PNM Resources Inc (PNM) 2002 Q4 法說會逐字稿

Good morning. Welcome ladies and gentlemen to the PNM Resources fourth quarter year-end earnings release conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are on a listen-only mode. At the request of the company, we will open up the conference for questions and answers after the presentation. I will now turn the conference over to Barbara Barsky. Please go ahead.

Good morning. I'm Barbara Barsky, Investor Relations Officer for PNM Resources. I'd like to thank you for joining us this morning to review our fourth quarter and year-end results for 2002. Today's conference call can also be heard on the internet through our website at PNM.com.

With me here in Albuquerque are PNM Resources Chairman, President and CEO, Jeff Sterba, Senior Vice President and CFO John Loyack, Senior Vice President and General Council, Pat Ortiz, and Senior Vice President of Power Marketing and Development Eddie Padilla. Also our Controller and Chief Accounting Officer Robin Lumney.

Yesterday afternoon PNM Resources reported earnings for the quarter and year ended December 31st, 2002. That news release, together with accompanying charts and financial statements and supplemental information on earnings variances for the quarter and year is available on the investor section of our website at PMN.com.

Please remember that some of the information we are providing today relative to earnings, regulatory issues, investments and other issues should be considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act. Actual results in 2003 may differ materially from our expectations.

We caution you not to place undue reliance on these statements as actual results will be affected by a number of factors, including weather, the local and national economies, interest rates, the performance of generating units and the transmission system, the competitive environment in the electric and natural gas industries and various legal, regulatory and legislative outcomes that the company is unable to predict at this time.

For more information about these uncertainties and risk factors please consult PNM's 10K filing for 2001and Q filing for the quarter ended September 30, 2002 and PNM's 8K filings with the SEC. I'd like to now turn the call over to Jeff Sterba.

Good morning. Thanks, Barb and thanks for all of you for joining us today. As you know, 2002 was a very challenging year for the entire industry, particularly for those of us operating in the western United States.

It was a year in which the western wholesale power market was buffeted by market, regulatory and political dynamics. And like all market participants, we were adversely affected by low prices, a significant reduction in credit worthy trading parties and the dramatic slowdown in sales activity over the course of the year.

And while it's never good news to have to report a decline in earnings, we certainly anticipated that there would be a decline, we just did not expect it to be as dramatic as it was. I think in 2002 we made some significant achievements in laying the groundwork for future growth in earnings in both our core utility business and in our competitive power marketing business.

I think last year we did more than just survive. While many others have been forced to cut back, abandon growth plans or even quit their wholesale market efforts all together, we weathered that storm. We did some necessary realignment in the third quarter.

You'll recall that we reduced our work force by about 3% in our continuing effort in operational efficiency. We reduced our planned capital expenditures in 2002 and 2003 by about $600 million and cut our five-year plan by over $1 billion. We also cut operating and overhead costs where we found savings could be achieved. As a result our nonfuel O&M costs were down about 5% for the year. And even with that, we achieved top ratings in system reliability and customer satisfaction which are really the things that we focus on to make sure we're headed in the right direction.

Those are all minor course corrections to adapt to the demands of a changing market place. We continue to execute on a strategic plan that has served us well through the turbulence of the last decade. We remain committed to the vision of building America's best merchant utility.

Because we have been cautious and conservative in pursuing that vision, the slowdown in our wholesale business in 2002, while it certainly didn't allow us to achieve our initial earnings target it did not undermine our financial health.

Our debt remains investment grade. And in fact, one of our successes last year was to arrange a new and expanded resolving credit agreement on reasonably favorable terms in what you all know to be a very difficult credit market.

We finished the year with $83 million on hand in cash or short-term investments, and we continue to benefit from a healthy cash flow from our utility operations. We believe the PNM dividend is secure and we plan to fund our construction capital requirements in '03 without accessing capital markets.

With the state commissions approval of the global electric agreement that we negotiated last year, that approval took place at the end of January, we have in place a known electric rate path over the next five years and have the ability to continue selling system-wide power into the wholesale market to the benefit of our shareholders. We are now moving forward with the necessary adjustment of our gas rate structure that's intended to correct the underperformance of this business.

Our global electric agreement also ended much of the uncertainty over our corporate structure, the terms of our participation in the competitive wholesale market and the future status of utility regulation here in New Mexico.

If the State Legislature adopts the recommendations of all of the parties that were part of the global electric agreement, we will continue, for the foreseeable future as a traditional regulated gas utility in our home state with the unique flexibility to expand our wholesale business through a blending of all of our regulated and unregulated resources.

That certainty allows us to plan effectively to meet the continuing above average growth in our service territory. Our wholesale marketing effort remains focused not on gaining short-term advantage, but on cementing solid, long term relationships based on meeting the unique needs of each customer.

At the end of last year we entered into a contract to supply 80 megawatts to the U.S. Navy in San Diego. This is a firm requirement round-the-clock commitment that will gross about $42 million a year in revenues for the company and it's just shy of a 2 1/2 year contract.

Our firm requirements contract with Texas New Mexico Power which runs through 2006 increases to 107 megawatts this year. And our Navapache contract which is a co-op in Arizona is now for about 60 megawatts. These are the kinds of sales that we believe will serve as a firm foundation for future growth in this business.

It's a pleasure to introduce our new CFO John Loyack, who many of you have had a chance to visit with over the last year or so. And I've asked him to give more detail on our 2002 results and also to go into a bit of detail relative to our 2003 guidance. As you'll recall, we gave guidance early this year for 2003, but we did not have a conference call to discuss it, just the release. So we'll go into just a little more detail about that guidance. John?

Thanks, Jeff, and good morning. In January we revised our forecast for 2002. At that time, analysts consensus had us at $1.90 and until late in the fourth quarter we believed we would meet or slightly exceed that expectation.

However, based on developments in December we revised our estimate downward to about $1.80. Three key factors reduced 2002 earnings by 9 cents from what we had previously expected.

First it was the outages we experienced at the Four Corners power plant where we are a nonoperating owner. Four Corners generated only a 55% capacity factor for the month of December. The lost sales and incremental O&M we incurred through fourth quarter earnings by 3 cents a share from our forecast.

A second factor was higher than anticipated coal mine transition costs that reduced fourth quarter earnings by another 4 cents. And finally, mild weather and higher O&M our retail utility gas and electric businesses reduced our forecast by 2 cents a share.

Now, let me briefly review PNM's fourth quarter and full year results. For the quarter, total margin improved $10 million or 7% from 2001. On the retail side of our business, electric sales grew by 3% because of strong customer growth and improved consumption levels. We also had a $3 million weather-related improvement in gas margin.

In our wholesale business, lower counterparty risk and higher market prices helped offset a decline in sales levels. O&M costs for the quarter were unchanged at $101 million as operational efficiencies were able to offset cost inflation, unscheduled outages, and severance costs,.

In addition other income approved $2 million for the quarter reflecting the absence of merger costs from 2001, partially offset by the write-off of a planned transmission line project in 2002. Reported GAAP earnings totalled 26 cents per share for the quarter, compared to 11 cents in 2001.

Ongoing earnings net of nonrecurring items totalled 32 cents per share compared to 20 cents last year, an improvement of 60%. In the fourth quarter 2002, PNM recorded 6 cents of one-time charges. The charges included 3 cents of severance costs at Palo Verde and Four Corners, and 7 cents for the termination of the transmission line project. These charges were partially offset by a one-time gain of 4 cents to reflect the early successful resolution of litigation with Western Resources.

Now, let me review our full year results. Operating margins declined $127 million or 24%. The 2002 decline was created by the supply and demand shift in the western wholesale market that began in Q3 2001.

This oversupply and the ongoing restructuring of the wholesale market in the west drove market prices and sales velocity down as PNM wholesale prices fell from over $100 megawatt hour in 2001 to below $35 in 2002. Other margin activity included a $1 million drop in gas margin that was more than offset by retail electric sales growth of 2.1% for the year.

Total O&M was down about 5% for the year to $360 million reflecting the effects of work force reduction and operational productivity that more than offset cost inflation. Overall the PMN generation fleet had an excellent operating record in 2002 despite December difficulties. With San Juan operating at 86% capacity factor up from 82% and Palo Verde operating at about a 94% capacity factor up from 88% in 2001.

Other income improved $31 million because 2001 included one-time expenses such as merger costs, coal mine decommissioning and unregulated investment writedowns. GAAP earnings for 2002 were $1.61 a share compared to $3.77 in 2001. Earnings before one time items were $1.81 a share for 2002 versus $4.52 a year ago.

Other than the fourth quarter items discussed earlier, the only other nonrecurring item for 2002 was a charge of $9 million or 14 cents a share taken in the third quarter in connection with the 3% work force reduction.

Now, let's look forward to 2002. In January, we provided earnings guidance for ongoing earnings of $1.80 to $2.05 for the year. Today we are reaffirming that guidance.

As we said back in January, the range is based on a number of factors, including retail growth rates, wholesale electric prices, merchant sales velocity and spark spread. 2002 certainly presented a difficult market in the west, and 2003 will have its challenges as well. However, we do see reasons to expect earnings growth in 2003 despite these challenges.

Retail electric revenue growth is projected at about 2% at the low end of our range. Recent growth has been in the 2.5% range with every 1% increase in load adding $3 million to margin and 5 cents per share to the bottom line. This growth was partially offset by a retail electric rate reduction beginning in September 2003 that lowers margin by $5 million.

This reduction is a result of the global agreement approved by regulators last month. The global agreement also provides for recovery of $100 million of coal mine decommissioning costs. Those costs will be amortized over 17 years beginning this September, increasing fuel costs by $2 million.

Return on our gas assets will continue to decline in 2003 as returns are expected to be reduced by another $3 million due to the end of an existing rate rider. We filed the gas rate case in January seeking a $37 million rate increase. The case has a 10-month clock which may be extended. If the 10-month clock holds we could see some small margin in EPS improvement in December.

On the wholesale side, our low end forecast assumes weak liquidity and flat prices. We are projecting an average annualized market price of about $34 a megawatt hour. While current forwards are stronger than this, it's far too early in the year to see this as a continuing trend and forward prices don't directly translate into our mix of short-term and long-term, peak versus off peak sales.

We are assuming a merchant sales philosophy for the year of about 1.5 at the low end of our range compared to 1.6 in 2000. This assumes PNM will sell about 50% more power than it actually generates. When velocity goes from 1.5 to 1.6 that adds about $1million to gross margin and a penny to EPS.

In addition, spark spread assumptions at the low end estimate remain at levels that will restrict operations of PNM's gas fired assets to capacity factors below 10%. Finally we expect to realize coal savings from the start-up of the underground mine that supports the San Juan generation station that will help improve margins.

[INAUDIBLE] cost increases will effect PNM's earnings potential in 2003. The combination of lower interest rates and poor market performance for the pension fund in 2002 increase costs by $5 million. Insurance costs have also grown by $2 million reflecting the change in the insurance market since 9/11.

Palo Verde will be replacing a steam generator in unit 2 adding 37 days to the outage schedule. San Juan has scheduled two major outages this year extending the outage schedule by 50 days over 2002. The result will be higher O&M and lost margin.

In addition, this will be the first full year of O&M and depreciation on our new gas plants increasing costs by $8 million.. These cost increases will be partially offset by having a full year effect of the work force reductions that were implemented in the second half of '02 and we expect to continue to drive costs out of the business through process improvements.

If you refer to the slide on 2003 earnings guidance, you will see our estimate of how variations in these differing factors affect our earnings range. These are guidelines that attempt to quantify a number of complex and interdependent factors. These guidelines are provided to assist investors in developing their own independent assessment of the company.

Let me wrap up by addressing our CAPEX plans for 2002 and -- or 2003 and beyond. In 2002 the company spent $238 million on CAPEX. Of that, $73 million was for new generation.

Without generation acquisitions, we expect to spend an average of $140 million a year in total CAPEX over the next five years funded by operating cash flow. That schedule is a bit front-end loaded.

2003 CAPEX is forecasted at $156 million because of a number of projects. Including the steam generator replacement at Palo Verde, a turbine rewind as San Juan, gas transmission additions and final gas turbine payments. Now, I would like to return the call back over to Jeff.

Thanks, John. To sum up, last year was a tough year financially. I think we've not just weathered the storm in pretty good shape by maintaining our position in the wholesale market, cutting our capital costs, but also advanced the ball in terms of our fundamental operations and in removing uncertainties in the regulatory arena. So while I fully expect we'll have challenges this year, I'm pretty confident that we're going to be able to manage them successfully.

If you look at our core utility it's performing well. I expect it will provide a solid foundation for future earnings growth. As we talked about before growth in our home service territory continues at rates above the national average and probably on the basis of job growth, the second highest in the nine western states.

In 2002, we continued our success in the quest for operational excellence and customer satisfaction. We ranked number one for system reliability in a survey which is really based on 2001 results issued in 2002. And what's interesting is our performance in reliability for last year was even stronger than it was in '01.

Another recent national survey ranked our call center first among 18 utilities for customer call satisfaction. In an annual national survey of utilities we have seen a steady improvement in our residential and business customer scores in each of the past three years. These are not things we take for granted.

They are effectively the foundation that has allowed us to negotiate our electric settlements and I think has positioned us for better acceptance than we would otherwise see in our quest to gain appropriate rate relief for the gas business. The PNM focus on customer satisfaction has been a prime contributor to the improved regulatory climate and, as we've talked about, that directly benefits our shareholders.

We now have that known rate path for the next five years and the ground rules under which we are going to continue our conservative expansion of the wholesale business. Certainly one of our major challenges will be the gas rate case.

The global agreement lays the groundwork for future growth on the wholesale side. This is worth reiterating. We've talked about it before. It allows us to retain all of our generation assets, regulated and unregulated in the utility and continue joint dispatch of those resources. All margin that we generate from wholesale sales flows directly through to the bottom line during the five-year period of the rate freeze.

That arrangement gives us a competitive advantage, because it expands the size of our footprint to not just our merchant generation, but all of our generation being available to serve all loads including those wholesale sales. Over the last couple of months, we've seen some firming of the wholesale market.

Although the market still suffers from a lack of liquidity and a shortage of credit worthy trading parties, I am pleased that we're continuing to find opportunities in our focus on meeting the needs of smaller utilities, munis and co-ops in the western market place.

As we turn in through 2003, there are many things we have on our table to manage, but let me just touch on five priorities. First, our continuing progress towards performance excellence through process quality and customer-based initiatives.

Second, achieving an acceptable return on our gas business through the rate case and cost control initiatives.

Third, continuing our incremental expansion in the wholesale electricity market through additional longer term sales that will more effectively utilize existing power resources.

Fourth, pursuing growth opportunities as our market place and competitors continue to realign their business.

And fifth, expanding our efforts in our environmental stewardship effort through renewable energy and our environmental management system which covers all of our existing operations.

As you know this year we will bring in 200 megawatts of wind generation. We are looking forward to having that as part of our portfolio and continuing to work on other opportunities to meet the desires of our customers to continue to improve the environment.

So our committment to shareholder value will be demonstrated as we continue to improve our balance sheet strength, provide a secure dividend and find ways to provide earnings growth over the next few years.

With that, we'd be happy to take any of your questions. And I'll ask the moderator to turn it back over.

Thank you. The question and answer session will begin at this time. If you are using a speaker phone, please pick up the handset before pressing any numbers. Should you have a question, please press star one on your push button telephone. If you wish to withdraw your question, please press star two. Your question will be taken in the order that it is received. Please stand by for your first question. Thank you. Our first question comes from Andrea Feinstein with Angelo Gordon. Please state your question.

Hi, Jeff. I have a couple of quick questions for you. First one, when you came to town subsequent to the rate settlement and walked us through the base earnings power you gave us a very useful breakdown by various segments as to where you saw base earnings. While I appreciate the breakdown that you guys just gave us on some of the 2003 factors, it would be helpful if you could more specifically tie those to the breakdown that you had given us before so we could see where you are underearning versus your expectation for base line earnings power.

Sure. I don't have that with me, Andrea, but I understand your question. It's something I think we ought to provide -- we should be able to provide in the future. John, you may have a few.

Sure. Our plans would be for the first quarter release to have those buckets on a consistent basis with what we had provided.

I don't think she's talking about the buckets, John, I think she's talking about the earnings power table that showed the $2.00.

Exactly. So that I can get a sense of where things are kind of falling behind.

Right.

And understand --

Certainly.

Okay. Great.

There's really too, just to touch on that relative to the $1.80 to $2.05 compared to the $2.00 earnings power. There are a couple of things. First is the gas side. We lose $3 million of margin because of the termination of a rate rider in January.

Mmmm-hmmm.

So that's a chunk right there.

So versus the 3.8% ROE that you were showing --

Right.

You're actually earning less than 3.8% in--

It turned out for the year we earned less than three.

Okay.

For 2002. And as we move into this year, there's another $3 million of margin reduction because of the termination of the rate rider.

Okay.

So that's the first and probably the most significant element that places our range while we think there's a chance that we will go over $2.00, we've got a lot to make up on the gas side because of that underearning.

Okay. From the perspective of your expectations of the wholesale business and the marketing business, can you give me a sense in your $1.85 how much contribution you expect based on the velocity numbers?

On that one, Andrea, that really does get into the buckets that John described. I think you were with us when we were in New York --

Mmmm-hmmm.

And went throughout the five buckets of contribution to earnings that we are going to start reporting on.

Yep.

We will do that as of the first quarter.

Okay.

So we are not in the position to yet do that. We will start doing that, though, on our quarterly releases starting the first quarter of this year.

Okay. Great. And then the other two questions I had real quickly. Can you just repeat for me the CAPEX expectations that you had laid out? I think you said $156 million in '03 and then you had given a longer term number as well, and I missed that.

Yeah, we are around 700, a little over $700 million for the five years.

Okay.

Now, let me make sure it's clear a what that represents. I've been chastised about using the term maintenance capital for accounting reasons. But it effectively is that capital which is associated with maintaining and expanding existing facilities. It does not include any allocation for asset acquisitions, or significant new plant development.

And does --

It does, for example, include all of the Palo Verde steam generator replacements that we will be doing. It does include some things like that, but it doesn't include any new generation resources.

Just on that point, which was my last question. You've talked in the past about how the bid ask spread has been on--

Yep.

-- on the opportunities you would hope would be out there. Are you seeing any difference in that?

Yeah, I think it's narrowing a little bit. Not enough, but I think it's narrowing. I think there are some folks that are realizing with the amount of market uncertainty that exists, it's pretty difficult to make -- to put some of these assets into the market and the financial pressures continue.

Okay.

So I think it's narrowing. I don't think that we've seen a floor, by any means, yet.

Okay. Great.

And we are obviously actively monitoring that as we go forward. Andrea?

That's it. Thanks so much, Jeff.

You bet. All of a sudden, it's like I didn't know if we had put you to sleep.

I apologize.

That's okay.

Thank you. Our next question comes from Sam Brothwell with Merrill Lynch. Please state your question.

Good morning everybody.

Hello, Sam.

Hey, Jeff real quick to follow on Andrea's question. I was writing fast and furious as John went through this, but I think you indicated that your movement and velocity from the 1.6 to the 1.5 range was worth about a million?

No, it's less than that. Think of it as a penny.

Okay. Okay. As I said I was writing fast.

Think of it as a penny.

Okay.

The margins in that part of the business have never been huge and they are even smaller today, largely because of the lack of players in the market.

Right.

So we look at it as about a penny.

Okay. Two other questions. I was wondering if maybe you could comment a little bit on how things are shaping up in the coal mining end of things in terms of savings that you are realizing to date?

You bet.

Also if you could comment a little bit on what you see happening up in Santa Fe at the commission with the change in administration and everything?

Okay. First on the coal, you know, last year it -- there were things that had happened in the transition from the above ground to the underground that were more costly than had been anticipated, and we raised that with you first in the summer and then we had another little bite at the end of the year as they made their final transition. It's now in commercial operation.

In fact, I was up there Monday, and met with the president of the BHP Billiten and Coal who came in with his entire senior management team from -- well, all over the world, but he's in Melbourne. There's a strong commitment on their part relative to making that a world class operation. And, in fact, I think it already has established that. Not just in its size, but the speed by which the underground mine game to fruition. But, always these finds of operations as huge as they are, they have a lot of challenges. And I think they ran into a few more challenges than they expected in its initial operation.

The budget that we have for this year relative to the coal operation is built into our range. And so long as the market allows us to sell the power out of San Juan, I am very confident that they are going to be able to keep up with that production requirement within the cost constraints of the budget. You know, there's always little issues that crop up, some of them are positive, some of them are negative. And I think one of the good things that came out of Monday is a recommitment to working together not on the mining issues so much, but some of the political, broader based issues that surround it.

Let me just give you a quick example. This is property that has both gas and oil, well, primarily gas leases, methane leases, as well as coal leases. And it probably doesn't take much for you to think that drilling methane wells in an area that's going to be mined underground for coal, those two may not always been compatible. They have been trying to work through that, and I think we can bring a little more political muscle than they have to that situation. And, in fact, was back meeting with Domenchi and Bingingham last week -- and this was one of the issues on the table.

So I feel pretty good about where they will be and their ability to perform. When you go out there, you'll hear as many south African and Australian voices as you will hear American. They brought the best of the best from their entire BHP Billiten operation because this is the largest coal operation they have and we are the largest customer for coal across the world. So there's a lot of focus on it. So I feel pretty good about that. It doesn't mean, as I said, there won't be challenges. But I think the fundamental expectations we had for the mine will be met.

Relative to Santa Fe, you all will remember that our commission is elected, not appointed. But it certainly has -- it reacts to political issues and political pressures.

We have two new commissioners, and we're pleased to have those two commissioners on board. Neither of them have what I would call fundamental energy experience, but they have -- one of them has legislative experience, is a lawyer and the other one has a lot of financial experience, was the treasurer for the state at one point and comes from a very well-known family in the state, the King family.

I feel pretty good about where the commission is today. As you also know, we have a new Governor, Bill Richardson. Someone we have worked closely with. And Bill is shaking things up and getting things done. Just as an indication of that, this is probably unheard of, certainly in this state, but his proposal to cut the top end tax personal income tax over four years almost cut it in half, went through unanimously in the Senate in a period of about four days.

I'm not sure I can think of something that has been unanimously passed through the New Mexico Senate in my short tenure living here. So I think it shows that there is a different kind of leadership and a different kind of commitment to help make things happen. I'm sure there will be some rocky roads. But Bill is an activist Governor. I would also note that there is a movement in the legislature which we are completely on the sidelines on for obvious reasons, to look at reversing the constitution amendment that took the PRC from being elected to turning it to being appointed. I don't know whether this will advance and go anywhere, but that's being kicked around up in the Legislature in this session.

We do have issues in front of the Legislature. The largest set deal with the implementation of our global stipulation, and the permanent repeal of the restructuring act with a couple of provisions that are kept. That's the major item we have, but there are others. I do think that we'll see a commission that will engage the issues. They are very different. They are certainly not of one mind, and that's okay. But they, you know, they acted very quickly on our stipulation and that's with two new commissioners. They had a recommended decision out of the hearing examiner, Eddie, first week of January?

Right.

The first week of January and they approved it two weeks later. Two and a half weeks later. And it is probably one of the biggest stipulations that a commission has acted on. So you know, on net net, we are okay about what's going on up in Santa Fe.

Okay. Well, thanks.

Thank you. Our next question comes from Theresa Ho with Banc of America Securities. Please state your question.

Yes, I have a couple of questions. First on the gas rate situation, could you remind us when the test year for that is?

Yes. The test year ends September 30th, '02 with known and measurables that build in changes that could go forward in the year beyond that.

So even though you earned less than 3.8% and for the year you earned less than 3%, they would consider the fourth quarter as an issue as well?

Well, what -- no. Not quite Theresa. What happens is the test year is based on actuals through September 30th, and then known and measurables. Those known and measurables will take into account investments that are committed to. They'll take into account for example sales, obviously financial performance is based on actual sales. When we go into a rate case it's based on normalized sales, where we do weather adjustments.

I see.

It's a little hard to compare it to an actual year. It's more on the expense side that we look at the test year and then with known and measurables.

Okay.

Expense and capital.

So we could look at the 3.8% as a starting point and then adjust for weather and other assumptions?

I think the thing that you look at is, in order for us to earn a 12% return on the test year, isn't that what we filed with? 12% return?

12% return.

It's a $37.9 million increase. And rather than looking at actuals and then trying to build up, I think it's better to look at, this is what the rate case is, and this is what the return is. Now, I'm sure there will be some that will quibble with certain elements of costs in the rate case. They may quibble with the cap structure. They will definitely quibble with a 12% return. And I think, John, 1% ROB on the gas business is --

$3 million.

About $3 million.

Okay.

So I think it's better to think about it that way, Theresa, than to try to build off actuals.

Okay. Then in terms of the assumptions that you're using for your '03 guidance, just going back Andrea's questions on the velocity, as well as the assumptions for wholesale prices and spark spreads, I'm assuming that's not a linear relationship, that as you get further out from the assumptions, the impact would be greater? Is that correct? Or --

I guess it depends on which item. If you took, for example, price in the wholesale power market, not necessarily. It should be fairly linear.

Fairly linear.

Yeah.

Okay.

The problem, and I just want to stress it. The problem, we are trying to provide you some rules of thumb. But, just because market prices move up a buck, doesn't mean that we'll get that full impact because it depends on what our mix of long-term and wholesale -- long-term and short-term transactions are and also where in the year are we. The numbers that John gave are annualized.

Right.

So they assume a full year impact.

Mmmm-hmmm.

And also on spark spread, we really need to see spark spread of 15 bucks before our gas units really have an impact. So if you see spark spread move up $1 but it moves from 7 to 8, it didn't do a darn thing.

Mmmm-hmmm.

Once we get above $15, then you'll -- then we start to see contributions because of increases in spark spread. Eddie, or John do you want to add anything?

I think you think of earnings in three layers. Where market price he creates a layer, the velocity creates a layer and the gas fired generation creates a layer which is really why we've laid out those three assumptions. And the gas fired is probably the least linear because of the interconnection of spark spread and the actual electric price.

Okay.

Yeah, if we saw spark spread jump to $30.00, you would see more than a doubling of what it was at $15.00.

That's right. Yeah.

So can you make it so, Theresa?

I'll try. I'll do my best. In terms of the wholesale side, could you tell us what the mark-to-market gains were for the quarter?

John? Do you have that?

Mark-to-market gain was $3 million for the quarter.

And what was it for the year?

$29 million.

And could you sort of tell us, in terms of your book, the duration of your book and when you -- I guess when you expect to realize most of your cash?

What was the very last part of your question, please?

When do you expect to realize your mark-to-market gains in cash?

Well, in regards to the first part of that question, you know, we have previously identified that it is our target to maintain a book where we have approximately 75% of our transactions sold into the long-term. And when we presented those graphs before, we've included in that discussion the commitment to our jurisdictional requirements.

We have, in the past, recent past, added some new resources that we've identified, but at the same time we've reported a couple of new transactions, inclusive of the Navy contract, as well as the extension of the City of Gallup contract. So with those, we still feel we are on target that on a capacity basis, we are still in the 75% range when we measure it on a pure capacity basis.

There are other ways to measure that. For example, we can do it on an energy basis. We know that in the year 2002 approximately 10% of our transactions were associated with long-term contracts. We are now, given the contracts we have locked in for 2003, that number has moved on an energy basis to approximately 30%. So we feel that on several bases from which you can look at these transactions that we are steadily moving to our target having a substantial portion of our portfolio committed to long-term transactions. In regards to the --

On the second piece?

Yes.

Let me try and handle the second piece, Theresa. The gain that John referenced, both for the fourth quarter and for the year, was primarily a recovery of what had been booked as losses prior to that. In 2001, we'd had significant mark-to-market losses that almost fully offset the gains that we've picked up in '02 as market prices started to move back to more normal levels. So you can look at it that effectively our net mark-to-market is nominal today compared to what our cash position is.

And the small amount that is there is really all '03 related. Primarily third quarter. Maybe a little bit that will go into the future years because of the San Diego contract. The Navy contract. But, effectively, it was really offsetting prior period booked losses on mark-to-market.

Okay. And then my last question, you mentioned that there's some firming at the wholesale markets. I understand that some of the off peak power prices are coming up to the peak pricing -- I mean it's not the same, but it seems like the differential is narrowing. Is that what you're seeing in your area?

Eddie?

Yes, Theresa, that's definitely been something we've been observing. The off peak prices on the forward basis have strengthened considerably, from our projections, that is. We haven't -- don't have a good finger on why that's exactly happening. We know that there's a couple -- three very significant new plant additions that have just come on line. They are gas fired. And so given the gas price situation and the forward market right now, and these significant new generation additions that are gas fired, we are speculating that there is some movement in off peak prices associated with the marginal gas units that may be displacing other units in the off peak market right now.

Is that -- do you think hydro is having an impact as well?

Well, we think that's certainly affecting all prices both on and off peak.

Okay. Not just in particular off peak, though?

That's right.

Thank you very much.

Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star one at this time. Thank you. Our next question comes from Richard Greenberg with Donald Smith and Company. Please state your question.

It's Rich Greenberg from Donald Smith and Company. I noticed you had a drop in your common equity of about $59 million from the third quarter to the fourth quarter. I presume that's a pension charge. Could you walk me through why? That works out to $1.50 a share which strikes me as a large hit. Am I correct in that it's the pension? And also what capability do you have to recover that ultimately in rates?

You are correct, it is pension, and it's largely the drop in the discount rate that creates this minimum pension liability as the liability is much larger, and of course pension assets haven't performed as well. A lot of it is related to the interest rate, so I think it turns around. On the rate recovery side, we have factored pension costs in as a known and measurable adjustment in the gas rate case obviously, in the electric rate case that's settled for the next five years.

Okay. Thanks.

If there are know further questions, I will turn the conference back to Barbara Barsky to conclude.

Thanks to all of you for joining us today, and we will be available for questions during the day if you want to call. Thanks.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 973-709-2089 with an ID number of 274494. That concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.