PNM Resources Inc (PNM) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PNM Resources fourth quarter 2006 earnings conference call. My name is Onika, and I'll be the operator for today. [OPERATOR INSTRUCTIONS.]

At this time, I would now like to turn the call over to Mr. Frederick Bermudez with Investor Relations. Please proceed, sir.

Thank you, Onika. Good morning, everyone. We had a snowy day this morning in Albuquerque, so sorry for the delay. Happy Valentines Day to you.

This is the PNM Resources 2006 earnings call. Please note that the presentation and accompanying materials for this conference call and supporting documents are available on the PNM Resources website at www.pnmresources.com.

Joining me today are PNM Resources Chairman, President, and CEO, Jeff Sterba, and our Chief Financial officer, Chuck Eldred, as well as other members of our Executive Management Team.

Before I turn the call over to Mr. Sterba, I need to remind you that some of the information that we'll be providing this morning should be considered forward-looking statements pursuant to the Private Securities & Litigation Reform Act of 1995. 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 detailed discussion of factors affecting PNM Resources' results please refer to our current and future Annual Reports on Form 10-K and the quarterly reports on Form 10-Q, as well as other current and future reports on Form 8-K filed with the SEC.

With that, I'll turn it over to Jeff.

Thank you, Frederick, and good morning, folks. Again, thanks for joining us, and I apologize for being a few minutes late. And happy Valentines Day. We hope we will bring you a nice treat for your Valentines Day.

Well, I'll be referring to the slides in the presentation on the web, and if you flip to page 3, slide 3, what we will do is first talk about the earnings and operational overview, and then go into more detail on the earnings, then we'll move into the guidance discussion, and provide some updates relative to both PNMR and EnergyCo.

With that, let me--moving to slide 4, note that we're very pleased with the outcome of the year. I think it's--it was a good strong year, although as many of them do, there were certainly challenges during the course of the year. Our earnings, as we announced, from continuing operations were $1.80, in the upper half of the range that we provided at the beginning of last year. That's a little over a 15% increase in earnings per share in a year in which we also increased the number of shares outstanding. With that, we have seen about 11.5% compound annual growth rate in our earnings per share since 2003. Yesterday the Board also increased the dividend by $0.04 a share, giving us a payout of $0.92 per share and we've seen dividends grow at almost 11% per year since the same period of 2003.

Before Chuck walks through the 2006 earnings performance in more detail, let me just touch on a few key operational items. Referring to page 5, the first, relative to the additions to our generation fleet, we had three, as you will recall, additions that are--either have occurred or are in the midst of occurring. The first was the acquisition of Twin Oaks, which was closed in April at a price of about 500--$1,575 a kilowatt, and that asset is locked up through September under a off take agreement, and then 75% of it is hedged under an off take agreement until 2010.

The second is the completion of the construction at the Luna combined cycle facility, which you will recall we bought in a storage state with at about, a little over--about half a percent--half of it completed. We finished that facility in the spring, brought it in to service under schedule and under budget, at a cost of about $245 a KW, that's 190 megawatts, our share. We have two equal participants in the plant, which we operate.

And, third, we have received regulatory approval, as you know, to expand the Afton combined--I'm sorry, CT, and it is being expanded to a one-on-one combined cycle, and it will be brought into rates. I'll talk a little bit more about that later, but it is proceeding on schedule and on budget.

Relative to reliability, load growth, and cost containment, let me refer you to page 6. Now, one of the things that we have always held out as a strong factor for our customers is the reliability of our system. I think that's a hallmark for all utilities. We think we've done a bit better. If you'll notice we show a top quartile performance for the typical measure, which is SAIDI, system average interruption duration index, which is basically how many minutes is the average customer without power in a given year.

And we have consistently been below, or I'm sorry, above, in the top quartile. We have fewer minutes than the top quartile measure. 2006, it bumped up a little bit because of the extreme weather that we had in December, when it finally started to snow, and some very--probably the strongest snowstorm we've had in 50, 60 years. But our performance on service has continued to be strong.

I would also note that our customer satisfaction scores, which we just recently received, are up across the board in both our residential and particularly in our business classes, where in our large business classes they're touching and, in fact, exceeding the top quartile performance.

Relative to load growth, we've always had load growth that's in excess of the national average. That certainly happened last year, but even in a more--in a stronger fashion. On a weather normalized basis, electric load growth was 4.2% last year, compared to a national average of just under 2%.

And--but one of the things that has allowed us to continue to drive earnings while having great reductions in effect is that we have continued to drive our operating cost as a percent of margin, or--down, and you'll see that in 2006 we continued that pattern of having non-fuel O&M per dollar of margin dropping by another 6% or so.

Moving to First Choice Power, I'll give you a brief update on First Choice Power and their performance in '06. We're very pleased with the performance that First Choice had. They grew the number of customers, while they continued to have churn in the price to beat range of about 7 to 8%. They significantly grew their competitive portfolio base, their competitive portfolio group by about 85%, so we saw net-net about a 17% increase in the number of customers. And their EBITDA grew 23%, to a little over $67 million for calendar year '06.

Power plant performance is obviously very critical for us, particularly on the base load resources, and I really have to say San Juan has done a tremendous job. It's--to have a good year of performance you always are pleased with, but when you have three straight years that are three of the best years that plant has ever operated in its 25-year history, that is just a pleasure to see, and so they were just under 90% in equivalent availability.

Four Corners also did very well this last year. We had minimal maintenance scheduled for the units at Four Corners, but they did very well, and they have continued over the three years to show improvement.

Obviously, the problem child was Palo Verde, largely due to the extended outage with the vibration problem that we had on Unit One. Overall, they performed at 70%. Chuck will talk in a little while about our--what our expectations are for this year. We are very supportive of the changes that have been made at Palo Verde. Randy Edington, as you know, has come on as the Chief Nuclear Officer. He is very well respected as a person who can take plants that have gone through some problems and troubles and get them straightened out. He is already--he's onsite, on the ground, and, in fact, making management changes at the officer level to guide that plant back to great health, that we know it can be.

With that, let me turn it over to Chuck to talk about earnings in '06 in more detail.

Good morning. Again, I hope the weather is better where you are than it is in Albuquerque, because it's--we had quite a snowstorm this morning.

But, as Jeff said, we're very proud to reflect the earnings we did this year. And when you look at the full year walk across, beginning with 2005 at $1.56 to where we ended up at $1.80, and you go back and in the early part of the year when we had difficulties with Palo Verde and certainly some challenges, the end result has been very, very positive for the Company, and we're excited about reporting this information to you today.

Some of the things I'm going to talk about are very consistent themes, which you've heard all year. Nothing new, no surprises, very consistent to what we've done, and a good reflection of diversification of our earnings. Beginning with the Walk Across in financing, which was a reduction of $0.21, again, reflects the Holding Company financings and commercial paper and mandatory converts that resulted in the TNMP acquisition. Palo Verde performance was a decrease of $0.13 which, as we know, the Unit One outage had a considerable impact there but it was offset by some of the positive impacts of the other units.

We also had dilution of $0.09. As you know, we issued some additional equity through the [Dribble Program] and also a public offering in December to support the Twin Oaks acquisition, about $225 million, that resulted in about a 6.5% increase in shares or $4.3 million.

On PNM Electric, it was a reduction of $0.08. If you recall, we talked in September of '05, we had another 2.5% rate reduction, which was the last phase of the global settlement, and certainly that had some impact into what shows a reduction for PNM Electric.

On TNMP it was $0.06. Keep in mind, we had full 12 months of this year, compared to 7 months last year. This has been impacted by about $0.20 in rate decreases. Again, if you go back to the rate reductions we had beginning January of '06, with a $9.6 million reduction in New Mexico. And, also, if you go all the way back to May of 2005 we had a $4 million reduction in the Texas part of TNMP.

On the natural gas usage, it was down $0.04. We still did pickup a little bit with the colder weather in the fourth quarter. On the up side of Walk Across and Four Corners' performance, we did pick-up $0.03. The plant availability was up 90.5% which--from 86% in 2005. I also just want to comment again, as Jeff pointed out, that San Juan operated with an EAF of 89%, close to 90% in 2006, and although we don't see any increase in earnings that relate to the plant performance, the fact that it consistently performed well in both years has been very solid to our overall performance.

First Choice, as Jeff pointed out, for the full 12 months compared to 7 months of last year, again, a pick-up of $0.15. We've seen, again, the overall customer growth which has been very strong, about an 8% attrition in TNMP service territory and a strong growth outside the service territory, and a very successful hedging strategy, as well, to support and sustain the earnings of First Choice.

On PNM Retail, load growth, $0.17, if you break that down it's $0.06 in gas, again, because of customer growth, and $0.11 in electric. On the wholesale marketing side, as we talked about earlier in the year, we had some forward sales from 2005 that picked up some earnings there. Also, we've been successful with long-term contracts. We've also had some continued increased marketing opportunities from the Luna availability and the strong performance, as I mentioned, with San Juan and First Choice.

On Twin Oaks, it was $0.34, and this is net of the bridge loan financing that we had in place early in the year. And I also want to point out the purchase accounting impact of that from the revenue was about $71 million from the underwater contract which, as you know, expires in September of '07.

Now, to go through the full year of EPS by segment, once again, the pick-up of--from $1.80 to $1.56 was $0.24. And just hitting some of the highlights on the regulated side of the business. PNM Electric, the margin was up by $0.03, again, because of strong load growth, certainly offset by the electric rate decreases. As Jeff pointed out and we've pointed--talked about in the press release, the return on equity was 6.4% in 2006, and we'll be talking shortly about our plans going forward for a filing of a rate case later this month.

On the PNM Ggas side, again, margin was flat, although we saw load growth, it was offset by customer usage. Returns in this business are extremely low at 2.8% for 2006, and we'll talk a little bit more as to the update of the rate case filing that we certainly are expecting to hear shortly, that will go into effect this year.

On TNMP Eelectric, we saw a $0.06 reduction. Again, this represents a full year of 2006, compared to a partial year in '05. Earnings are lower, which was expected based on the rate decreases. We don't see much growth in TNMP in kilowatt hour sales, although we see a little bit of customer growth at 1.8%.

On the wholesale side of the business, it's $0.46. The new plants, primarily Twin Oaks, is a result of that. And, again, I pointed out the purchase accounting impact on revenue on the underwater contract is $71 million, and to keep in mind the bridge loan, itself, is an impact of $0.18.

The wholesale marketing activity certainly increased from the forward strategy we had early in the year and, also as I mentioned, the growth in long-term contracts and the increase in market spreads, and we've had some offsets by, as we all know, the plant performance at Palo Verde, which impacted about $0.08 against the wholesale side of the business.

First Choice, again, very strong performance, reflected in good, strong customer growth and favorable hedging strategies. And the corporate other really gets into the increased financings that we've had at the short-term borrowings and the acquisition and financing for the Holding Company.

Now, I'd like to go to page 11 and talk about the earnings guidance for 2007. We have a range of $1.80 to $2.00, and I want to talk and highlight some of the main assumptions that drive that earnings range. And, certainly, we'll talk about the Energy Company, the JV venture with Cascade and talk--discuss that relative to earnings guidance.

But, first, let me go back and start with customer and load growth. Looking at PNM Electric, about 2.9% customer growth in 2006, a little bit higher than what we've seen over the past few years so we've set our expectations slightly lower in 2007 at 2.7%. On PNM Electric, again, 4.2% weather normalized load growth in '06. Again, slightly higher than we've seen in recent years, so we've also set our expectations slightly lower, here at 3.6%, which is still well above the growth rate projected nationally.

The earnings impact of the projected increases in customers and load are less--are really going to have somewhat of an impact. As we grow into our native load of our service territory, there becomes less generation available to sell, and that has some impact on--in earnings going forward of PNM Electric.

Excuse me, we're on page 11 in the presentation. Oh, I'm sorry--my eyes are not good this morning--it's page 12. I beg your pardon.

There is some sensitivity around the PNM Electric, I want to point out that really because of what I just mentioned and the fact that our increase in PNM load growth really has very little impact on margin because the projected average market price that we're selling into the retail is very similar to the price that we'd sell into wholesale, so we see very little impact as far as if there is surplus energy to sell, then the pricing margin is essentially the same whether we sell retail or to wholesale markets.

On TNMP the customer growth is projected to increase slightly at 1.9%. Keep in mind that New Mexico's portion of the business experienced a slightly lower growth in 2006 at 1.2%. This is included in the PNM Electric operations beginning in 2007. And we talked about weather normalized load did not grow much in 2006. We saw that in customers in Texas reduce their usage significantly, probably responding to high prices, which offset the impact of about 1.8% customer growth.

In 2007 we expect a slight increase of the overall use per customer, with load growth by 2.9%. Just some sensitivity, that 1% change in load growth is about a 1.5% gross margin on TNMP. On PNM Gas we are projecting gas customers to increase by 2.7% in '07. This is consistent with the increase projected for the TNM Electric side of the business. We've seen, again, a trend in conservation among our customers, and we're projecting an increase in usage slightly at 2.6%.

On the next page, 13, as Jeff pointed out, San Juan had its third year in a row of stellar performance, and we're expecting the trend to go forward in 2007. Looking at Four Corners we had a great year in 2006 and we're expecting 2007 performance to be in line with the average performance over the last two years, which has been close to 89%.

Palo Verde, we know we had problems last year, it has been a tough year, but we don't see any reason at this point that we believe that the outage situation there in 2007, we'd expect anything but a good, strong performance. We've--there is a plant outage that will be--result in a planned replacement of steam generators in Unit Three, starting in October, that's an outage that will last for 75 days, and we're looking for equivalent availability factor of 85% at Palo Verde.

I will mention, since I'm talking about the base load plants, a comment about Twin Oaks. We did see strong performance since our acquisition in April of 2006. The equivalent availability factor in '06 was 88.3%, and our assumption going forward is about 88%.

On page 14, the on peak and off peak prices, we're forecasting off peak and on peak electric prices to increase in 2007 with averages falling below $49 and $67 per megawatt hours, respectively. We are expecting [spark] spreads to decrease slightly in 2007 to an average of about $12 per megawatt hour. This is driven by the increase in forward natural gas prices at $7 per megawatt hour. And to give you some sensitivity, an increase in spark spreads on peak of 20% would contribute to gross margin of about $1.7 million. At the same time, a decrease in spark spreads on peak of 20% would reduce margin--gross margin by $1.8 million.

We've increased the amount of gas generation this year, keep in mind the Luna and the Afton build-out both increased the gas usage of our generation fleet, but we do have 70% of our expected gas requirements hedged for 2007. Any sensitivity of an increase of 40% in gas prices should have very little, if any impact at all, on earnings, assuming our plants operate as expected.

Going to page 15, if you go back to some of the focus on First Choice, the emphasis on customer growth. We would expect a customer growth of 22%, looking to surpass 300,000 customers. Our attrition in TNMP, we look to be--remaining flat or certainly around that 7 to 8% level. And, again, our hedging strategy continues to move forward with 95% of our total supply requirements hedged for the first quarter, and then about 87% of our fixed price customers hedged throughout the rest of the year.

On the--page 16, looking at the gas rate increase, we've talked about before, but we're--it's looking for a successful outcome of this gas case that we filed a $20.7 million annual increase. The original assumption of the new rates would go in effect on April 1. Given the fact there's been some slight delays we would look to the effective decision to occur such that the rates would go in effect in May, with--which would have an impact of about $1.7 million.

We'll talk shortly about some general comments of our plans to file for an electric rate increase to have an effect in January of '08. There'll be no increases in '07. And just to point out, TNMP New Mexico, their current rates are in effect until--in December 2010. And TNMP Texas the current rates are in effect until May of 2007. Certainly, we'll take a close look at the returns on that business and make some determination later in the year as to whether or not we need to pursue a rate increase in TNMP Texas.

Also, should recall that we've discussed about the CTC charges for TNMP, that we're allowed to recover $87 million in [stranded] cost. We began collecting this in December of last year. And so for '07 we would expect to generate close to $11 million in earnings, that's a balance of $19 million of revenues, minus the amortization of this at $7.5 million.

In the area of depreciation, we expect to see a $14.8 million increase in depreciation in '07. That breaks down into $8.7 million of this increase is expected to come from the regulated side of the business, driven by the expansion of Afton and its classification as a jurisdictional asset. Also, the remaining $6.1 million of the expected increase is on the unregulated side, due mostly to the full year of depreciation of Twin Oaks and Luna, which we placed in service in April of 2006.

I'll also mention the EnergyCo. It's important to note that this earnings guidance of $1.80 to $2.00 has no assumptions of growth within the Energy--within the JV at this point. We feel like we have enough range within this current guidance to provide opportunities throughout the year to reflect growth and, certainly, we'll update the market as we see opportunities and make acquisition, to indicate whether or not we remain--what side of the range we remain on and whether or not we need to change that going forward.

On the next page, page 17, I just want to comment about capital expenditures, looking at 2006 versus 2007. As we mentioned, in 2006 the capital spending was $323 million, which is about $35 million less than we expected. We had some difficulty in weather the latter part of this 2006 which delayed some of the construction at Afton. As a result of that, those funds will be spent in 2007. I just want to point out that Afton is still within the budget and on schedule for completion this summer, in 2007, included in rates in January of '08.

Some other highlights in the 2006 actual spending compared to 2007, you can see in the chart we'll have expenditures from environmental enhancements at San Juan generating station, also existing generation of Palo Verde Three, replacement of the steam generation, as I talked about--steam generators that I've talked about, and capital expenditures for new generation will be slightly lower in 2007. It does include the completion of the Afton expansion.

On the next page, I want to point out the five-year capital expenditures for 2006 to 2010, last year it was $1.5 billion. You can see an increase to $1.9 billion, which is a $400 million increase. The real focus there is the capital plan going forward. The expenditure is necessary to support the utility and generation additions to serve customer and load growth at PNM and also TNMP service territories.

With that, I'll turn it back over to Jeff for some other Company updates.

Thanks, Chuck. Now, let me just--on page 16--on page 19, we're all having trouble seeing the numbers this morning. On page 19, I'll just go over a couple of quick items.

First, relative to the gas rate case, we're expecting to get a recommended decision in March which would still enable rates to go into effect the first of April or maybe within the first half of April, I'll say that. We would then--as we put them into implementation, it goes fairly quickly, so the rates would go into effect, I would expect, in April.

This is the first case that we've had that we do not anticipate settling, and the reason is--has really got to do with the fact that we have not had a fully litigated rate case, frankly, on either the electric or gas side for a very long time. And there are a number of what I'll call policy issues, prepaid pensions and things like that, that we and the participants, the interveners in the case, felt we really need to get rulings on. So there was a conscious decision that this is probably a case that we ought to go on and fully litigate. We're pleased with the case that's been put on. I'll be very pleased and surprised if we got everything we asked for--that's not the way this process works. But we do believe that we've put on a good case, and we'll see what the outcome is.

On the electric case, we'll be filing that before the end of this month. It will be a significant rate case, but in the context of it being over 20 years since our last rate increase and 5 years that we've been operating in this last range of two-step rate reductions, we're talking about fairly small percentages, very small percentages on an annual basis for the electric rate case. And, as Chuck said, we would expect that the rate change that results from that rate case would go into effect at January of 2008.

Now, let me go back on the gas rate case for a second. One of the things that Chuck mentioned, the returns that we've received in our regulated businesses, which is really sub par, on the gas side that was even more aggravated this last year because of a mild winter last year, where we did not see good gas load. And we still have a fair amount of volumeetric revenues that come from the T&D charges. And so one of the things that we have proposed in the gas rate case is a decoupling mechanism that would help separate that impact, particularly as we pursue aggressively energy efficiency initiatives from both the gas and the electric side.

One of the things as a result of the TNMP, or TNP acquisition that we agreed with the regulators to do is that we would integrate the New Mexico portion of TNMP into PNM, such that all of our properties within New Mexico would be within our PNM subsidiary. That was accomplished the first of January, and as Chuck mentioned, they will remain on separate rates, however, through December of 2010.

I mentioned that we had received regulatory approval last year to expand the Afton simple cycle facility to a one-on-one combined cycle facility, and move it from the unregulated side into the regulated side. That will take that plant from 141 megawatts to 235. It will be completed this summer and it is going forward. We had some bad weather, which kept some equipment from being delivered on schedule, because of the torrential rains that we had. For those of you that are familiar with southern New Mexico, the notion of torrential rains in southern New Mexico is not quite something that would pop into your mind, but we had railroad tracks under 3, 4 feet of water, equipment couldn't be delivered, and it slowed things down. But our folks have done a great job about getting it back on track. While that plant is designated as a jurisdictional plant in 2008, it will be included in the rate case per the agreement we had with the parties as approved by the Commission, so it will be included in this rate case.

Relative to EnergyCo, just a couple of quick updates. We have gone on and formed EnergyCo. At the time that we talked last, when we announced it, we indicated that we had reached preliminary agreements under the terms under which it would be created. We have subsequent to that gone on and created EnergyCo. The Board has been established, with three representatives from Cascade and three representatives from PNM Resources. Chuck and I are on the Board, along with Cindy McGill, our Vice President of Corporate Strategy. We are in the process of continuing to look for the right person to lead this organization.

We have--and are continuing to work on what, if any, assets that we have would transfer into the venture, as well as pursuing acquisition of both generation assets, as well as trading and marketing properties, and pursuing development opportunities in addition. Part of the challenge is, as you all know, properties have moved up in price. They are tending to be auctioned in blocks. We have a tendency to focus on specific assets. We are certainly willing to look at larger blocks of assets, but when they go into auction sometimes prices can move beyond what we believe is a reasonable range.

And one of the things I think you have seen in our efforts so far is that we're very deliberate and analytic about our approach, and we're not going to put ourselves in a position of overpaying for assets. We'll--we have patience and we'll bide our time until we can find the right properties to acquire. And we'll continue to be very high and pleased with the opportunities that the EnergyCo joint venture presents to us, and it'll just be a matter of finding the right things to move the business into.

With that, we would be happy to turn it over for questions from you all.

[OPERATOR INSTRUCTIONS.]

Your first question comes from the line of Lasan Johong with RBC Capital Markets. Please proceed.

Thank you. Good morning. The weather here is not that great either, it's sleeting and snowy outside.

Yes, well, I understand that.

First question, could you elaborate on how you derived the guidance for '07 of $1.80 to $2.00? It seems like there's a lot of positive things going on, and not a lot of negative things going on, which would lead me to believe that guidance should have been above $2.00, so I'm a little puzzled as to why it's in the range of $1.80 to $2.00?

Okay. If you've got a second question, Lasan, go on and ask it, and we'll--tell us what it is? You said--.

--Oh, okay.

Or is that the only question?

No, that's the primary question. But on CapEx spending beyond '07 how does $1.95 billion kind of get split-up?

Beyond '07?

Yes.

Okay.

Is it front weighted, back weighted, middle weighted?

Right. Okay. What's the spread between the five years?

Yes, exactly.

That's the question. Okay. Chuck, do you want to talk about the guidance bases?

Yes, Lasan, I mean the guidance is $1.80 to $2.00. As we've mentioned, there are a lot of very strong indications of where the business is headed and good strong diversification, and we've had some good successes that we're rolling off of 2006. But the guidance is conservative, and what we look at the outlook of how we look at the unregulated business going forward and making sure that we allow for some room to reflect within that guidance a conservative outlook of the business. But at the same time, as I mentioned, our reflection of the JV is not indicated in this guidance. So opportunities as we go forward will either be discussed as we announce them to reflect a positive pick-up within the guidance or exceed that range and the fact that we--depending on what the acquisition would be.

So this is a very conservative outlook towards the business, but we do feel like we had some challenges last year with the Palo Verde. We're optimistic things are solid there. We continue to grow into our native loads, our ability to sell surplus energy is somewhat less than we've had in previous years, and we anticipate success in the gas rate increase, but certainly we've still got to receive the news on that. We do--as we said, the returns on both the gas and electric side of the business are significantly lower than they need to be, and we're having to work towards rate filings going forward. So we're being very conservative in outlook and trying to be reasonable in our projections, but the real growth we look for is really in the JV and our outlook to what would happen later this year, at some point.

Let me add a few things to that, Lasan, to give some other elements that are causing increasing costs, and because we are still in the rate freeze will-they won't be able to be recovered. As you may recall, we operate under a coal contract that is a cost plus contract, it's not market based. In this market, frankly, that's been quite good, it's been lower cost. But it's an underground mine. One of the things that they use an awful lot of is steel, and the steel is used for reinforcing the roof of the underground mine, and we are seeing quite significant increases in the cost of the coal because of the additional support that's being required in that mine. Now, typically that wouldn't be a big issue, but since we operate under fixed rates those increased costs are--bear directly on earnings.

Now, the trade-off, as you will recall is that we--when we put in place the rate reduction in this five-year plan, that's when we also went underground, and we were able to create a significant--about a $35 million reduction in our average coal costs. And what we've seen is those coal costs have moved up in the last two years a bit more rapidly than we had anticipated, and largely it's because of steel and other related costs, the collection and venting of methane, we've had some issues with wells that are sitting--gas wells that are sitting in the middle of the field, and we haven't been able to resolve with those owners, so we have to workaround them. So we've had--there are some costs there that are increasing.

The second thing is we are moving into having more gas generation in the jurisdictional mix. That's why we needed to bring Afton in on the retail side. And so on the margin we've really used up all of the base load surplus that was available from jurisdictional resources. We're having to use more and more gas. And when we experience 4, 5, 6% kinds of growth numbers, which is what we saw this last year, that puts pressure on the amount of marginal gas that we have to use. Obviously, that is not included in our rates, either.

So while we are very positive from the long-term perspective, 2007 will have some challenges because of it being the last year of the fixed rate path. We view the gas rate case certainly as something to help bring the gas business back into an appropriate earnings level. On the electric side, we expect to have a very strong and good rate case put on, but the results of that won't be seen until 2008. And so that's one of the things that I'd ask you all to keep in mind.

At the same time, I think the other point that Chuck made, which is very relevant, is the notion that we haven't included anything in here for the JV. Given its newness and it's not something we fully--will fully control, we want to make sure that we bring to you the things that are actually done and not the things that we may look to try, or hope to try, to execute.

Yes, on the question regarding the capital spend over the five-year period and whether it's back loaded or front loaded, the answer to the question it would be more back loaded. If you look at the next three years it's roughly around the $350 million level, '07, '08, and '09. And then we get upwards to around the $430 to $450 level, 2010 and '11. So most of that's going to be driven by the fact that--the additional spend we'll have for the generation that I've talked about going forward. We'll--it will be more heavily in 2011, to give you an idea of when that really starts in 2010, with most of the capital spend to occur in 2011.

Great. Thank you. I'll follow-up with more questions later.

Thank you, Lasan.

Your next question comes from the line of Paul Fremont with Jefferies. Please proceed.

Thank you. I guess my first question is on the accretion contribution. If I use a 35% tax rate on your $71 million, it looks like you came in ahead of the 25 to 30% contribution that you were expecting. It looks more like $0.65 or 36%. And I'm curious as to how you would come in ahead given sort of the weakness that we've seen in gas prices? And, also, would like to get an idea of what you're expecting for accretion in your '07 number?

The second question relates to the quarter, the quarter contribution from accretion alone should have been $0.15, yet your wholesale was only up $0.11. You had I think 38 fewer outage days at Palo Verde versus the fourth quarter of last year, so that should have been a big plus. Is there something on the wholesale side that was a loss or a drag against--against those positives?

And then the last question is can we just get the staff recommendations in your gas case?

Sure. Tom, Chuck, you want to take the first one on accretion, because I think he's--.

Paul, you talked briefly about the after-tax on the Twin Oaks purchase accounting, you also have to put in the effect of the financing for the bridge loan, which was about $0.21 a share. So when you look at the overall impact of purchase accounting, you get to the $0.34. And I think that those numbers are still in line with the projected amount of the non-cash earnings that Chuck had indicated at the Q3. So you've got to include not only the amortization of the underwater contract, but you also need to include the effects of the bridge loan financing.

And that puts it in the 19% range.

Right.

Which is--we talked about 20%, so. On the quarter--

--And the contribution for '07?

Yes, Paul, the contribution in '07, if you get a full year, which would be 100%, we'd be looking at earnings accretion anywhere from 16 to 18% for Twin Oaks.

16 to 18% of 2007 earnings, right?

That's correct.

And that's for a full year for the whole plant.

Full year, yes.

Then his question on the quarter?

What was his specific question?

Paul, repeat the question on the--.

--On the quarter, given the accretion contribution and also given the fact that you had materially fewer outage days at the Palo Verde plant, is there something that's sort of a drag against those positives that had you end up at only $0.11 up on the wholesale side?

We--there's nothing that's popping for us. We'll go back and take a look at that and see if there's anything that pops. But obviously the point that Tom made, you have to take into account on the interest from the bridge. But I don't--I can't think of anything, and Hugh can't either, that was significant in the wholesale market. On the staff side, on the staff side the--in the gas rate case, their recommendation--Tom, I'm looking at you--I believe was 8.--

--It was in the $8 to $9 million range.

$8 to $9 million range. Remember we filed for $22 million. Their $8 to $9 million range included a ROE, though, of 8.5, so 8.5%. We filed for 11%. I think that we put on a very good case about why the 8.5% was analytically flawed. The other interveners, most of them didn't put in specific numbers, so we're really looking at the staff, and I think we did a pretty good job on their ROE, plus there were a couple of other issues that I think we--.

--And equity ratio and rate base, do you have those numbers?

Tom?

Yes. Basically, the equity ratio was 51.8%. And the rate base was $409.2 million.

And did the staff do anything on the cash structure, Tom?

No, the staff and the other interveners accepted the cash structure that the company's cost of capital witness had filed and, as Jeff said, there's always issues in any rate proceeding. There were issues addressed in the rate base, but our filed rate base was $409.2 million.

Paul, I don't know if I'm going to get to your number or not, but I just--just to kind of think through what you're saying, the wholesale was a pick-up of $0.46 and you take out Twin Oaks, you get down to about $0.19 was due to the--as we talked about the forward strategy of forward contracts last year, the growth in long-term contracts and increasing market spreads. But that was offset by $0.08 with the Palo Verde performance, so that gets to $0.11. But, again, without really looking at your numbers and knowing more specifically what you're addressing--.

--But you think--

--I think we have to have a follow-up discussion on it.

Oh, okay.

Yes, let's do that one on a follow-up.

Okay.

And if there's anything significant we'll post it, but I don't see it.

Okay, next?

Your next question comes from the line of Maura Shaughnessy with MFS Investment Management. Please proceed.

Good morning.

Good morning, Maura.

Just a couple of questions. Can you first--with the electric business, PNM Gas as well as TNMP, can you give us the trailing 12 months ROEs?

Well, trailing--on gas and the electric side, we gave that as indications in the--for 2006 in the press release, which I believe were 2.8% on the gas and --6.4 on the electric side. On TNMP, I'm not sure if we have that. Tom?

I don't have that number.

We don't have that with us, Maura, sorry.

Okay. And--sorry--on the rate base on the gas side what did you say that the equity ratio was in the filed rate case?

51.8%.

Okay. Okay. And the rate base on the electric side?

The rate base is $1.2 billion with an equity of 51.4%.

Okay. Awesome. Thanks very much. Good luck.

Thank you.

Your next question comes from the line of Ted Heyn with Citigroup. Please proceed.

Good morning.

Good morning.

First, I had a quick question on TMP Texas, and what your thought--you mentioned briefly that your moratorium expires there mid this year, what's your thought process on filing a rate case? And if you were to file one when would you expect any sort of impact flowing through to the financials?

This is Tom Sategna. We're looking at that business, as we speak. As Chuck indicated, the rates that are in effect today, the rate reduction--.

--In Texas--.

--In Texas goes away in May of this year, and so we are analyzing that business to determine whether or not we're going to file. You'll also note that there is a synergy saving, a giveback, that's about $3 million a year that also affects the TNMP Texas revenues. The full effect of that will cease June the 5th of 2007, so we are looking at Texas as we speak to file a rate case there.

If we do file a rate case, though, we would not expect to see any impact on 2007, it would be in 2008.

It would be later, potentially fourth quarter of '07, but probably 2008--that's correct.

Okay. And then just a quick question on the EnergyCo, you had made some comments that it sounds like prices in the market seem pretty robust. You did on your slide talk about potential development.

Yes.

I just wanted to get your feeling about if you were to do, pursue a development project and contribute assets, your kind of philosophy on near-term dilution if you were to kind of contribute an asset to build an asset that may not have earnings in the near term?

It's a good question. Our view on this and our approach is that this is a long-term business strategy for the creation of the--of EnergyCo. And while we certainly aren't trying to create any near-term earnings dilution, if there needs to be a little bit of dilution in order to better position the long-term business, that's a fairly easy decision for me. But, again, obviously we'll do everything we can to avoid near-term impacts, but if it enables us to better position that venture for the long term, such that the net value to our shareholders within a foreseeable future is higher, then we will pursue that kind of an action.

Understood. And then just a quick update on the Twin Oaks expansion. Has that moved forward, at all? And what are your--have you changed your thought process on that?

Hugh?

We're continuing to move forward with the permitting process. The landscape in Texas is obviously a complicated one with a lot of activity going on on coal permitting, but it's progressing with expectations of having some significant milestones met in the second quarter of this year.

Great. Thank you very much.

Thank you.

Your next question comes from the line of Darin Conti with Wachovia Securities. Please proceed.

Good morning.

Good morning, Darin.

Could you maybe quantify a range of what would meet the terms of a successful outcome at the--on the gas rate case? And along those lines, I guess based on your discussions and proceedings so far with the staff and commission, is there anything that gives you confidence with respect to how you might be treated on the electric side?

Well, I think for reasons that you could probably surmise, I really am not going to say in public what I think an acceptable range of outcomes are. I think we deserve $22 million. I also am a realist in understanding the process that we're going through. So I wish I could answer your question, but I don't think that would serve your interests in the long term.

Yes, on the second one--restate your second one--I'm sorry?

Well, I was just trying to get a sense of--with the significant electric rate case filing--.

--Yes--.

--Pending, just kind of based on how discussions have gone with the staff and commission around the gas rate case, does that give you less, or more confidence going into the electric rate case?

Well, I think the conversations that have taken place, people understand the need for an electric rate increase. Certainly, there are some elements of the gas rate case that could establish principles to be applied in the electric rate case. Obviously, ROE would have some bearing because it's within a relatively near-term range of time. There are other issues, like prepaid asset--prepaid pension assets, et cetera, that--where there are principle issues that may be decided in the gas rate case that will be precedent to the electric outcome.

I think that the landscape, sure, no one wants to see higher rates. But when people look at the more than 20% reductions in nominal rates that we've had within our Company, and that we're 27% below regional averages, the notion of a rate basis is understood and accepted, obviously we're going to have to get into the details of it.

I think that they also understand that we are positioning to eliminate the joint dispatch and move to have the unregulated assets probably moved from our system into the joint venture, so they understand the bringing to a conclusion the sharing model that we've had in place. I think the fuel clause is a significant issue that the interveners, none of them like it. I mean they've enjoyed having fixed prices, but they certainly understand the increased costs and risks that are associated with volatile gas prices, with coal prices moving up.

We will continue to work with them on looking at alternatives to just a traditional fuel clause, but it's going to have to--for us to agree to it, it would have to meet our needs relative to some protection, some appropriate level of protection for cost increases on the fuel side.

So I think there's a good landscape being drawn, but obviously the rate case will be up against a number of--each of the specific issues will have to be addressed. The big ones for us will be the fuel clause, obviously the return on equity, and those really are the two big ones.

And, Jeff, are you going to ask for decoupling on the electric side?

We've gone through that with a lot--with a number of the parties that we've been working with on energy efficiency, and I'm not sure we're going to ask for decoupling in this rate case. And the reason is that I think it is more appropriate for the Commission--there's still a big learning process underway. And I think the gas case stands on its own, but on the electric side we really want to talk about how do we turn energy efficiency into a business that works for customers and works for the Company.

And so I anticipate that we will--we may very well have a piece of legislation that comes out and is passed. We've got one--there is one introduced that addresses energy efficiency, it addresses decoupling, and that would obviously affect how we go forward to implement the desires of the legislature.

So I would expect that we will end up with a set of workshops on how do we best position energy efficiency in a broad sense to make it a business that works for customers and owners, during the course of the year, and that it could be implemented independent of the rate case.

Great. Thank you.

You bet.

[OPERATOR INSTRUCTIONS.]

Your next question comes from the line of Erica Piserchia with Merrill Lynch. Please proceed.

Hi, guys. How are you doing? Just a couple of quick questions. First on the--on your forecast for 2007 for your wholesale sales forecast, can you give us an idea of how much of that is hedged, and then also for '08?

We've got about 70% of it hedged right now, going forward, and that's on peak. We've got a little bit less than that hedged on the off peak, and we're pretty comfortable with that position right now.

Okay. That's just for '07, or--?

Yes.

Okay. What would be the '08 kind of outlook, just even roughly?

We have not put any hedges in place other than against transactions that are already in place for '08, and so we're just mainly focused on making sure that we have the '07 portion of that done, that wholesale operation covered, except for transactions that are in place for beyond that time-frame.

Okay.

Yes, Erica, I want to make sure you understand that--I don't know what that is, but--

--Sorry, that's my--the PA system here at Merrill. They're doing a fire alarm test--my apology. How convenient.

Yes. Well, but, in fact, for all transactions that have been entered into, those are fully hedged. So it's really just are we--have we hedged any of the open gas positions, open gas generation options that we may have. That's what Hugh is talking about.

Okay.

And, Chuck, relative to that, I don't know--did you mention the--our hedge position on First Choice?

I did.

Okay.

I talked about that, yes.

Good.

And then is there a way actually, my other question is is there a way to get an idea of a--for First Choice, a sensitivity on either a $0.50 per megawatt hour change in the unit margin or a 1% change in the megawatt hour volumes that you're projecting for '07? Some sort of way of--to get a sensitivity around the earnings power for that portion of the business?

We have not given out anything in more detail other than the earnings, the number of customers. We have talked about long-term margins, but we don't speak--talk about individual per unit margins in a given year. And I'm still a little reluctant to do that. I think it's--it goes to part of our strategy, and we'll certainly give you information about hedging and things of that nature, but we'd have to think a little bit more before we'd give that kind of detail.

Even just like a--just--I mean even without knowing what the margin is? Just saying--a $0.10 per megawatt hour or a $0.50 per megawatt hour change would impact your earnings by X? Because I think it's hard for us to get a sense of what the true earnings power of that business is on an ongoing basis. And at least having some sort of rule of thumb to use I would think would be kind of helpful to get us to understand how that--what level of price change could impact your earnings there?

That's a good--you make a good point. Let us think about it, and we will probably address that in the future.

Okay. And then a last question--.

We just don't have that information today.

Okay. The last question, the $22 million you're seeking in the gas case, can you just remind me what the percentage increase in gas rates that would represent?

Unfortunately, it doesn't look like any of us remember that percentage. It's single digit on the total bill for the customer. I--my recollection is it's in the 5 to 7% range, but I--I couldn't give you a specific number. I apologize.

Okay. Single digits, though?

Oh, yes. I think it's 5 to 7%.

Okay.

I just can't remember which end of that.

Okay. So that's cool. Thank you.

Your next question comes from the line of Paul Patterson with Glenrock Associates. Please proceed.

Good morning. Can you hear me?

Yes, Paul.

The price-to-beat--the profitability that you guys are getting from First Choice from those price-to-beat customers, could you give us an idea? I mean I know it's about 38% of customers at the end of the year, but what are you looking at in terms of 2007 in terms of how much that's--that is--I don't know, a percentage of gross margin, or could you give us a little bit of a flavor for that?

And then, just in general, there was some proposed legislation done by some committee chairman in Texas, regarding customer choice and sort of changing some elements potentially of the deregulation situation there to potentially create more--to stimulate more customer choice. And do you have any thoughts on that? Do you see that impacting 2007, or is that just--is that just--what do you think might happen as a result of that, I guess?

On your first question, the--we don't really see any significant change in the level of churn of those traditional customers, as we move into a non-PTB era versus the--well, into the non-PTB era. We expect to see 7 to 8% churn, as we have over the last two years, nothing greater than that.

On the legislative front, we are aware there's a number of bills that have been introduced, that some of them are trying to provide more information to customers. But frankly, what they'll do is then they'll make for a more confused marketplace, because there is a point in here where so much information is provided that is not--it's data more than it is information, and it's not necessarily helpful to encourage customer choice.

I think the best things that can be done to encourage customer choice is to ensure a robust, competitive wholesale marketplace that can develop a greater range of fuel diverse options, and so we're looking at some of the legislative proposals that focus on how do you build a more robust marketplace. I don't think that it would dramatically affect the '07 market because any legislation that's passed, particularly if it has any structural elements to it, will take some time to implement and so you're probably looking at 2008 or beyond.

The challenge--the difficulty in the Texas marketplace is that we've got zones that are not as well connected as one would like, and you've got a very gas dominant marketplace, and so you have to take a hard look at what are the things that can be done to help improve that. And I think Texas has embarked on an aggressive program to try to encourage more transmission to be built, particularly to help move energy from the west to the east and a lot of the renewable energy that's being built on the west side. And we have got--that will help on the fuel diversity side but we--I believe coal, clean--advanced coal has got to be a part of that marketplace to a greater degree than it currently operates to help build in some diversity. And we certainly are supportive of seeing nuclear expansion within that market.

Okay. Could you give us an idea about what the price to beat--is projected in terms of gross margin for 2007?

At this stage, the price to beat is out of our lexicon. We don't look at customers with a price to beat basis.

Okay. But just the, I guess, legacy--legacy pricing, or I mean I understand that the price to beat expired at the end of '06.

Yes.

But I mean you mentioned 38% of the customers, I guess, and I'm just wondering, it might be a little bit helpful to find out sort of what the relative contribution to margin is.

Yes, we won't give that detail, and I would say that's one that we will not give in the future either.

Okay. Thanks a lot.

Thank you.

Your next question comes from the line of Scott Thomas with Lehman Brothers. Please proceed.

Morning, folks. Can you hear me?

You bet.

I'm just following up on one of Paul Fremont's questions from before, around the non-cash amortization at Twin Oaks. Before netting out the finance charges, it was like $0.60, $0.65, something like that, this year. Is--without guiding to--I'm just a little confused by the 16 to 18% before. Without netting that against, netting those two things out and then expressing it as a proportion of going forward earnings, can you just tell us if you're expecting the same level of amortization? In other words, the $70 million next year, is that about right for--if markets don't move from where they are now?

Yes, to answer your question, it's--for all of 2007 it'd be around the $75 million on the revenue piece of the non-cash amortization.

Got you.

Even though there's a full year of Twin Oaks, as well.

Right, right. And then just thinking about the economics, as that contract rolls off and the next one comes on for the sort of '08 to '10 timeframe, is it fair to think that--how--what can you tell us about the economics of the contract? It's much closer to market, I'm assuming because the amortization is projected so much lower, should we assume that most of that non-cash margin gets transferred into a higher margin, [inaudible] from a new contract?

Yes. A simple answer is yes.

Okay.

It is--it's a contract that was entered into at market in December of 2005, I think December or January--you may have it--December of 2005? Yes.

But starting in October we go to the new contract, 75% locked in, 25% open, and we're closer to the market at that point, where really there's very little impact on the purchase accounting for--on the non-cash amortization.

But a pretty fair assumption just to market-to-market as of that time, and that just gets to the bottom line on a cash basis?

Yes.

But let me go back to the question we had on rate case, the gas rate case percentage, we gave you a range of 5 to 7%. It is--it's at the low end of that, it's just under 5%, so I apologize we didn't have that at the tip of our fingers.

I think we've got time for one last question. Operator?

At this time, there are no questions in queue.

Oh, okay. Great.

Well, thank you all very much for joining us today. Again, I'm--I think we--I'm quite pleased with the year that we had in 2006. I'm looking forward to a good year in 2007, and particularly to the development of the EnergyCo joint venture and the appropriate prosecution of our rate cases to bring our regulated business into line with the good work that is occurring in the balance of our business from a financial performance. Thanks much. We look forward to seeing you the next time we're in New York or you're out here. Bye-bye.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Thank you, and have a good day.