PNM Resources Inc (PNM) 2008 Q4 法說會逐字稿

Good day, and welcome to the PNM Resources 2008 earnings conference call. Today's conference is being recorded. At this time I'd like to turn the conference over to Miss Gina Jacobi, Director of Investor Relations. Please go ahead, ma'am.

Thank you, everyone, for joining us this morning for a discussion of the Company's fourth-quarter 2008 earnings. Please note that the presentation and accompanying materials for this conference call and supporting documents are available on PNM Resources' website at www.PNMResources.com.

Joining me today are PNM Resources' Chairman and CEO, Jeff Sterba; PNM Resources' President and Chief Operating Officer, Pat Vincent-Collawn; and Chuck Eldred, our Executive Vice President and Chief Financial Officer as well as several members of our executive management team.

Before I turn the call over to Jeff I need to remind you that some of the information provided this morning should be considered forward-looking statements pursuant to the Private Securities Litigation Reform Act of 1995. We caution you that all of the forward-looking statements are based upon current expectations and estimates and that PNM Resources assumes no obligation to update the information.

For a detailed discussion of factors affecting PNM Resources' results, please refer to our current and future annual reports on Form 10-K and the quarterly reports on Form 10-Q as well as other current and future reports on Form 8-K filed with the SEC. And with that I'll turn the call over to Jeff.

Thank you, Gina, and good morning. Thanks for joining us today. I'm sure you've had a chance to read the press release where we announced ongoing earnings per share for 2008 of $0.12 within $0.01 of market estimates. If I was to summarize 2008, it was certainly a difficult transitional year for us. Our focus was really on shoring up the foundation for providing sustainable returns in the future, but we had a significant performance shortfall at one of our units, First Choice Power.

While the financial results are obviously unacceptable going forward for the entire Corporation, we did make significant progress on the four strategic initiatives that we laid out for our owners at the beginning of 2008. Let me just summarize those briefly.

Relative to fair regulatory treatment this is not something that, as we talked before, you turn on a dime. It takes time, it's building better understanding with regulators; it's working with regulatory lag that keeps rate increases from going in in a timely way, although we are focused on that. But if you look at 2008, we had our first electric rate increase in over 20 years. We also had the first fuel adjustment clause implemented for the Company on the electric side of the business in over 15 years.

Progress is being made; Pat will talk more about the regulatory environment that we're in and the improvements that we're seeing. We also had a major focus on efficiency and effectiveness and we drove $35 million of cost out of our structure, which is about 15% of controllable O&M, by that I mean non-fuel, non-lease related operating costs. And that process isn't done, it will continue.

We also laid out that we wanted to simplify our operation, particularly with PNM where we conducted merchant operations very successfully over the last seven years. But as you move into a period of rate cases, having that mixed merchant model within the utility was problematic. We entered into a successful Palo Verde toll at very good prices to take care of the unregulated piece of Palo Verde and we have reached an agreement to move all of the merchant gas units in New Mexico into our regulated operations and that is waiting Commission approval. And then last, we said that we really wanted to focus on our core electric businesses and so we executed the sale of the gas business.

Pat and I are going to talk about the operational performance of our businesses and then Chuck is going to provide a financial summary and discuss our 2009 outlook and major drivers for 2010. But before turning over to Pat I'd like to bring your attention to slide 5 in which we identify the checklist that we utilized in our first meeting in January to say this is what our owners can hold us accountable for in 2008.

Of those eight items seven were accomplished and I think were accomplished in pretty good form. Unfortunately one we fell short on and we will spend some time talking about that. Relative to the gas transaction, you know that it's closed. As of yesterday we dividended $220 million up to the parent which will largely be used for debt buyback and I believe most of you are aware of the tender process that we conducted.

The Cap Rock transaction we've talked about before where we received a payment of $15 million in relationship to EnergyCo -- as I said, I'll come back to First Choice in a minute. We've got Cedar Bayou 4 moving forward on schedule and on budget to be online in this summer. Palo Verde's performance has continued to show steady improvement. I'm sure you all, and obviously us also, would like to see that improvement come quicker. But when you're dealing with a nuclear facility it really is about rebuilding regulatory margin.

The good news is that we are seeing very positive signs of acceptance by the regulator, this being the NRC, as to the execution of the plan to bring Palo Verde out of the degraded cornerstone status.

Obviously one of the major things that we had going on in 2008 was about a $360 million construction endeavor to retrofit the environmental back end of San Juan. We've completed that on three units; they are operating very, very well. And the last unit to be going through that project went down this last Friday, in fact.

So I think we not only are seeing good performance out of the units since they come back, but the environmental performance is in fact better than we had anticipated. I talked about the O&M reductions that we've achieved and that we filed rate cases in both Texas and New Mexico that Pat will talk about.

Pat's going to talk about the operation of the utility -- our utility -- the two utilities in New Mexico and Texas and then I will come back and talk about First Choice Power and Optim Energy. Pat?

Thank you, Jeff, and good morning, everyone. I'm going to start on slide 7. As Jeff mentioned, while this was not a year that we were happy with the outcome, there was a lot of solid achievement going on. PNM had its first new rates implemented in May which was worth about $34 million to us and then we obtained a much-needed fuel clause a month later.

Chuck is going to provide you with more detail, but net of the fuel expense and the planned outages of prior June, higher great relief in the fuel recovery clause added about $0.26 per diluted share year over year. We then filed a rate increase in September for $123 million; testimony will be filed later this month on February 27th and we are on a nine-month clock for that case. We feel that this case is being put in a much more constructive regulatory environment than we have seen before in New Mexico.

Jeff mentioned we've completed our San Juan scheduled environmental upgrades and those have gone very well. We're seeing very good operational and environmental performance out of those. On our completed units for example we're seeing 95% SO2 removal and mercury removal north of 90%.

One of the things we keep our eye on here is reliability. In this cost cutting environment and in an enhanced regulatory environment we need to make sure that our environment -- or our reliability is still good. And PNM and TNMP have both maintained top quartile reliability which helps with customer satisfaction.

Jeff talked about Palo Verde and we're working with them and they continued their improvement. They went from an EAF of 77% in 2007 to an EAF of 83% last year in 2008 and we also achieved our business improvement plans.

We turned to the next slide on page 2009 -- or excuse me, on page 8 and talk about 2009. I want to talk about our focus areas. But for a minute I want to talk about the economy. One of the things that I think every utility and every business is struggling with is what is 2009 going to look like on an economic basis? We're looking at load growth in both of our territories at about 1%, which is very consistent with what we saw at year end in both territories.

And also in PNM, for example, half of that load growth comes from one municipal customer which is already on line. Some of it comes from Intel who, as many of you may remember, closed down one of their fabs here in New Mexico last year to retool it, it is now their newest and most automated facility and we will be seeing some load growth from that this year.

We're working very hard to achieve our appropriate regulatory ROE. We continue on our cost recovery. Just yesterday here in New Mexico Legislature in the Senate, Senate Bill 477 was introduced for those of you that track legislation. It is a bill that allows a historical test year, it puts it in statute including -- future test [year], excuse me, including CWIP. It was introduced by Senator Payne who is the minority whip here and it was cosponsored by Senator Michael Sanchez who is the majority floor leader. These are two very senior gentlemen and in the area of utility regulation and energy they are the leaders in the Senate.

We're also working this year on greenhouse gas cost recovery legislation. We're also continuing to enhance our stakeholder relationships, both with our outreach with the general population and the business leaders, but also with the interveners. And I think you've seen some positive momentum on this in terms of the stipulations; we reached two key stipulations in 2008. One was the inclusion of Luna and Lordsburg and the Valencia PPA in our rate base, and the second was the sale of the gas company.

And I just want to emphasize on the sale of the gas company, the Commission allowed us to keep 100% of the gain and we were just able to dividend, as Jeff said, $220 million up to the parent from that sale. We're also going to look to expand our renewable portfolio through effective recovery avenues, but only if we can get the appropriate cost recovery for those renewables will we be adding those to our portfolio.

The second area that we're focusing on in 2009 is capital deployment and managing our costs. Jeff talked about the ABI savings; we have continued to bake those into our budget and our numbers and are continuing to identify more cost improvement projects. We're working on continuing to improve our power plant availability. We'll complete the final environmental upgrade at San Juan in a couple of months, started last week, should be done by the end of March.

I talked about TNMP; TNMP also had a very good year in 2008. It was a good contributor to earnings, contributed $0.28 in 2008 versus $0.24 in 2007. We filed our first rate case in more than five years last August, we asked for an $8.7 million increase and, importantly in that case, it allows us to unlock the automatic transmission recovery mechanism that takes place in Texas -- one of the features of Texas is a very constructive regulatory environment.

We, like many other utilities in Texas, faced Hurricane Ike this year. It was the largest restoration effort in our company's history. We had almost all of our customers up in two weeks and received much praise from public officials in terms of how we restored customers, but also how we communicated to customers and communicated to the public officials. Also in Texas we achieved our business improvement plan.

On page 10, TNMP's focus will sound familiar -- appropriate regulatory pretreatment to earn our allowed ROE. Seeking timely recovery of our costs will be key. The Commission and the interveners came to an agreement with TNMP to allow us to abate our rate case filing until March 16th. That's very good for us because it allows us to do two things. It allows us to take the Hurricane Ike costs and add them to the rate case, and to put at the higher interest expense that we're seeing on our debt going forward.

So they allowed us to keep all of the current data in the rate case, but add those new pieces without the data to be considering failed. We're working very closely with those interveners over there and hope we can come to a settlement in that case. As at PNM, at the TNMP we are working to keep our costs down, have baked those aggressive business improvement targets into their budget and are looking for more savings.

And finally on page 11 as we face this environment, we took a look at our capital spending. The last time we talked with you we had estimated $1.7 billion in capital spending over five years. We have gone through and looked (inaudible) areas where we could cut out due to the slowing economic environment and we reduced our capital spending by about $356 million. A piece of that, about $135 million, was the fact that we could include Luna and Lordsburg into the rate base so we do not have to build any new base load plants in New Mexico.

We are were also able to pull out some money due to lower load growth expectations, we have fewer polls to buy, fewer meters, fewer transformers. We're seeing some reduction in nuclear fuel costs of about $30 million. The fact that we've completed two of the environmental upgrades -- or three of the environmental upgrades at San Juan and only have one in the 2009-2013 time period has lowered our capital expenditures.

But we did increase spending in our capital budget for transmission in TNMP. We will continue to spend in areas where we can get good and timely regulatory recovery. Once we're in a question-and-answer session I'm happy to answer any questions and right now I'll turn it over to Jeff for First Choice Power.

Thanks, Pat. Let me just add one thing in terms of the economy within the state. For those of you that haven't followed us greatly in the past, one of the things that you find in the New Mexico economy, and it's to a lesser extent true in Texas, is that its resilience in economic downturns has been something that's always been there.

Part of it is because of the large governmental federal government presence with the labs and the large Air Force bases. And that's why -- but also we see the attraction for people to retire out here and the like. That's why even in the fourth quarter we still are seeing 1% customer growth rates in New Mexico. And in fact we're seeing higher than that growth rates of customers in the fourth quarter in the properties served by Texas.

Moving to slide 13, let me spend a few minutes talking about First Choice Power. Obviously the results in 2008 were unacceptable. If you look at the three prior years, the first three years that we owned Palo Verde -- I'm sorry, that we owned First Choice Power, it averaged an EBITDA performance of about $50 million. Going into 2008, however, it slipped to a loss of $27 million which, as I said, is unacceptable.

All of us in ERCOT experienced to varying degrees the impacts of really four things. The first was the high congestion that was experienced in the spring and, frankly, poor congestion management on the part of ERCOT, which has largely been rectified.

Second was the extreme commodity price volatility that drives market prices and created very interesting and difficult dynamics, particularly as we moved into the late spring and into the summer. Third, as Pat mentioned, Hurricane Ike. FCP has a large number of customers that are in the -- were in hurricane Ike's path. And forth, largely because of both Hurricane Ike and the commodity price volatility, substantive increases in bad debt.

The major drivers for the downturn in performance were lower average unit margins which impacted us about $32 million, bad debt which was an increase of about $34 million meaning that our bad debt for last year was just above $50 million or almost 8% of sales. That's untenable, that's got to be turned around and I'll spend a few minutes talking about what our folks are doing with it. And there are a number of different factors in that.

But before I touch on that I do want to note, as I think we set out over lease some time ago, that we came to the conclusion that given that we were going to hold on to First Choice Power we needed to change its leadership and change its direction. We brought Brian Hayduk in at the end of last year, who was previously the president of Juice, before that a senior vice president with Constellation on the retail side and its predecessors.

Brian has certainly hit the ground running and has given me a greater sense of confidence about the performance capacity of this business unit for 2009. We are already seeing a return to growth in that business where we saw a significant reduction in the number of customers as we went to the fall, some of which was forced, we purposefully slowed down the rate of customer acquisition. We are seeing that it is -- that the marketing efforts are being successful and it is upticking.

And it's particularly stronger in our term products. So we've gone from under 50% to almost 70% of our customers being on term products. But most importantly is that margins have substantively improved in the product offerings for these new customers. In fact, our margins in the second half of the year are more than double what they were in the first half of the year and we have particularly seen strong growth in our commercial sector. These are a lot of new customers being added that service really just barely got started in 2008, it really goes into 2009 forward, typical contract terms of three years.

On page 14 let me spend a few minutes talking about the bad debt issue specifically. Obviously, as I said, this is unacceptable. There are a number of action sets that are being put into place, some of which obviously I don't want to go into details on because they are market sensitive. But they certainly include diversifying the customer portfolio to a greater extent than has been done in the past; to improve our risk-based pricing and particularly recognizing different pricing and term provisions for customers that have different kinds of credit profiles.

And it's not as simple as just FICO scores, because there are also demographics where you see certain customers that may not have great FICO scores but they've got great payment histories for utility kinds of services. Then you have others that may in fact have better FICO scores but, frankly, hop around.

One of the challenges that we have is moving forward with the REP community to help bring about some change on the regulatory side because there are certain rules that allow customers to REP hop while collecting bad debts at the entity they just hopped from. And avoiding contract termination payments, which was the major mechanism that's been built into the rules that you can use if a customer does hop. But they have found ways to avoid those payments.

We also need to stabilize the margins, obviously. And that is obviously focused on our pricing strategies, the mitigation of bad debt as I've talked and cost management. In terms of where we're positioned for 2009, we're about 95% hedged at margins that we're very comfortable with, the higher level what I'll call more necessary and appropriate margins in the business, and about 85% hedged for 2010.

I touched on the increases that we're seeing in the customer acquisition side, but this is not a business that we're going to heal by making it up on volume. The primary focus that Brian has got is on the cost side of the equation and the margin side of the equation. And as we're able to ensure that we've got those under better control to then continue with the growth plan so we can add customers.

Moving on to slide 16, let me just briefly touch on Optim Energy, which you have previously heard us refer to as EnergyCo. Its EBITDA improved from $9 million last year to $49 million in 2008. It has had very strong performance at its two generation resources -- the coal-fired Twin Oaks power plant and the Altura Cogen facility, which operated at available factors of 98% and 92% respectively.

One of the main focuses that we've had in 2008 is really around the optimization of the Cogen facility, which is really about building flexibility into how we operate that unit to meet the steam and electrical demands of the chemical facility while maximizing the availability of that plant for market sales and ancillary services. One of its primary opportunities is within the ancillary services market and we are exercising that much more aggressively than has been done in the past.

With that let me just touch briefly on slide 17 in terms of the strategic growth for Optim. We firmly believe that -- the capacity for it to grow its EBITDA at a compounding 10%. We've certainty seen sharp price reductions in the second half of the year of 2008 and moving into 2009. But with Cedar Bayou number 4 coming online in the summer and the optimization efforts we're comfortable that we will be able to achieve that kind of growth.

We will continue to evaluate expansion of that fleet, which with Cedar Bayou will be at about 1200 MW, but we don't see the kinds of market incentives today that would trigger us to want to build new facilities except potentially in a very small niche application where we can bring in a facility at exceptionally low cost. And we have not committed to any of those at this stage.

We'll continue to look at the opportunity to buy assets, but it's not exactly a robust market. It's moving to more of a buyers market, but there are many plants that have term financing in place and I think a lot of them are trying to weather this storm and determine how long the depressed prices will last and as to whether they see the opportunity to get their returns down the road. If not we will start to see I think more owners in the market look at exiting at prices that may be attractive for us.

With that let me turn it over to Chuck to go into the financial side in a little more detail.

Thank you, Jeff, and good morning, everyone. As Jeff mentioned earlier, 2008 was a challenging year and, while our financial results don't show year-over-year improvement, we have made significant strides on the four key initiatives that Jeff mentioned in his opening remarks.

So turning to slide 19, I want to point out some of the significant year-over-year performance drivers. Ongoing earnings were $0.12 per share in 2008, down from the $1.11 we reported in '07. What's not evident in our financials is the steady improvement we made on the regulated side and how the successes we achieved during the year, most of which Pat mentioned in her comments, but in the first quarter prior to the implementation our new base rates and the emergency fuel clause adjustment, PNM's earnings were down $0.34 from the prior year.

However, since that time PNM's earnings have rebounded; during the second half of 2008 the utility's earnings were up about $0.10 or 45% above last year. Our walk across graph clearly shows the benefit from implementing new base rates in the fuel adjustment clause for PNM. The $0.26 increase on the graph reflects the impact of the higher retail rates and fuel recovery which were partially offset by the costs incurred early in the year related to the power plant availability and higher coal cost.

Regarding scheduled generation outages, the $0.14 decline in EPS as due to generation outages reflects the O&M associated with last year's scheduled outages. With implementation of the fuel adjustment clause we're able to timely recover the cost of purchased power whenever we take the plants down for scheduled outages. However, we still incur the O&M expense related to those outages.

As Jeff talked about, in First Choice we begin to see a return of growth in our fourth quarter. However, the bad debt expense more than offset that growth. During our third-quarter call we affirmed guidance, we had expressed continued concern regarding First Choice bad debt expense given market price volatility and the market rules in ERCOT. Unfortunately year-end results reflect a continuation of this issue.

On financing and dilution, other negative drivers experienced in 2008 include higher financing cost of $0.10 reflecting last year's financing activities and the credit downgrades. Dilution associated with the conversion on the equity linked securities into stock reduced earning by $0.06. Approximately 14 million new shares were issued last year.

Optimum Energy, while Optimum Energy's EBITDA was up substantially year-over-year, changes in the amortization of sales and purchase contracts reduced our share of earnings and results in a $0.09 unfavorable earnings variance. The transfer of Twin Oaks to Optim Energy in the middle of 2007 also reduced our earnings by $0.09 year over year. The other reflects primarily the $0.07 of Valencia demand charges which won't be recovered until the stipulation is resolved that's currently pending and being reviewed by the Commission, which we reflect that through the fuel clause.

Turning to slide 20, I'll walk you through our current outlook for the year excluding the impact of the pending rate cases. On the electric side we're projecting that our regulated utilities, which include PNM and TNMP, will earn $0.32 to $0.47 next year. I'll go through the details and drivers in a minute. The gas company, as we kept the gas an extra month we expect $0.04 to $0.05 earnings per share for January.

On First Choice we're projecting substantial improvement in First Choice profitability from a loss of $0.26 to a gain of $0.10 to $0.15 per share. We recognize this is a challenge but, as Jeff has pointed out, our focus and attention will continue to work towards restoring the value of that business.

On Optim Energy, although Optim Energy's EBITDA is projected to grow from $49 million to $55 million to $70 million, our share -- PNM's share of Optim Energy's earnings is expected to decline from a loss of $0.03 per share in 2008 to a projected loss of $0.03 to $0.08 in 2009. The main drivers are higher depreciation and interest expense associated with the startup of Cedar Bayou 4 and certainly the current market prices which are slightly depressed, or considerably depressed since we projected 2008 going forward.

Corporate really reflects the holding company interest expense. We see that that will decline by $0.32 in 2008 to a range of $0.16 to $0.20. The reason is for the long-term short debt balances that we'll be able to pay off and the impact of the results of the tender which we're able to pay off $157 million of debt at the holding company.

I want to point out since we sold the gas business before -- to realize going forward that we will have a different distribution of earnings quarter by quarter. In the past 15% of our annual earnings were generated in the first quarter. Following the sale of the gas business this will no longer be the case and our quarterly earnings picture will be closer to that of a typical electric utility. We expect to incur a loss in the first quarter and generate about 75% of our earnings during the third quarter.

For those of you that project quarterly earnings, please look at page, in the appendix, A4 for an approximation of our new quarterly earnings distribution.

Now turning to slide 21, I'll walk you through the impact of the pending rate cases on our earnings outlook for the year. We have included considerably more detail on our rate case and revenue requirement calculation in the appendix on page A10 through A14, so I'll just summarize the impacts on EPS.

We're providing you with a rate case assumption as filed. You can use these factors to determine projections for the year based on your own rate case expectations. But first with PNM, as you know, the utility filed another rate case in September of last year in which we projected an annual rate increase of $123 million, of which only $85 million will flow to the bottom line. This is because of the incremental fuel costs that we are now collecting via the fuel cost. Some of that will be recovered through the new base rates.

$85 million translates into $.57 per share, assuming rates go into effect in October 1 of this year, and we would see a $0.15 increase in EPS for 2009.

At TNMP, we filed an increase at $8.7 million. As Pat mentioned in her comments, the case has been evaded so that we can add Ike restoration cost of about $4 million and higher financing cost into that rate case filing. Based on our current market conditions, we're estimating an incremental interest expense to cost about $9 million, building an annual increase in base rates of about $18 million or $0.12 of EPS.

Assuming new rates are implemented during the fourth quarter, we should see a $0.02 increase in EPS for the year. Keep in mind, this is 100% assumption of rate increases.

Now, turning to slide 22, you'll be able to compare our 2009 outlook assuming no incremental rate relief, without assuming we get 100% of what we requested in our rate case filings. I don't want to spend a lot of time on this slide, as you've already seen most of these ranges previously on slide 20. I just want to point out to the highlighted numbers, these are the EPS ranges that are dependent upon the outcome of the $0.02 rate increases.

Turning now to slide 23, I'll walk you through the major earning drivers for 2009 with our electric utilities. We are projecting to earn between $0.32 to $0.47 per share at our electric utilities compared to $0.47 in 2008, excluding the impact of the pending rate cases. The increase in earnings reflects the full-year impact of new base rates and fuel adjustment clause implemented in the second quarter of last year, which adds $0.08.

Other positive drivers include the expiration of two long-term post sale contracts which are expected to add about $0.10 to $0.13 of earnings in 2009. We'd entered into these contracts in 2003 and they are costing us more to serve that revenue than what we were able to generate, so that's why we see a pickup of $0.10 to $0.13 in 2009.

The impact of lower market prices in southern New Mexico, the lower fuel costs in the former TNMP territory in southern New Mexico are expected to add $0.03 to $0.05 per share to earnings. This territory is served by Afton gas plant and now subject to the fuel clause, so it's benefiting from lower gas prices and favorable hedging activities.

I've talked about load growth, it's a big uncertainty given the current state of the economic conditions. Our base case assumes load growth of about 1% for year which is down substantially from previous years. However, we reflect the uncertainty of load growth in our guidance range which we reflect an assumed decline of load 2.7% or slightly under the 1%.

Unfavorable drivers affecting 2009 utility earnings include new depreciation rates. We just finalized our new depreciation study and are expecting rates to increase from about 2.5% to 2.8%. Pension income is also expected to reduce earnings. Last year we earned about $8 million in pension income while this year we anticipate pension income to be approximately flat, zero due to the reduced market value of our pension assets.

Higher interest expense, we expect interest expense to be substantially reflecting last year's credit downgrade, the full-year impact to our financing at PNM and this year's refinancing at TNMP the debt that expired and will be refinanced later.

Dilution associated with the conversion of the equity linked securities expected to reduce earnings per share by $0.05. 2008 our average diluted shares outstanding averaged about $83.5 million (sic), that number is expected to increase to 91.7 million shares in 2009.

Now, moving on to the unregulated side of the business on slide 24. If you recall, we measure the performance of our unregulated businesses in terms of EBITDA, not EPS, so that's why the focus on this slide is on EBITDA. At First Choice we're projecting $20 million to $35 million of EBITDA in 2009 and we feel confident First Choice can achieve this EBITDA level to the numbers that we've -- reasons that Jeff had talked about.

But again, reemphasizing higher margins, we're projecting EBITDA margins in the mid-20s, in line with average unit margins between 2005 and 2007. First choice has increased its products and offerings in the marketplace to appeal to a broader set of customers and actively adjust those margins based on market and competitive pressures.

And we're also managing a tighter retail book, matching energy sold with energy purchased, which should provide alignment to cost with actual cost -- estimated cost to actual cost. And as Jeff pointed out earlier, we've already begun to see higher margins and return to customer growth in the fourth quarter of last year, we're confident First Choice can achieve its targets.

On lower bad debt, another favorable driver is lower bad debt, First Choice is seeing a positive trend in customer retention with departure rates on the decline in recent months. We expect bad debt trends to follow suit over time. However, we anticipate the challenges of extreme price volatility experienced in 2008 to impact 2009 to some degree.

First Choice is projecting bad debt in 2009 to average about 7% of the revenue down from about 8% experienced in 2008. Marketing offsetting the positive drivers are higher marketing costs of $46 million reflecting the return to growth.

Now moving on to Optim Energy. EBITDA is expected to increase from $49 million in 2008 to a range of $55 million to $70 million in 2009. Some of you might notice that the projection is down from the $100 million we projected last year. This decline primarily reflects the decline in forward power prices. Current forwards for 2009 are about 40% below 2008's average power prices.

The key factors that are driving the year-over-year increase in EBITDA include the startup of Cedar Bayou 4 in the summer of 2009 and favorable asset optimization of the plants. Optim is adjusting plant operating configurations successfully and, as Jeff pointed out, bidding into ancillary services market, and effectively managing plant output and commodity exposures to natural gas and purchased power -- or power prices, purchases and sales.

Now moving on to slide 25. Given the pending rate cases in New Mexico and Texas will be major determinants in our earnings in 2010 we have decided to hold off issuing guidance for that year until we get better clarity around the outcome of those two cases. However, we do want to provide you with enough information to provide you some modeling in 2010 and beyond.

The first item to consider is the impact of the two pending rate cases. Assuming we get 100% of rate case request PNM's net increase in revenues would be worth an incremental $0.42 in 2010 while TNMP's incremental revenues would be worth about $0.10 earnings per share. Other factors to take into account include higher pension expense of $0.03 to $0.05 per share due to market conditions and increased interest costs associated with our borrowings in 2009.

2010 earnings will also be impacted by several plant outages; we have scheduled maintenance outages at Afton and Reeves, two outages at San Juan and an extended three-month outage at Four Corners. In total we expect the outages to increase our O&M costs and reduce our earnings $0.03 to $0.05 per share.

For these reasons our view in 2011 is more reflective of our true earnings power, we'll be able to recover operating costs and earn an appropriate return in the form of TNMP New Mexico territory in southern New Mexico where rates have been frozen through 2010.

If you turn to slide 26 I'll walk you through our regulated utilities potential earnings power beyond 2010. By the end of 2010 we estimate we'll have about $2.6 billion of regulated rate base, that once we work through the regulatory process we should provide earnings power of $1.52 per share. We've always said it would take several rate cases to achieve a regulated earnings potential and earn an appropriate return on that business and that outlook has not changed.

Before I hand it back to Jeff for his concluding remarks I want to take -- quickly take you through our projected cash flow liquidity position for 2009. On slide 27 you'll see our projected cash flow for 2009. Total sources of cash, including cash from operations, proceeds from the sale of PNM Gas and the Cap Rock termination fee are projected at $860 million.

Total uses of cash are projected at $1.1 billion, $640 million of which will be funded through the proceeds of the sale of the gas company. Currently we anticipate paying down $349 million of short-term debt at both PNM and the holding company with the remainder of the proceeds being used to fund our tender offer and pay taxes on the sale of proceeds.

Given that our uses of cash are greater than our sources of cash, we anticipate a cash shortfall of about $192 million. Despite the shortfall we project our adequate liquidity to cover us through the year. The graph on the right depicts our available liquidity on January 29th before the close of the gas sale and as well as our projected year-end liquidity broken out by entity. As you can see, we expect to have ample liquidity at all our entities during the current year. Now I'd like to turn it back over to Jeff for his closing remarks.

Thanks, Chuck. And let me just close with a few comments about the economy, the big uncertainty that we're all facing in terms of the impacts of the recession and particularly the duration of that recession. We've tried to build that into our 09 guidance through a number of factors.

First on our load growth as we talked about before, if you strip out this one municipal load which is already starting to show up, we're looking at just barely a half a percent load growth which is, even in the height of the 1982 recession when we went back and looked at that data we saw almost 2.5% growth in the '82 recession. In Texas we're looking at stuff about 1% and we're continuing to see customer growth in both of those territories.

Second, relative to FCP, while it pains me greatly, we have built in a 7% bad debt write-off. And even with that we believe and have shown you what our forecast is for that business. Obviously we're going to do everything we can to reduce that, but given the recessionary impacts that we're seeing I think it's prudent to recognize that bad debt is something that virtually all businesses are going to have to deal with. And so we've built that into our plans for FCP.

What we're seeing in going back to New Mexico is while we had some minor layoffs -- Intel, for example, is going to lay off 100 people -- we're seeing that or more in terms of job additions in other pieces particularly at the Air Force bases where we've got, through the BRAC process, increases at the scientist level and certain other levels, the addition of -- probably total up to around 500 jobs or something like that.

So no one really knows what this is going to actually do, but we've tried to take into account its potential impacts of a more prolonged recession within our forecast. With that let's turn to questions.

(Operator Instructions). Jonathan Arnold, Merrill Lynch.

Good morning, guys. I had a quick question, you talked about the new legislation that's being introduced with the future test year and CWIP, etc. Two questions on that -- what is the timing, how long is it likely for that to take to navigate through the Legislature? And some reminders around when the session is open would be helpful. Secondly, I'm guessing you would want to file a new case to take -- reflecting that at some point. How should we think about your future rate plans beyond the current case in PNM?

Thanks for the question, Jonathan. The session is a 60-day session this year in New Mexico. It started in mid-January so it will end in mid-March. We think this bill will probably take the whole amount of time just because most of the bills are taking the full 60 days and the first priority on the legislature's plate here is obviously the budget deficit in New Mexico which is not as bad as in many states, but we do have a deficit. So I would look for that probably the middle of March to come out.

In terms of future plans and when we would have a new case, that question is really dependent upon the outcome of the current case that we have now. So once we have the conclusion of that case we'll take a look at what we wouldn't want to do a future test year. Obviously we would want to get our costs under the future test year as soon as possible after that. But I think the biggest determinant is going to be what happens in this case.

One thing to add to that, Jonathan, is for our southern New Mexico territory it's real clear that we will be filing a rate case that isn't dependent so much on the outcome of the current PNM rate case for rates to go into effect in early 2011. And if this bill passes Pat would use that legislation for the shaping of that rate case for the southern territory.

Thank you, Jeff.

Brian Russo, Ladenburg Thalmann.

Good morning. Could you just comment on what was the driver for the impairment charge on First Choice Power in the fourth quarter?

Yes, let me comment on that. We continually have to look at the valuation of the business using the accounting methodologies that incurred earlier in 2008 when we had the impairment write-off. We go through that analysis and in doing such we look at three areas, one of which is the trade name, which is our assumption is a 1% royalty rate.

You can look at that as the value of the First Choice Power name in the market relative to that methodology, we reduced that to 0.5%. That's a non-amortized intangible asset and also what kind of discount rate we would use to apply to that would result in part of that $24 million write-off we mentioned in the press release.

Also we have to look at the customer list which is another amortized intangible asset which is amortized over seven years; we have to look at that value and reflect that relative to where the market is. That is part of that after-tax $24 million write-off. So the additional amount is really the enterprise value that's associated with goodwill and we'll go through that analysis in the second step and announce any changes to that as we finalize the 10-K.

But this is something we have to go through. And given the fact that First Choice didn't perform as expected for 2008, and given that valuation that triggers the methodology for the accounting approach to making determinations to any adjustments to goodwill and intangible assets. And as a result of that performance we're adjusting accordingly to that.

So was it more of an historical look at the value of the business or is there some sort of forward-looking component?

Brian, let me -- the biggest change is on the intangible at the trade name. And frankly, from a layman's perspective, I'll tell you my rationale for it -- is that we see, particularly in a recession, that price is going to drive much more than the value of trade name. So when we look at what is typically used as 1% for a value of a trade name, frankly I don't think it's worth that. So in a sense that is a looking forward analysis where we don't think the value of any trade name frankly in a recession is worth what it was in a non-recession. And so we're appropriately reflecting that adjustment.

All right, thanks. And one more question. Could you just add some more color to the increase in bad debt expense in 2008? Was it primarily related to the impact from Hurricane Ike or is it increased customer switching without paying bills or is it more related to commercial and industrial slowdown that we're seeing here?

Really all of the above and particularly the first two. With Hurricane Ike we've got a lot of customers that are still going to rebuild or -- you've got a meter set that now the house is completely gone or they haven't been able to come back and take on employment. They may be still paying small amounts on the bill or they've asked for bill terms. So we've got obviously a continued amount of Accounts Receivable and we take the total amount of Account Receivable into account as we look at total bad debt. So Ike has definitely had an impact.

I think probably a bigger piece has got to do with some of the rules. For example, in Texas if you're a customer under a term contract, if you leave that contract you're supposed to pay a termination penalty. But what some people have found out is that they can use what's called a move-in/move-out procedure where no one knows that it's the same customer on premise, none of the reps know. So they just switch to a new provider and don't pay the termination fee because it's done under move-in/move-out and then they just don't pay that last bill.

And because of the fly up in gas prices that we saw in early year we ended up with much bigger last bills. So it was -- and then we saw a very sharp increase in the percentage of customers who defaulted on their last bill. So it's a combination of all of those factors. And the way we have to manage it obviously is through our credit policies, through our -- a much more aggressive deposit and tiered deposit structures, as well as working with the Commission and the rep community to change some of the loopholes that were never intended to be utilized in this way.

One of the things I think the Commission is really coming to understand is that everybody in Texas is paying a high price because the rules enable people to avoid paying their bills. And that -- and Texas has been sensitive to what's happened to electric prices, and this is a way to help mitigate electric prices to the vast majority of customers.

Okay and one more question on First Choice Power. You're focusing 7% of revenues and bad debt expense in 2009, it seems awfully high. Is that just the reality of Texas retail?

No, I would say it is high and on a steady-state basis we would not expect, nor would we tolerate 7%. But part of this is our intention to build in the impacts that may very well occur in a recessionary environment, where it might be that you'll continue to see people not be able to pay bills or that we are not able to get the adjustments that we believe are appropriate in the regulatory rules.

If we're able to get those rules adjusted, the more rapidly we're able to get those adjusted then frankly you'll see these percentages come down. So I think part of it is the conservatism because of what we experienced in 2008. On a going-forward basis long-term though in an improved economy we would not tolerate or expect to see 7%.

Brian, this is Chuck. I want to add a comment too on the impairment to be clear because you asked about the forward-looking view or the valuation of the business. Keep in mind that we're valuing the business with the accounting methodology at year-end 2008. So we look at the impact of that business, look at the full enterprise, look at fixed price contracts associated to where they are relative to the market at the end of 2008 and make a determination based on that to a performer that we would project the accounting valuation.

So we can have a debate about market valuations and accounting valuations, but this is the right thing for us to do to reflect the appropriate impairment charge against the business given the results that occurred at the end of 2008.

All right. And then lastly, on slide A14 of the presentation you outlined the revenue requirement in the pending PNM Electric rate case. It looks like a good portion of it has already been, so to speak, preapproved on Luna, Lordsburg and some other things. I'm just wondering how much of the revenue requirement relates to the incremental financing costs experienced as your credit rating was cut below investment grade?

I'm not sure I have that -- well, I know I don't have that number. We'd have to get back with you on the specifics of the increased financing cost. There is certainly some in there, but there's obviously, in addition to the what you might call pre-approval, although remember, we don't have that stipulation yet provided the Commission, we obviously have other investments that have been made and increased O&M and depreciation costs that are pretty critical to us. But we'll get back to you, okay?

Okay. Thank you very much.

(Operator Instructions). Sam Brothwell, Wachovia.

Good morning, guys. Jeff, a couple questions on the Texas business, and I'm not trying to beat the First Choice horse to death. When you made the decision last year to hang onto it did you and the Board discuss a window of time that you're willing to allow to rebuild that business?

Sam, I don't think you could beat it to death anymore than we have. And the answer to that is absolutely. FCP understands that they are being watched closely and being actively supported and that their performance, as we move through particularly the first three quarters of 2009, are very important. And I have a large amount of faith in Brian and in what Brian is going to be able to accomplish, but obviously it's within the constraints of that marketplace and what happens and what the regulators may or may not do.

But I'm not putting any specific timeline on it. But we're not going to tolerate another performance like we saw in 2008. If we can't turn this business around then we're not going to stay in it, regardless of how we may have to exit. We made a decision that we believed the best way to add value associated with FCP was to restore its level of performance, then we'll make a determination about what to do. Obviously if that performance is not restored we are faced with the issue.

It sounds like the spotlight is definitely going to be on it this year?

Spotlight, heat lamp, you name it -- yes, sir.

I guess the other thing is looking at some of your assumptions going into '09, if I'm doing this right, we're looking at 11% customer growth, pretty good improvement in margins. And what do you see happening differently versus the last two quarters of '08, especially in light of some of the -- the petrochemical industry in Texas in particular which I imagine you have some exposure to is coming under a lot of pressure.

The only exposure we have to the petrochemical industry frankly is on the employment side. We don't serve any of the petrochemicals and, frankly, the commercial customers that we serve are really not in that supply chain for the petrochemical side. But obviously as an overall economy turns that will affect customers in general. We do have customers in the Houston area, but, remember, we also have a pretty good chunk of customers that are up in the Dallas area that are really fairly well disconnected from the petrochemical industry.

The challenges that we face relative to FCP on growth really have to do with how we look at pricing our products. One of the things that we're seeing in ERCOT this year as we move into this year is everybody, and you all don't have transparency into it except for a couple of us that are publicly traded, but everybody in that business has gotten buffeted hard. And there is a rebounding that's occurring. People realize that the market hit everybody so hard in 2008 that margins have to move up.

And I think what you're seeing is pricing within that market that is much more rational than it was last year. How long does that last before someone starts to try to drive down prices thinking that they can chase something? Well, I don't know, we'll have to see. We're going to be very disciplined about maintaining the kinds of margins that we're seeing today, which on average are certainly in the mid-20s if not a little higher. And that's going to be a matter of the target markets that we go after and the way in which we price that product and our ability to control cost.

Okay. And one last quick one. With respect to petrochemicals specifically, isn't Altura -- isn't the host there a Lyondell facility?

It is, it's BasellLyondell and, as some of you may know, they have gone into Chapter 11. We're actively involved in that process. We do have a small amount that's immaterial of pre-bankruptcy debt, but in the post-bankruptcy period. This is not a facility that is on the list that they have submitted to the bankruptcy judge for potential closing of facilities. And we're in discussions with them about how we can enhance this facility.

So we feel we're in pretty good shape relative to the bankruptcy. But obviously that's something that we're going to be paying very, very close attention to. It has not demonstrably changed the operation; they certainly have cut back production. But what that has done is freed up the ability to deploy Lyondell capacity into the ancillaries market which is still a very strong market particularly for the Houston zone.

Okay, thanks a lot.

Sam, let me just add a comment too in regards to Lyondell and what Jeff had alluded to. Under the very worst scenarios, if there were consequences of that plant shutting down, we still have plans and contingencies that will allow for those units to be essentially merchant units, as Jeff pointed out, that with a small capital investment would allow us to dispatch those units still in the ancillary market and provide the ability to serve the load within the Texas market.

So even on the worst-case scenarios we don't lose the ability to manage the output of that plant, it just has to be reconfigured and accessed to water rights, etc., to a allow us to run it as a merchant plant going forward.

Okay, thanks for the extra help, Chuck.

Okay.

And we have no further questions at this time. I would like to turn the conference back over to Mr. Jeff Sterba for any additional or closing remarks.

Well again, thank you very much for joining us. In many ways obviously we are all happy to close the door on 2008 and open the door on 2009. I would also point you to slide 29 where we provide a checklist, much as we did last year, of the things that you can hold us accountable for as we move through 2009 which will be the indices of our ability to meet our earnings targets. Please feel free to make contact with Gina or her folks if you have any follow-on questions. And we look forward to a better 2009. Thank you very much for joining us.

Ladies and gentlemen, that does conclude today's conference. We appreciate your participation. You may disconnect at this time.