TXNM Energy Inc (TXNM) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2006 PNM Resources Earnings Conference Call. [Operator Instructions]

I would now like to turn the presentation over to your host of today’s conference, Ms. Lisa Rister, Director of Investor Relations.

Good morning. Thanks for joining us this morning. Joining me today are PNM Resources Chairman, President, and CEO, Mr. Jeff Sterba and our Chief Financial Officer, Mr. Chuck Eldred, as well as other members of PNM’s management team.

Before I turn the call over to Jeff to start this morning, I need to remind you that some of the information that we will be providing to you should be considered forward-looking statements pursuant to the Private Securities Litigation Reform Act of 1995. I caution you that all of the forward-looking statements are based upon current expectations and estimates and that PNM Resources assumes no obligation to update the information. For a detailed discussion of the factors that affect PNM Resources results, please refer to the current and future end report on Form 10-K, the quarterly reports on Form 10-Q, as well as other current and future reports on Form A-K that are filed with the SEC.

And with that, I’ll turn it over to Jeff.

Thanks, Lisa. Good morning. I appreciate you all joining us this morning. As you all have seen in the release that we made last night, our earnings for the first quarter were $0.38 ongoing earnings of $0.39 a share. From my perspective, this is a good, not great performance given some of the factors that we faced in the first quarter, particularly, the Palo Verde extended outage, which as we advised you all before, would cost us about $3 to $4 million a month and, secondarily, and that this has happened through many of the areas of the country. Warmer weather and conservation given high gas prices, drove down our gas sales about 10% year-over-year, accounting for about $5 million loss for us. So, those two items were fairly significant downward pressures.

What I’m pleased about it is that we continue to see strong retail low growth in excess of 4% and stronger wholesale performance than you might have anticipated given the outage of Palo Verde 1, and I’ll talk about that in more detail in terms of the performance of the other units that helped us, but also facilitating that were forward transactions that we entered into last year for the first quarter and, as you know, gas prices dipped down a bit, and from the time that we struck those prices for those forward sales to the cost that we incurred to supply those forward sales, we were able to pick up a bit of margin.

Chuck Eldred will go into more detail on the first quarter earnings, so let me focus on a couple of other items as far as updates, and if you look at page 3 of the presentation, it’s available on the website, that’s where I’m going from right now.

First, we had earlier advised you about two weeks ago that the California AG had filed a lawsuit in May of last year. This was an anti-trust suit, which was really contending that as filed in State Court, that we, Powerex, and a hundred other names-- unnamed parties had conspired to set and fix prices in the California events of 2000-- 2001.

As we noted in our release, that lawsuit was dismissed by a Federal Court. That decision is appealable, but at least, our lawyers believe there is, virtually, little chance of that case coming back to life and being remanded in the State Court. So, we consider that a victory in a number of ways. It confirmed the FERC’s Jurisdiction in this issue, it upheld our positions and allows us to move forward with that I, hopefully, I believe, now behind us.

Also, about that same time we had the FERC approve the extension of our market base rate authority for our New Mexico territory. We still have one issue that we are working with them. They’ve asked for additional delivered price test information relative to our interface with Southeast New Mexico, and we hope to bring that to conclusion within the next couple of weeks or months.

On a regulatory side, we have mentioned to you before that we anticipate filing a gas rate case in this-- end of this spring, early summer. We’ve now targeted that that case will be filed in May 2006. You’ll recall that the last rate increase that we were able to settle had rates that changed in 2004, it was a fairly substantive rate increase. It was the first one that we had in 10 years.

The purpose of this rate case is really three-fold. First, we have continued to invest at a fairly high rate into this business given the bare main replacement and integrity management costs associated with pipelines. Recall that our pipelines are all in-cross-state not inter-state and, so their rates are subject to the state regulatory approval. That’s number one.

Number two is, we are seeing with higher natural gas prices, conservation by our customers, which we think is a good thing, but we have to ensure that the fixed costs of our system are recovered regardless of what may happen to use per customer and, so we’re going to be going forward with a decoupling mechanism to help decouple-- the revenues that we receive from the use of any individual customer. And lastly, we want to true-up the return on this business.

Second regulatory item that we have advised you of in the past is the FERC Transmission Rate Case. I’d like to let you know that we now have a stipulation that has been filed. It was unanimous with all of the parties to the case. We expect a decision, probably, in the June timeframe. Yes, the rates already in effect, subject to refund. This stipulation will add about $4.5 million a year.

The last regulatory update is that we have filed a stipulation in Texas regarding the competitive transition charge and the price to beat rate reset. The stipulation, I believe, was filed yesterday or the day before, and it does a couple of things.

First, it resolves an agreement with all parties with the exception of the cities, one party. The amount of competitor transition charge, how it will flow to customers on a net-net basis, it’s about $140 million. It will show up in bills starting in October.

The other item that this stipulation addresses is the price to beat rate reset where we would have-- or the Commission would have the ability to strike our price to beat rates down at the time that the CTC goes into effect, says the CTC rates are not going into effect until October under this stipulation, that price to beat rate reset would not go into effect until October also, giving us the summer under existing rates.

We would also, obviously, still retain our two potential price to beat strike-ups. After that date through the balance of 2006, and recall that price to beat only stays in effect until the end of 2006.

Last, let me move onto power plants in which we’ve had a number of endeavors going on.

First, as you are probably aware, we have brought into service the Luna Combined Cycle Facility, it’s a two on one, 570 mega watt facility in New Mexico that had been mothballed, partially constructed. We, along with our two partners, Tucson Electric Power and Phillips Dodge, acquired that project for $40 million and we estimated that we would spend about $110 million to complete construction.

In reality, that plan has come in at about 20% under that and, so that unit-- or that plan will be coming on at about $230 a KW, which is about as good as you can get, and I’m not sure-- it even surprises us that we are able to bring it in at that price, but kudos to Hugh Smith and his team for the great work in bringing that unit on.

Second, is the Twin Oaks acquisition which, of course, we’ve announced and talked about. We’ve now closed that transaction. Just as a reminder, we paid about-- just under $1,580 a kilowatt. It is a very valuable resource, probably, the cleanest coal plant in Texas. It has a fluidized bed unit, it has a lot of flexibility as to fuel, so it can burn not just lignite, but it can also burn other elements that can be put in there, literally, anything from petroleum coke to tires. So, it has a lot of fuel flexibility. It also has the ability to be extended-- expanded by about 600 megawatts. That transaction is closed and Chuck will talk about the financing for that.

Last, let me touch on plant availability. You all know about the challenge we’ve had with the extended outage of Palo Verde 1. I think the performance in the first quarter was substantively advantaged by the very strong performance of all of our other generation resources. The other two units at Palo Verde operated at 99% and 95% respectively, between Units 2 and 3, and the coal units operated in excess of 90% across all of them, both San Juan and Four Corners.

So, we’ve had good performance out of the units-- the coal units and the other two Palo Verde units. We, obviously, are managing our costs relative to the extended outage of Palo Verde 1, which there’s really no change in the prognosis, we expect to see that unit back online by early July. It has the potential of, maybe, being a little before then, but that’s our planning assumption.

With that, let me turn it over to Chuck to talk in more detail about the first quarter.

Thank you, Jeff, and good morning to everybody, and thank you for joining us this morning.

Let me start by just giving a quick reconciliation of GAAP ongoing earnings. If you look at slide 5, you can see that the non-recurring charges related to the TNP acquisition that took our earnings from $0.38 on a GAAP reported basis to $0.39 ongoing.

There were no non-recurring charges last year during the first period. You can, also, see we’ve got additional diluted shares, the impact of the equity associated with TNP Enterprises, we see an increase of about 8 million shares which had an impact from this time last year.

If you’ll turn to slide 6, I want to talk about the walk-across and, as you know, these are the key drivers that impact our earnings during the quarter and contributed to the reduction in ongoing earnings per share from the $0.50 to the $0.39 this year.

So, we’ll start moving to left to right to the Palo Verde performance of Unit 1, reduced ongoing earnings per share by $0.10. Jeff just provided you an update on the specifics of Palo Verde and the extended outage and, certainly, we’re looking forward to that unit and the entire plant to be back on its excellent performance level here soon.

The dilution affect, the next two bars and the financing, we’ll put them together, show about an impact of $0.12 combined to EPS, and even with the impact of dilution and financing of the acquisition, is well underway to being more than 10% accretive to earnings per share and 20% accretive to pre-cash flow in the first full year.

On the area of reduced natural gas usage consumption, also impacted EPS. Jeff commented on that and you can see that customers have responded to the high natural gas prices during the winter heating season, and if you were to normalize the usage at this reduced margin by $4 million and the impact was $0.04 on EPS.

On the next bar is the result of the 2.5% rate reduction that was part of the global settlement that went in effect into September 2005, and as you can see, it impacted $0.03 to earnings, quarter-over-quarter.

Now, let’s look at the upside of what really is contributing to the earnings per share going forward. TNP and First Choice both contributed $0.03 to earnings per share, and even though the shoulder periods of the first quarter and second quarter is, generally, the lowest usage in Texas. We still were able to get positive EPS contribution out of those entities for the first quarter.

At PNM we saw very strong retail growth, as much as 4.1% load growth in PNM’s Electric Service territory and 2.2% customer growth on the gas side, and together the retail growth contributed to $0.06 to earnings per share for the quarter, and even though, typically, this is a little bit higher than what we’d expect on load growth, we expect about 3% annual load growth for the year if you average it for the entire year.

The next bar is really the wholesale revenues, which we’re very pleased to report that that increase margin and contributed about $0.09 to EPS, and as Jeff pointed out, that’s the result of some forward sales that we entered in last year when prices were higher and then the ability to remarket that power during the first three months of the quarter when prices dipped, resulted in a significant impact to our wholesale power marketing segment of the business.

Now, if you’ll turn to slide #7. I want to go through some of the details regarding ongoing earnings per share by business segment and, of course, this is quarter-over-quarter comparison. As I mentioned previously, the dilution resulted in $0.06 reduction to earnings per share. The distribution of the impact falls mainly on PNM Electric and Gas, which is $0.02 each, and TNMP and PNM Wholesale, which is $0.01 each.

I’m just going through each of the operations of the business, starting with the regulated side of the business. PNM Electric was down $0.06 to $0.13, and here again, you’re seeing the impact of the 2.5% September rate cut and forced outage of Palo Verde Unit 1. The strong load growth and decreased depreciation, partially, offset the impact for the rate decrease and the plant outages.

On PNM Gas, it was down $0.04 compared with 2005 and finished the quarter contributing $0.15. Again, this is mainly an impact of reduced customer usage.

On PNM Electric, you can see it contributed $0.02 to our earnings per share this quarter. As you recall, we did not acquire TNMP until June of 2005, so there is no first quarter EPS comparison for PNM Resources.

If you go back to TNP. If you go back to the first quarter 2005 results and calculated it based on diluted shares, TNP would be down $0.03 quarter-over-quarter.

The limited TNMP contributions are a result of rate reductions and synergy savings, givebacks, and taxes in New Mexico combined with, I mentioned, the traditionally low usage during the first quarter in taxes.

On the unregulated side of the business, on PNM Wholesale, it demonstrated an increase in EPS compared to a year ago. Finished in the quarter at $0.13, up $0.01 from 2005, and as I mentioned, our forward power sales and remarketing the power during the quarter, more than offset the impact of Palo Verde 1 and, also, a planned outage that we had a San Juan.

On First Choice, like TNMP First Choice, traditionally, experiences low sales during the first quarter of any year. First Choice contributed $0.01 to EPS and by comparison if you were to use First Choice results last year and PNM Resources diluted shares, First Choice would, actually, be up $0.01 from the first quarter 2005. The increased margins were offset by higher bad debt expenses which were driven by state regulatory moratoriums after the hurricanes, it’s an impact with the collection of outstanding customer balances.

In the last segment of Corporate and Other, this is 5% impact to earnings, it’s related to the TNP Enterprise acquisition financing at the holding company level. Also, I want to note that the appendix section in the back of this presentation contains details regarding quarterly margin by segment.

Now, I’d like to turn to the next slide which is, really, the earning guidance. We are reaffirming our earning guidance for the year to be in a range of $1.65 to $1.90. This doesn’t exclude the acquisition related and other non-reoccurring charges and, as you know, we kept this in a wide range to account for the Palo Verde Unit 1 Performance.

Now, I’d like to through some key drivers that impacted or influenced the earnings guidance, and I’ll just hit some highlights because I talked in more detail back in the actual call back in 2006, we gave a lot more detail to these assumptions, but let me just update some of the main assumptions that went into our guidance.

First of all, on power plant availability, we’re seeing strong performance at the coal-burning facilities that Jeff referred to. Our expectations for Palo Verde to have an equivalent availability factor similar to what it had in 2005 levels, which is around the 75% level of availability factor. And, Jeff mentioned that San Juan and Four Corners had strong performance for the quarter and are close to last year’s equivalent availability factors for the quarter, certainly, helping to contribute to sustain our strength in results that we get out of those plants.

On the subject of Twin Oaks, we continue to expect Twin Oaks to be neutral to a slightly accretive earnings in the first 18 months of ownership, approximately 15% to 20% of earnings during this period will include the non-cash amortization from the existing contract, which is at 100% capacity and, as we pointed out before, runs through September 2007. The acquisition is expected to be fully accretive after the first 18 months and we are in the process of finalizing the purchase accounting since the closing in April. We also expect the transaction to be neutral to cash flow in 2006 and accretive thereafter.

I know there’s been discussions and questions before on the permanent financing, which will again come through a mix of long-term debt and equity, and the amount of equity will be sufficient to maintain a current investment grade both at PNM Resources and PNM the utility, and the timing of that we haven’t worked out the details yet. We’re still in the process of working through some things, but it will all be done, certainly, by the end of this year.

On the subject of First Choice Power, we like to report on what has been, actually, hedged in that business. First Choice is now 100% hedged through the second quarter of 2006, and at nearly 100% hedged in the third quarter of 2006, actually, around 98%, and First Choice is partially hedged in the fourth quarter of 2006.

So, again, based on the updated assumptions and our current schedule for the extended Palo Verde Unit 1 outage, as we previously discussed, we will likely finish 2006 at the lower end of the range.

This concludes my first quarter report and I’d like to turn it back over to Jeff for final comments and any question and answers that might come up.

Thanks, Chuck. Let me just make a few other comments around First Choice Power. As you’ll recall, we had two-- what I would call very strong quarters of performance, the first two quarters that we had management responsibility for FCP, but during those two quarters we really were not able to deploy much in the way of marketing endeavors for the retail marketplace because, one, we had to get our arms around it and, then we had a number of systems that had to be upgraded as well as with the high gas prices, and the volatility that we were seeing in those gas prices, frankly, that’s swamped many of things that we thought we could effectively do from a marketing side.

We have started rolling out marketing initiatives in the first quarter of this year and I’m, frankly, very pleased with the results there. We’re seeing-- we have the lowest fixed price offering in the Texas marketplace, and it’s all adequately hedged to ensure that we gain the margin that we need from those that tied up, it’s a two year offering at this stage. They’ll be other offerings rolling out.

We have stemmed the attrition rates. So, in the first quarter of the year compared to the fourth quarter of last year, we’ve seen no reduction in customers. There, certainly, has been some reduction and we expect there continue to be some reduction in the PTB customers, however, some of that reduction that you may see in PTB customers is because we’ve got those customers signing up for a two year fixed price offerings.

So, I think that the marketing programs are beginning to take hold. We will be aggressive, but we also know what we’re after. We’re not trying to become number two or three, or one in the market, obviously, and from a size perspective, we have very specific targets to try to grow that business and I think we can be successful in it.

The margins, as you know, are not excessive by any means today, and there are lots of strategies that we are putting in place relative to the termination of the PTB, one of which is the offering of fixed price transactions for at this stage two years, but you’ll see other offerings coming forward.

So, we’re feeling pretty good about how that retail market is progressing in Texas.

Well, with that we will open it up for questions, Lisa.

[Operator Instructions] Steven Rountos from Talon Capital.

Good morning, guys.

Morning.

Can you talk a little bit about what the impact will be on an earnings basis, the settlement versus what you had in your guidance for the earnings contribution, and then what is the path or what could be the path for securitization of those amounts?

Okay. I’m going to look at Tommy on the first one and, Chuck, you want to handle the second part of the question?

In regards to the settled case, first we had in our annual offering plan. Obviously, there’s a delay in the recovery of-- in the start of the CTC recovery, which would be offset by, as Jeff indicate earlier, being able to push the price to beat reset out, that First Choice Power will have to-- will occur there from June, basically, to October. So, it’s favorable in terms of what we had modeled compared to the settlement that we do have pending before the fees get--

Yes, as a result, once the settlement is finalized and there is an appeal process that will occur, that really delays the opportunity to pursue the securitization aspects of the structure, which could result in another couple years once the settlement occurs, but we have intentions at this point to pursue securitization as a financing vehicle, but we’re going through the process of appeal and then we’ll determine as we get closer to the opportunity to do the financing and take another close look at that.

Let me add a little bit to Chuck’s comment. What’s under appeal is the original CTC order that established the amount of stranded costs that could be recovered before all of the adjustments would have to be made, like the retail clawback, etc.

We are an appellant because-- and for those of you that are familiar with the story, you know that this was all done prior to our acquisition of the company. There was an order on the amount of stranded costs. There is a fairly substantive claim that the amount that was allowed on the stranded cost is short of what should be allowed by an excess of $100 million. So, we are an appellant seeking to increase the amount of stranded cost recovery.

There is also the cities who have appealed, obviously, trying to make-- have it reduced. Our expectation is that those appeals will take some time to wind its way through the courts because there are really, depending on how many appeals are made, it can be up to three courts that it goes through. So, I would not expect to see securitization being done anytime soon because, obviously, bondholders are not going to be interested in buying bonds when there is a risk as to how much it will be.

Our personal view-- my personal view is that there is a reasonable likelihood we will see an increase in the amount of stranded costs that will be allowed and I, personally, don’t see much risk of it being reduced, but it will be going through the appeal process.

Okay. It’s a little more on the earnings side than what you had your guidance in, but the timing for the securitization might be pushed out or is pushed out based on the appeal’s process. On the financing for Twin Oaks, what are the gating factors? The acquisition is closed already, what else is out there that you guys are waiting to come out with the financing plan?

Yes, the Twin Oaks as we’ve talked about is going to be a finance with-- we currently have a bridge financing that has allowed us to go through the closing and that bridge financing will be taken out with a combination of debt and equity this year and, really, at this point, we’re just working through the timing of when that should occur, certainly, we’re focusing on the Palo Verde scenario to ensure that we want to get that behind us as we feel that there is pressure and an equity overhang on our stock as a result of Palo Verde and, so we would like to see that issue resolved and that we’re very confident that we’re on track to do that going forward, and then the balance of the planning will be to offer debt to take out the balance of the acquisition and, as I mentioned before, maintain the investment grade.

One other item, let me add that, obviously, if we’re going to go the capital markets while it may be being driven by the Twin Oaks acquisition, we also factor in the balance of what our capital spend is and we do have a number of things that are going on this year and next year that we’re working on the funding for. So, it’s a little more than just the Twin Oaks piece. It’s got to be a part of the overall financing and, frankly, until we get through, as Chuck said, get through and people get to see, hopefully, and what we think will happen, Palo Verde Unit 1 return to service, and that cloud lifted, it doesn’t make much sense for us to go forward with offerings or to specify what the offerings will be.

Great. On First Choice, what was the-- you mentioned that there was an impact of collections of bad debt given the moratorium, what was that impact of that debt for the quarter?

It was approximately, I think it was about $1.7 million in total. Some of that was related to moratorium, probably, in the neighborhood of $800,000 to $1 million on First Choice’s bad debts.

So, it was relatively small. The hedges that--

I’m going to suggest, you’ve got a number of questions. We’ve got other people in the queue. Let me ask that you go back into the queue just so we can get to some other folks.

Yes, that’s fair enough. I’ll do that.

Okay, great. Thanks. And, if we don’t get back or if you got other questions, obviously, always call us.

Will do.

Anthony Crowell from Jefferies.

Hi, good morning. I’m just looking for an update on what the game plan is for the Palo Verde unit to get back to full power operating.

Okay. The game plan is that we are pursuing a path that the engineering and design work is being done today in which we will remove what is-- a valve from it’s current location on the emergency water supply line and move it closer to the point of injection into this pipe by about 30 feet, and the purpose of that is that the vibration that is occurring is within the distance between the point where this water comes from the tank to the check valve and, so by shortening that distance, that vibration will be eliminated.

The difficulty is, that sounds fairly simple. You and I, probably, both done that kind of plumbing repair, to keep a pipe from a knocking. It’s a little more complicated on a nuclear power plant and it’s fairly large, it’s a sophisticated valve set. For example, we had hoped that there would be another valve somewhere within the industry or within the world. Turns out there’s not, that can adequately fit. So, we’re having to engineer the cutout and the move. The engineering for this, because it is on the security system is-- the emergency water supply system, is a very complex engineering challenge, and that’s why it takes a fair amount of time to get all the engineering and the work packages done.

Hugh, what would you add in terms of the specifics or timing?

Well, that really completes it fairly well. The work is planned to begin in a few weeks and then be completed, as Jeff said, earlier by the end of June. One of the complications that adds to that is the fact that since this is on a emergency cooling shutdown system, they have to remove the fuel from the core during the process and, so that’s an added length of time that will extend the outage longer than what you might have anticipated just based on the description of what is taking place, and adds to the element of complexity that Jeff referred to.

So, if I understand correctly, the planning for this procedure is complete. It’s now waiting to be, actually, worked on or the engineering is still going on?

There’s still some engineering going on.

There’s still engineering going on?

Yes.

So, at what point do they think-- do they believe they’re going to, actually, get a weld and then cut this pipe and move this out. Is that weeks away, is it months away?

I believe that work should begin near the end of this month.

End of May, okay. And, now what’s the timeframe, actually, to move the valve which, probably, is the easiest of the process and then, also, refuel the reactors? Are we looking at sometime mid June when the fuel will be put back in the reactor?

Well, the estimate is about five to six weeks to have that work take place and, so we’re really looking from a planning prospective, near the beginning of July of having that unit back up and operating, and to the extent that their able to accelerate either the beginning of that work or the work itself, then there’s the possibility for it come a little earlier than that.

Now, the sister unit, which had a vibration, the operative did not have to move the valve. I think the steam generator upgrade diminished this vibration whereas this unit, actually, moving the valve to diminish the vibration. Is that correct?

None of the other Palo Verde units are experiencing a level of vibration that approaches what we’ve seen on Palo Verde 1. While you have some vibration within the line, it’s well below the limits. So, it’s really only on this unit, and recall we’ve done a steam generator replacement on one of the other units, and the third unit, we’ll go through it in about a year and a half. I think that’s right for you, isn’t it? So, this is the only one that’s been affected and these are very complex systems. It isn’t-- there are a number of things that are done over time that while these are, virtually, identical units, you can get slightly different performance out of the units, and in this instance that’s exactly what we’re seeing.

[Operator Instructions] Lasan Johong from RBC Capital Markets.

Thank you. How certain is the fix at Palo Verde? Are we talking 85% or 99%?

Well, I don’t know that you ever put probabilities on specifics. We feel very confident that this fix will work and, so I’m not sure I want to put a percentage on it, Lasan, but it’s high and my confidence comes from work that we have done on the outside. I think-- I can’t recall if I’ve mentioned this, but we have a Ph.D. Physicist on our staff who has run a lot of our technology endeavors, who came out of the labs, who took three of the world’s vibration experts out of Los Alamos National Labs, and worked with Palo Verde to understand the situation, to look at the options, to make recommendations on those options. These are the folks that fine tune lasers, linear accelerators, all those kinds of things on a practical basis at the nuclear labs in New Mexico.

We also had spent a fair amount time with EPRI, which is the collaborative research institute, that both APS and we are members of. I serve as the current Chair of the Board for EPRI, and EPRI has gone through in fairly exhaustive support in looking at the alternatives and the options, and reviewing this specific fix, and has also concluded that it has the highest likelihood of success, and that likelihood is high.

Good. Competitive expectations for ’07 on particular things like the fixed price two year contract. What kind of a margin does that have relative to, say, PTB and is this going to be an effective, say, mitigate to competitive pressures?

Typically, and there’s no single rule of thumb and, obviously, we’re careful about what we give out on competitive information, but most of the discounts you’re talking about single digit discounts. So, not substantively 15%-- 20% kinds of discounts, but single digits, in fact, mid single digits.

A lot of market research would say that those kinds of discounts usually don’t illicit switching. Frankly, in many instances we’re finding that they can. It depends on how they’re packaged. Both through Affinity Programs as well as through, certainly, if you compare fixed price offerings to something that floats with gas price, what kind of market response you get in one versus another can be quite different.

So, we’re not looking at substantive discounts. We’re, certainly, not going to try to gain market share by loss leaders, by any means, any product that we put out on the table it’s going to make money or it doesn’t go out on the table.

Right. you mentioned a $0.03 cost deficit on TNP versus what actual performance was in the first quarter of ’05. Did I hear that correct? And, what was accounting for that?

Well, I think the $0.03 that you saw on the--

TNMP--

You said there was an impact of $0.03 which is the first quarter of ’05, right?

Yes.

Okay. And, $0.02 was TNMP and $0.01 was First Choice Power. I’m just wondering why the deficit. Is it the rate reductions?

If you’re looking quarter-over-quarter-- we had TNMP for the quarter in ’05 one of the primary drivers, would be the rate reduction and the synergy savings giveback that occurred in 2006. That is correct.

Okay, great. Thank you.

And, Lasan, just also one other thing. Remember that as part of that stipulation for the acquisition to TNP, we’ve agreed not to file rates until 2008. May 2007 for rates that would go into effect in 2008 and, so obviously, that’s not until next year, but that’s something that’s being taken a hard look at.

Understood. Great.

David Schanzer from Janney, Montgomery Scott.

Yes, good morning. With reference to this gas rate case in New Mexico, recently, what would have been then ROE awards in the last year rate cases?

Well, it’s difficult to say with certainty because, frankly, most rate cases, that certainly we’ve had, have been settled, but we looked at, in the last gas rate case, 10.5-- 10.25 as effectively what’s implicit on the entire gas rate base for that rate case.

Okay. And, there hasn’t been any real regulatory changes since then?

Not really.

Okay. You also mentioned that you had substantial improvement in retail customer sales. I was wondering if you could give us some numbers for a small C&I and or large C&I as well.

Well, we don’t go after that at all.

I know, but I was thinking more in small C&I.

Yes. Small C&I, we still have some small C&I customers on PTB, and we’re seeing the same kind of attrition that we do on the retail market, the residential market. We are just looking at rolling out a few programs geared toward the small C&I industry-- the small C&I accounts and, so the marketing on that piece is a little behind the marketing programs on the residential market segments, so I don’t really have any data with me that I can give you.

Yes, and then just going forward for the next three quarters, is there anything that you see in the intermediate future, on the horizon, that would impact operating maintenance expense? I know you’ve had Palo Verde and you’ve had what everybody else has had, which is higher pension costs, etc., but is there any particular things that we ought to look for, pitfalls, potholes?

There really isn’t on the O&M cost side. In fact, on pension, I think, if you’re not aware, our pension costs are fairly well mitigated because we eliminated or froze our defined benefits plan back in the mid ‘90s or ’97-- ’98, and so effectively all of that goes through 401k style plans, which are fairly well fixed and they’re defined contribution, obviously.

So, that’s one to where we have not experienced the same kind of pressures that much of industry has-- healthcare costs, obviously, affect all of us. We have been able to do a very good job, I think, in managing our healthcare costs where for about three years running we held our healthcare cost increases at, virtually, zero and I think they increased about 7% last year, Alice?

Yes, sir.

Again, that 7% is well below what you’ve seen and we’ve really done it not by cutting benefits in any way. Certainly, there is the continued sharing of costs between employees and the company, but we haven’t changed that sharing on a percentage basis. It’s really been more about getting much more rigorous regarding our wellness programs, our disease management programs, and our interface with the medical providers that we use throughout our territories, and we’ve done things like move our retirees off of our plans and onto AARP plans, which has helped substantively manage those costs.

But, you don’t see anything in the way of major increases in that area?

Well, we see it, sure. We see increases in healthcare costs, but not anything out of line with what you see in the market.

Great. Thank you.

Darren Conti from Wachovia Securities.

Morning.

Morning.

With regard to your forward wholesale sales, to what extent do you expect these to continue through the balance of the year?

Well, the specific ones that substantively helped in the first quarter, they were strictly Q1 sales. So, as we move forward through the year we always have to have forward sales, but I do not expect to see them have the same kind of impact as they did in the first quarter because it really was a good timing, and the difference between what the forwards looked like and what the actuals came in at. We don’t have substantive forward sales of that magnitude going forward into the other quarters.

Okay. And, then a quick follow up on Palo Verde 1. You talked about your expectations availability factor as 75% for 2006. Assuming that that plant does come back up around July 1st, what assumption are you baking in for the availability factor in the second half of the year?

E4s on the other-- well, on all three units for the second half of the year would be in the 3% to 5% range. Do you know what I mean by E4s? Equivalent forced outage rates.

The forced outage rates?

Yes. So, the forced outage rates would be in the 3% to 5%. Palo Verde, historically, has operated at less than two and I think it’s going see, probably, higher than that, at least, we’re allowing for it to be higher than that.

Okay. So, the assumptions are fairly conservative to get to that 75% for ’06?

I think they’re reasonable.

Okay. Thank you.

Let me go back. It just dawned on me. And, the person who asked the question regarding mass markets or small C&I, what I call mass markets. It was David, that’s right. David, one other piece of information I can give you. We have made some initiatives on mass markets C&I that has, probably, driven customer increases close to 20%, and this is largely-- that’s total-- that’s based on a meter count not the number of customers, necessarily because in some instances, these have been multiple site lead accounts, and so it’s 20% which is high, but it’s not a huge volume, and I think you’ll see that continue to pick up as more and more of our mass market programs get rolled out.

Jennifer Preller from Barclay’s Capital.

Hello. I believe you said Palo Verde outage is costing you $3 to $4 million a month. Is this with Palo Verde operating at 25% reduced levels or is with the plant down completely, which I think has been the case since mid March.

The numbers that we gave in the range of $3 to $4 million per month are effective with the current operating status that Palo Verde is operating under with zero output coming from Unit 1.

Okay, perfect. Thank you.

Steven Rountos.

I just wanted to know on the First Choice, if you could give an idea of where the hedges are in terms of pricing for First Choice that you have going forward?

Yes, Steve, it’s because of our market’s position, we won’t do that. We view it as competitive. I can tell you they’re in the money, but I’m not going to give a number overall through the course of the year, but I’m not going to tell where the strikes are.

Okay. Can you give us an idea of margin-wise, how they compared to last year or just historically? Are they close to where you’ve locked in margin historically?

Well, maybe, I can answer it by telling you about the process because we do something a little bit different. We have a tool-- when our folks are out attracting customers. Typically, you end up with about three day ERCOT data on their consumption, then you price it out, then you go back to the customer and you try to get the customer to sign a contract, and then take the deposits, etc.

We have a process in which that can all be done, literally, within one hour and, so we update our forward curves for our marketers for-- anywhere from 3 to 5 times a day. So, they know instantaneously on their computer that that carry with them what prices they can do, and meet our margin requirements, and all of the transactions are done off this computer on a real time basis. It’s, basically, a tablet computer and, so we put ourselves in a position where every new transaction we have we’re effectively locking in immediately. We don’t take a day risk or a two day risk, or a three day risk, as we find most marketers do. So, those margins, then, effectively get locked in at the point in time at which it signed. I know that’s not telling you where we’re locked and I’m just not going to tell you that.

I was just trying to get a feel for the trend of where margins are. What kind of margins you’re realizing with First Choice, is it on an uptrend, is it flat? Where do you guys see margins for the Texas competitive market-- ?

Well, clearly, on the price to beat side margins have expanded, finally, being to get prices up at the level that they needed to be whereas last year for, certainly, most of the second half of the year, we did not have until the third quarter where consumption really matters, we did not have adequate prices on the PTB side. We were able to compensate for that because of our wholesale positioning and that’s why we’re able to show third quarter good financial performance where most suppliers-- most providers in this market, clearly, did not.

So, we’re seeing higher retail margins because of PTB relief. We’re seeing continued, fairly thin margins on the competitive side and I think this market is still in a shake out mode, particularly, given the changing gas prices, but we are seeing positive margins on our competitive side. Not as high as we’d like, but certainly not as low as I think they have been.

Is First Choice core for you guys in terms of operations?

Well, Steve, let me answer it this way, the way we-- when we entered the Texas marketplace what we said is that we lead with load, and First Choice Power provides the leading with load. It gives us an anchor for which we can then acquire resources to expand into the wholesale business, and I think what you’ve seen is that’s exactly what we’ve done with the Twin Oaks acquisition, and FCP is an important part of the business, and at this stage, we have no plans in altering FCP.

Okay, great. Thank you.

And, at this time, sir, there are no further questions, so I’ll turn it back over to you for closing comments.

Well, thanks very much for your time this morning. As always, if you have follow up questions, you can certainly get hold of Lisa Rister. We look forward to-- I know Chuck will be at the AGA Conference, as well as, at the Goldman Conference in Las Vegas, and he’ll be around at the AGA sessions to answer any questions you have along with Lisa, and we look forward to a balance of a good year. Take care.

Ladies and gentlemen, thank you for participation in today’s conference. This does conclude the presentation.