PNM Resources Inc (PNM) 2004 Q1 法說會逐字稿

Good morning and welcome ladies and gentlemen to the PNM Resources first quarter 2004 earnings 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 would now turn the conference over to Barbara Barsky. Please go ahead, ma'am.

Good morning, thanks for joining us this morning. Please note that the presentation accompanying this conference call together with supporting documents relating to our first quarter earnings is available on the PNM Web site at pnm.com. With me today, are PNM Resources Chairman, President and CEO Jeff Sterba; Chief Financial Officer John Loyack; and other members of the PNM management team. Before I turn the call over to Mr. Sterba, I need to remind you that some of the information we will be providing this morning should be considered forward-looking statements pursuant to the Private Securities Litigation Reform Act of 1995. We caution you that all forward-looking statements are based upon current expectations and estimates, and PNM Resources assume no obligation to update this information. For a detailed discussion of the factors effecting PNM results, please see our current and future annual reports on Form 10-K, and quarterly reports on Form 10-Q, and our current and future reports on Form 8-K, filed with the SEC. Thanks. Now, I would like to turn it over to Jeff.

Thanks Barbara. Good morning to you all. Thanks for joining us this morning. I know that you got a lot of calls to sit through today and over the course of this week; so we appreciate you taking the time to visit with us. In summary, we had a very strong quarter I think for the first quarter of this year as you've seen in our earnings announcements, and if you would look at page two of the package that's on our Web site. Quarterly earnings were $0.61 per diluted share with no one-time charges or gains and that compares to $0.53 for the same quarter last year about a 15% improvement. And that 15% as you will hear about was really driven by operational factors -- margins were up across the board, and good wholesale markets performance and good performance out our coal units.

We also in the first quarter announced a dividend increase to an annualized rate of $0.96 a share which was a 4.3% dividend increase. And we continue to believe that the growth that we are demonstrating is sustainable and supported by continued dividend increases in alignment with the philosophy that we've discussed with you before -- paying out 50% to 60% of our earnings from our regulated operations.

In terms of that $0.61 a share, just a couple of things I want to point out. First as I said, our coal unit performance was really strong in the first quarter. We had some unanticipated Palo Verde outages that bothered us a little bit. But they are -- frankly, have been managed very well. And to see the coal units perform as well as they did I think capacity factors in excess of -- or availability factors in excess of 93% was very good to see. Our wholesale margins were about little over $4m higher than they were in the first quarter of '03, without too much of a change in price. And so it really was driven by volume. One of the other points I would make is that we saw margins on our retail electric and gas operations also move up, really as we saw temperatures return to a more normal range. 2003 was a very mild year -- mild winter -- particularly. And this year we've returned to a more normal weather pattern. One other item that is of concern for us as we go forward is water. As you know, that is one of the big limitations on growth in the Southwest. And we've been in the period of a drought. And so we have entered into arrangements for shortage sharing in the instance that we have to restrict the amount of -- or the use of rights in the San Juan basin and the Navajo reservoir.

Frankly this year, we're very pleased with where we stand on the water front because we have had good snow pack in Northern New Mexico and Southern Colorado mountains. We've also had good rains. And so it looks like we will not -- should not have any issues or need to exercise our shortage-sharing agreements that we entered into with the Navajos and other water uses up there. Also, our coal mine operations are on target, in terms of cost and performance. They have done another long low (ph) mine -- long low move (ph). There is a -- the next one is scheduled for June. The long law moves are occurring on-schedule and on-budget, and some of the difficulties that they have had in mining the appropriate quantity of coal seems to have been worked through, as they are now exceeding their forecasts, typically, on the amount of coal removed from the underground mine. As you all will recall, we have in New Mexico, a legislative session that on odd-numbered years, is a 60-day session -- on even-numbered years, is a 30-day session. So this year, we just finished our 30-day session. When we had our conference call in February, we talked about where legislation stood, let me just review with you on page three, the things that actually came out. First, you will recall that the New Mexico Commission had promulgated a rule for a performance -- a renewable performance standard. And, while we are not a fan of those kinds of standards to be imposed -- a renewable portfolio standard -- most of those things, always have unintended consequences. It was clear to us that number one, we were going to exceed any renewable portfolio standard that would reasonably be imposed. And we did have demand from our customers for renewable resources. So we joined with all of our interveners and went to the legislature to codify that rule into legislation. And the reason for that was to create greater certainty over what the standard would be as well as the ability to ensure cost recovery.

And that was approved by the legislature -- passed the legislature -- and was signed in the law by the Governor. We also obtained a piece of legislation that enables us to utilize what we call produced water. This is water that is associated with natural gas production, particularly at a coal bed methane fields that has a high amount of associated water. It's fairly briny water -- not very clean at all. And the importance of the law is that it allows us to take that produced water, treat it, use it in an industrial process and not have it be deemed to be put to beneficial use. The importance of that is water that's put to beneficial use comes under the jurisdiction of the State Engineer and has an enormous set of issues that can complicate the use of the water. And the state engineer, in fact, supported this request. So it clears one of the main hurdles for our ability to use produced water for supplementing water needs at San Juan or for other purposes within our power production fleet. And that was important.

On the economic development front, I would mention that three new pieces of legislation were passed. I won't go into the details of them. But I think it continues to show that the state is doing the right things to make itself attractive for new businesses to relocate and for existing businesses to expand within the New Mexico territory. We also, in the first quarter -- or really at the end of the first quarter, implemented the gas rate increase that had been approved by the commission. Recall that one that was approved in January, we put into place the business rate increases. And then the residential rate increases were deferred until the first of April -- really April 4. The total of those increases on an annualized basis is $22m. Now -- and so now, that is fully implemented with our retail customers.

So, the last item I want to touch on from a political and regulatory perspective is, as you know, there have been a series of wholesale market proceedings both at the FERC as well as with -- as in court by litigation initiative by the state of California. And I just wanted to give you an update. There is really nothing that has happened recently in this arena. But there are two matters that have been important to us, both sitting at the FERC level. The first one deals with the creation of gaming practices. There were two orders issued in 2003 -- I believe June of 2003 -- that were show-cause orders to about 60 different entities.

One of them was a gaming practices order and the other one was a gaming partnerships order. The gaming practices order effectively required a show-cause that we and others had engaged in practices that were not in compliance with the California ISO and PX rules. We were removed from that proceeding by motion of the staff in January of 2004. The gaming partnerships order alleges that we, working in partnership with about 13 other entities -- that we engaged in practices through those partnerships that attempted to not comply with rules and may have gained the market. In that order we are still a participant, most of the entities -- in fact I believe all of the entities that it was initially alleged -- with the exception of one, Enron -- that we have partnered with if you will, have been released, either by settlements or by order from their participation in that proceeding. We continue to believe that we have done nothing inappropriate or wrong, relative to the gaming partnerships, we have -- I believe the FERC and California have filed their case in this proceeding. In the FERC proceeding -- or in the FERC testimony, we are not even referenced. So it is not clear to us what that the FERC staff at least believes that we did anything. But this is the one remaining issue in terms of the FERC proceedings that we need to see play out. Again as I said, I know we've had a number of questions regarding the status of these proceedings. I thought it would be useful to give you a brief update since nothing really has happened. We are really down now to the one remaining FERC issue that we have to work through. Then on the California refund side. As we've said before, we believe that we are more than fully reserved. And as you probably know, the FERC has now said that they will not have a final determination of the amounts owed, either to parties or to the State of California until probably August. But we believe that we are fully reserved for the most probable outcomes that could occur in that case.

If you turn to page four, I just want to take a minute and talk a little bit about some management changes that are occurring within the Company. I'm very proud and pleased with the folks that I have the opportunity to work with, I think we have shown great performance for our customers as well as for our owners over the last set of years since I've been back and I've been very, very pleased to have had an opportunity to work with these folks.

Roger Flynn who has been our Executive Vice President and Chief Operating Officer joined us about 10 years ago after completing a career as an officer at Pacific Gas and Electric. And he has brought a wealth of insight and capability as well as humor to our table. And Roger after now two careers has decided to retire. This has been planned for sometime and he will be retiring at the end of June. I want to thank Roger on this call for all that he has gone to help advance the interest of this Company and its shareholders. He has really been my right hand as we have gone through the last four years. In preparation for that, we have made some changes within our other senior ranks. Eddie Padilla who has headed our wholesale marketing efforts for a number of years has been moved over to take over our delivery business, as well as our retail customer service and marketing operations -- today reports to Roger. When Roger retires, will report directly to me. Eddie has been with the Company for about 25 years and has primarily worked in the bulk power markets and bulk power operations starting as a transmission engineer. And so in a sense, this is kind of going back home, since he'll have responsibility for transmission. But I know that he will bring a wealth of that experience into the delivery area. We've had the pleasure and the opportunity to hire Hugh Smith who had a 25-year career with Tampa Electric in a variety of areas, particularly in the bulk power markets, in fuels, in environmental services, but also in areas like customer service. So he has a very well rounded background. He has been with us now for about 3.5 weeks and has hit the ground running. And we are really looking forward to great things. He will say grace over our commodity business if you will, which will include all of our power production, fuels as well as our wholesale marketing and trading efforts. So, we welcome Hugh to the group. The other change that's occurring is one that's -- it’s apropos that we have an opportunity to talk with you all about it, because this is a person that you all know well.

Barbara Barsky has been with our company for 20 years. I have known her for virtually almost all of those 20 years except for my little sabbatical. And she has always provided not only everything that she could do at her best for the Company, but I think has represented our shareholders and our owners as we have held strategic discussions in an exceptionally admirable way. She has overseen a number of areas heart our company from human resources, modeling, and now in charge of Investor Relations. And I know she is a person that you have counted on to always get straight information. In the face of what many of you know as personal adversity in terms of health issues that have occurred over the last set of years, her spirit, her determination and her grit, if you will, has really been an inspiration. And Barbara has decided to retire to play with grandkids and do other things. She will be at the EEI session. So you'll all have a chance to visit with her. And you will also have a chance to meet with the person who will be taking over the Investor Relations area, Lisa Rister, who has also been with the Company for a number of years, most recently as our Chief Risk Officer. She has really helped transform our risk management activities from just being commodity risk to enterprise-wide risk and has been active in the Chief Risk Officer's group over the last couple of years and I know will do a great job as Executive Director of Investor Relations and Corporate Planning. So, I'm sure that you join me in thanking these people for what have done -- to Roger and Barbara for their service. And welcome the other three new executives. With that, let me turn it over to John Loyack, our CFO to go through a more detailed explanation of performance.

Thanks Jeff and good morning. Let me start on slide five with our quarterly earnings comparison. As Jeff mentioned, ongoing earnings were up about 15% or $0.08 per share to $0.61 a share. This is our fourth consecutive quarter-over-quarter earnings improvement, demonstrating the sustainability Jeff discussed earlier. On a GAAP basis, earnings for the first quarter of 2003 were $1.22, versus $0.61 in the first quarter of 2004. As we mentioned earlier, there were no one-time items in 2004. But if you remember 2003, we had a one-time gain of $0.95 for the adoption of FASB 143 and a $0.26 charge for transition cost write-offs due to the repeal of deregulation in New Mexico.

On slide six, I'll take you through our walk across for the quarter. On the positive side, we saw higher margins across the board and lower interest costs. That was partially offset by the electric rate reduction as well as some higher operating costs. The electric rate reduction cost us about $0.08. Medical and retiree costs -- about $0.07. Higher bad debts and higher IT license and maintenance costs cost us $0.05. And we lost $0.04 as a result of the plant schedule -- maintenance schedule at the Four Corners facility that went through a major this spring, versus a minor last spring. On the positive side, our wholesale margin was up $0.06, reflecting new business, refinancing activities where we refinance senior, unsecured, and tax-exempt debt in 2003 saved us $0.07. Gas margin was up $0.08 due to growth and a normal winter season. And electric margin was up $0.11 due to very strong load growth and lower cost of generation at our coal units.

On slide seven, let's discuss our margin by platform. Overall margin was up $12m or 7%. On the utility side, electric utility margin was up $2.4m -- 2.7% despite the fact that we had to implement the electric rate reduction for the quarter. We saw load growth of 3.5% and lower fuel costs at our coal units that were more than enough to offset the electric rate reduction. Gas utility margin was very strong, up 13% or $5.4m. We saw 2% customer growth and we also generated $1m of benefit from the new gas rate increase. Remember that is just the commercial and industrial component, as residential rates did not go into affect until April. But weather was a big story, as we returned to a much more normal winter season, as we saw heating degree days right on the 10-year average for our gas business -- where if you remember a year ago we had the warmest January in recorded history. To wrap-up, our utility margin, transmission margins were even with a year ago.

On the wholesale side, margin was up $4.2m. Long-term contract margin was up $2.5m or 13% reflecting our Overton and Mesa sales. Forward margins were also positive, up $2m, as we saw velocity improve to 1.9, versus 1.8 a year-ago and our margin per sale up about $1. Short-term margins were about flat. Pricing was a little better, $42 around the clock this year versus $41 last year. But that was countered by less generation, due to the outages at Palo Verde, units two and three in February and March, as well as some higher purchased-power costs. On slide eight, let's walk through EPS by segment. Electric utility EPS was down $0.05 as the rate reduction, the outage scheduled at Four Corners, and higher salary and benefit costs more than offset the margin improvement for the quarter. Gas utility EPS was up $0.06 or 35%, largely due to margin. Transmission EPS was up slightly -- $0.01, and that reflects our EIP lease refinancing transaction. Wholesale EPS more than doubled, up $0.06 to $0.11, reflecting new contract business, while corporate and other was steady with the year-ago.

On slide nine, let’s spend a minute reviewing liquidity and cash flow. Our short-term borrowings were down $35m to $90m, quarter-over-quarter. We saw the benefits of the refinancing that took place in 2003. S&P upgraded us to BBB, while Moody's upgraded us to Baa2, both on a stable outlook. And both Moody's and S&P provided us a rated commercial paper program for the first time since the mid-80s, with an A2 P2 rating. That program went into effect on Monday. We actually sold 42m of rated commercial paper under that program for the first time. Cash flow was very strong for the quarter. Operating cash flow up $48m from $6m a year-ago. Free cash flow at $31m and construction expenditures down $6m. Remember we had a fairly high CAPEX cycle in 2003 that we expect to tail off a bit in 2004.

On slide 10, let me reaffirm earnings guidance at $1.90 to $2.15. As we discussed on our February 10 call, there are some critical factors that will move us through the range during the year -- plant availability, weather, wholesale growth, short-term pricing in the wholesale market, and our cost control initiatives. On slide 11, we'll take a little closer look at that, as we review our key guidance factors. Short-term pricing was $42 around the clock for the quarter, versus our low-end assumption of $37. In fact, if we look at May forwards, they are in at $49 around the clock. So, early in the year, pricing looks very good. Merchant sales velocity at 1.9, versus our low-end assumption of 1.7 -- very good liquidity there. Retail electric load growth was very strong, 3.5% versus 1% on our low-end and 1.2% a year-ago. And finally, our retail gas customer growth in at 2%, right where we were last year and just slightly above our low-end assumption. All-in-all, our key assumptions are performing well during the early part of 2004. Now let me hand it back to Jeff for a wrap up.

Thanks, John. Let me just touch on a couple of things -- I’m on slide 12. Before going into the substance of slide 12, let me raise one other thing that has occurred more recently. You'll recall that when we created the Holding Company in 2001, we claimed an intrastate exemption under PUHCA. And we included that in our most recent filing in February of this year, which we had to make to the SEC. I think -- I don’t think, I know, we disclosed in our 10-K that an order issued by the SEC at the end of 2003 denied the exemption to Enron -- the same intrastate exemption based on the interstate activities of its subsidiary, Portland General Electric. And this order called into question the availability of the intrastate exemption for companies that have a certain level of interstate utility activities. And as you know, our wholesale marketing endeavors have grown fairly significantly over the years. And it represents just under 40% of our revenues and 20% of our bottom-line profit. In discussion with the Office of Public Utility Regulation of the SEC, in the recent past, we were told that they view the existing interstate activities of PNM to be significant enough to require registration based on the Enron decision. And so we are preparing to register, seeking the appropriate authorizations under PUHCA coincident with registration. We don't see that becoming a registered holding company will really affect our business strategies in any real significant way. And we continue to be a supporter that PUHCA needs to be repealed. But we don't have great heartburn over becoming registered. In fact, with the Western transaction a couple of years ago, we knew we would become registered. And any of a number of things that we would do strategically would cause this to happen anyway. So -- but we did want to make you aware of it. We have had discussions in New Mexico. We believe that the things that we will need to do to go on and complete the registration will be able to be managed without any significant issues. And as I said, it will not change our growth prospects or pursuit of growth opportunities.

Let me turn to that in closing, again, on page 12. The wholesale market continues to be something that we have performed well in, and we are continuing to look for opportunities to expand it, both in the long-term contract portfolio as well as the addition of new resources. We've talked for the last couple of quarters that our customer origination efforts, frankly, have outstripped our supply origination efforts, because we have seen too big of a spread between -- on a bid/ask spread on generation resources that we have an interest in. I would say that we see that dynamic changing a bit, not maybe to the same degree that we would of course like to see. But I think that opportunities as developers and owners of resources need to resolve how they are going to go forward. We're seeing opportunities come to the table that are more closely aligned with what we think a fair value for those resources would be. Now our focus continues to be within the region, integrated with our current footprint. They need to be integrable (sic) into our system. So we are not looking for onesey and twosey resources in the Midwest or in the East or in the Southeast. We're looking to expand within the market area that we know and where we have customers.

One other thing I thought I'd just mention is, it’s not a profit growth business, but is one thing that we do have occurring that I frankly think we found a pretty good model to work from. And that's our technology development. We have a small subsidiary called Avistar. And first let me say that the development and operation of Avistar will cost our shareholders no more than a $.01, $.015 a share this year. And next year, we think that will break even and maybe will begin to add to the bottom-line. What Avistar has focused on is the developing technology solutions to problems that we have in our energy business. And in the instance that those technology solutions have application to a broader-based market, we will then start to take them public. There are two that are rolling out into the market today. Let me just mention them briefly. One is what we call our Mutual Inductance Bridge, or MIB technology, which is a non-destructive mechanism -- testing mechanism -- to determine wall thinning in boiler tubes. Now that may not sound very romantic and it isn't. But it is the single largest cause of forced outages, particularly in coal-fired boilers. And there is a tremendous amount of money that goes into the loss of coal units, due to tube leaks and their repair. But the real cost is the loss of having to take the unit down to make the repair.

The MIB technology allows us to -- in a fairly rapid order -- scan entire sections of tubes, either with the use of a robot or the use of a hand-held device. And we are just starting to roll this out through partnerships -- the first one being with Longview for the North American market. And this has potential to go forward. Whether or not it will ever make money -- we know that it will at least make back its investment. And we'll continue to stimulate new technology. The other one that I just mentioned is something we call About Phase, which is really a field-related device that allows folks working on power systems to be able to identify which phase of a three-phase system they're working on, and also to be able to determine the phase angle. Without going into all the detail of that, because frankly I can't, I would tell you that it is getting really interesting market reception for application and distribution operations across the country and is just now rolling out of the pre-production side. So those are two things that we have going on in the technology side. Again, we do not view them as a major growth engine. But they fundamentally help our business and we are finding more and more opportunities for them to help others within our industry. With that, I think we'll bring this to a close and certainly stand for any questions that you may have, if the operator is there?

Thank you sir. 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 questions will be taken in the order that they are received. Please standby for your first question. Thank you. Our first question comes from David Schanzer with Janney Montgomery Scott. Please state your question.

Hi, good morning everybody.

Good morning.

Couple of questions. One, the administrative and general expenses were up about $0.26 for the quarter and you went over the reasons. I was wondering if you could give us a sense of what the next few quarters would be like, as far as that is concerned? And the second question -- I was wondering if you could give us a little more color about the performance of the wind farms and whether your outlook has changed, as far as further expanding that aspect of your generation?

Let me ask John to take the first one, I'll take the second one. John?

Yes. I think that the component of that, Dave that you'll see throughout the year is obviously the salary, benefit, retiree, medical kinds of costs. I think the others are more period-specific, particularly when you think about plant maintenance at Four Corners -- that really is a spring outage. So that's not something that we would expect to repeat -- as well as some of the higher IT and bad debt expense for the quarter.

Okay.

Relative to the wind farm, David -- it has performed up to expectations, both in terms of its actual performance and generation of electricity. We are now entering into the windy season here. And so we are already seeing a major jump in its performance levels. We have also seen good performance or good acceptance of this in our retail markets. We are running about double the customer sign-ups and probably more like triple on the business side. We have had really strong business and even industrial commercial -- industrial acceptance of it. So, I think that that's going well. We are interested in further developing additional renewables, not just wind. We do have a couple of biomass projects that we're taking a very hard look at. Solar is a little more difficult, because of pricing. But one of the things we are thinking about is trying to find -- and we are working on -- alternative wind sites, because we can expand the existing wind facility by about another 30 or 40 megawatts -- maybe up to 50 -- without any significant transmission investment. But we wouldn't mind having another farm that has a slightly different wind pattern to help offset the changes in performance of a wind farm. One of the biggest challenges of operating a wind farm is the level of generation changes all the time. And so you have to regulate your other generation in order to meet that. If we had a facility that has a slightly different wind pattern, that would help offset some of that regulating margin challenge.

Okay. Thanks.

Thank you. Our next question comes from Jeff Gildersleeve with Millennium Partners. Please state your question.

Good morning. Just wanted to ask you about your generation and the outlook for scheduled outages this year. I saw that Four Corners -- I guess one is unit down for a spring outage and another unit was down briefly for a boiler leak repair. Can you just highlight the outages plans for this year?

We’ve got a short minor outage at San Juan plant for the fall of this year. And then Palo Verde has a refueling outage later this year, as well, in the fall. And other than that, we expect it to be a fairly typical year as we move forward.

The one thing that I would mention on the Palo Verde outage -- it's scheduled as a refueling outage, but it looks like there will be an extension. We are not quite sure exactly how long. But instead of the typical 35-day refueling outage, it may go to 15 to 20 days longer than expected, because of some work that has to be done. It can’t -- it really goes in addition to the fuel outage. We'll have additional information on whether that is going to be more like 15 or more like 20 as we move closer to the period.

Okay. Is that an extension of the Palo Verde outage -- is that associated with an upgrade?

No, it's not.

Okay. You would benefit this year from upgrades that occurred last year though?

That's correct. We will have an upgrade on unit two, which went through the steam generator replacement last year. And I believe that is on the order of 10 to 12 megawatts for each of the units when they go through the steam generator upgrade.

Okay. That's your share?

That's our share.

Okay. Secondly, as your balance sheet is doing well and you have received good applause from the credit agencies, and you look at certain opportunities -- how should we think of your priorities, as far as growth and the ability to use your balance sheet and seek opportunities?

Well, we certainly have worked hard to get the balance sheet in the shape it is today. And while we are not going to put it under threat, we do intend to utilize it for transactions that are beneficial to our shareholders. So, growth -- it fits within our priorities at a very high level. Because we’ve, I think, put our fundamental business in pretty good shape. We are still focused on moving forward with market excellence in our retail arena. There is more we can do on the customer service and delivery end. But frankly, that business is in pretty good shape and we're looking aggressively for growth opportunities. Those growth opportunities are certainly going to have to be accretive in order to be exercised. And as I said, we're not going to do something that will push us back in an over-leveraged situation on the balance sheet. John, would you add anything?

Yeah. I would just add that the projects we're looking into, were very focused on overall return. And I think you will find that as those projects become available, we'll be financing them in a smart way, so that we won't be overlevering the balance sheet as a result of growth.

Now, are you referencing things such as assets, small power plants, or could these be larger acquisitions?

Both.

Okay. And when you look at your return metrics, you said overall return -- obviously, looking at cash return in earnings. Is there a priority though? Are you mostly concentrated on the -- would you do a deal that might be mildly dilutive on the EPS side, but could enhance your cash flow?

Well, we believe that that notion of cash is king. But to say something is mildly dilutive -- unless there is a very specific plan that will help improve that earnings to an accretive position in a short period of time, that would have a much higher hurdle for us to get over. I mean, if it has a positive cash generation of significance all through the period and there is little risk associated with that cash, certainly it would not be thrown out with the bath water. But we do believe that it ought to be accretive to earnings and that their are transactions to be done that are accretive.

Okay. And one more finally -- you spoke about this intrastate action by the SEC. Could you just clarify -- what's the timing you might have to register and what are the implications? If you could just run through that again for us?

Well, we would expect -- I’ve got Pat Ortiz here, so I may ask him to chime in and add anything or correct anything that I say. But in general, we'd expect that we will be making the filings within a reasonably shorte period of time -- the next -- okay a couple of months. I was going to say six weeks or so -- but a couple of months for the filings. We would expect that there would be a transition period that will give us an appropriate amount of time to form the services Company, which will have to be formed. And these are not new issues for us, because as I said, we planned on creating a services company when we were originally going to split under the restructuring order in New Mexico. We also planned it when we had the western transaction on the burner. So, these are issues that we've obviously looked at and worked with. We don't see that it will alter or affect, in any adverse way, our growth strategies. And we don't -- while it is a cumbersome administrative process we will have to go through, we don't believe that the costs associated with it will be material in any way. Pat, what would you add?

I would just reiterate what Jeff said. It is going to take a few months for us to work with the SEC staff to put the application and the regulatory authorities necessary for us to operate as a registered company in-place, such that we are not in regulatory limbo. But we don't anticipate any problems with that. And in the meantime, we intend to maintain our current exemption, while we are working with the SEC staff. We don't anticipate any problems.

Okay, very good. Thank you.

Thank you. Our next question comes from Maurice May with Power Insight (ph). Please state your question.

Good morning everybody.

Good morning Maurice.

My question has to do with San Juan -- and I wanted to get some color on the operating expenses and coal expenses going down there? Are the expenses related to higher heat rate coal? Are they related to cleaner coal? What is driving the cost reductions there, exactly?

It’s really all of the above. It is higher heat rate content coal; it is lower ash coal and lower moisture. So, we are getting effectively a cleaner coal, in terms of ash. The sulfur content is very low any way and it’s scrubbed. So, that really doesn't affect it. But the heat rate of the underground coal is maybe, on an average, 400 BTU per pound higher than what we were taking off the surface.

Okay.

So, that's really one of the main benefits associated with going underground.

Okay. Now just as a follow-up. Your FERC Form 1 last year said your oil and production costs were about $24.50 per megawatt hour. And in the press release this morning, you said production costs were going down 10% in the first quarter -- or went down. And so, can we look at about a $22 cost of production per megawatt hour at San Juan?

Yeah. I don't have that data specifically, John.

Yeah. We certainly did for the quarter. Obviously, how well the plant runs from a capacity factor throughout the rest of the year will have a bearing on whether we wind up there for the full year. But that's not off the mark.

Okay. So, this is really -- this is very low compared to the current market price, which is in what, the low-to-mid 40s in the West?

That would be right.

And in reality on a margin basis, it is even different than that, in that we have an incremental coal pricing arrangement for the coal delivered to the plant over a certain burn level, where the incremental is -- without getting all the specifics -- maybe 30% -- 25% of the average cost of coal.

You mean the price goes down, the more that you use?

Correct. We have an incremental pricing arrangement, once we cross a certain threshold of coal usage, which we certainly plan on.

Okay. What is that threshold? Can you give us that?

6,500. Is it 6,500? 6,500 tons, yeah -- 6.5m tons.

Okay. Okay, thank you gentlemen.

Thank you. Our next question comes from John Hanson with Imperium. Please state your question.

Good morning.

Good morning.

From a wholesale market -- I am trying just to understand here. We've gotten kind of used to you guys coming onto pretty much announcing new contracts each quarter, or at least fairly regularly. So I looked through there real quickly -- I didn't see that this time. I guess my question is, are you getting pretty well termed out now? Or what's your comfort level, in terms of being able to sell more forward?

Well, with the 330 megawatts of additional contracts we added last year, frankly, we need to focus on our supply side, to add some additional resources. That does not mean that we are not out actively developing additional customers. And we've made good progress with that. But we need to see these two things kind of go hand-in-hand. I would look to Hugh and Eddie, who is just transitioning out of that area, as Hugh gets his feet wet -- for either of you two -- comments you would want to make.

Yes. This is Eddie Padilla. Fundamentally we've sold forward the majority of our existing -- what I would call base load capacity. So, all the additional sales are focused on either Viper resales or looking at new generation acquisition opportunities and sell off those assets.

Okay. So, you really may need to have those new resources in order to take the next step on some of that growth in wholesale. I just have one clarification -- it reminded me. On the Palo Verde outage that is going on now, is that -- or excuse me -- that was being extended -- is that the one that's going on now?

No. It is the Palo Verde outage that will occur this fall.

The fall outage, okay. Let me come back though, to the wholesale situation and the fact that you are getting pretty well matched now. How do you and how comfortable are you covering, when you do have the fossil outages that have occurred recently here? How do you cover that? And is that just a matter of covering it with other resources? And are those resources more expensive? Or do they pretty well give you the same margin?

Yes. We cover those in two ways. We typically maintain somewhat of a, cushion if you will. We are long by going forward and buying contracts that we think we will resell into the forward market. Those are specifically done with the expectation that we may have outages of our unit. So we will cover up that way. Alternatively, we can also run off of our gas units. Those typically would be out of the money, for those hours that we run those. But we have a couple of ways that we cover up unexpected outages.

On the gas units, do you have contracts or options -- something that allows you to pay reasonable prices for that gas? Or are you pretty much on the margin there?

For the most part on contracts that we have with long-term customers that we know we would have to be provide -- or maybe exposed to providing -- passing energy out of our gas units. We cover those up with hedges. So we do have gas procured and available to run our units. And very seldom do we have to run gas on our margin. We do have certain instances, but they are not very often.

Okay. Very good. I would like to wish Roger well and, in particular, Barbara well. Thank you.

Thank you.

Thank you. Our next question comes from Teresa Ho with Salomon Brothers Asset. Please state your question.

Yes. Good morning. I just had one question, regarding the registration. If I go back and remember the last time we discussed this, there were a couple of things that you had to look at. One was sort of the dividend restrictions. Another one was sort of reporting requirements discussed with -- another issue was, could you discuss at least those two items and what we should be looking at -- what else we should be looking at?

Pat?

We don't really believe that any of the additional requirements that PUCO imposes on registered companies is going to affect our current operations, because our current operations are within the requirement. As you know, the New Mexico Commission has already placed a number of restrictions on us that are very similar to what we would expect to see on the PUCO side. So the requirements for paying in the dividends and the securities issuances and the like -- what we are anticipating working through in the next few months prior to registration is, getting those blanket authorities that the SEC allows into place at the time we register, so that we won't run into any problems.

Okay. And can you discuss sort of some of the costs that would be one-time in nature, regarding the registration?

The major cost that we're anticipating, which we don't think is going to be all that great is of course -- well, there’s going to be costs related to the legal cost incurred in working with the SEC and getting the registration in-place. But also the reorganization that is going to be required to move corporate services out of the Holding Company and into a services company. But given what the NMPRC condition put on us when we formed the Holding Company to put those services into the Holding Company, it seems like a fairly simple matter to move them out of the Holding Company and into the services company to comply with PUHCA and the PRC conditions.

Okay. But, you don’t I guess, se any kind of, I guess, challenges in terms of the possibility to manage your earnings and cash coming from this structure?

No. We don't at all. We don't at all. And in fact, in the discussions with the SEC staff, after they understood the way we operated, they indicated they didn't see much of an impact at all in the way we managed our business and operated.

Okay. Great. And I just wanted to say congratulations to everybody, especially Barbara. I will hopefully see you at EEI. Thank you.

Thanks Teresa.

Thank you. Our next question comes from Michael Lapides with Hibernia. Please state your question.

Hi guys. Congrats for a great quarter. And Barbara, like Teresa just mentioned, hope to see you up in New York or some other time soon, before you step aside. Quick question, regarding other income and deductions. Noticed that other income was pretty similar to the year-ago quarter at just over $11m, but other deductions was substantially less than the year-ago quarter. Can you kind of walk me through what is in the other deductions category and what sets the delta?

I'm looking to John. And he is going back to look at it in a little bit of detail. I'm not sure we've got a specific answer at the tip of our tongue. Michael, what we may do is ask you to call back and we will give you that, and then we will post it to make sure that it is available. Is there a simple -- it is a bunch of different things.

Okay. I mean, I guess the real question is the sustainability of that quarter-over-quarter or year-over-year ago quarter?

John?

Yes. I think you'll see the run rates. It's a long list, so probably the easiest thing is just to get back to you on the long list. But I don't see anything in there that isn't going to continue throughout the year.

Okay. Great. Thank you folks -- and John, I'll just follow-up with you offline.

Yeah. You bet.

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 Brooke Glenn with Jefferies & Company. Please state your question.

Yes. Good morning. Can you just give us an update on any plans that you have to file for additional rate relief on the gas side? And additionally on the electric side, any plans that you have to bring the two gas-fired units into rate base?

Yeah Brooke, thanks. On the gas side, I think as we've talked before, we do anticipate that we will be seeking additional -- probably be seeking additional rate relief. I don't think you'll see that filing being made this year. I think you'll see it slip probably into the next year, because I think that is appropriate timing. We just finished a case. And I think we want to make sure that we see how customers have responded to that. We do -- we currently have a task force underway looking at ways -- and this is a joint effort between us, the Commission Staff, and a variety of community players -- ways in which we can help customers manage their bills better. And there is a whole -- a list of some really good ideas that have come out of that work. And we won't really see that work come to a head, until later this year. And I think that those ideas need to be built into any request that we may have for further adjustment on our gas rates. And on the electric side, we're currently going out on an RFP for power supplies that could be available within -- for our retail load in 2006. I think that RFP will hit the streets the 1st of May. So that form will be one in which we will take a look at our existing gas units. Remember that a lot of that gas, particularly the Lordsburg facility, is really tied today to our T&P contract. So, a portion of that gas resource is really already under contract, although that contract only runs, at this stage, through 2006. We certainly would intend on trying to renew that business beyond 2000 (technical difficulty).

Thank you very much.

Thank you. Ladies and gentlemen, as a final reminder, should you have a question, please press star one at this time.

Operator, it appears that we've run out of questions. We have exhausted them or they have exhausted us, whichever the case may be. I would just like to thank each of you for joining us today. And I'd like to turn it over to Barbara to make a few closing comments.

I just wanted to thank you for joining us today, as well, and to let you know that not only will I be in New York for EEI, Lisa Rister and I will be in New York -- in Florida for the AGA Conference next weekend -- and so will Roger Flynn. So you'll have a chance to say good-bye to the two of us and hello to Lisa. So we look forward -- please stop by and visit with us at either or both places. Look forward to seeing you all again. So thanks for joining us. If you have further questions, please as usual, feel free to give us a call. Thank you.

Ladies and gentlemen, if you wish to access the replay for this call, you may do so by dialing 1-800-428-6051 or 973-709-2089 with an ID number of 345458. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.