verde to be out of the woods in terms of a number of things that they must address, we are certainly seeing much better performance out of the Palo Verde units.

Relative to a -- before I turn it over to Chuck let me just to a quick update on a couple of regulatory issues. Yesterday we did receive the final order from the Texas Commission regarding the CTC competitive transition charge for the regulated utility that we have in Texas as well as First Choice in our rate reset. If you'll recall in our second-quarter update, we indicated that we had a stipulation entered into that would address both of these matters.

We, subsequently, about three weeks ago, received a bench order that approved the stipulation and now we've received the final order. We have a compliance filing to make that has to be accepted by the Commission, but within the next reasonable period of time, we'll be putting in place the CTC into rates as well as making the rate reset for First Choice Power. So that's moving forward as we had hoped it would.

Also, I'd just remind you that we now do have a Commission order approving Afton as a New Mexico retail resource. Recall that this is a current peaking unit that is under construction today to become a one-on-one combined cycle facility. And so it will now be -- it was an unregulated asset, it will now be dedicated to our retail operation and will be rolled into rates in the rate case we'll be filing toward the end of this year on our electric side, and we expect to see that unit in service before summer peak of 2007. So, with that, let me turn it over to Chuck to discuss in more detail earnings for the quarter.

Thank you, Jeff. Good morning, everybody. I'm going to talk about the quarter earnings per share by segment. And just to reference that, in the appendix section we do have this information and walk across by quarter as well as the margin by quarter. But you can see, as Jeff pointed out, if you compare the third quarter of '06 to third quarter of '05 we improved $0.17. And let me break this down by the regulated operations and unregulated business as well.

PNM Electric was just down $0.1, margins are flat. The impacts are from the rate increase, but they're offset by the improved plant performance that Jeff referred to. Just as a refresher, we had a rate decrease that was effective in September 2005 of 2.5% which, again, was the last stage of our global settlement. The customer and load growth was offset by cooler weather. Customer growth remains strong at 3% and cooling degree days were down about 17%.

On the gas side you can see the earnings are flat; increases in customer growth were offset by the continued trend of customer conservation, the growth about 2.4%, the total load down about 10.5%. As you recall, we have a pending rate increase on the gas side of the business of $20.7 million, which includes a return on equity of 11%. Our last rate increase was in 2003 with an ROE of 10.25%. We expect hearings to occur sometime in December and hopefully a decision will be rendered in February or March with an effective date in April of '07. And once again, our ratebase for this is about $401 million, which we released publicly when we announced the rate increase.

On TNMP Electric, it's down $0.06, earnings are lower which, again, is partly due to the rate decreases that we've had in New Mexico that began in January of this year that affected a quarter by $3.2 million. We reduced usage from the cooler weather and also contributed to the decrease in the number of cooling days relative to last year's comparison.

On the wholesale side, that has certainly been up $0.26 and that's driven largely by Twin Oaks, which contributed $0.17. We've also had better performance at our base plants and the addition of Luna which was 190 megawatts occurring in April of this year allowed for greater opportunities for us to sell energy in the market. And although, as Jeff mentioned, we still had difficulty with Palo Verde, we still have barely had strong performance at our coal-fired plants and the other units of Palo Verde compared to unit one that performed better than this time last year.

First Choice, as you can see, looks flat -- it is flat relative to quarter-over-quarter, but it has maintained its strong earnings performance. And they continue to have success with the customer growth, increasing competitive customer counts more than attrition priced to beat customers. Overall customer growth has been about 6.3% or a little over 14,000 customers.

The reason for it being flat, it looks more like the bad debt, we've had about a $2.1 million impact in this particular quarter and a lot of that is just really just from the moratorium that was in effect last year and has since released. We're receiving some of the impact of that. So although it's flat it's still been a very, very strong performer overall to earnings for the Company. On the corporate and other, down $0.02 and it's primarily driven by the increased financing charges mostly from Twin Oaks.

Now I'd like to turn to the year-to-date walk across. If you'd turn to that slide. And starting with year-to-date 2005 at $1.16 you can see the Palo Verde impact overall has been $0.18. Financing costs down $0.17 and that's really driven largely from the acquisition of financing the Twin Oaks. The same issue with the dilution of $0.08 that increased the number of shares we issued for the equity that would occur for the acquisition of Twin Oaks.

Electric rate reduction was down $0.08, and again as I mentioned, we had a 2.5% effective September 2005 rate decrease. Natural gas usage is down $0.06. Total load is down 5.4%. TNMP is down 5%,which is really reflective of nine months of contribution this year compared to four months of last year. And this is impacted by about $0.14 of rate decreases which is $0.09 more than it was last year. Just as a refresher, it's $5.7 million in New Mexico; it's $4.2 million more in Texas than last year. At this point the total take in Texas since May of 2005 is close to $10 million.

On the other side, as we look to add to earnings we've increased on the other side of $0.02 which has to do with some increased lower depreciation and offset with some FAS 123 stock compensation results base pay. San Juan and Four Corners performance has been up $0.06, that's from the equivalent availability factor of 1.6%. Outage hours are down over 20% and also Four Corners -- San Juan was equivalent availability back to 1.6%, Four Corners EAF is up 5%.

The retail load growth has added $0.09, the gas side $0.03, that's 2.3% customer growth. The electric side added $0.06 which is 3% customer growth and total load of 3.3%. Once again in First Choice you can see year-to-date was $0.14, that's nine months of this year and four months of last year, again with strong customer growth and then certainly we were impacted this quarter with the cooler weather temperatures and they are 90% hedged for the fourth quarter.

The wholesale marketing side has added $0.17. We talked once before about the forward sales that we received from 2005 that we actually received the benefit in the first quarter of this year, that was about $10.8 million. We've had some growth in existing long-term contracts and also the increased market price spreads have driven by increased marketing opportunities have provided -- through the better part of the availability have provided some benefits as well.

On the new plants, certainly we've added $0.25 to earnings, largely contributed by Twin Oaks, and there's been a small benefit from the Luna, as I mentioned, which went into effect in April of this year and that's contributed about $1.9 million to margin.

For earnings guidance we are reaffirming our near the middle of the range. And as we pointed out, this is driven from the upsides of the Twin Oak acquisition and the wholesale power marketing activity, the customer growth and particularly First Choice Power's success which has been in a number of different areas. And also we'll add a comment on that with customer satisfaction being up and, again, they're hedged 90% through the fourth quarter of 2006.

Key impacts, as we've all been aware, the impact of Palo Verde plant performance and the decrease in natural gas usage. And as I pointed out, the milder heating season. So once again, our 2006 earnings guidance is reaffirmed in the middle of the range.

Thanks, Chuck. Let me now turn to do the alliance that we are announcing with Cascade Investment to create a new unregulated energy company. We certainly believe this will be value creating for our company and our shareholders. Let me first talk about why are we doing this.

As we step back and look at our business from a strategic perspective we conclude four things. First, that our core regulated business is growing at a faster rate, placing greater demands on capital formation and balance sheet strength. And certainly Chuck talked about what we've seen so far this year. We continue to see our peak demands grow. So we not only -- in excess of 5%,we not only have strong investment requirements in our T&D side, but we'll need to add over 800 MW of generation in the next six years just to be able to serve our retail loads.

Second, we also see a need to develop a more clear separation between our regulated and competitive businesses in the future. And this is really for regulatory, structural and flexibility reasons.

The third observation would be that we continue to believe in the balanced model that we've created where we have exposure for 30 to 40% of our earnings from our competitive electricity markets that we know well. And I know that there are some entities that have moved out of the having regulated and unregulated operations, we continue to see value created by having a strong stable base with an above-average growth multiple within our business so long as we manage that and manage the risks associated with it effectively and that we don't have the unregulated piece grow to be more than 30 or 40%.

That really leads us to the fourth observation which is to enhance the growth of our successful competitive businesses. We believe that we needed a partner that would bring capital and financial acumen to the table. So consequently that has led us to the creation of the alliance with Cascade which will enable us to execute this unregulated growth strategy and drive shareholder value creation faster than we could have otherwise and with less risk than we otherwise would have incurred.

This is clearly dependent on leveraging Cascade's deep financial resources and our marketing and operating expertise. And you can see that while, for example, the name of this entity may not be finally resolved, the strategic perspective on this business and its strategy is quite well defined. Our anticipation is that this will be an unregulated energy business that will focus on acquisition of unregulated generation assets in markets that we know well, that will participate in the marketing and trading around those assets as we continue to believe in being an asset-backed trader, and that we will not only participate in wholesale markets but also in competitive retail markets.

Now let me be clear that we are not by this venture looking to become the largest regional power trader in the region, that's not our game. This venture will maintain the strategic focus that we have taken on which is to be a niche player that focuses on those markets where something more than just the commodity is needed for both our wholesale and our retail side. And we will continue to focus on those markets that we know well. These happen to be the most rapidly growing markets in the country with Texas, the Southwest and then the balance of the Western United States as the core markets that we will be focused on.

Once we decided that we felt we needed to have a partner, then the question is what's the characteristics. And for us we are not just looking for equity capital. We were looking for an entity that has a long-term view and perspective on participating in the energy market and as it turned out one of our largest investors turned out to be the ideal partner for us.

Many of you are probably familiar with Cascade Investment. It is the private investment vehicle for Bill Gates. They have been one of our largest single shareholders since very late in 2000. They currently own about 9.5%, I believe, of our outstanding shares and they also own $100 million of the equity linked securities that we used to fund the TNP Enterprises acquisition.

One of the keys for us is that they are a long-term investor. There are many different kinds of investors that provide different elements to the marketplace and we wanted someone who would look at this long-term, but would also recognize the flexibility that the creation of this kind of a new company would provide. With that let me turn it back over to Chuck to give a little more detail on the transaction.

Thank you, Jeff. Jeff pointed out a number of reasons why we established the partnership. But before we could ever get to a point of really establishing the transaction and papering the actual structure of the deal itself there was a lot of discussion about alignment, which Jeff has just mentioned some of those areas today. But as a result of those discussions and understanding of what our expectations and their expectations were going forward, you can see from this diagram that the energy company will operate as a 50-50 limited liability company with PNM contributing its market and operating expertise and Cascade contributing its financial support through equity and credit guarantees.

In this regard I want to affirm that the energy company is expected to have a robust balance sheet. The company could grow either by asset contributions, by PNM Resources and Cascade matching with cash or by future acquisitions. In terms of the governance of the structure, the energy company will have a six-member Board with three members appointed by PNM and three by Cascade. The management team will be a selected by the Board over the coming weeks. We expect them to be experienced in the unregulated energy business and familiar with the markets we're targeting. And as the energy company grows through acquisitions, as well as through asset contributions, we expect the management team to also be skilled in transactions as well.

So you can see that we've established a clear platform to advance and accelerate our unregulated growth strategy while reducing risk for PNM Resources. The partnership itself and Cascade, our partnership provides a number of strategic and financial benefits. The new company combines the best of both Cascade and PNM to accelerate PNM Resources' growth without assuming new debt. I mentioned that would be done through asset contributions that Cascade could match with cash. Cascade's credit guarantees, we also will reduce PNM Resources' risk.

And another important benefit of the partnership with Cascade is that it provides PNM with a platform to better separate our regulated and unregulated businesses which, as we all know, is becoming an industry direction and a better way to focus on the business segments of both regulated and unregulated. In addition to meeting the future regulatory separation requirements, this will increase transparency and reduce complexity in PNM Resources' business segments. And with that I'd like to turn back over to Jeff to summarize the comments on the Company.

Thanks, Chuck. Again, I think we had a good quarter in the face of some challenges, really weather and pricing in the wholesale markets. But I think our folks did a good job in continuing to run the business. I'm very pleased with the coal plant performance and very pleased with the success of the moves that we've made in the unregulated side. The new company that we're creating with Cascade will only enable us to do that more effectively and with less risk for us and our shareholders.

So we're looking forward to that joint venture actually creating -- developing some substance and having assets move into it through acquisition. We're not in a position of talking about what assets we may acquire that would go into it. Obviously you'll hear about those as those acquisitions take place. With that I believe we've covered all that is appropriate at this stage and we would stand for questions.

(OPERATOR INSTRUCTIONS). David Grumhaus, Copia Capital.

Good morning. A couple of questions about the alliance. How does this affect your plans for equity issuance? That would be question number one. And then I guess Cascade's ongoing involvement with PNM, will they stay in as a shareholder there or will that capital be transferred over to the new venture? And then just as you think about dropping assets in -- you obviously have the joint operating agreement, should we think about it being assets that you've bought in the last couple years or are we likely to see a piece of Palo Verde and some of the other plants dropped in as you go through the electric rate case?

Let me take the second two and then I'll have Chuck do the first one. In terms of Cascade's ongoing involvement as a shareholder, obviously that's up to them, but there is nothing that I'm aware of that would alter their position as a shareholder. And I think that provides good alignment for the comfort of our other shareholders that Cascade will be on both sides. There are no obligations or limitations by virtue of the creation of the new company about what they do with their existing shares.

In terms of what kinds of the assets -- would any assets that PNM currently holds transfer and, if so, what? No determination has been made in order for any assets to transfer out of PNM. Obviously it would have to be agreed to by both parties. But it would be limited to those assets that are unregulated. It very well could include those assets that reside currently within PNM that are what we call merchant assets under our merchant model which includes Palo Verde Unit Three, Luna and Lordsburg.

Those are assets that we have an obligation to move out from under PNM the utility by 2010 or we have to go get another approval by the Commission to allow them to stay within PNM, the utility. But there's a regulatory requirement that we remove it. We could remove them earlier than that if we so choose as they are not under the regulation of the NMPRC, but we have an obligation to move them out from under PNM. Chuck, on the equity issue?

Yes. On the equity issuance question, let me answer that by just asking that you refer back to what we said in the second-quarter earnings call. And with that said the Company is strongly committed to our investment grade debt ratings and we continue to expect balance sheet improvement over time.

Okay, so it sounds like then you don't think that this -- this shouldn't have any effect on the equity issuance?

I'll just go back and answer the same way. We really at this point -- we would just ask you to refer back to the second quarter.

I assume you're aware of the restrictions that we've got at this stage that we can't really say anything.

Okay, great. Thanks for the time.

(OPERATOR INSTRUCTIONS). Dave Parker, Robert W. Baird.

Congratulations on a good quarter. Maybe just to look at EnergyCo a little bit. When an existing plant gets transferred and you lose 50% of those earning streams how do you mitigate the results so that's not earnings dilutive or sort of just what's your thought there?

First, let me step back on the purpose of the joint venture; it is to accelerate the growth of our unregulated operations. So it certainly has not been created just solely to drop down existing assets and only have 50% of the earnings. But obviously when you have an asset like that, as cash is created because if we contribute an asset then Cascade is contributing a like amount of cash and then that cash is put to work. So the challenge will be how is that cash put to work? So obviously we're focused on this being an accretive transaction obviously over the longer-term.

Right. Well, it sounds very innovative. And the second and my last question is -- do you have what the trailing 12 months return on equity at your utility operations is or has been?

We don't have that with us, David.

Okay, all right. I'll follow-up then. Thanks very much.

David Grumhaus, Copia Capital.

I’m sorryto jump in twice. I thought I'd go farther back in the queue.

It's a quiet crowd today, David.

Lots of calls going on. The First Choice competitive retail business, it sounds like from your remarks that we should expect that that's likely something that you will move in to the alliance.

Was that a statement or a question, David?

A question.

And again, I'll just say that there are no decisions on what will transfer. I'll let you read in whatever you choose to. No decisions about what will transfer. The First Choice business is moving very well. I think they're committed customers are up 60% year-over-year, margins are up. The third-quarter performance was flat relative to a very strong third quarter last year largely because of bad debt because of the moratoria that we had in Texas and some accounting things that will wash out in the fourth quarter. But the business is doing very well. And the question is what's the best way to leverage the value that we're creating with First Choice.

Okay. You may not be able to answer this one. Just in terms of timing, should we expect to see -- obviously the Journal had this this morning, I don't know if that affected your timing in terms of announcing it, but should we start expecting to hear about asset purchases and transfers in the next couple months or is this something that will unfold over the next 12 to 18 months?

The rate at which this unfolds solely depends on the kinds of transactions that we find in the market. We're not going to rush to do transactions just to populate the venture. This is a vehicle that we're going to use to find the right kinds of transactions to do. But certainly I don't expect that we'll be silent on this for a year. I think you'll hear things -- would anticipate that you would hear things before then. And on your other point, no, we had intended to announce this today.

Great, thanks for the time.

While we have a large number of folks on the call, it looks like we have -- I'm sorry. Now there are more questions coming.

Cezary Nadeki, Shroder Investment.

Just trying to understand a little bit more about the mechanics of this transfer. It sounds like an interesting idea, but if you can explain timing around finding the project and then pricing your piece of the business as contributing to the EnergyCo. Because I'm assuming you're going to go out, look for some projects that would make sense within the structure of EnergyCo and only then move some of your assets, which then means you don't have that much time left to price it. What are the mechanics of pricing these transfers?

Any transfer -- if we move an asset from PNM Resources into the venture it will transfer at fair market value and we have within our agreements with Cascade a mechanism as to how fair market value will be determined. So, obviously you still have to then go through the mechanics with each business or asset that is transferred, but we have the process by which that will be done fully resolved.

So every time you look at a project you're kind of going to have two valuations going at the same time: valuing that project and then, at the same time, valuing your assets?

You portray that they will go hand-in-hand and in general that's a logical approach, but there can be reasons why assets may transfer into the venture without an immediate asset being found to acquire or that there will be acquisitions made before a transfer of an asset is made. Those are more tactical issues that will depend specifically on the transactions being looked at. So don't take it that it has to go hand-in-hand.

And one more question on this. When you transfer the assets, I'm assuming in the regulated piece the leverage will change as you're transferring some of these assets. Or are you transferring -- the idea is to transfer some of it with debt attached?

No, you're right. As you begin to restructure the separation of the unregulated from the regulated business then the capital structure itself would change and the regulated side of the business certainly will be stronger than what it is today. And also look at this type of approach and the platform we're building as an opportunity that we will be pursuing in a more robust way of our chances of growing the unregulated side of the business. So although there's a lot of discussion about timing, it does give us an opportunity to grow the business faster than what we would otherwise grow it.

All right. Good luck with the new enterprise.

Thank you, sir.

Shelby Tucker, Banc of America Securities.

Just wondering if you -- and you might have mentioned this earlier. Have you a certain credit metrics targeted for the EnergyCo or credit rating?

We will look as we -- well, first of all, let me just say, we've had good discussions with the rating agencies to make sure there was an understanding of what our plans are and what we see as the benefits to PNMR's overall credit quality and understand the transaction of building our balance sheet going forward. At the same time we mentioned that we have credit support from Cascade which will certainly provide reduced impact to PNM Resources and support the business needs that Jeff had talked about for this joint venture.

And with that we will initially build the business in a manner that will provide a very strong credit profile with a strong capitalization and one that we're very comfortable with the support of Cascade that we can really time the market and look for opportunities or assets that will continue to maintain a very strong capital structure. So the targets of capital structure will be working towards a solid investment grade, but that takes some time as we build the business going forward.

So when you say strong, the strong investment grade you could be referring to is high BBB, low A?

I would say more along the BBB range, on the lower end.

Shelby, the only thing I would add is that clearly as we go forward with other transactions through the new company, each of those transactions may be financed separately depending on what they are and the scope of the credit support that Cascade provides. So I think the big difference is that with the credit support of Cascade the financial flexibility of this venture I think will be broader than you typically would see.

Okay. And the second question. If you were to transfer First Choice, would that have an impact on your existing contract with Constellation? Thank you.

The Constellation contract only runs through the end of this year. So it's a fairly short-term arrangement. The obligations under that contract for forward positions that have already been taken obviously must be fulfilled, but the contractual obligation only runs through 2006. So I don't think we have too much exposure there.

Okay, thanks again.

Teresa Kim, [Jennis] & Assoc.

I have two questions. First, I know that you're restricted on what you can say about equity issuance, but could you just refresh our memories in terms of the bridge financing that you have for the acquisition, when that runs out and are there any kind of I guess terms in which that financing would pick up over time? I'm referring to the interest rate.

Okay. The bridge financing was put in place in April in this year when we closed the transaction. It's for one year which about mid-April of 2007. And no, there are no particular terms of that that would change relative to how we structured it originally. So nothing different than what we started out with or different structures in that regard.

Okay. And then in terms of the new alliance, I'm just curious if we're looking at this as what you said, Jeff, sort of a direction in which you would go towards in terms of separating your regulated from your unregulated assets. How should we read into this in terms of how we look at your flexible dispatch and how you would, I guess, approach your electric rate case next year?

Good questions. Relative to what we call our merchant utility model on the PNM utility side where we have certain unregulated generation which is comingled, if you will, for dispatch purposes with our regulated generation. We're in the final throes of our strategy for the development of the rate case that we expect to file by the end of this year. One of the things we're looking at is the separation of those assets.

The value of that model for both us and our customers is less today than it was five years ago when we put it into place. And the reason for that is that on the regulated side we are more gas on the margin and not coal or nuclear as we were previously. So, in fact, having gas on the margin imposes greater fuel-related risk in serving the regulated end of the business. So the trade-off between having the merchant assets involved in that dispatch from a shareholder perspective is not as robust or strong as it used to be.

And so at this stage we're looking at separating the assets. We've made no final determinations. We can remove the assets without regulatory approval, but we are looking at ways to -- at what the impacts would be relative to the rate case that we file.

Okay, thank you very much.

Rob [Mullin], Duquesne Capital.

A follow-up question to the last question actually. So the components of the formerly regulated assets that are -- not formerly regulated, but the legacy assets that were put in the unregulated basket, the Palo Verde unit three and part of the coal assets, those are completely outside of the jurisdiction of the regulators for purposes of moving these assets? You don't have to file or notify nor negotiate with them for the movement of those assets? Those are federally regulated and completely outside of the reach of the New Mexico regulatory process?

Yes, let me ask Pat to answer that, our general counsel.

There are some conditions that the Commission has imposed for moving the assets out, but they're pretty easy to meet and if we meet them then we don't need any further approval.

What type of conditions?

The conditions are getting a commitment letter from Standard & Poor’s that moving the assets out will not result in the investment credit rating of PNM being lost. And that the debt-to-equity ratio is no greater than 65%.

And just refresh my memory, are these assets from a regulated perspective like exempt wholesale generators, i.e. like FERC jurisdiction assets so that ultimately, no matter -- if the Commission looked to alter or reinterpret the types of conditions that they wanted to impose for the movement that you would have a pretty strong legal recourse to claim these assets?

Yes, we would have very strong legal arguments that the Commission can't change the conditions after the fact.

Recall, Rob, that for example on Palo Verde 3, they invented a new term -- permanently excluded asset so they can never touch it. On the merchant assets that we've invested in since then, that has been subject to a law and a Commission order that allowed and enabled these merchant assets to be invested in.

Oh, that's right. I was thinking more of the -- I just wanted to make sure -- I was just kind of curious of that status, if they were specifically kind of -- if Palo Verde -- if your component of Palo Verde 3 in the coal plants were. Like we're seeing in some other jurisdictions having them -- the legal argument is strengthened by having them sort of FERC regulated versus carved out by the state regulator.

They would clearly end up being FERC regulated as they are today, they are FERC regulated.

So they are in fact like exempt wholesale generators under the FERC?

They're not under EWG, but they are FERC regulated assets.

Okay, that's great. Thank you very much for the clarification.

(OPERATOR INSTRUCTIONS). Steve Rountos, Talon Capital.

I wanted to ask you on previous calls you mentioned that you were planning to do the equity by year end of '07. Are you still on track for that?

That question comes up quite often with these calls. But in this case we just have to go back and refer you to the second-quarter earnings call because of the restrictions we have at this point.

Okay. On the JV with Cascade, is it a definitive agreement that you've signed or an LOI and has the Board approved it?

The Board has approved it. What we have signed is a letter of agreement that attaches to it. The agreements that will actually be signed, there were a few minor things that have to be done before we sign the definitive agreements,but they're relatively minor. They're very minor.

What are those minor things?

One of them I can't really disclose because it has to do with the credit support that is being provided by Cascade and that's under a nondisclosure.

Okay. On the potential transfer of assets then, would you look to cash out at all if you were to transfer any of the assets in? And if you do transfer some of your non-reg assets maybe to the trading side or the First Choice side, will that reduce your collateral needs?

There are really two questions in there. We're looking at growing the business through the new company and it will be grown on a disciplined growth basis. So I don't know what you mean by cash out, but we will look at contributing assets to it that are going to better position that new company to accomplish the strategic objectives we lay out for it.

And your other one is relative to the collateral requirements. Depending on which assets transfer in, absolutely, our collateral requirements would change. For example, if First Choice were to transfer in, the collateral that's required by First Choice today, which we cover would not only be split 50-50 but also would be benefited from the credit support that Cascade provides. The same would be true for our wholesale trading and operations business.

I guess by cash I was curious if you were looking to take cash back or all stock in the JV if you were to contribute assets?

I'm sorry, would you say that again?

I was just curious if you were to contribute assets then would you take out a combination of cash and stock, would it be all stock? I mean what's your intent?

Again, we have options. The structure itself gives us a lot of different options of how we pursue and build the business. And some of those certainly would give us options to pull cash out of the business and that stock is whatwe would be looking to do that. And certainly the other side of it is we move assets over Cascade would match with cash. So we have a lot of flexibility, a lot of different ways depending on what the circumstances are and the timing of what we're pursuing at the time. So this venture gives us great flexibility to build the business and perform the ways in which we need to to grow the unregulated side.

And keep in mind that while we might drop some assets down, the primary focus of this entity will be the acquisition of new assets available within the market to grow that business on a disciplined basis.

Great, thank you.

ladies and gentlemen, this concludes our question-and-answer session. I would like to return the floor to Frederick Bermudez and management for closing remarks.

Let me just take that. This is Jeff Sterba. First, thanks very much for your time this morning. We look forward to seeing many of you in sunny Las Vegas over the next couple of days at EEI. And I know we have got a very full agenda meeting with a number of you on one-on-one's. If we don't have a one-on-one scheduled I know that we do have open time, plus we'll be making a presentation on Tuesday. We look forward to seeing you there. Thanks very much.

Ladies and gentlemen, this concludes our conference call. Thank you for your participation in today's presentation. You may now disconnect. Good day.