PNM Resources Inc (PNM) 2009 Q2 法說會逐字稿

Welcome to the PNM Resources second quarter earnings call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Gina Jacobi, Director of Investor Relations. Please go ahead. Thank you every one.

Thank you for join us this morning for a discussion the Company's second quarter 2009 earnings. Please note the presentation and accompanying materials for this conference call and supporting the documents are available on the PNM Resource's website at www.PNMRESOURCES.com. Joining me today are PNM Resources Chairman and CEO, Jeff Sterba, PNM Resources Chief Operating Officer, Pat Vincent-Collawn and Chuck Eldred our 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 on current expectations and estimates and that PNM Resources assumes no obligation to update the information. For a detailed discussion of factors affected PNM Resources results, please refer to our current and future annual reports on Form 10-K and the quarterly reports on Form 10-Q, as well as other current and future reports on Form 8-K filed with the SEC.

With that, I'll turn the call over to Jeff.

Thanks, Gina, and welcome. Thanks for joining us this morning. I'm sure most of you have seen our earnings release that showed in spite of challenging economic times with the recession really across the country, our Company turned in strong quarterly performance and this was on the heels of a solid first quarter, with we had ongoing earnings for quarter of $0.21 a share compared to a $0.10 loss same quarter last year. And year-to-date earnings, ongoing earnings are now $0.31 a share compared to a $0.05 loss in 2008. Really what drove this was good performance across virtually all our businesses but the primarily improvement drivers were within our New Mexico utility PNM and First Choice Power. For those of you interested in the GAAP numbers, those are also included in the release as well as a reconciliation to the ongoing earnings. You will see when you look at that, that GAAP earnings are up significantly as you would expect largely driven by the gain on the sale of the gas business in the first quarter. Based on the performance that we've had so far this year, we do expect to be at the high-end of the earnings range that we provided you, which is $0.40 to $0.55 when adjusted for the rate case outcomes, but I do think we have the potential to exceed that range and we'll talk a bit more about that as we go forward.

Before turning it over to our folks to talk about some specifics, let me just make a few summary comments. First, regulated utilities they continue to be on a solid path to restoration but we are obviously not there yet. You've seen the news of the new rates that was implemented July 1, in New Mexico and the unanimous stipulation that's in Texas, which will be hopefully acted on this next month, where rates would go into effect in September, along with numerous other regulatory initiatives on renewables efficiencies and the like and solid progress is really being made but obviously significant earnings gaps still exist. We've talked to you about this and the time that it will take to restore full earnings power in our regulated operation, particular in New Mexico.

On First Choice Power, I'll spend some time in a few minutes giving you some more detail but I'm very pleased in the progress that's been made in the turn around from disastrous 2008. Brian Haddock and his folks are doing a great job in stabilizing and restoring the value to this business, which we knew it was in there, and as I said I'll come back and talk about that this a few moments. Let me first I'll turn it to Pat Collawn to comment on our core regulated operations.

Thank you Jeff and good morning everyone. I'm going to start this morning on slide six. For several quarters we have talked with you about how we are working towards accomplishing two main goals for our regulated businesses. We reached many mile stones during the quarter and I just want to spend a little time updating you on our progress.

First, in our effort to achieve regulatory relief at PNM, the New Mexico Public Regulation Commission approved our unopposed stipulation in May. This is a $77.1 million increase to base rates implemented in two phases that started July 1, of this year. An important component that have stipulation is the implementation of a more conventional fuel and purchase power clause. The previous emergency fuel and purchase power clause had a cap on recovery and a floor on power plant performance, this fuel clause has neither. Another important piece of this stipulation was the inclusion of our merchant assets, Luna, Lawrenceburg and Valencia in base rates. Chuck is going to talk in more detail about the financial impact of the rate case and slide 24 in the appendix has additional detail on the earnings contributions. We're also working in ernest to prepare for the future test year filing in the next rate case. We talked about the legislation that was passed here in New Mexico that gives us a true future test year. Weed we'd like for those rates to effect on April 1 of 2011, so we are working towards putting together our filing, which will be required about this time next year.

We also continue to be successful in streamlining our capital and managing our operations. We saw a solid power plant performance in our base load power plants. Our T&D operations remain in the top cortile of reliability. And we're continuing to manage our costs; it's very crucial, especially in these economic times, that we do that. You'll probably remember that the entire company cut $354 million out of its five-year capital plan. Since that, we've identified $17 million at PNM that we have removed from the capital plan. If you look at slide 27 in the appendix, we have the detail of our five-year capital plan.

You turn to slide seven, I want it spend a minute talking about another regulatory initiative and that is our renewal procurement plan. Many of you probably saw the news release early in July announcing that we filed our procurement plan. The plan calls for a new build of approximately 70 megawatts of solar and wind to meet the 2011portfolio standard of 10%. The plan also calls for a pursuit of an ownership model versus procuring the power through purchase power agreements. Many changes in rules, including the Federal Stimulus package, makes it much for economical for customers and much more valuable for shareholders for utility to own these types of assets. We working to take advantage of the investment tax credits and the government guarantees to build these facilities in a manner that makes sense for both our customers and our shareholders. A key to this ownership, though, is make sure we have regulatory recovery. The New Mexico Renewable Energy Act says that if the renewables are procured in accordance with an improved plan they are deemed just and reasonable and therefore recoverable. We'll be making a detailed filing in September to get the Commission's approval on those bills.

You turn to page eight, I'll talk about TNMP for a minute. We're also working on achieving appropriate regulatory treatment there. When we last talked, we talked about the fact that we had amended our rate case that we filed in August of 2008, to include the higher interests costs that we were seeing as we refinanced and our restoration costs associated with Hurricane Ike. Since then, we have reached an unopposed stipulation that would allow TNMP to increase base rates by $6.8 million annually and recover an additional $5.9 million annually of costs associated with both Ike and the CTC Financing. A proposed order, which mirrors the unopposed stipulation that we have come do, is on the PUCT's agenda for action on August 13. That order is -- the proposed order is also posted on the rates and regulation filing section of our website. We also remain on track in other areas of TNMP. TNMP, like PNM, is on track for top cortile reliability and TNMP has also identified additional capital reductions. They found $5 million since this first quarter that we are planning to cut.

If you turn to slide nine, I want to take a moment to talk about the economic conditions which is always on everyone's mind. While we can't say the recession is over, we can say that during the second quarter the current recession has had less of an impact on our business than it had before. The economy in New Mexico and Texas, both generally fare better as the US as a whole. While the unemployment rate in New Mexico and Texas has increased from the last time that we spoke, it's still well below the national average. New Mexico's's unemployment rate comes in at 6.8% and Texas at 7.5% versus the national average of 9.5%. And while this was a 12-year high in New Mexico, Albuquerque, has actually seen an unemployment decrease, in May, we saw 7% unemployment and now in June, we were down to 6.8%. If we look at the tables on slide nine, in terms of how it affects our sales, let me start with the bottom table first, on customer growth. PNM customer growth remains modest at 0.8%, same as it was in the first quarter and in TNMP it's up 0.6%, so we're up almost 1% year-to-date in TNMP, so customer growth, while not at the same pace it was before, is still up. We look at the top table, this is our total retail energy sales. Four PNM, we saw load decline of 3.7% in the first quarter, this quarter we saw a load decline of only 2.6%.

In TNMP, we actually saw an increase this quarter, in the first quarter we saw a load decline of 3%, this quarter it's up 0.7%. For the question we ask yourselves is why is this load decay lessening, because despite some economic indicators that show the recession is lessening their unemployment is still going up. We can have some reasons for this and our analysis on is is not scientific. First of all, customers may have been responding in the last quarter of this year and the first quarter to the rate increase that they saw, remember, we put in a rate increase in the fuel clause. Now they may be more comfortable with that higher level of energy prices and so using a little more. Secondly, customers are likely staying home more than ever before. We've seen a decrease in restaurants and other places and therefore slightly increasing their energy usage. But if you subscribe to those two reasons, then we need to be cautious that the trend might be is short-lived. We have another rate increase in place here in New Mexico that started in July, and these rates are seasonal, because the rates become more expensive in the summertime. We have that rate increase that will go in effect in Texas, hopefully on September 1. So we'll see what happens in our next earnings call but we are cautiously watching the economy.

With that, I'll turn it over to Jeff for the discussion of our unregulated operations.

Thanks, Pat. First, on First Choice Power our financial performance is obviously ahead of plan year-to-date. This is due really both to market conditions and I think also improved execution. On the market conditions, we've as you all know, we've seen continued low gas prices, continued low power prices and also low volatility in Texas, and the volatility is important because as -- since we try to maintain as flat a book as possible at FCP, the thing that cause real perturbation is weather related, increases in demand or reductions in demand when you are either over or under hedged, so you're moving to the balancing markets and those markets can be much more volatile and frankly, they've been relatively stable through the summer. Those things, the low general prices, wholesale costs and the low volatility have helped to significantly improve margins, so we saw in the second quarter it's the same kind of margins that we saw in the first quarter with residential margin up in the 40's range. We don't expect that to be a new norm by any means. We're already seeing now price decline notices by other players in the marketplace. And this is expected, we obviously are doing our own, as we work to add customers to the system, so we expect the third, fourth quarter and particularly as we move into 2010, that we'll move closer to more historical levels of margin performance.

Obviously, one of the other main issues that Brian and his folks has faced has been the bad debt challenge that we had, which really cost us last year with exceptionally high levels of bad debt and we talked about what were the real drivers for that. The main thing the teams have focused on is, number one, changing the mix of customers that we have to a better profile of customers placing more under term contracts. They've increased the term contract percentage from about 40% to over 75% at this stage and they're doing that with increasing levels of customer satisfaction. There's a number of levers that have been pulled to help improve bad debt. It still isn't at the kind of levels we would like to see, and really need to see for the longe-term. There are actions we can take but there are actions the Commission should take. You may be aware the Commission has a rule making regarding the development of a bill payment data base, that would greatly facilitate any rep's review of the credit history of a customer. This can benefit the customer because you may have a customer that has a low credit but good payment record and this would allow us to rapidly be able to say, based on that experience we are going to waive your deposit or reduce your deposit, and it can also help on the other end where we have customers that may even have reasonable credit scores but a bad bill payment history and we can take appropriate action on either pricing or deposit or waiver of providing service to that customer. So we think that this makes a lot of sense. One of the against it that we've heard is that this is expensive and cost more than it will save. That is a fascinating argument given that the reps say they will pay for the creation of the data base. It isn't something that's going into rates for customers and given what we have seen as the cost of bad debt, I don't think the data base would cost anywhere near what it has the potential of saving. That is not a near-term solution, but in the longer-term, we think that that can have a continued significant benefit for customers because as we remind the commission, customers today on average are paying for that bad debt and I don't believe that that's an effectively-placed cost. So in summary, First Choice Power is doing a good job in fixing a lot of the things that needed to be fixed in orienting the business for long-term sustainable customers and really interesting and good marketing and pricing strategies.

The flip side of that, not in terms of overall performance but in terms of impact of the market as Optim. A falling market benefits the retail business in general, a falling market hurts, a commodities business, the wholesale commodities business in general but in spite of that, Optim has been able to provide a level of performance for hitting the target range of EBITDA that we provided at the beginning of the year and we think they will still be in it despite the lower energy prices and the reduced volatility. Certainly bringing Cedar Bayou for online, under budget and ahead of schedule was a very big positive for that business and we expect that will be a very valuable resource going forward. I believe we indicated that would probably generate about 7 to $9 million of EBITDA for Optim, of which we have a 50% interest. That brings the portfolio for Optim to about 1200 megawatts, but obviously in this kind of a market where we've got depressed prices, even though we're seeing heat rates move up a little bit overall low prices, there's a strong focus on cost control, liquidity management, and optimization of performance. Certainly, our Cogen facility is an example of what you can do with a facility that looks like a 600 megawatt unit but in reality we can operate where it's a series of spinning units and generate revenue out of the ancillary services market.

They sustained solid power plant performance with high equivalent availability factors and so the units seem to be operating very well. On a hedging basis, they're about 50, 55% hedged for the balance of the year, less as they move into 2010. Because we continue to see a little bit of a softness in the market, particularly in the near months, they're a little more conservative about moving into hedge position, so we maintain adequate exposure to a rising market because we don't see that much additional risk on movements down, but obviously there's some, so we're partially hedged. And I think that their real challenges going forward will be to continue the level of operations, focus on cost control, because it looks like at least today, the -- the power prices while they're going to increase I think as we move into 2010, obviously to some extent, we're not going to see a return to the power prices that we saw in 2008, didn't expect to, at least.

With that, let me turn to Chuck to go into more detail on the financials.

Great. Thank you Jeff and good morning, everybody. Beginning on slide 14, you can see we earned $0.21, up $0.31 from last year. Now, the results were largely due to improved performance at First Choice Power. However, last year's implementation of new rates, the fuel clause at PNM and our continued focus on controlling costs were critical achievements that added to our bottom line. Obviously we're very pleased with the performance this quarter. It clearly demonstrates the progress we're making towards earning our loud return and restoring value to First Choice Power. Before I move on to the business unit, I do want to touch base on cash flow and liquidity. Year-to-date cash earnings were $205 million up about $45 million or 29% from last year. Even more significant, if you exclude the one-time cash items from both years, our cash earnings were up almost $40 million, or 32% year-over-year. You can see clearly we're making progress on both the earnings and cash flow results, and this certainly will translate into our improved credit metrics which is our key object this year. Our available liquidity remains strong given our reductions in short and long-term debt, following the sale of a gas business, which we were did are reduce $150 million of long-term debt at PNM Resources and $375 million of short-term debt both at PNM and PNMR and also accomplishing the refinancing of debt at TNMP.

Now, if you'll turn to slide 15, I'll walk you through the results of the regulated operations. Our combined regulated utilities, PNM and TNMP had on going earnings of $0.13 from the quarter, this is up from a $0.01 from the second quarter of last year. PNM Electric's earnings of $0.11 were up $0.06 from last year. The full quarter impact of rate cases added a total of $0.08 to PNM Electric's earnings. If you recall, PNM implemented its 2008 rate increase and fuel claus midway through second quarter last year. However a number of factors offset about half of the impact of last year's rate release. A 2.5% decline in our weather adjusted load that Pat had discussed earlier lowered our earnings by $0.02. Milder weather in New Mexico further reduced our earnings by another $0.01. In New Mexico, cooling degree days were done about 14% from last year. PNM second quarter earnings were down $0.05, compared with last year, $0.03 of the decline reflects higher interest expense associated with our refinancings of PNM's long-term debt. Milder weather also reduced earnings slightly as cooling degree days in TNMP's service territory were down 6% compared to last year.

Now turning to slide 16, I'm walk you through the performance of our unregulated operations. First Choice generated ongoing EBITDA of $21 million up substantially from a loss of $19 last year. The improvement was mainly driven by increased margins which were up $44 million quarter-over-quarter. If you remember, the ERCOT market suffered from severe congestion, extreme price volatility during the second quarter of last year and all the reps, including First Choice, saw the unit margins plummet. This year realized margins were up due to the lower purchase power cost. During the quarter, purchase power prices were 50% lower than last year average price of about $100 per megawatt hour. Before I move on I want to point out, that the benefit from higher unit margins was partially offset by the drop in sales volume. This decline is primarily related to lower customer account. First Choice is focusing on attracting and retaining quality customers and the Company is being considerable more selective in its marketing efforts. As a result, we expect our customer accounts to remain below last year's level during the rest of the year. Higher marketing and bad debt costs reduced EBITDA by $2.5 million, although bad debt was up over last year the increase is smaller then what we have seen in recent quarters so it appears the actions that First Choice has taken to address bad debt are beginning to show results. But it's still too early to determine whether these tests will continue to show positive results in the coming quarters. It's critical that these trends continue for First Choice Power to achieved its year-end targets. .

Now, looking at Optim Energy, on the next slide. The company generated EBITDA of $16.2 million, which was down about $7 million from last year. A major factor effecting Optim's EBITDA was lower power prices, although First Choice clearly benefits in the drop in prices and Optim Energy does not, as Jeff discussed, average quarterly market prices in ERCOT, Houston, and North Zones were down more than 65% when compared to the second quarter of last year. On the positive side, the start up of Cedar Bayou Fork contributed almost $4 million to Optim's EBITDA. Although plants started up toward the end of June, its contribution was substantial due to heat rates at record levels and some congestion during the last week of June. Overall, we are very pleased when Optim has done a good job in managing through a very difficult market and we are pleased with John Loyack and his management team for their efforts and challenges they have seen this year.

Now turning to the next slide and looking at the earnings outlook, we now expect earnings to be $0.40 to $0.55 for the year after adjusting for rate relief in New Mexico and Texas. We also expect to be at the high-end the range with the potential to exceed the range provided we continue to see positive factors we saw in the second quarter. Let me talk about what we feel would be the factors that could certainly influence and affect our ability to raise guidance for a number of reasons. First of all, the economic conditions remain uncertain. It's too early to tell if the slowing pace and decline in our load we experienced in the second quarter will continue in the third. We can see decreased customer demand following the implementation of new rates in PNM's territory and lastly, although First Choice is making progress on the bad debt front, it's still too early to tell whether the favorable trend will persist into the third and fourth quarters. We're also affirming EBITDA ranges for unregulated operations with First Choice having the potential to exceed its targeted range. Although we are affirming our consolidated EPS and unregulated EBITDA ranges we are increasing our outlook for cash earnings.

Let's turn to slide 18 and I'll walk you through our cash outlook. Last quarter we indicated we expected to generate between 250 and $270 million of cash earnings, we now project our cash earnings to come in about $50 million higher for the year. Let me walk through the drivers for the increase. The largest driver by far is our $47 million tax refund associated with a recent IRS ruling. During the second quarter, the IRS approved PNM's filing for change in depreciation method for certain types of cost. The IRS ruling also allowed the Company to book a catch up entry by applying this method to prior tax years. The refund had a minimal impact on our earnings and simply reflects a shift from from deferred taxes to current. The two rate case settlement in Texas and New Mexico also expect to provide $10 million of cash. New Mexico, the July 1 rate increase is expected to add about $7 million of after tax revenues, this amount will be partially offset by the refund of past SO2 emission allowance sales. If you recall, on the rate case settlement, PNM agreed to a credit its customers (inaudible) to allow its sales over a 21-month period, this refund is expected to total about $4 million after taxes this year. Given we expect a increase in cash earnings, we have also raised our projections for available year-end liquidity to $680 million.

Now I'll turn it back over to Jeff for his concluded

Thanks, Chuck. On page 19, we have the check list we close with every quarter. I don't plan on going through it in any great detail, you can read it for yourself, you can see that it's all in green. Things are moving, well, forward. We look forward to a solid balance of the year. I think there are a couple of things let me just point out. I think one of the things we've seen is by the work of Jim Ferland and his folks, the power plants have really picked up and have improved in their availability. While a lot of that flows through to our customers under fuel clause, frankly, that gives us head room, though, relative to the ability to get other rate increases in place in New Mexico, and that's very important. Obviously Optim's availability has done very well also. The improved credit metrics are very important to us, the increase in cash earnings, 29% increase is a real important measure as we go through the balance of this year and move into next year. I think that's all I'm going to comment on. And we would be happy to take any questions that you have.

Thank you. (Operator Instructions). We will turn first to Lasan Johong with RBC Capital Markets.

Thank you, nice quarter by the way.

Thank you.

Pat, if I'm not mistaken, there's at least one potentially one more rate filing coming at PNM.

Yes.

Do you know when that might be or how much?

It will be around this time last year and no, we haven't put together the numbers yet. We're just working on that right now.

Remember, that will be one we use using the future test year provision we got if the legislative session.

Right. And that's going to decrease the lag, right?

Yes.

Yes.

Would it eliminate it?

Pretty close. I mean, you never -- I don't know that you ever get it zero. Part that have will depend on what we file and how the commission responds.

The legislation is very good. It really gives you most future test years. It -- you're still a little bit behind because it's the data you file. Ours would be the data when the rates go in effect but the legislation is very good, but as Jeff said, it will end up what we actually file.

Okay. That makes sense. Right now, Texas I hear is going through a very bad drought/high temperature weather period. This definitely bodes ill for First Choice power in the sense that yes, demand goes up, but if you haven't bot enough power to offset that increase in demand, you having to out into the marked and buy expensive power, so the question becomes is First Choice Power ready for this and can Optim benefit on the other side from this particular situation developing?

Well, one of the things, Lasan, you're right that one, they have had a drought largely restricted in the Houston area more than other areas. And the heat you also have to look, Texas is not a small state, so in fact the Houston area, which is an important load piece for us, they have had hotter weather than normal and hotter weather than last year, but if you look at Dallas, which is also an important load piece for us, they've had cooler weather than normal and cooler weather than last year, so it's not all across the board. You really have to start looking at the individual areas. And while the Houston zone is the most congested zone, it's the one we are most focused on both the opportunities from Optim's side and the risks from First Choice's side, I think folks have that pretty well under control so long as ERCOT continues to do a much improved job from what they did last year on congestion management and the like. While we're still seeing basis differentials that show higher prices, in the Houston zone, that's been built in our hedge and rest assured as we think about the risks we have in Houston, that also goes in to how we hedge. We're talking in general we're flat that doesn't mean there aren't zonal differences.

One last question, if you don't mind. On the renewables initiative, couple questions. What kind of -- do you expect to kind of get an ROE in line with the utility ROE or something greater, can you give was split say between wind and solar roughly speaking and when you might start going out and putting metal in the ground.

We would expect ROE to be in line with the utility ROE. There's no provisions for higher ROE's on renewables here. The nice thing about Regulatory Recovery here though is that piece from the New Mexico Renewable Energy Act, once you get your plan approved it's deem just and reasonable, we're talking about probably, two thirds wind, one-third solar. We're in the process of negotiating contracts, so is it goes back and forth and we can start some construction next year.

Okay.

On that.

One thing to mention, Lasan, on the solar side this has been an issue in a lot of areas is this difference between (inaudible) versus concentrating solar. While we initially started in a hard examination for a concentrating solar project because you got the potential for storage and the like, quite frankly, the -- the cost of PV has come down so much and it has not come down on the concentrating solar, we just don't perceive it to be worth the risk from a technology side and the higher cost for the storage benefit.

Thank you.

Just a reminder if you have a question, please press star one. We will turn to Brain Russo with Ladenburg Thalmann.

Good morning.

Good morning.

In terms of First Choice Power, just to confirm, you guys realized low $40 per in the second quarter?

That's for the whole portfolio.

For the whole portfolio. Okay. So residential could be higher and the CNI would be lower?

It could.

What are the margin trends that you're seeing in July?

Well, I think we're starting to see a little bit of compression, but, what happened in July is a lot of people were waiting to see -- were we going to start to see a price fly-up in the wholesale market and we really didn't so margins for July have stayed reasonably strong. Maybe it's conservatism, but I think it's just practicality. We do expect to see a narrowing of that, I mean, TXU (inaudible) came out yesterday with an announced 15% rate reduction across all classes. That did not surprise us that much. There was a question of timing, so we've already been building that or Brian has in his plans. So we do expect to see margins start to come down because what we saw, if you think about it, natural gas prices in the prompt period, the near window of the futures curve, has dropped. Heat rates moved up and that's good for Optim. The net of it, though for First Choice is a wash. And because of that softness in the gas market, we do expect to see -- start to see more pressure on prices.

All right. And could you give us essentially any net customer additions or decreases year over year at First Choice Power?

Yes, I've got Brian here, I am going to ask Brian to answer that question. Let me put a note in front of it, one of the direction I can Brian was look we are not measuring you on customer account, we measuring you on profitability and we want to you get the right kind of customers and that requires some transition.

This is Brian. The only thing that I'll say is we are still ahead of where we went ended 2008 in terms of customer account. Quarter-over-quarter, 8 over 9, I think we are below but we're still ahead of where we were end of '08, but as Jeff said, as we try to change out a little bit of the portfolio looking for a better quality customer, we could see that trend down slightly towards the end of the year.

When I look at the gigawatt watt hour electric sales at the various customer classes, it looks like some pretty steep decreases. Is that just a function of the seasonal weather patterns year-over-year or what else is leading to such a decrease there? Considering we had a hot June?

Yes, I don't have those numbers in front of me but certainly it's a combination of customers and weather and demand at the customer's site and I'm sure it's a combination of those things.

Okay. And what was bad debt as a percentage of revenues?

It was 7% for the second quarter, and remember, it was in the 12's in the first quarter. One of the things we've seen is as people make comparison of our bad debt to other bad debt by other entities that are publicly held and the one thing you got to recognize is we have a very different customer mix than a reliant for example and certainly on a kilowatt hour basis, there's a big difference in customer mix but it's trending down. It's still -- it's not going to be low this year. And also, as a percentage, we're going to have lower prices this year, so that percentage will be partially boosted by the denominator being lower.

All right. Thanks and in a previous presentation, you had laid out what your projected 2011 rate base could look like at the various regulated subsidiaries. I think it totalled about 2.5 billion with 1.9 billion at PNM Electric is that still relatively intact despite the near-term curtailment of CapEx and would the plan to build the renewables, would that be incremental to that rate base.

The are you renewables will be incremental to that and we will be updating that information closer to the end of the year. As Pat pointed out for the filing for the test year. That information at the beginning of the year but there's a couple updates we'll be pursuing.

Because some of the capital reductions we made were are not in included to what you're going back to Brian.

Okay so just on the renewables side, are these assets that would be in operation in 2011 and captured in the upcoming rate case.

It would, Brian.

Okay.

One things, Brian, to note, I don't know Pat that you mentioned the issue of unrenewable those that go into service so we're not accumulating AFUDC but it's before the rate case picks up the cost, we go on to accumulate a charge, a regulatory asset charge, so even though there may be in lag from the time they go into service to the time they go into rates there is a regulatory asset that will be booked and also place into rates so we don't lose cost of money.

(inaudible) Where the carrying costs.

Right.

Okay. Got you. And then lastly, on the full year guidance of $0.40 to $0.55, what are -- could you break down the subsidiary to and that and given you reported $0.31 already in the first half, it seems like you're well on your way to exceed the $0.55 but I sense a little caution on your part and I'm just curious maybe if you could just elaborate on that a bit.

Your sense is right, Brian. We're -- we have not -- we are not issuing new numeric guidance at this stage. We want to get through the third quarter and see how the third quarter performs and come out and tell you where we think we'll be at the end of the year. We believe we'll be at the high end of the range and with the potential to exceed that range, but we have not provided breakout numbers by each of the individual businesses.

All right. So there's no subsidiary breakdown for the $0.55 top end of the guidance.

Not for the forecast.

As Jeff said, there's just other factors that go into and we felt better to stay in the range we pointed out with the potential to through that, but as you could tell from the performance of the business, First Choice certainly has that potential to continue to show signs of improvement but the year-to-date performance has done well and we don't want to get ahead of ourselves and we want to understand the impact to economy, the impacts to load and deliver results this year that you are comfortable with and that's why we're leaving the guidance where it is now.

Okay. Then just one more if I may, the hedge prices at Optim, how does is that compare to market or spot prices?

We're comfortable that the hedges that we've got in place at Optim are -- were placed in good position. I'm not going to give you a full breakout of where they actually are, but we don't have -- I don't think we got any that are -- there's no underwater.

Basically -- certainly they're hedged around the 50% level but we've got plenty of opportunities to have surplus power to sell if market movements occur this year and the same strategy going into 2010, we're partially hedged but positioned well enough to take advantage and good results if energy prices good up.

Yes, Brian if you look at the forward curve from the end of the first quarter to the end of the second quarter, on power, they virtually are on top of each other. While there's been a lot of movement in the MIN time quarter to quarter, they've been on top of each other. But the front price of the gas ends is down and the front of the heat rate curve is up.

Okay. Thank you very much.

Next we'll turn turn to Edward Heyn with Catapult.

Good morning.

Morning.

Congratulations on the good quarter. Wanted to just go back to the First Choice margins for a second. You mentioned I guess first you said that you expect to back to historical margins. Is that historical margins mean the same as the $26 megawatt hour you talked about before.

Yes in general.

Okay. Then the -- is the -- the assumption that they go back to Yes, I think you talked a little bit about the competition but the levels is you're just being conservative as you're going into the third quarter versus actual fundamental pressures you are predicting.--

Now, you're trying to be a psychologist, Ed.

Okay.

I'm just teasing you. Sure, there's a little bit of conservatism as we move through this because we're still licking our wounds from 2008 performance at FCP, where some missteps were made and the market did everything possible to hurt all of us that were playing in that market, and but -- but you're seeing prices come down. Remember that a falling wholesale market generally advantages a retail business because the lag if nothing else, and that's what we're experiencing today. Prices are not even the forward curve shows this, prices are going to move up, and as the prices move up, there's a tendency to believe that you will have increased volatility because it doesn't take much to get the same $5, $10,$ 20 movement in price, so with that, you will see more pressure on margins. And I just -- I don't believe that the level of margins that we're seeing today have established a new norm. And I think the pricing behavior of some of the players in the market demonstrates that. Willing to take a little more risk. I don't think that we'll see margins collapse like they did last year. I think we all learned some lessons through that process. But a rising market will by nature put more pressure on margin.

Okay. And I think you guys have said -- I guess I'm a little confused because you said that I think you've been working to get more of your customers to a term versus a month to month.

Yes.

And given that you have more term customers now, wouldn't that give you more comfort that the margins would stay at that rate or how does that work? Did you still have risk on the term customers of margin compression?

Well, you have -- you have risk on margin compression of term customers with high volatility that affects the balancing market because of changes in weather. You can't hedge perfectly a residential customer, right?

Got you.

So when you see 5% to 10% movements in consumption because of weather or because of some fundamental change in the mix of the type of customers that you're attracting in the residential piece, it's not a perfect hedge, so you will see changes there. Yes, we are very effectively hedged, we try to maintain a flat a book as possible, but the margins that we're locking in the in the future are not necessarily the margins that we experience last quarter.

Got you. And then just the last question, if you look at your year-to-date First Choice EBITDA I think I calculated it's like $33 million which is already at the high-end of the initial range that you gave of like 25 to 35 million, is -- just kind of getting back to Brian's question on the segment guidance is something on the other segments where you're seeing a little bit more weakness that caused you not to just pick up the range this quarter as opposed to kind of giving a little more cautious tone of potential exceeding?

There's a couple things that we see as risks as we go forward. One is the overall economy. Yes, we think that it's kind of bottoming out, but we just had an announcement of another manufacturing close a couple days ago here in New Mexico. It's not huge, but it's 400 employees, so there's still more fallout that can happen in the economy and we want to be cognizant of that. Our folks have done a great job of doing things to help offset the impacts that we'll see in kilowatt sales in our retail businesses and regulated businesses but that's a piece that can remain of concern. And certainly Optim, the low price market it bears more risk than other segments of our business right now, they're performing well and the new unit come on line provides greater stability, but the third quarter of 2008 is not that long ago. And the third quarter of 2008 knocked us on our butt and so I would like to kind of get through the third quarter an we will be very straight up with you where we think we'll be. Obviously when FCP at 33 million, the 35 million target, Yes, that looks pretty good. We understand that. But we're just wait with us until the third quarter but we are bullish on this year.

Thanks a lot.

With that, that will conclude the question and answer session. Mr. Sterba I'll turn the conference back to you for any additional or closing remarks.

Thank you very much for joining us. And we appreciate you visiting and if you have any follow-up questions who to get hold of and I know Chuck, Pat and I will be out on the road and if we don't see you before we will see you at EEI and have a great weekend.

That will concludes today's conference. Thank you, everyone for your participation.