PNM Resources Inc. and Cascade Investment LLC, the personal investment vehicle of Microsoft founder Bill Gates, have agreed to create a niche power trading company to serve expanding U.S. markets throughout the Southwest, Texas and the West. Under the terms of the agreement, PNM and a Cascade subsidiary will jointly hold a 50% stake in the unregulated company, temporarily named EnergyCo LLC.

EnergyCo, with a board made up of three PNM directors and three Cascade directors, would invest in wholesale and retail electricity sales, generation and some power trading markets. A management team is expected to be named in about three weeks.

“To enhance our growth, we needed a partner that would bring capital and acumen to table,” said PNM CEO Jeff Sterba. “This new company will not only enable us to do things more effectively, but to do it at less risk to shareholders.”

Speaking to financial analysts Friday, Sterba said assets to be purchased by EnergyCo had not yet been determined. The assets purchased by EnergyCo would “have to be agreed to by both parties, and it will be limited to those assets that are unregulated.” Sterba added, “the rate of how this unfolds depends on the type of transactions we find in the market…We are not going to just do transactions. This is a vehicle to find the right transactions.”

However, Sterba acknowledged EnergyCo’s purchases “could very well include assets that currently reside within PNM…our so-called merchant assets.” PNM’s unregulated business focuses on some of the largest and fastest growing domestic power markets, includes First Choice Power, a deregulated electric provider in Texas.

By combining Cascade’s financial resources and PNM’s operating expertise, EnergyCo is expected to enable PNM to capitalize on the growth opportunities in unregulated markets without adding to its $2.5 billion debt load. PNM currently has a market capitalization of $1.9 billion; 35% of its sales come from its unregulated entities.

In particular, Cascade would commit capital to buy assets and make “significant” credit guarantees to increase EnergyCo’s scale in its three anticipated business lines:

“Our partnership with Cascade enables us to execute our unregulated growth strategy faster than we could have otherwise,” said Sterba. “Together, we will create a growth vehicle that has the expertise, resources and flexibility needed to meet the rising demand for power in the markets we serve, while delivering clear benefits to customers and shareholders alike.”

Michael Larson, Cascade’s chief investment officer, said EnergyCo would provide “a platform for capitalizing on solid growth opportunities in the unregulated energy sector. We have been long-time supporters of PNM Resources and are highly confident in the company’s leadership team and their operational capabilities.”

Through Cascade, Gates is PNM’s second-largest shareholder. Cascade, formed in 1995, owns 6.5 million, or 9.4%, of PNM’s outstanding shares of common stock, which Gates began buying in 2000. Last year, Cascade invested $100 million in PNM equity-linked securities to help fund the acquisition of Fort Worth-based TNP Enterprises (see NGI, Oct. 17, 2005; March 7, 2005).

EnergyCo will operate as a limited liability company. PNM will recognize its 50% share of the earnings from EnergyCo by using the equity method of accounting.

Deutsche Bank Securities Inc. is acting as financial adviser to PNM.

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