TXNM Energy Inc (TXNM) 2007 Q3 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the third quarter 2007 PNM Resources earnings conference call. I will be your conference coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to your host for today's conference, Ms. Gina Jacobi, Director of Investor Relations. Please proceed, ma'am.

Thank you. Thank you everyone for joining us this morning for a discussion of the Company's third quarter 2007 earnings. Please note that the presentation and accompanying materials for this conference call and supporting documents are available on the PNM Resources web site at www.pnmresources.com. Joining me today are PNM Resources Chairman, President and CEO, Jeff Sterba; Pat Vincent, President of our Utilities; Chuck Eldred, our Chief Financial Officer, as well as several members of our executive management team. Before I turn the call over to Jeff, I do 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 financial annual reports on Form 10K and the quarterly reports on Form 10Q as well as other current and future reports on form 8K filed with the SEC. And with that I will turn over the call to Jeff.

Thank, Gina, and thanks to you all for joining us. In our second quarter call we indicated that 2007 would be what you could call an extremely challenging year and there's really a couple of reasons and let me touch on them. One, increased load growth in new Mexico which is usually a good thing except with our current rate structure which was set a number of years ago we find ourselves in a situation where current rates frequently don't recover the marginal cost of supply. Second we had plant performance issues in the first six months of the year at the Four Corners plant which is operated by APS. Third, a current lack of a fuel adjustment clause to recover the higher replacement costs that we have incurred when either plants were down or when our loads have outstripped our generation resources to meet our regulated retail load and last, hedging losses in both our regulated and unregulated operations due two are due to mild weather especially in Texas operations and low gas prices that resulted because of mild weather throughout the country this past summer.

And these items did impact our third quarter performance. Overall ongoing EPS was $0.41, compared to $0.62 last year. And on a YTD basis ongoing EPS is $0.96, down from $1.27 last year. These numbers exclude unrealized mark-to-market gains and losses on economic hedges in our ongoing earnings and Chuck will go into the details of that in just a little bit. The GAAP earnings decline is due to a number of items which are reconciled for you but let me mention the largest two. But first, as you'll recall, we transferred with commission approval the Afton generating station from our unregulated operations into our regulated operations and expanded it into a one on one combined cycle configuration. We had an agreed upon cap in the stipulation that was entered into to allow the transfer of that into the regulated side. We have incurred higher cost in its construction than that cap and so consequently, and we previously announced, this write off.

The higher construction costs were caused by a couple of things. First, was some challenges in bringing the unit into commercial operation which kept it delayed about two months from beyond what we had originally hoped, and the increased costs associated with that, mostly dealing with control systems. We also experienced particularly in '07 higher labor costs than we had anticipated because of the shortage of skilled craft work in virtually all construction projects. You are seeing cost for virtually all construction costs going up and it affected this project. And we also in 2006 had experienced some weather related delays which we felt we could make up, and these were weather related delays due to flooding on railroads. We thought we could make it up but at the end of the day that schedule was further delayed.

The second item, as you probably read by now, we announced a business improvement plan to streamline the Company which will involve reducing our workforce by 15% over the next 12 months. About 5% of the employees will be impacted today and we incurred a severance related cost, again non-recurring, of about $0.10 per share. With us on the call is Pat Vincent who as you know joined our Company about six months ago as the President of the Regulated Operations for both New Mexico and Texas and she'll outline the plans to reduce cost and efficiencies as part of the business improvement plan.

But before I do that let me spend a few minutes talking about First Choice Power and the Energy Code J V. First relative to First Choice Power, moving to slide four, First Choice earnings came in $0.23 below the same period last year. You recall that we consistently said 2006 was a blow out great year. Results in 2006 were enabled by near perfect conditions with respect to weather, our trading position and trading performance.

Four factors lowered results this year compared to 2006. Less usage due to mild weather. Slower growth in the first half of the year to you to market uncertainty and the conversion to our new customer care system not having occurred until the summer, lower per unit retail margins driven by somewhat higher purchase power costs and trading margin variances. Let me just give you a little more color on each one of them. Relative to the weather, in July, for example, we saw cooling degree days in the Dallas/ Fort Worth area, being 17% below normal. This led to average use per customer being 14% below the same quarter in '06.

Relative to growth, we talked at the Q2 call that growth really stalled in the first half of the year due to a number of reasons particularly the public policy and market issues as the Texas legislature tried to wrangle through what were they going to do with the marketplace. Also the timing of the in service of our customer care system put us in a position where we cannot be as aggressive on some of our marketing efforts as we would have liked to be. But what we've seen in the third quarter is that has begun to pick up significantly. Enrollments in the third quarter of 2007 are about 60% greater than they were in the second quarter and comparable with what we experienced in the third quarter of '06. I would remind you that in '06 our full year customer growth was about 17% and we now expect for 2007 that it will be in the 5% to 6% range because of the reductions that we witnessed in the first six months.

Relative to lower retail margins there's a couple of points, let me make. The first is that FCP entered 2006 and 2007 with similar hedging strategies. Their goal was to conservatively position against historically high summer power prices and resultant load response but as you know mild weather and significantly lower prices in July combined to forced a liquidation of the unanticipated long position at less than desired prices. So that affected the purchase power cost to serve those customers. And second the lower trading margins. Again, in '06 we had, our trading is very tightly controlled and it has not a large volume of trading. But in '06 we did very well. In '07 because of the same things that happened relative to the pricing for our supply for retail load with the mild weather and the significant drop in gas prices we ended up in a situation where a number of the positions taken turned against us.

In terms of going forward relative to First Choice we continue to believe that it remains a growing company that's increasing its capabilities to target and cost-effectively serve customers in a maturing market. I think the turnaround that we've seen in customer acquisition in the third quarter where, as you probably know, when we sign up new customers we really don't see the revenue for a number of months because there's a waiting period and we've incurred the cost of attracting them but we haven't started to generate the revenue from the contract. So we'll see that starting to hit our books really the first of next year, maybe a little bit in December. So we are seeing the important return to growth that we experienced in '06.

I think there's a couple things I want to note relative to that. The first one is a key point has been the conversion to a new customer care system which will enable us to provide stronger offerings, give us much more marketing related information to help us target the customers that our FCP folks want to go after and we are already seeing the beginnings of the benefit of that, as I said, referencing the increase in the attraction of new customers. Also, as we look forward, remember that ERCOT will be moving into a nodal market probably not until the end of '08, or maybe more likely '09, and we are doing a lot of positioning relative to that. I think as the price to beat this is the first year that were we had the price to beat no longer in existence which has also been a transition. I'd have you recognize that I'm pretty sure, in fact I'm sure, that FCP is the only formally affiliated rep that has more new competitive customers than it has traditional legacy customers within its system. So I think we are showing the power to grow the business and we expect that you want to see the demonstrated growth particularly given what happened in the first six months of this year.

Relative to unit margins we expect to see relative unit margins in the mid 20s, it could hit the mid 20s, it could be lower than 2006 when it was in the high 20s because of the changes in the marketplace and the very unique positions that existed in '06 but we expect to see them in the low, possibly the mid 20s. We expect those margin differences will be amplified in the longer term based on the wholesale opportunities as the nodal market develops and matures and I believe that you will see as we move into the fourth quarter, also, hopefully continued strong growth in the number of customers within the system.

Turning briefly to the EnergyCo, as you know EnergyCo at this stage has two assets, a mix of coal and natural gas. In terms of cogen facility that totals about a little over 900 megawatts and we have another 275 megawatts under construction. The units much like our San Juan units are operating well, in excess of top quartile performance of similarly situated units. Our trading and marketing group is forming within the EnergyCo joint venture so it can optimize the use of these plants in the market and prepare for the opening of the nodal market. We delayed creating that marketing and trading organization partially because the assets that we had were completely hedged but that group is now up and operational and we are already starting to see them add some value. At this point I'd like to turn it over to Pat to talk about our regulated operations. Pat?

Thank you, Jeff. Good morning everyone. I will first start off talk about our rating cases. As most of you know last week was the deadline for testimony in the PNM Electric rate case. To summarize we requested an $82.4 million increase to rates and a fuel clause. This is the first rate increase that PNM Electric has asked for in 20 years. We also asked for a changed rate design looking for higher rates in the summer to cover higher generation costs in the summer, which Jeff mentioned was a factor in our earnings. This slide outlines the major positions of the commission staff, the Attorney Generals office, which serves as the consumer advocate here in New Mexico. There there are no surprises here. We have been in discussions with staff in the AG as well as the other intervenors in our case so we were very familiar with their position. I would like to point out on this slide that just because the staff or an AG rejected a particular item does not mean that they rejected the idea behind the item, they just may have rejected our requested methodology in that particular item.

If you turn to the next page it outlines the schedule for our rate cases. The suspension period for the current rates expires May 7 so we do not expect to implement new rates prior to that date. We are continuing with our rebuttal preparation and in it we will counter the objections made by the intervenors. For example, we are going to point out that our application meets all the requirements of the PRC's rule for fuel clauses which is known here as rule 550. Those three criteria are the cost of fuel and purchase power be a significant percentage of the total cost of service which they are, that the costs periodically fluctuate and cannot be precisely determined and that our practices are designed to assure that power is generated and purchased at the lowest cost. We will make those arguments in our rebuttal. We also have a national expert in to talk about fuel clauses and to show how PNM Electric will be an outlier if we do not have a fuel clause. We have also started dialogue with the intervenors on the possibility of a settlement. That said we are fully prepared to litigate the case.

The Public Regulation Commission here has also opened up a notice of inquiry on fuel clauses here in New Mexico. We consider this as a positive step. This purpose is to be -- look for a simplified and standardized clause that can be applied to all utilities in the state. We see this as a good sign from the public regulations commission acknowledging that we are the only utility here without a fuel clause and that they want one that is standardized and simplified so that all utilities have the same treatment.

We also have an ongoing process of education and outreach around our rate cause and industry cost trends. Last week we had representatives of EEI and Wall Street to present to our legislative committees and other interested parties including staff from the P. U. C. They discussed cost trends in the industry and how Wall Street views the regulatory environment here in New Mexico. We had follow up from some of the audience members questing more information about Wall Street's views of our regulatory community.

Additionally, we are working here with the community to get support for our rate case. We have a very successful outreach program going here. The Albuquerque Chamber of Commerce, the Hispanic Chamber of Commerce and the Albuquerque economic development community have voted formal resolutions in support of our rate case. Matter of fact, the Albuquerque Chamber of Commerce filed theirs with the PRC and while it's not part of the case because they are not an intervenor, their resolution was noticed on the other parties. Regarding the gas rate case the issue is now in the hands of the New Mexico Supreme Court. There are two appeals, ours and the AG's margins regarding weather normalization. The court has consolidated appeals and ordered simultaneous briefs. The slide here outlines that briefing schedule.

Turning to power plant performance in the next slide, if you start in the upper left-hand side corner we'll start with San Juan. San Juan has an E AF of 85.8 as opposed to 97.5 in '06. We want to point out that while all this performance is below last year's the plant ran as expected and this level of performance has been reflected in our revised guidance. The various plants' performance versus last year was driven primarily by a planned outage at Unit four. Unit four was taken off-line on September 8, started scheduled environmental upgrades. The environmental enhancements were completed on October 31. We are on the second day of a planned five to seven-day startup process and we have steam in the boiler today. While the outage was there we also upgraded our controls from analog to digital. Without this planned outage the third quarter E AF at San Juan would have been approximately 91% or in the top quartile for those plants. The plant also sustained a number of unplanned outages during the quarter primarily associated with tube leaks and precipitator issues. However, we expect improved performance moving forward for several reasons. As we complete the environmental upgrade project on each unit the precipitators will be replaced by bag houses as a primary particulate removal system. Bag houses are less prone to malfunctions that result for need in outages on those respective units and I'll talk a minute about what we are doing on the tube leaks.

We turn to Four Corners, Four Corners had good performance in this quarter and we continue to see improvement at this plant. As you recall, there were some turbine issues earlier in the year but we have generally seen improved performance since then. In terms of Palo Verde, Pal Verde ran in line with last year's performance in this quarter and our revised guidance expectation. As you know the planned Unit two outage expanded three weeks in July primarily due to start up issues. Units two and three remained on line throughout the third quarter until Unit three shut down for its scheduled refueling, steam generator replacement outage on September 29. The planned outage is scheduled through December 13.

I want to talk a little bit about what we are doing at the plant. If you turn to the next slid we are in the process of completing outage at each of our San Juan units for purposes of environmental enhancement. And during those outages we are also performing work that will continue to enhance plant performance. For example, our analysis has shown that many of our forced outages were caused by boiler tube leaks. Therefore when we do these environmental outages we are also going to do replacement or significant repair to those sections of each boiler that has the highest rate of tube leak failures. This will help us avoid the forced outages we experienced earlier this year.

In terms of Palo Verde, we believe that challenges to plant capacity factors in O&M and capital will continue for the next 12 to 18 months. In order to address these issues we plan direct and frequent interaction with APS management to emphasize the importance of safety, plant performance and cost containment. We are working with the other minority owners to make sure their messages are coordinated and heard by APS management, we are working with APS finance and plant management on continuing plant improvements.

Turning to the next page on business improvements plan that Jeff talked about. We've initiated this business improvement planned designed to cut cost and strengthen our utility business as well as the entire corporation. We took a look across our entire corporation for areas we felt that we could streamline processes and reduce costs. We found many opportunities to streamline our processes and to provide customers with more automated and self service options. These are win/wins because they help reduce our costs but also provide the folks we serve with better service. Providing self service opportunities is just one of the ways we are going to rebuild and redefine our meter to cash process resulting in more efficient operations and better customer service.

As Jeff mentioned, part of the business improvement plan includes the need to reduce our workforce. We expect to reduce our employee count by 15% over the next 12 months. One third of those reductions occurred yesterday and today. This improvement plan is expected to save the Company approximately $35 million on an annualized basis, not including our cost to achieve. A portion of that savings will be realized in 2008.

In order to make sure that we capture and retain the savings in the plan the chief administrative officer and I are personally going to be monitoring the tracking of these savings. We will have a detailed rigorous tracking plan that will monitor our headcount and the other process design savings and we will be looking at that on a monthly basis to ensure that we not only get the savings but we do retain those savings. With that I would like to turn it over to Chuck for details on the third quarter and the YTD earning results.

Thank you, Pat, and good morning everyone. Let me start before I get through the YTD walk across, I want to talk about the change that we are making beginning this quarter to exclude from ongoing earnings the net unrealized gains and losses from economic hedging activity. We haven't done this in the past because those gains and losses have been relatively very small. For example, in 2006 it was a gain of $1 million, 2005 it was a loss of $2.5 million, and in 2004, a loss of $1.6 million. Given the change in our hedging strategy this year and the mark-to-market activity it's become more material and as you can see from this particular chart we are providing you, that a good portion of this thing are longer term maturities that go out beyond 2013 to show mark-to-market losses, basically about 60% of the losses are reflected on here.

For those two factors the materiality and the maturity dates we think it's important to reflect excluding the unrealized gains and losses for ongoing operations going forward. And again to reemphasize that when you get into the hedging periods of 2013 and beyond these are really long-term hedge positions that we've taken with our merchant business as we enter into long-term contracts contracts to lock into margin and hedge generating assets. As you can see 2007 that particular position is a fourth quarter loss that we expect to occur and again I want to reiterate that particular loss is also baked into the year end guidance that we provided you previously. In addition to that, the liquid period which is really where we have market information from 2008 to 2012 changes a slight loss relative to the gas and power prices and then beyond which is really reflected in the liquid period in 2013 which is the greater percentage of the losses, it gets into $0.06 which brings us back to the $0.11 that we've excluded from the ongoing earnings that we've reported during this particular period.

Now I'd like to go and in talk about the significant drivers of the business. Looking at YTD ongoing earnings from last year, the first nine months is $1.27, that bring us down to $0.96 for the first nine months of this year. The first part of it is a gain of $0.09 for EnergyCo and Jeff talked about the plant performance and the current state of the EnergyCo and its acquisitions. We talked about guidance last month that we would expect year end to be around $0.07. We do have an outage in the fourth quarter at Twin Oaks but we expect our guidance at this point at the year end to be at $0.08 given the current performance of the plants and we are on budget and on schedule to meet that objective for year end.

Jeff talked about plant performance and equivalent availability factors. We see improved plant performance. Palo Verde has certainly offset some of the impacts we've seen from the plant performance or base load plants. That's picked up $0.07. We also have $0.05 pick up from the Texas E. T. C. charges which allows recovery of our stranded assets in Texas from the deregulation and that started in December, 2006, also 56 guidance in PNM growth in weather part of that is attributed to cold weather. Our heating degree days are up 16% and we also see customer growth around the +2% range. As you know we have the rate increase that goes into effect on July 1 and that's a minimal impact and most of that would be seen in 4Q assuming that we would have colder weather and this week, frankly, it's been around 70 degrees so it hasn't been the kind of weather we like to see for that business. And it's a 2% load growth and average customer count increased about 1.4% over 2006. On other that really is mostly the financing costs, the higher short term debt with CapEx and higher interest rates that we are seeing during the last quarter and YTD.

And the other next two items the PNM Electric wholesale growth and weather, and coal costs, really goes back to some of Jeff's comments earlier reflecting the business model that we are facing with and the challenges we see going forward. And if you think about the fact that load growth and warmer weather typically would result in a gain of the benefit of the utility when in essence it's actually working against us. As Jeff pointed out it works against us because, one, the uncertainty around the plant performance also results in the fact that we have to use, in some cases our merchant plant -- merchant fleet in order to provide and serve our jurisdictional load and also as Jeff pointed out the retail margins are really not covering with our electric rates the cost of that energy. And in addition to that as we lose some of that wholesale surplus energy from our merchant fleet we are not able to make money in the wholesale businesses.

You tie that to the discussions we've had earlier this year with the coal cost increases due to the commodity prices as well as the cost to mine the coals. Those two factors clearly indicate the business model that we are faced with today and the reasons why we are having to pursue the rate increases that we are pursuing now that Pat referred to and the fact that we don't have a fuel clause and ability to recover purchase power, complicates our business model and makes these challenges, as you can see, from this year's performance more difficult for us to manage and deal with, and we are looking forward to our ability to pursue this rate increase and justify our position. In addition to that we had $0.13 YTD for Twin Oaks, which is the contribution. As you know, Twin Oaks EnergyCo on 6/1 reduced earnings at $0.15 We picked up $0.02 from some property tax true up that occurred this year. The dilution we talked about before, this is about a 9.6% increase in additional equity we issued in December of last year.

And the last piece of this the First Choice Power. Jeff talked about the business drivers in that market and some of the challenges we've had this year. If you were to break that down you would see $0.06 of that was from milder weather and reduced margins and the other piece of that is $0.12 which is $7 million trade gains that we had in '06 and a $7 million loss that we experienced this year. And again I want to point out that all these even the trading margins certainly are well within our risk management tolerance that are approved by the risk management committee and our board and certainly we typically look to be about 10% to 15% of EBITDA in that particular business this year but as Jeff pointed out, too, that going into the first part of the summer we have positions and market conditions softened with gas prices being do you understand it resulted in lost trading positions.

I'd like to talk about 2007 guidance and beyond. As we pointed out in the press release we would affirm that EPS guidance will be at the low end of $1.30 to $1.40 range but certainly this has an impact relative to the plant performance as to whether or not we are able make the $1.30. It could have a risk of that being slightly under given the plant performance that we are providing some information on what the EAS has to do to meet that guidance for Palo Verde and San Juan and as Pat mentioned construction was completed on time and is currently in the start up mode and certainly could have potential risk that could set us back in that regard and also on Palo Verde three with the steam generator replacement, we could have some risk relative to that start up and that being on schedule and the increased NRC oversight.

At this point I want to talk about guidance for next year that we intend as we complete our 2008 cleaning process as we finalized that we would look to give guidance in January timeframe of next year but I want to point out some key considerations that you should take in mind as you look forward to 2008. First of all don't forget about the $350 million equity link securities that we'll convert next year and that's driven, that dilution will be experienced based on what our stock price is. Two-thirds of that will convert in May and the remainder will convert in November. If you reference our Investor Relations Web site you can get some details on the equity link conversion and the price dilution information.

Secondly I want to talk about the impact of the load growth that I just mentioned. That continues to be a challenge. As we see the electric demand in New Mexico increases, our excess capacity is limited and we continue to have higher costs in serving our jurisdictional load as we begin to have to purchase power to meet that load and we see our retail margins shrinking relative to our current recovery in our rates. In addition to that, our fuel cost increases continue to impact results of this year and as we go into next year without the fuel cost recovery and the fact that we don't have a rate case settlement until May 7th, we'll have to continue to manage through these costs both on the coal and nuclear coal cost fuel increases the first part of the year.

In addition to other issues that will impact is our plant performance that we talked about. We have increased the Palo Verde O& M costs associated with NRC oversight and we have a number of planned outages in San Juan in 2008, two major outages one in the first quarter about 50 days and the second which is scheduled in the Fall which will last about 45 days. And also Pat talked about the ABI project we have $35 million that is annualized and a portion of that would be reached next year and we are still working on the timing of the savings as to when that will occur and we will talk more about that during guidance. And lastly is certainly the electric case outcome. So those are some of the considerations to think about as you look into 2008 and we will work hard to get our planning information up to date so we can give you some guidance in January, 2008, to give a clear picture on what our outlook would be. With that I would like to turn it back over to Jeff.

Thanks, Chuck, we will go to questions but let me just mention that Chuck, Pat and Gina will be in Florida for the EEI Finance Committee and I know that their schedules are fully booked to meet with many of you all. I had anticipated and planned on coming out. I've decided that with the downsizing and the impactions that we are doing today I really need to be here not just the end of this week but also the first of next week as the folks are coming back in and felt that that was the better place for me to be because Chuck and Pat and Gina can handle, I'm sure, all your questions. I will miss seeing you there but we will see each other down the road. So, operator, let's go to questions.

Thank you. (OPERATOR INSTRUCTIONS) And our first question will come from Lasan Johong with RBC Capital Markets.

Good morning. Thank you. A couple of -- a few quick questions. Does the rate case filing have a 15% staff cut reduction in it?

Go on through your questions, the two questions, Lasan, and then we will answer them both.

Okay. No problem. Basically with Palo Verde when do you expect Palo Verde to kind of regain its past glory of being one of the top performers in the nuclear industry?

Okay. Relative to the first question it is not in the rate case because it's out of period. The rate case is a historic test year for a period that ended --

Oh, I see.

--September 30, 2006. Now what this, what the O&M reductions are trying to do is move our future O&M costs down closer in line to what is in the rate case. It won't move it all the way down there such that as we have additional rate cases those rate cases will largely be driven by the investment patterns.

As you know we've got about $2 billion of capital to invest over the next five years. So it doesn't affect this rate case. Because it's way out of period. But it's our efforts to try to help minimize disturbs once we have the rate case to be able to operate under those rates for a period of time and to minimize future rate increases. Relative to P. V. regaining their glory, Jim Ferland is with us who you may know joined us about six months ago from Westinghouse, comes out of the nuclear industry, he was the CEO of LES and he is the on point relative to Palo Verde.

Thanks, Jeff. We spent some significant time with Palo Verde management, as Pat indicated, operations level, finance level and senior management and I think Pat mentioned we have kind of a 12 to 18 month window we are looking at where we would probably not expect P V to regain its prior status. After that Palo Verde is a new unit. We would expect it to operate in the top quartile or dectile in the country but the next 18 months is a risky period for Palo Verde and we are going to keep our eyes on them and work closely with their management.

Thank you, next question comes from Paul Patterson with Glenrock Associates.

Good morning, guys. I just want to follow up on Lasan's question and forgive my ignorance on New Mexico regulations, but a lot of times in historical test periods, they look at known and measurable differences and I was wondering if you could just elaborate a little bit more on how that would work with the announce many of cost savings? And the second question I have is what do you think the cost to achieve would be and when do you actually think we would see that?

On the known and measurable under the rules of New Mexico known and measurables can only go 150 days outside the test period. So we are into, barely into the first half of '07 for the allowance of known and measurables and these cost savings don't accrue until some time in '08, even the first traunch that's occurring today. On the cost to achieve the first estimate of the cost to achieve is included in what we booked as a non-recurring item for this third quarter and I believe the number is about a $12.5 million pretax.

In terms of the savings and the timing of the savings, the $35 million is an annualized number, a portion of which will be -- will accrue in 2008. But not all of it. We don't yet have an estimate of how much in '08. We will include that in our guidance. One other thing let me mention, Paul, relative to both your known and measurable and Lasan's question about, is it in rates. The 15% is action cross the entire corporation so it's not all, all electric or even for that matter all New Mexico, there's a piece of that in the Texas arena in addition.

Thank you. We'll move next to Greg Gordon with City Investment Research.

Hi, Jeff, how are you? So just to recap maybe a summary of drivers for, I know you haven't given '08 guidance but just structural drivers for '08 versus '07. First we had all these what we hoped to be nonoperating related issues that depressed second quarter earnings, that should reverse. We know coal costs are higher. We know we get some benefit of the account program next year, how much much that is not completely certain. You are also telling us we hope that Palo Verde opens, but there's no guarantees but then in San Juan we are expecting actually a significantly higher number of outage days next year versus this year, is that correct? And what other major structural issues should we contemplate?

Well, on San Juan it would be slightly higher. It's not significant. Just let me remind you San Juan has been in the top dectile performance for really the last four years. We had a little trouble with some forced outages this year greater than what we have typically incurred over the last five years. But with the outages, the planned out at this point this year we will have slightly higher planned outage days. I will tell what we can -- we will provide you, Greg, we can provide you the number of days of planned outage between '07 and '08. I don't have that with me. I don't think any of our folks do today but we can provide that to you. And then, I'm sorry, Greg, the first item you mentioned?

Okay. Mr. Gordon, could you please press star one?

I forgot the first item.

Mr. Gordon, your line is now open.

I was just saying that first and foremost we can hopefully normalized second quarter, second, we know that hopefully Palo Verde will improve. The big question is on regulation in New Mexico is still outstanding. As to what your returns will be you have a cost cutting program that will hopefully have some at least modest impact in '08.

Yes. The one that I was going to mention, Greg, was on Palo Verde. I think what we are saying is we don't expect to see improved, significant improvement in the operation of Palo Verde over the next 12 to 18 months. So will you not see us banking on an improved capacity factor next year for Palo Verde. We think it's going to take, as Jim said, 12 to 18 months to work out of this position and it's largely caused by when something happens the N RC descends and what may be forgiven in another plant and the plant is allowed to start up or they take a written explanation that's satisfactory for the cause, they end up with a much higher degree of scrutiny. So the outage tends to last longer. That's why we just don't see next year's Palo Verde performance increasing.

Thank you. We will move next to David Parker with Robert W. Baird.

Good morning. Maybe a little color on two things, first all with the commission a workshop on fuel clauses, how will that sort of dovetail in with your rate case and, secondly, you talked about settlement talks maybe being worked out. What do you believe the probability is there and who will the key players be or have been in the past, that would be helpful?

Relative to the fuel adjustment clause hearings, this process is just getting started. So it's not clear what impact it would have. I believe, we believe, that this is a positive thing because instead of saying, well, maybe we should eliminate fuel clauses they are saying, well, let's find a way to look at standardizing fuel clauses. So in term of the rate case obviously we will go forward with our arguments case obviously we will go forward with our arguments as to the installation of a fuel clause.

If changes are made to conform the different fuel clause mechanisms applied to the primarily three utilities, investor owned utilities that operate in the state, then that will be fine. We will try to take some of our best thoughts if we get into strong settlement discussions we may be able to help establish that standard. But so that's the impact from the rule-making process that they are going to go through. Relative to your second question, who wants to take that one? Pat.

The major intervenors in the case and we've had settlement discussions with the staff, the Attorney General, who functions as the consumer advocate here, [Nemeniac], who are the industrial customers here in New Mexico, the city of Albuquerque as they are our largest city here and are very active and then the University of New Mexico is also a big player in this. We also have western resource advocates and some of the other environmental groups that have some small issues but the major ones would be staff A G, Nemeniac and the university.

We are not really, it would be inappropriate for you to walk away saying that we are in settlement discussions. We are not yet. We will be open to it. Our focus right now is on filing our rebuttal case in a couple of weeks but if there's the opportunity for settlement we will always remain open to settlement discussions.

Thank you, we will move next to Paul Fremont with Jefferies.

Thank you. Looking at slide seven, sort of two questions. One, it doesn't indicate the recommended equity ratio and second would be that I've come up with about $14 or $15 million of cost of capital differences with the rest being expense items. Can you sort of review what the major disagreement is on the major expense items?

Yes. The cap structure is a 50/50 cap structure in the rate case. I'm looking at Tom Sategna who is our comptroller and responsible for the cost of service to explain the other item.

Paul, you're right. the cost of capital differences are in the range of $14 million. There are a number of issues cross the board depending on the exact intervenor and all the way from disallowance of all construction work in progress to adjustments to some of the capacity factors that we have proposed for Palo Verde/ San Juan. Also we have normalized some outage numbers for maintenance costs going forward and there's been exceptions there. So those are some of the major drivers but the biggest single item would be the reduction in the equity rate from what we filed at 10.75 down to 9.1 on the staff and 9.57 for the AG.

Thank you. (Caller Instructions) We'll move next to Darin Conti with Wachovia Securities.

Good morning. I wanted to just touch base on the '08 guidance that you talked about or some of the drivers I notice that you didn't mention EnergyCo. It was $0.09 YTD, I was wondering if you expect that not to be incremental next year? Can you just give a little color on that?

You know, this wasn't meant to give you guidance as much as just some key considerations. Certainly we will talk more about EnergyCo when we talk about guidance in January. But I guess the message this year is that we are right on track. We are meeting our expectations relative to year end performance and we made some good success with the acquisitions that we talked about with the Altera Cogen and the movement of Twin Oaks over there and the continued construction of Cedar Bayou which is on schedule to complete around 2009. But this one we would give you more color around expectations at EnergyCo as we give guidance in January, 2008 and it's our objective to give you as much transparency as possible so you can see how it is contributing towards the performance at PNM Resources.

Okay. Just we will look for guidance in January, then?

That's correct.

Okay. Additional question, with the lack-- I guess some of the challenges that Jeff talked about this past year, and the lack of not recovering off retail rates, what are you doing on the to kind of maybe mitigating some of that cost exposure, can you talk about that a little bit?

Absolutely, very good question. I am going to make a few comments and ask Pat to full in: We have now got eight programs that we have just deployed, just really in the last couple of months for our retail electric business and we have given an indication, a very strong indication that we believe that there is substantively more that can be done but we have to look at a change in the regulatory framework to ensure that those things can effectively be done. And provide the incentive, quite frankly, for them to be done. So we believe strongly that energy efficiency can have a significant impact in not only in cutting the growth rate and particularly cutting it from where we are incurring the higher cost. One of the things that we are facing is that our load shake has shifted fairly significantly in the last five years which is the time frame for the rate path that we've been under in the current settlement that we are operating under.

It's much more peak-y. It's driven by a lot of large amount of air conditioning load that's been added to the system. I know those of you in the east don't understand this and you shouldn't but we actually, you do a lot of cooling out here through the use of evaporative cooling. And so instead of having compressors running you have a fan running across water to cool the temperature 20 to 30 degrees. But we are not seeing that being installed in new homes and we are seeing an enormous amount of conversion to air conditioning. So our load is becoming much more peak-y. That's really what's driving our marginal cost of supply being higher than the average revenue that we get from those customers. Pat?

We have as Jeff mentioned an electric program and we also have a program on the gas side. Recovery, we have dollar for dollar recovery on a rider now for those programs. We are working to do more but the first thing we need to do as Jeff said is get the regulatory scheme right. The governor of New Mexico this year plans on introducing a major energy efficiency bill as part of this thirty-day session. We are in discussion with his staff and some of the environmentalists in terms of what that would look like. Our major focus is that it gives us the proper incentive to do more energy efficiency.

We are also working on some load control programs which is a big focus for us. As Jeff mentioned the penetration of refrigerated central air conditioning is becoming quite large in our area so we are working on some load controls both for the residential side and the commercial side to help level out that peak. But it is a major focus for us.

One other thing let me mention we already have on the books from this last session legislation that says that the commission is charged with removing disincentives and considering the application of incentives. Obviously we believe that not getting a return is a disincentive. But we agreed to go forward, this is a voluntary filing on our part with a first set of programs to get them off the ground this year.

Thank you. We'll move to Lasan Johong with RBC Capital Markets.

Thank you. A couple different questions. Chuck I thought you mentioned you had taken a mark-to-market of $0.04 this year is included in your guidance for $1.40, is that right?

That's right, Lasan. If you look at that chart that we're providing in 2007 that's already baked into the guidance projections.

So excluding that, that's $0.04 higher?

Lasan, I think one of the things, probably it's understood but we want to clarify is that the only mark-to-market gains or losses that in the future will be included in earnings is those that are on the trading book. So all of those that are economic hedges or related to our base line operation, those mark to markets will not be included. But since the trading one of the things that they do as part of their business is to, is the trading. The mark-to-market will be included in the income statement.

So if you can look at YTD anything that we've done this year has been settled and then we expect at this point for 2007 4th quarter position that we currently have would also be settled as a loss, frankly, and that's included in our guidance.

Thank you. We'll move to Paul Patterson, with Glenrock Associates.

Good morning, guys. I was just wondering if you could sort of touch base on the margin on the new customers versus the legacy customers in the first situation of the first business, excuse me, and what you are seeing there in terms of the flavor of the competitive market, what's actually happened with the mass market and just in general what you are seeing there in terms of how we should look as this in terms of a cost to acquire the customer, just give a little more of a flavor so we can be a little more predictive of what happened happen as what happened in this quarter as the load volume versus a more normal volume summer what have you?

Good question and I am going to ask Jeff [Weisser] who is the president of [NCPM] who is with us today. Let me put a caveat up front, Paul, is obviously we are not the large player that at least two others are or three others are and so we are a little careful about our competitive information but Jeff I think can give you a little better handling on how we look at the different customer groups. Jeff.

Thanks, Jeff. First of all with respect to your question on margin, we've reported margins in the 20s as Jeff talked about. And there's a variation above and below that depending upon the specific areas. So you said legacy versus competitive. It's a little bit lower in the competitive, a little bit higher in the legacy area. And that's just a function as we go forward of volatility and of competition.

The competition remains strong in Texas. We did get some clarity with respect to the legislative picture earlier this year which you know obviously translated into the beginning of growth in terms of acquisition of customers as the year went on. With respect to your question on costs to acquire, we look at this as if you look at any other capital budgeting opportunity and we want to see significant returns, cash on cash, IRR, et cetera, on our acquisition programs. So we do those things completely consistent with capital budgeting criteria you would do for any other type of activity. We like to see accretion on customers within a year of those spends. We won't talk specifically about what our costs to acquire are but I can assure you that those are the measures that we utilize to evaluate the effectiveness of marketing activities.

There's one other item on there, Jeff, that you may want to mention which is the positioning of our cost of servicing customers given the new system.

Well, yes, thank you, Jeff. Obviously as one of the smaller players, the fourth largest in this market, you have to have some competitive levers to apply and the customer service system that we've deployed and the related technology around that incents us significantly to acquire new customer, the to serve is significantly lower than on our existing base of customers that we had. So that's clearly a factor along with bad debt in our acquisition model.

While we are not being specific on numbers the delta between competitive and other customers is in the, in the legacy customers is in the high single digits, is that fair, Jeff?

In terms of dollars per megawatt hours? Probably so.

And relative to the costs of service we are certainly well below $1.00 a customer at this stage.

Our cost to serve is probably at least around half as much for an incremental customer as it is the existing customers we had when we entered into the marketplace.

I hope that gives you some more information, Paul.

Thank you, and we'll take our last question, Lasan Johong with RBC Capital Markets.

Jeff, you mentioned basically in Texas you guys are prepared for the nodal market, what goes into the preparation?

There's two things that go into that but I am going to have Jeff address them but it goes into systems and expertise of the people and the second one is obviously understanding where do you expect there to be locational differences. Jeff?

Exactly that, system, protocol testing that we have to do. And we think it's a very good opportunity for us as wholesale led retailer we have those skills intrinsic inside the business and it makes a lot of sense as we go forward tow understand how that market evolves and essentially to protect our customers and take advantage of the opportunities that many of the small under capitalized new entrants simply don't have. They essentially outsource those skill sets and that's a significant impact in this market going forward. And frankly we are prepared to address it.

Okay?

And that will conclude our question and answer session. I'd like to turn the question back over for any additional or closing remarks.

Well, again, thanks for your time today and I know you will see Chuck, Pat and Gina in Florida. Have a drink for me, would you please, and enjoy yourselves. Take care, bye bye.

Thank you and ladies and gentlemen, that will conclude today's conference. We thank you for your participation and you may disconnect at this time.