TXNM Energy Inc (TXNM) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by and welcome to the PNM Resources 2005 earnings release and 2006 earnings guidance. [OPERATOR INSTRUCTIONS]

I'd now like to turn the presentation over to Jeff Sterba.

You really like that chair, huh? Well, good afternoon and thank you for joining us today. I'm Jeff Sterba, the Chairman, President, and CEO of PNM Resources, and it's a pleasure to join you all today, either by those of you with us in person in New York or those that are joining by telephone and computer. I would refer you first to the Safe Harbor on page 2. I'll spare you the reading of it, and spare me reading of it. But I just refer you to that for the appropriate disclosures.

One of the reasons why we wanted to be here in New York and will be in Boston on Wednesday was to have an opportunity for many of you to reacquaint yourself with Chuck Eldred, or meet him, if he is someone you didn't know in the past. He joined our Company two weeks ago and has had a bit of a whirlwind coming up to speed. We delayed our announcement of earnings guidance, because I really did want Chuck to be able understand it and have his input into that process. The last two weeks have been great. I must say that I really enjoyed the three weeks before that, because I got him to do a lot of work without having to pay him. [LAUGHTER] I'm not sure that he enjoyed it as much, but I hope you all will have a chance to hear from Chuck in a few moments. As you know, Chuck spent about 20 years with Southern Company, including a term where he headed the capital markets for the parent. And then, in 1999, he moved to Chief Financial Officer at OPPD in Omaha, where he had responsibility not only for all the financial functions, obviously, but a heavy involvement in their planning and their regulatory endeavors. So, we're very much looking forward to having Chuck as part of our team.

I'd like to also introduce someone that really needs no introduction. You know her very well, Lisa Rister, who heads our Investor Relations side. And also sitting next to her is someone who you probably have not met before, but he is the one that has done all of the financial reporting for us these many years, Tom Sategna. So all of the segment reporting and things of that nature are really his creation and invention. And sitting in the back, we have Lisa Eden, who works for the first Lisa, Rister, in Investor Relations and one of my former CEO aides. And then Ray Vigil. who is an engineer with us and is currently my CEO aide. So it's a pleasure to join you all

There's really two major things we wanted to accomplish today. First is to talk about 2005; as you know, we reported earnings last night. And then, also, to provide guidance on 2006 and talk about some items ongoing within the business. As you saw in our announcement yesterday, we announced earnings of -- for op -- for ongoing operations of $1.57 per share, which was nearly a 10% increase in ongoing EPS compared to 2004, and represents a compound rate of growth since 2002 of about 9.1%. As you know, we target a 5 to 6% growth rate. We've certainly done better than that, and we will continue to target the 5 to 6%, as we go forward. The $1.57 was at the low end of the guidance range that we gave of $1.55 to $1.65, and in many ways does not the reflect many of the successes that we had in 2005, because those successes were somewhat masked by less-than-desired performance of Palo Verde Generating Station.

I put at the top of the list of the successes of last year the closing of the TNP transaction, which, as you know, we closed about ten months from the point of announcement where we acquired both the distribution business, as well as the competitive retail business. And that transaction, and particularly the results of those business units in the second half of 2005, pointed the way toward what we gave as guidance on that transaction, which was at least a 10% accretion to earnings and a 20% accretion to cash on a full-year basis.

Let me touch on a couple of the other items, switching to the slide 5, that affected our operations in 2005. As I mentioned, certainly the closing of the transaction was an important milestone for us. But as you all know, it's not getting a deal done that matters; it's how you operate it once you've gotten it done and how you integrate it into your baseline operations. And it's this integration process that I feel very good about. We have -- we're on schedule to achieve about $50 million of operating synergies over the first five years that will be retained by shareholders, while at the same time, we're providing, between this transaction, as well as our rate reductions announced earlier in New Mexico, about $40 million of rate reductions to our customers throughout New Mexico and Texas. So, I'm pleased with the way the integration is going. The system side is -- there's a still a few of the systems that are in the process of integration, but fundamentally, all of the structure work is done. And as we'll talk about in a few moments, the operation of FCP, or First Choice Power, and the TNMP distribution business did exactly what we had hoped it would do, which is provide a diversified earnings stream for the Company.

Secondly, like in all years, we put a fair amount of capital in infrastructure additions. We spent about $150 million last year in -- in basic reliability and service quality investments to serve our growing customer base. In addition, we're in the midst of constructing Luna, which I'll talk about in a few moments, but recall that is the combined cycle facility that we acquired from Duke, and it is on schedule, in fact a little bit ahead of schedule, to come on line at the end of this spring. We've also announced, which I will also talk about in a few minutes, an agreement relative to the Afton, which currently is a peaking facility. It's a simple -- simple cycle turbine that has been unregulated and the agreement that we have is it will be shifted into our regulated portfolio. And then, of course, we most recently announced about two weeks ago the acquisition of the Twin Oaks facility, a coal fluidized bed facility in Texas.

But if I really think about what forms success for our Company, I can kind of think it about this way. What do we really need to do? Number one, we need to operate very effectively in a volatile commodity market in which we provide service in territories that are gaining above-average growth rates within their markets, where we provide top quartile service levels and we increasingly provide a level of efficiency in our operations. Those are four keys for our performance, and let me touch on those for a moment. First, we all know what happened to natural gas markets last year. It's not just that -- as shown on slide 6 in the top right -- top left-hand corner -- it's not just that the absolute prices of natural gas moved up dramatically. It is also the level of volatility that existed in those natural gas markets, in both the west and in Texas and, really, all throughout the United States.

When we started the third quarter, we quickly found out that our price-to-beat rates in Texas were under water. Yet, at the same time, through the management of our First Choice Power, we showed earnings and earnings gains in both the third and the fourth quarters, in spite of that volatile gas market. The gas market affected our western business also, in that -- and I'll talk more about Palo Verde. But as you know, Palo Verde did not perform up to expectations last year, and with that put us in a position as having to go to the wholesale market to buy energy, or generate energy out of our natural gas facilities, both for our wholesale loads and retail loads in New Mexico. We do not have a fuel clause in New Mexico, so those higher prices dampened margins for the operation of our western business. But if I look at how we performed on whole relative to that volatile gas market, frankly I think we performed very well with earnings that were within the guidance range that we had provided, in spite of poor performance at Palo Verde.

As you all know, one of the strengths of our Company is that we operate in a service territory that has above-average growth. We typically don't see the absolute highs that you see in some markets, nor do you see the lows that happen in a recession. But we always tend to average about a percent or so above the natural average of growth, and that's certainly true for our New Mexico properties and most of our Texas properties. One of the things that is key to those customers, obviously, is reliability, and we have not only provided a top-quartile level of reliability to those customers, but really best-in-class, for not just reliability but increasingly, also, the way that we work with our business-related customer . And then I think, particularly when you're in a growth stage, one of the things you really have to pay attention to is the efficiency of your operations. And so, when we look O&M per dollar of margin in 2005, we operated at the lowest level of O&M per margin dollar that we've operated in the past, and we continue to show a downward trend in that measure.

So when I think about the keys for our success of operating successfully in a volatile market in a service territory that's growing at a rate greater than the national average, that propounds on reliability and quality of service as a key for the customers. And in order for us to grow, we have to demonstrate efficiency in our operations. I think 2005, again, showed a very, very successful track record for that.

The challenge that we faced -- moving on to slide 7 -- dealt with plant performance. And plant performance for us in 2005 was a bit of a mixed story. For San Juan, it represented the best two back-to-back years of operational performance in the history of that 30-year plant life. It operated at just under 90% in both 2004 and 2005, and we're very pleased with the progress that that plant has made. Unfortunately, the other side of that story is Palo Verde didn't do so well. In contrast to what has been an average of about 91% equivalent availability over the last ten years, it operated about 15% -- 15 percentage points below that at 76%. And that, as I talked about before, cost us significantly, both in terms of replacement power for our retail market and sales into our wholesale market, because, recall that two-thirds of our investment in Palo Verde is committed to serve retail loads and one-third of it is committed into the wholesale market place. So that was a challenge, and as you are aware, that challenge continues with us as we move into the first quarter of this year.

Let me just give you a brief update and reaffirm comments that I've made to you all in the past. The challenge that Palo Verde has right now is associated with a pipe that moves the emergency coolant water, if you will, into the reactor vessel itself, and so it provides the emergency source of water supply. And the problem is that it has a vibration, which effects -- in fact, that vibration has gotten to a point, as load was put onto the unit -- this is one of the Palo Verde units -- as load was put onto that unit, it went out of bounds of the safety considerations. And since it is the pipe that provides the emergency water supply, you can't allow that pipe to continue at a level of vibration that places at risk its integrity. So it has been kept at an operating level of about 25% now for a little over a month.

At this time, as you may be aware, we anticipate installing a short-term fix -- what I'll call a short-term fix -- in mid-February. This is the use of some mass absorbers, which is a combination of springs and weights that will help dampen the vibration. Don't think of this pipe as the kind that, you know, we have in our basements, when the water heater kicks on or something that clunks. It's not doing that. It is vibrating less than a 1/16 of a thousandths of an inch. But over the course of a minute, the sum of all those vibrations may be an inch or an inch and a half or two inches. That's the problem. And so, this fix we believe may be able to help dampen the amount of vibration by 50% or so.

APS does not know what load level that will allow us to take the plant to. Our hope is that it will allow us to take it back to full load, but we will not know until such time as the installation is done and it can actually be tested. So at this time, that's set for mid-February of this year. In the instance that that approach doesn't work, there is a backup short-term fix that will be ready in mid-February. Ultimately, and it would be our hope that this will not happen until the next scheduled outage of the plant, we will probably end up having to do something to move the check valve that is on this pipe and effectively as one of the pieces of equipment that is causing this acoustic vibration. Now as -- as Chuck will talk about later when he goes into the range of guidance, we are using a little wider range than we have typically used. It is a $0.25 range, but I think it is still reasonable, and the main reason for that is to ensure that we can account for another year of performance like last year, on the downside, within that range.

With that, let me turn it over to Chuck to go into more detail on the 2005 earnings and the guidance.

Thank you, Jeff. Let me start by saying that my last company sent me to MIT and the nuclear reactor course, which is a 30-day course, but Jeff explained that so much better than those MIT professors. That was very well stated and it's important for us to understand the nuclear risk of the business. Before I begin the discussion towards the earnings guidance in our 2005 results, I have been asked the question by several people as to what my plan of approach or attack -- maybe attack is a little too aggressive -- but what's my state of outlook toward starting off with PNM Resources. And I'll say that, first of all, it begins with my perspective and belief that Jeff's vision of where he is taking this Company is certainly very much on track, and the fact that the Company has a strategy to be America’ss best merchant utility is something I think really works in the Southwest, given the markets and where we are headed. But most importantly, the fact that there's already momentum established by last year's ability to execute the strategy of the acquisition of TNP, as well as the First Choice Power and Twin Oaks shows the Company is following through on what they said they would do.

In addition to that, I see some opportunities on the regulated side of the business where, really, that is the foundation for where the Company really is anchored. And is their focus going forward on continuing to make the commitment and investments in that side of the business to allow for the growth of that foundation is very important, and certainly I'll make some comments about that as we go forward. Also, I think the timing is really right in the Southwest. I see there's plenty of opportunities and chances to achieve economy of scale and size in the Southwest, given the fact the way it is currently structured. If I were to go any further, I'd get into the interest of focusing on risk management, system integration, and continued cost managements. But those are the things that led me up to the decision.

Now before I get into presentation, let me just say that all these earnings are considered unaudited and subject to change, pending the completion of our 2005 auditor financial statements. First slide is what we call "the walk across." What I want to point out that the key drivers that impact earnings over this last year, showing an earnings improvement of 9.8% from the $1.43 to a $1.57. But moving from left to right, you can see the financing, mainly related to the TNP Enterprise in additional purchase power and plantability -- availability, depreciation, reduced ongoing earnings per share in 2005 compared to 2004. On the upside, we saw that PNM retail load growth, with the additions of TNMP and First Choice Power, contributed earnings year-over-year. You can see when considering the impact of the financing charge is the acquisition of TNMP and First Choice really contributed and was very accretive to the business.

Turning to slide 10, we want to provide you some details regarding the ongoing earnings per share by business segment , and I'm going to give you the 2005 over the 2004 comparison. PNM Electric, although we had solid load growth, it was more than offset by the 2.5% rate decrease, planned outages -- particularly with Palo Verde -- and increased cost to serve the growing load. This resulted in 13% decrease in the margin.

We also continue to make investments in the transmission and distribution side of the business, with $76 million invested in 2005. This increased depreciation and lowered earnings by $0.08. With the acquisition of TNP Enterprises, the Company issued new common shares, which you're well aware of. This impacts all of the business segments and for PNM Electric, that resulted in $0.07 dilution. PNM Gas had a full year of the gas rate increase that was effective in 2004. And with customer growth, which it experienced in 2005, this was offset by warmer weather and customers' reaction to customer conservation and price signals with higher gas prices. But also, we continue to focus on that regulated side of the business by once again making $48 million of investments in distribution, transmission and software enhancements that impacted earnings by $0.03. In this case dilution was $0.02.

Regarding TNMP was a very strong contributor adding $0.28 for the seven-month period of the acquisition. If you were to look at the entire year, you would see that it is down $0.34 from 2004. This is primarily associated with the carrying charge related to the stranded cost for TNMP-one that was booked in 2004, reducing year-over-year earnings to $0.25. And keep in mind, the stranded cost will be recovered upon regulatory approval this year, hopefully by mid-part of the year, or thereabouts. Regarding TNMP also benefited from warmer weather and load growth, which is more than offset by, once again, rate reductions in Texas that went effect in May, but also were agreed to as part of the acquisition, and that reduced margins by $0.03. Dilution in this segment was $0.06.

The story is much -- along the PNM wholesale, the story is pretty much like the PNM electric. While we have higher priced market sales, it was more than offset by planned outages, increased purchase power cost. This resulted in a decrease in margin by $0.09. Dilution in this segment was another $0.02. And First Choice Power, as you have heard us say before, had a very good year and contributed $0.44 for seven months. Comparatively over the year, it was $0.01 increase. First Choice participated in the ERCOT capacity auction, which they've never done before. It was very successful and it contributed $0.03 to margin, and it's one example of how we're working to optimize the business. And also because of Texas regulation changes in June of last year, First Choice Power was able to improve collection efforts and reduce bad debt, adding $0.02 year-over-year. Dilution in this segment was $0.04. Most of this related to -- on corporate and other relates to the TNP Enterprise acquisition financing at the holding company. Keep in mind that we were able to save more than $40 million for shareholders by the refinancing of the high-cost TNP debt. If you refer to the appendix of the presentation, you'll see details regarding year-over-year margin and quarterly margin and EPS, by segment.

Moving on to 2006 -- earnings guidance, on slide 12 -- you can see we're projecting 2006 ongoing earnings per share to be in the range of $1.65 to $1.90. If we were to end up at the midpoint of that range, that would translate to 13.1% increase over 2005 earnings per share of $1.57. And you can see that we continue to grow our EPS by more than our stated long-range objectives of 5 to 6%. Now in the next slide, I realize that the business has become more complex and more difficult to understand. But what we try to do here is show you on the top part of this chart what the main business segments are, that you are familiar with. But also on the left-hand side of this chart, show you the factors that influence the business or some of the key assumptions that might help you in making your determination of the Company's outlook.

First one, which goes all the way across all business units, is synergy savings. Jeff mentioned this, that we've identified a plan of $50 million savings over five years. In 2006, we assume that we'll receive one-fifth of that savings or $10 million. Some examples -- that this is primarily all O&M dollars -- is the closing of New York office that TNP had, consolidation of legal, board fees, insurance reductions, duplication of admin departments, like accounting, HR, et cetera, officer reductions and some restructuring of the pension plan. All of those things are certainly already implemented, and there's continued plans in place to find other cost savings out of the business. On load and customer growth for electric and gas, PNM electric historically has been about 2.5% to 3%. We are expecting a slightly higher load growth for 2006, driven mainly by the growth in industrial sales.

On PNM Gas customer growth, historically we've been approximately about 2%. We expect about the same in 2006, with some exposure to declining load because of customer conservation, as I mentioned earlier, with customer reacting to higher gas prices. TNMP Texas historically has been about 3.5% low growth. We expect load growth to be slightly lower in 2006, mainly because of slower industrial sales growth. Regarding TNMP New Mexico, we expect low growth to be flat. First Choice Power, customer retention and growth, we've seen that the pricetobeat customer attrition stays about the same, about 7 or 8%, which I might add is slightly better, from our information, than the attrition experienced by other retail electric providers. We also expect customer retention will be offset by customer growth and successful customer retention and marketing initiatives. So that will be the key as we go forward as -- continuing to implement ideas and ways in which we cannot only attract customers, but retain customers within First Choice Power. And that will be done through a number of marketing initiatives that are in the planning stages now.

Regarding depreciation, which effects all business lines except First Choice Power, it is expected to increase by approximately $25 million in 2006. The increase on the regulated side of the business is $8 million. The increase on the unregulated side of the business is $17 million. That includes the depreciation for Luna and Twin Oaks. The $25 million also reflects and includes benefits that we've already received from a life extension of 30 years from San Juan, which reduces depreciation by 13.5% -- $13.5 million, excuse me. This is split between regulated and unregulated, where the regulated side of the business gets 86% and the unregulated side of the business gets 14%.

Regarding rate impacts, you can refer to the appendix on page 23 for specific rate decreases for PNM and TNMP. We don't assume any rate increases on the gas side of the business for 2006, but we continue to evaluate that for future filings. But we do expect to file electric rate increase in 2007 for PNM. Plant operations, Jeff really discussed in detail comments about plant operations, but I do want to point out the variability in the earnings range does provide room for short-term consideration of the Palo Verde plant performance. San Juan and Four Corners are expected to perform as they did last year, in the 2005 levels. I commented briefly on stranded cost recovery. We currently have a pending case before the Public Utility Commission of Texas for the recovery of stranded costs associated with TNP-One. We estimate we'll receive approximately $11 million in net earnings in 2006, when this case is finally approved by the regulators.

Electric and gas prices, last year the low-end average market price was assumed to be $42 a megawatt hour.For 2006, we project the low-end average market price will be $62 a megawatt hour. Now keep in mind, the changes in power prices have less impact in 2006 results, because a large portion of the capacity is contracted through native load and long-term contracts that we have in place. However, PNM is negatively impacted, as you saw in 2005, with any kind of significant planned outages. Regarding Luna and Twin Oaks, Luna is soon to start up in May with a three-month break-in period, with full operation scheduled for late July, with an estimate equivalent availability factor in the mid-90s. Twin Oaks is expected to be neutral to slightly accretive to earnings in the first 18 months of ownership. Approximately 15 to 20% of earnings during this period will include non-cash amortization in the below-market contract. However, the acquisition will be fully accretive after the first 18 months, and as Jeff pointed out, the next period of time, the three years after that through 2010, will be accretive to the Company. The purchase accounting valuation is subject to adjustments at the close, which is currently on or after April 17.

The price to beat rate and reset for First Choice Power on January 1, the price-to-beat fuel factor was increased to $11.39. First Choice Power has allowed two additional rate adjustments in 2006. At today prices, a further increase will not be justified. Gas price impacts are mitigated with management's decisions on rate adjustments, hedging and retention strategy for both price-to-beat and competitive customers.

First Choice Is also scheduled for a rate review 30 days after the commission in Texas rules on the TNMP stranded cost. Later in the year, the result of this review will very much result in a reduction of both components of base rates and fuel factor, which are imbedded in the price-to-beat rates. Hedging for First Choice Power is 100% for the first quarter, about 50% for the second quarter, and partially hedged for the third and fourth quarter. As you'll recall, the FAS 123-R goes into effect this year. Guidance includes expensing, of stock compensation, estimated at about $6 million. The last item on acquisition and financing is primarily related to the acquisition itself, which'll add about $22 million in interest expense.

Turning to the next slide, 14, which compares 2005 versus 2006 capital expenditures, we expect $407 million in capital expenditures this year. The most significant increase are for jurisdictional and wholesale expansion. That includes Afton and Luna respectively. And also some environment emission control enhancements at San Juan and Four Corners. This does not include any enhancements to Twin Oaks. Our next slide is is a five-year outlook for capital expenditures, and over the next five years, we would be spending approximately $1.54 billion, which is just slightly below the forecast that we had a year ago. In addition, the 2006 capital plan does include replacement of the steam generator at Palo Verde Unit 2, and other jurisdictional asset additions.

With that said, I'd now like to turn it over to Jeff for his concluding remarks.

Thanks, Chuck. Let me just clarify one thing that Chuck talked about, this regarding FCP and what's going to happen relative to rates. As Chuck mentioned, there is a rate review scheduled for 30 days after they finish their deliberation on stranded costs. We don't know what will happen. They have the ability to cause rates to change downward or change upward. We're in discussions with them, because one of the challenges is that, if you don't know what's going to happen and -- and something could be done regulatory rather than a market sign, it puts you in a position of how do you hedge? What is the right thing to do? Because you certainly -- if, in fact, they're going to strike rates down, you don't want to hedge today. You might as well just play it conservative and hedge at the point. And do they understand the situation, particularly given the situation, we sold at two strikes up last. We didn't give, like many of them. We didn't give away any of our strike-ups, as part of the arrangement to settle out on the 2005 natural gas. So, we don't -- we don't know yet what's going to happen with that, but we're working with the commission, and I think a reasonable outcome will occur.

Let me touch on -- slipping to the last slide -- just to update you on a couple of things. First, legislatively, we are in the middle a legislative session in New Mexico. It's the short session year. There is nothing on the agenda that we're concerned about. There are a number of bills that we're supporting. I am sure there are a few that we'll have to urge others to not vote for, but there is nothing of significance that we are concerned about. Texas is not in a legislative session. The only issue -- well, there's two issues. It's from the political side that we've been focused on. One is there are some folks who have been pushing to have an emergency session for retention of the PRB mechanism, the -- the price-to-beat -- I said PRB -- PT -- we have too many acronyms, PTB. And we -- our belief is that the whole gearing of the structure of Texas was to transition to markets. That transition is supposed to occur in 2007. We are certainly ready for that to occur. We don't see any reason to extend PTB.

The other one is the move from regional transition markets to nodal markets. And this is one that's going to continue for the next two years. I think the earliest we'll see it happen in Texas is the end of '08 or really 2009, and it's very difficult to say, is it a good thing or a bad thing. I have to look at it theoretically and say, in theory, it is a good thing, because it gets right prices to the point where you deliver power to, and it recognizes congestion. But in terms of its real implications, that's still being evaluated, because it really has to do with the transition to that point. On the Federal side, as we look at this next session, obviously there's a lot of implementation associated with last year's energy policy act, which, again, I think you all know, we were very, very supportive of. I think there are a number of things for our industry and for us to take advantage of. I think that you will see additional efforts on the energy front legislatively, really in two arenas.

The first one will be in trying to provide relief on the natural gas side, and this will come in the form of trying to expand the section 181 leases to bring additional gas off the shore of Florida, and another longer term initiatives for natural gas. And the other one is certainly going to be a heightened focus on energy efficiency and the like. The second area is going to be on the environmental front. We are a very strong proponent of multi-emissions legislation. We are also willing to consider having carbon addressed in that. It doesn't concern us. Frankly, what concerns us more is the uncertainty that's associated with the current set of emissions, regulations that are not necessarily conducive. And so we will continue to support multi-emissions legislation and we’re willing to engage in discussions around carbon from a legislative side.

In terms of facilities, as you know, we have got the Luna facility, which we jointly own with UniSource and with Phelps Dodge. We're in the process of being the constructing agent for it, and we'll operate the facility. It is coming along very well. We've had fire -- fires in the boilers since December. It's scheduled to be online in May. It may be able to beat that. The real issue for us is getting it as shook out as best we can before the summer hits because, obviously, that's when it will be there to make money. Recall that we entered into a transaction that isn't a lay-off sale, specifically, of our ownership in Luna, but kind of looks like that , in that it is a sale of a gas-based product to APS. That it's a six-to-seven month sale every year for ten years, starting in 2007. It provides us with a good return on our capital and the fuel -- they basically bear the fuel cost risk and it's priced at a 9,500 heat rate, where the heat rate for that unit is really 7,500. So, we think it's a good transaction for us over that next ten-year period, and we're very pleased with the Luna facility.

Second, Afton.. As I mentioned, we have an agreement with the intervenors that will take Afton, which is currently a simple cycle turbine, expand it to a one-on-one configuration, and bring it into rates. That stipulation was announced earlier in January. It has been filed with the commission and we would look forward to a decision probably in March. One of the novel and good things for us in this transaction is, even though it will not be in service during the test year for our 2007 rate case, which'll ba -- basically be 2006, it won't be in service until probably the summer of 2007, there's an agreement amongst the intervenors that it is includable in the rate case that will be filed in -- in 2007, and with rates going into effect in January 2008.

The last thing that I want to touch on, Chuck talked briefly about the electric rate case that we will be filing in 2007. One of the other items that we've talked about is a gas rate case. I do anticipate we'll be filing one. We've really looked at a couple of different scenarios, and we haven't made a final decision, but you may very well see us file one this year in the -- in the second or, potentially, the third quarter of the year. And they're really two issues for us. One is, it's now been a couple of years since the last rate case, which was the first one we'd had ten years. We've been investing 35 million, 38 million a year in that business and we have depreciation of around 20, so we've got an increasing rate base.

The other one is really a rate design issue that's important for us, and we're seeing the effects of it this year. With natural gas prices at all-time highs, people actually respond, and average use is down, and now part of that is weather. It is warmer than typical this winter, so far, but our average use for customer is down. And we have a rate design that recovers the fixed cost of the delivery system, both through demand charge and an energy charge. Frankly, there's too much on the energy charge side. So we are caught in this dichotomy of it's to our advantage to push natural gas use, because that's how we get recovery of our costs. Yet at the same time, that's contrary to the interest of customers, who really you should be thinking about how can you ensure they use it as efficiently as possible and reduce use. And the delivery system is the safety map, if you will, the safety valve to ensure delivery, regardless of what they use. So we'll also be going for a change in the rate design for that.

So those are the fundamental issues that I think we'll be facing. 2006, I think, will be another good and challenging year. I think the key drivers that we've talked about will certainly be how we continue to respond to volatile gas markets, particularly in Texas; Palo Verde operations, as well as the operations of our other units; our ability to continue to manage the growth that we've had on the retail side and our wholesale business; and certainly, as always, a focus on cash. So we look forward to a good 2006. And at this time, we'd be happy to answer any questions. We will start with questions from the room, and then we'll move to questions from the phone.

Yes, sir.

And if you would, just say your name into the microphone so the people on the --

Paul Fremont with Jefferies. You talked about a longer term fix at Palo Verde, as potentially involving the movement of a check valve. Can you give a sense as to how many days that would take in terms of -- I assume that work will be done during a refueling outage or a maintenance outage?

Yes. It -- it would require the removal of the fuel from the core, because when you -- when you don't have the ability to flow emergency coolant water into the reactor, you -- you're not allowed to have fuel in the core. So, we would defuel the facility. That takes some time. So it's one that we would want to do during a major outage or a refueling, obviously, would be the great time to do it, because it would otherwise probably -- I can't tell you the specifics, that's really APS's, but I would guess four weeks or so, maybe even four and a half, as the kind of time frame that you would have to have, because you do have to defuel the reactor core.

And the core -- [ Inaudible ]

Hold on. Let me get the microphone to you.

That includes the time for refuels as well, or not?

Well, typically, we at Palo Verde have looked at 35 days or so for a refueling outage, and so it would be afforded the opportunity to do that within that window of time. So if we had a refueling outage we can do it in, that would fit fine. Sam?

Yes, Sam Brothwell of Wachovia. Jeff, is -- which unit is this in?

You know, I get them all -- I think it is Palo Verde 1. Would you -- is this a test on how many fingers you are holding up? Yes, it's Palo Verde 1. This is the unit that we just went through the change out on the steam generator

Right. Is there any likelihood this is going to crop up in 2 and 3?

We haven't really seen anywhere near this level of vibration on the other units. This is not an unknown issue. It has happened in other facilities. I think the Calhoun facility is one where it has had a similar problem. We have not seen vibration that has moved to this level. I mean, we were seeing -- it's the sum of two inches, as that thing vibrates over the course of a minute. So we really haven't seen it effect units 2 or 3, at all. We don't think this area is a root design problem. Frankly we're still -- I think Pinnacle, APS and Palo Verde are still working on what -- what's really causing this. This is an acoustic vibration, okay, so it's actually being caused by sound waves. I think there was a question over here? Oh, okay.

Lasan Johong from RBC Capital.. Hi, Jeff. Palo Verde.

Hi, Lasan.

Palo Verde, let's continue to with that, if you don't mind. The long-term fix of moving the equipment, is that known to have worked in other situations? Or is it still kind of -- we don't know but we are going to try and see what happens?

No, I think -- I think that fix is one that we're pretty clear technologically it would work. Because it really is as -- I understand it, it's the difference between -- it's in the line between the valve in the tank and this valve. It's that section of pipe that's of biggest concern. so what we'd be doing -- what they would do is cut this valve and move it closer back toward the tank. So it shortens the distance and consequently you're --

I see.

-- you're automatically going to dampen that level of vibration. Doesn't have the kind of pathway for that --

Understand.

-- vibration to build up on.

You gave guidance of $1.65 to $1.90. What utilization factors do you have in there for Palo Verde?

Well, as you know, guidance is not a factor -- not dependent on one thing, so you have -- you have to -- there's a whole bunch of things that go into this obviously. But we could withstand the kind of performance that Palo Verde had last year, which was really not good, and be within earnings guidance. That's probably the best way, Chuck, you think to answer that.

A little bit of an overview on how PNM tends to finance Twin Oaks withequity and debt, and given in light of S&P's misses recently?

Yes, let me touch first about a few elements, because I didn't talk about Twin Oaks that I want to touch on, and then I'll ask Chuck talk about the financing of it. One of the things that makes me very comfortable with the Twin Oaks acquisition is first, it's hedged 100% for 18 months and then it's hedged 75%. Today we're not fully prepared to enter into the real time Texas marketplace, and so this gives us 18 months before we start moving that 25% or roughly 75, 80 megawatts into the marketplace, and that's just a good transition time for us. As I said, the transaction over that five years is accretive. It becomes accretive as soon as the 18-month contract's over. It is cash accretive in '07.

And then when we look to the longer term, post 2010, we need to see a gas price of $4.50 or so to get -- start to get a return, and we need to see a price of $6, $6.25 to get a return I'm really comfortable with. As we looked and thought and scratched our head about the future, I honestly -- you know, none of us know what gas prices are going to do, but I have a very, very difficult time believing we will see gas prices in the sub $6 range for any period of time post 2010. I just -- I just can't really envision it, unless there is some major thing that happens on a different form of fuel source. So at $4.50, we start to earn a return.

Chuck, would you talk about the financing?

Sure. In the short time I have been here, S&P has issued a negative outlook, so let me just say it is only an outlook and we're in close communication with both rating agencies in regards to their perspective relative to these acquisitions and our outlook towards the Company's position. We're very comfortable, and they seem to be comfortable with our plans and our dialogue in regards to what our intentions are to finance Twin Oaks. Nothing unusual for what you'd expect us to -- how we would finance that particular unit. We are looking at a mix of equity and debt. We are essentially at a 10% level at hybrid securities, so it's unlikely you'd see us to work in that direction. But we will, and continue to be committed towards maintaining a BBB investment grade rating, and that's the obligation we have with the regulators, and that's our commitment to the business. And with that said, we'll continue to finance to maintain that.

Let me just reinforce Chuck's commitments on maintaining our investment grade rating. We're not going to do anything that will place that at significant risk. I think one of the things we found is the rating agencies in there -- when they look at deregulated markets, particularly when you're a new entrant, you know, they're nervous, and I can understand that, and we only have six months of First Choice operations under our belt. While Twin Oaks has operated for a significant period of time, it certainly hasn't been under our ownership. And so I can understand them needing to get comfortable with this and we're committed to working with them to get this.

All right, Steven Rountos with Talon Capital. Two questions, the first again to beat on Palo Verde a little bit here. On the $0.22 of purchase power decrement in -- in '05 and $0.14 of plant availability, how much of that, again, was Palo Verde related?

Tom? Do you want to -- can you give an indication on that? We don't break it out specific but --

About $0.11 was related to Palo Verde, and -- and that's just on the wholesale side. On the retail , it's around $0.07. So it's kind of difficult because we don't break it out specifically, but as Jeff indicated, Palo Verde not only impacts the wholesale but also the retail load in ter -- margin in terms of not having that facility available to serve load, and then having to go out and buy higher cost power.

And the reason why on the retail side, even though there's more of Palo Verde committed to the retail side than there is on -- than committed to the wholesale side, we have purchase power contracts, long-term purchase power contracts that are based on a blend of coal and natural gas that first back up the retail end. So the back -- the replacement power cost is a little lower on the retail side than it is on the wholesale side, where we're having to back it up with straight market purchases or natural gas. But I think Tom is indicating about $0.18. I always thought about $0.18 to $0.20 is the probable impact

The $0.18 was between both purchase power and plant availability?

That's correct.

Okay. And then the second question was on the stranded cost proceeding. When do you expect that to wrap up in front of the PUC, and once that is decided one way or another, those proceeds -- I just want to confirm those proceeds can be used for any other nonregulated use, such as acquisition of Twin Oaks, et cetera?

Tom, do you want to take that one? Relative to stranded of cost.

Yes, the schedule for the PUCT is mid-June to July that we would expect an order to come out.

Can you remind us what the size of the stranded cost balance is, and what it will be once we get this order?

The base amount was $87 million and there have been carrying costs that have accrued since the order came out. I think that's around $39 million to $40 million. We've got about $130 million regulatory asset related to stranded cost that we will anticipate recovering.

And I would note that we are also in the process of pursuing -- we've gone -- requested a rehearing and we'll go forward into the courts a claim on an additional amount associated with the stranded cost. But that's -- my guess is five years in resolution.

It's a claim, but there were disallowances. The question was what's that claim. The claim -- there were disallowances made on the stranded cost recovery of the -- of the generation that TNP had that are not -- don't have judicial merit. Things like there was a contention that the auction that was done was done improperly. There's a contention that certain fees paid should be disallowed. There's probably about eight or ten different things, all of which -- not all of which -- a number of which we believe there's a strong legal basis for our claims, and so we are continuing to pursue that claim. We have to go through a process in Texas where you seek rehearing and then you go to the first judicial review and, frankly, it'll probably take a number of years to ever get there for final resolution.

[ Inaudible ]

Well, the disallowance -- Tom, do you recall? My guess is that it was somewhere in the $170 million range.

That's correct. And then, the other point of Jeff's discussion is that any upside goes 100% to the Company. At one point that was going to be shared with South Aquisi -- Southwest Acquisition, but through our mediation of resolving the purchase price, any upside of stranded cost is going to be 100% retained by the Company.

We have not given -- we have not given an estimate of what we think we may recover at this stage. I don't think it is $170 million plus carrying charges, but it is not zero either. At this time we have taken a number of questions from the room. Let me switch to the phone.

[OPERATOR INSTRUCTIONS] We have a question from the line of Leo [Harmon].

Hello.

Yes.

Hi, good afternoon, guys.

How are you.

Great. Just got a couple of questions for you. First, could you talk about the impact at 2005 of Palo Verde as it relates to purchasing power or the negative attribution from purchasing power?

Okay. I think we just went through that where it's a combination of both plant perform -- what are shown as the columns of plant performance and purchase prior expense, with an estimate of between the retail and the wholesale elements, it probably amounted to about $0.18 to $0.20 a share.

Okay, I'm sorry . I must have missed that.

That's okay.

Okay. The second question is -- I was trying to get a better idea of the amount of demand or the amount of uncontracted demand that First Choice needs to purchase, related as a percentage of its total demand? What portion of its total demand does it need to actually purchase without a contract on open market?

Well, today, we acquire virtually all of the power requirements that First Choice has through a contract with Constellation. And so we basically buy profiles from them under terms of a contract that is -- continues through this year. We are in discussions with both Constellation and a number of other suppliers for what will probably end up being a couple of contracts that will st -- that will kick in in 2007. But today, virtually all of the power requirements we need are covered under the contract with Constellation.

Okay, thank you.

We have a question from the line of Reza Hatefi.

Thank you very much. ran through a few numbers earlier. I just wanted to make sure I caught them correctly. The $25 million of increased depreciation, that's a consolidated number, '06 versus '05, and that, I'm guessing, includes Twin Oaks?

Yes, the $25 million does include Twin Oaks and it is the consolidated number. And I did mention there was a $13.5 million reduction from the life extension of San Juan for 30 years, and that's also included in that number, as well.

Great, and I think you guys also mentioned $10 million -- about 10 million of reduced O&M, due to synergies, and also $11 million of -- was it $11 million of post-tax net income from the CTC?

$11 million net income, that's correct, for the pretax regarding the strain of cost recovery for TNMP.

Great, and that assumes, I think, about -- what, a 11% return on capital?

Yes, that's about right.

And what is the total amount of Afton that -- I guess the rate base or the potential rate base addition, due to Afton?

I think it is $188 million is the total amount for rate base. So that is a cap, and we are currently looking to certainly hit that number or hopefully below, if we possibly can.

And I guess finally, could you guys comment on what your revenues were in '05 related to emission sales? I guess SO? allowance sales .

I don't have that number with me. I'm not -- yes, I am sorry, that's not something we've got at our fingertips.

Okay. Thank you very much.

And we have a question from the line of Erica Piserchia .

Hi, guys, just a couple of questions, briefly. First, Jeff, I know you spoke about this in your presentation, but can you just clarify for me whether or not 2006 guidance assumes that you strike again this year? I know you have two options to do so. Is that implicit in the guidance?

It is not implicit that we will strike.

Okay. And then, is there any way you can just give us a general sense of what your expectation going forward for -- whether for '06 or longer term, what percentage of your total earnings power will be coming from First Choice?

You know, I tell you, that is difficult, only because we do have some reasonably focused marketing that will be kicking off, but I don't expect First Choice to show dramatic growth. They did very well this last year, and I do not expect to see dramatic growth in First Choice power's overall performance. In terms of their -- the percent of earnings that will be coming from them, I look at it really on a margin basis, and I -- at this time, I don't have that in my head. But I don't expect to see dramatic growth in First Choice's performance '06 versus '05, not including, obviously, the impact of Twin Oaks.

Sure. Okay. I guess another -- well, maybe kind of bigger picture way to ask the question is do you -- when you think about your business, now that you've closed the acquisition and then going forward and the acquisition of Twin Oaks and moving Afton, a lot of moving pieces, what do you see as the break out between regulated and nonregulated earnings power going forward?

Okay, okay. Good question. As you know, I've always talked about maintaining 65% or so of our earnings in the regulated profile. And then of the unregulated profile, 80% of our wholesale earnings -- 70 to 80% of our wholesale earnings coming from term contracts. That effectively provides a fairly good security level for 80 to 85% -- 85% of our total earnings stream. And we will certainly stay within those boundaries, with the current structure and the current operations of the Company.

Okay. So that 35% would presumably kind of cover First Choice as well in there?

It covers First Choice, as well as our wholesale business, yes.

Okay, thank you.

You bet.

We have a question from the line of Ashar Cobb.

If I could -- just go to your comments. You had mentioned that the Palo Verde cost you $0.18. So, can we expect -- you said that there'll be no improvement on that item in '06 versus '05?

No, let me clarify that. I said that if we have performance in '06 that is at the same level as '05, we will still be in the earnings range of our guidance. I certainly expect better performance and hope for better performance out of Palo Verde in '06 than we saw in '05, but it's -- it's the statement that we can see the same kind of performance we did last year and remain in the range for guidance that we have provided.

Okay. So -- is it -- then can I just ask it in another manner that, if you expect that improvement, you could be at the higher end of the range? And if you get the same performance, you could be more in the lower-to-middle end of range? Is that a fair --

In the lower end of range, yes.

A lower end of range. Is that a fair statement?

That's fair statement.

Okay. Thank you.

We have a question from the line of [Danielle Seitz].

This is more of a quantita -- qualitative question. I was wondering wha -- if you could comment on what you anticipate what will happen to the Texas market after PTB is taken away? Just your own impressions.

Well, my own impressions, I guess, Danielle, are that, number one, we've found -- we have a group of customers who really prefer to continue to deal with the player that they're buying power from today. That's why you still have 60-plus% PTB customers in the residential marketplace. I think as long as those customers are treated fairly, I think they will continue to be fairly sticky. I think you will see a number of different things done by different players. Some will probably start see how much they can push the price up on those customers before they leave. Others will try to find other incentives to try to attract those customers away, because frankly, these are the kinds of customers you like. You don't -- they just really want to have good service and a fair rate, and they really don't want to be bothered. So I think the PTB -- the class of PTB customers will continue to be a sought-after group of customers, and we're certainly to have the ones that we have and have a slower attrition rate than -- then Texas has had on average.

I certainly can't say what our competitors will do, as to how much of them will try to find out how does price elasticity work in that market. You know, we -- we believe in having customers for the long term, and so we'll -- we'll price and act accordingly. I think one of the things our folks have done, if you look at what is going on with First Choice in the second half of '04, first half of '05, they were losing competitive customers, and we've reversed that and turned that around and started to add. And we really haven't done much in the area marketing to the retail side, because frankly, we haven't had the systems to be able to do it. One the things that we announced back in November was an alliance with ADS to take over a lot of our customer care functions. The first traunch of that happened two weeks ago and it went -- has gone extremely well. We'll be transferring all of the call centers over to them.

Today they've got the responsibility on the enrollment side. They'll have all of the call center functions and billing functions by March -- or in March, and that seems to be going very well. We're already, with their tools, getting a much better set of information for us to be able to start ensuring that we've got both good defensive marketing plans for our PTB customers and offensive plans to go after some competitive customers, those customers that have demonstrated an inclination to shop. So I guess that would be my view in -- in a nutshell, Danielle.

Thank you.

Is that the last question up in the phone? Well, listen, I want to thank you all very much for either joining in person or on the phone. For those of us who are here in New York, we are going to go have a nice lunch. For those of you on the phones, I'd be happy to send you a coupon for a Wendy's and a diet coke. [ LAUGHTER ] Some of you can't have fries, so I won't even tempt you with that. But it was a pleasure to join you all, and I know that join -- Chuck joins me in this in saying that we look forward to working with you in the future. Thank you.