PNM Resources Inc (PNM) 2010 Q2 法說會逐字稿

Good day ladies and gentlemen. Welcome to the PNM Resources second quarter conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, with instructions following at that time. (Operator Instructions) As a reminder, this conference is being recorded. Now your host for today's conference, Gina Jacobi, Director of Investor Relations. Please begin.

Thank you everyone for joining us this morning for a discussion of the Company's second quarter 2010 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' CEO, Pat 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 Pat, 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. With that, I'll turn the call over to Pat.

Thank you Gina. Good morning everyone. Let me add my thanks to Gina for having you join us this morning. I'm going to start with slide four this morning. By now, most of you probably have seen our second quarter news release that was issued earlier this morning reporting our ongoing earnings of $0.21 per diluted share. This equals our quarterly results from a year ago. Our GAAP earnings are up significantly compared with last year. You might remember that in 2009 we had several special items including regulatory disallowances and increases in legal reserves that lowered our GAAP results. As we stated in our news release, quarterly results were driven primarily by modest improvement from our utilities, PNM and TNMP. Both of which benefited from load growth compared with last year and higher rates that were in effect this year. While both utilities improved slightly, we still have numerous regulatory matters to address in order for PNM and TNMP to have an opportunity to earn their allowed returns. As expected First Choice Power was down from a year ago as we saw average retail margins compress. However, First Choice Power continues to do a good job of reducing its bad debt expense. As all of you follow the energy industry, you are well aware of the continued low price market in Texas that has had a negative impact on generators throughout ERCOT.

Optim Energy is no exception, but because of strong operational performance at their three power plants, Optim Energy has been able to minimize the impact of ERCOT's depressed power market. I'll discuss First Choice and Optim Energy in more detail in a minute. We turn to slide five. I'll provide an update on our regulatory activities. This is a new slide in our presentation, and we are hopeful it helps you track our regulatory matters for both PNM and TNMP. I won't go through each of the cases, but I wanted to let you know we will add this slide to our appendix moving forward and we will update it as things change. A couple of cases to note. The first is the 2010 Renewable Case, the first item on the list. On Tuesday, the hearing examiner issued a recommended decision to deny the stipulation reached in this case. You'll remember that this is the 80 Megawatt Solar Plan. We are disappointed in the hearing examiner's recommended decision especially because the stipulation we filed included a great deal of input from stake holders and was signed by numerous parties including Western Resource Advocates, the Coalition For Clean and Affordable Energy, the City and County of Santa Fe, and the New Mexico Department of Minerals and Natural Resources. We are also disappointed that the hearing examiner did not provide direction on what an acceptable plan would look like. The next step in this case are for exceptions to be filed by August 11, and then the Commission will address the case by August 31. We have to recognize that this is just a recommended decision and not the final order. In the past, the PRC has departed from a recommendation in making its final order, and we are hopeful the Commission reaches a different conclusion, but we remain committed to not turning any dirt until we have regulatory approval for cost recovery.

The second case of note, of course, is PNM's Future Test Period Filings. Let's turn to slide six for a discussion of that case. As most of you know by now, on July 27, the New Mexico Public Regulation Commission issued an order that extended the suspension period by one month and required PNM to file additional budgetary information. Late yesterday we filed the data requested by the Commission. The filing is literally larger than the original Rate Case application. This is primarily the same data we provided to an intervener doing a routine interrogatory process. That data is posted on our website at PNM Resources, and I will warn you that some of those files are pretty large. We firmly believe we made a complete filing based on the established Rule 530 and do not believe the additional detail provided to the interveneers during the discovery process should be part of the record. Nevertheless, we complied with the Commission's order and are looking to get the Rate Case back on course. Also yesterday, we filed a petition with the New Mexico Supreme Court asking the Court to vacate the Commission's July 27, order and to reinstate the suspension period to begin on the original date. We filed a petition for a writ of mandamus, which is an expedited process with the Supreme Court. While we understand that this step is extraordinary, we strongly believe that we are paving a new road with this Rate Case in establishing proper precedent is crucial. So where does that leave us? With the filing of our supplemental documents, we await the Commission's next move to reinstate the suspension period. In the meantime we are continuing to respond to interrogatories. During the current process, we expect for a new procedural schedule to be established based on the Commission's July 27, order to suspend the suspension period. We hope that, that occurs in the next 30 days or so. We will also wait to hear from the New Mexico Supreme Court. The writ is posted on the PNM Resources website for your review.

Now let's turn to slide seven to discuss some economic conditions in New Mexico and Texas. For the past several quarters, we saw New Mexico's unemployment stay lower than Texas's and the rest of the nation. We saw that trend end last quarter as unemployment in New Mexico was higher than in Texas, but now we're glad to see that unemployment in New Mexico seemingly reached its peak in Q1, as it is now at 8.2%, which is equal to Texas rate. The US rate, which just came out today, is the same as it was last month, at 9.5%. Customer growth remains positive, but still modest. PNM is seeing a 0.5% growth year-over-year, while TNMP is a little less at 0.4%. Generally speaking, the number of residential building permits is one leading indicator of customer growth, and we're still not seeing much of a pickup in housing starts in Texas or New Mexico. Turning to slide eight to discuss load growth. We reported today that quarterly weather normalized retail load growth for PNM and TNMP was 1.5% and 2.5% respectively. Those are about the same levels we saw last quarter. The right-hand side of the table has the year- to-date data. While we are seeing growth, we should put it into context. Despite a modest trend of load growth in the past three quarters for PNM, we are still below the yearly retail sales growth rates we saw prior to 2007. So while it is safe to say that load is improving, albeit slightly, demand response from price increases and efficiency measures will have an impact on our utilities load growth in the near future. We turn to the next slide for a brief discussion of First Choice Power and Optim Energy. Low prices in ERCOT continue to pose challenges for power producers like Optim Energy, but have provided good opportunities for retail electricity providers, like First Choice Power. While ongoing quarterly earnings are down from last year at FCP, bad debt expense continues to trend downward, as you can see on this slide. As Chuck will discuss in detail momentarily, we are increasing First Choice Power's EBITDA guidance range. Regarding Optim Energy, Optim continues to have solid results from an operational standpoint. Their power plants again had excellent availability numbers, and those are in the appendix on slide A-5. As we raise FCP's EBITDA range, we are narrowing Optim's and Chuck will provide those details.

Before I turn the call over to Chuck, I want to briefly address the new transport rule, which will replace the current version of CAIR and impact mainly the eastern portion of the US. There are some implications for Texas, which would be controlled for NOx only during the ozone season. There are many details to be worked out on the rule, but we believe it will have little impact for Optim. Optim's coal plant, Twin Oaks Power controls NOx by the injection of ammonia and additional ammonia can be injected for additional control if needed. We will continue to follow this issue, provide input on the proposed rule through industry group participation and provide you with any updates as necessary. At this time, I'll turn the call over to Chuck for a discussion on the Company's finances and outlook.

Thank you, Pat, and good morning, everyone. As Pat mentioned earlier on an ongoing to basis, we earned $0.21, which is the same as last year. If you break down our earnings by segment, you'll see that we're making progress on the regulated side of our business. Total regulated earnings were up $0.03 from last year due to modest load growth and our continued efforts to earn our ROE return. Earnings from our competitive businesses were down from last year, offsetting the gains on the regulated side, but this trend has been fully expected given the low price environment in Texas. Our year-to-date cash earnings of $151 million came in at about 10% above our original projections reflecting the First Choice Power's strong year-to-date performance, and helped support our progress to regain investment grade rating.

Now let's turn to the major factors that drove our second quarter results compared to last year. If you turn to slide 11, we've summarized the main drivers affecting our performance. Load growth and weather added $0.04 to earnings this year. Weather particularly in New Mexico was a positive during the second quarter and added $0.02 to earnings. While April and May in New Mexico were pretty close to normal, June's weather was considerably warmer than last year's, with cooling degree days for the month almost 60% from June of 2009. As Pat mentioned earlier, we also saw modest load growth in both PNM and TNMP's service territories. In total, the increase in load added another $0.02 to this year's second quarter earnings. Rate relief in Texas and New Mexico was also another positive driver. In Texas, we benefited from the implementation of new base rates in September 2009 and the more increase in our recent t-cost rates that went into effect in May of this year. Quarter-over-quarter PNM benefited from the implementation of both phases of our 2009 rate increase. If you recall, the first phase went into effect on July 1, of last year, while the second phase was implemented on April 1, of this year. Higher outage costs at San Juan partially offset the favorable drivers. This year two of our units at San Juan were down for maintenance while last year only one unit was undergoing a planned outage.

Turning to the unregulated business, First Choice Power ongoing margins declined $8.5 million from last year reducing earnings by $0.06. The decrease in margins reflect both the expected compression in unit margins as well as lower sales volumes. First Choice's residential sales were down about 15% from last year, but commercial sales were up due to a 25% increase in the average number of large commercial customers. That helped offset most of the decline in residential sales. The growth in large commercial customers reflects and increased focus marketing and products offered to this class of customers. Given current customer counts, First Choice expects their year end residential count to be at or slightly below 2009 year end levels. Partially offsetting the impact of declining margins at First Choice was lower bad debt expense. As Pat mentioned earlier, bad debt continues to trend downward reflecting the initiatives First Choice implemented last year. Although bad debt in the second quarter came in about 5% of revenue, we don't expect a repeat performance in the second half of the year, as bad debt tends to rise during the high usage months. However, given First Choice's favorable trend in first half of the year, we do expect bad debt to come in below our initial projection of 7% and be closer to 6.5% of revenue. Our share of Optim Energy's earnings were down $0.02 from last year, but that was expected, the decline primarily reflects the increase in interest expense and depreciation associated with the startup of Cedar Bayou 4 in late June of last year.

Optim's EBITDA, on the other hand, was up slightly from last year. I'll talk about that in a minute. The negative $0.02 variance labeled other encompasses a lot of different factors, the major ones being higher pension and medical expense of about $0.01 and slightly higher property taxes. More detail of quarter-over-quarter drivers for each of our segments have been included on pages 12 and 13. However, since I just covered the key earnings drivers, let's move on to page 13 to briefly touch on Optim's EBITDA performance. Optim generated EBITDA of $17.8 million in the second quarter, up slightly from $16.2 million they earned last year. The major positive drivers include a $3 million increase in the sales of ancillary services, reflecting a full quarter of Cedar Bayou 4's operations, Lyondell chemical plants returning to a more normal operation following last year's economic downturn, the increase in Lyondell's output added both sales revenue and allowed Optim to better optimize the plant's performance. Lastly, lower O&M as Optim continues to focus on cost control and enhancing free cash flow. These positive factors will more than offset the unfavorable impact of market and fuel prices, reflecting lower realized power prices to the roll-off of favorable hedges and higher gas and lignite fuel prices at Twin Oaks. Now moving on to the guidance for the year, given First Choice's better than expected performance in the second quarter, we are raising our guidance range for the year from $0.60 to $0.72 to a range of $0.65 to $0.75. We still anticipate our regulated earnings will come in between $0.66 and $0.72. However, we are raising the EPS guidance for First Choice from $0.15 to $0.22 to a range of $0.27 to $0.33, and narrowing our EPS guidance for Optim Energy to a loss of $0.07 to $0.10.

Correspondingly, we are also changing our unregulated EBITDA guidance ranges. We're increasing First Choice Power's EBITDA range to $40 million to $50 million to reflect our year-to-date performance, the previous guidance range had been $25 million to $35 million. We still expect Optim to come in at the lower end of their EBITDA guidance range. However, we have narrowed the spread by $5 million to reflect the continued low price environment. We now expect Optim to earn between $60 million to $65 million of EBITDA, down from original guidance of $60 million to $70 million . We're also increasing our cash earnings outlook to better reflect the expected results of First Choice. We currently anticipate our cash earnings to come in between $305 million to $325 million which is up from $290 million to $315 million. So all-in-all we're relatively pleased with our year-to-date progress. I say relatively, because we all know that the regulated business is still not performing as it should financially. With that, I'll turn it back over to Pat for her concluding

Thank you, Chuck. We'll end our presentation as we always do, updating you on the progress of our 2010 objectives. I won't go through each item, but I want to leave you with three take-aways. First, we are on track to meet or exceed five of the six major objectives set forth at the beginning of the year, including increasing First Choice Power's EBITDA guidance range. Second, we narrowed Optim's EBITDA guidance range. So the fifth objective listed here might not be achieved if the current natural gas price trend continues. And finally, we have consistently said that restoring the financial health of PNM Resources and earning our allowed ROEs in the regulated parts of the business are not a single event, but a journey; and journeys are not always smooth. Rough seas, turbulence and occasionally a diversion to an alternative airport are all part of the package, but we will arrive at our destination. That concludes the presentation portion of the call. Operator, we can start the Q&A session, if there are any questions.

Thank you. (Operator Instructions) Our first question is from Lasan Johong of RBC Capital. Your line is open, sir.

Thank you. Pat, what is the reason that they gave you for requiring an extension of the forward-looking Test Case? Is there anything specific that we need to be concerned about?

No, Lasan. Thank you for the question. What they said was that they wanted to see supplemental data on the budget documents and that there was concern that the documentation that we had wasn't deep enough, and that's obviously going to be a subject in the Rate Cases, and a forward tester -- how you prove your assumptions? So what the Commission said in their filing was that they wanted to see all of that supplemental data. Literally we delivered it yesterday, and the boxes were 40 pounds. Once they could take a look at that and deem whether or not they felt the filing was complete, they could reinstate the suspension period.

So it's a question of how do you justify the forward-looking Test Case?

It was a question really of how we justify the numbers we put in the forward-looking test year and on what budget information and assumptions were underlying those numbers.

I see. Is it fair to say right now that you're -- I'm sorry -- at First Choice Power, you're taking a lot of customers away from your competitors, and TNMP is losing some customers?

When you say "TNMP is losing some customers," TNMP the utility continues to grow customers.

Never mind. I was thinking more of First Choice Power, sorry.

Okay.

Repeat your question then Lasan, on First Choice Power.

Is it fair to say that you're gaining more customers at First Choice Power, net overall?

Well actually, as we mentioned residential sales are down, which really customers are down from where we were quarter-over-quarter last year, probably about 11%. But the other side of that is we're picking up sales volumes on commercial customers, so we're picking up and having some success on that side. So at this point, given where we are in projections, we look to be pretty close to where we'd be at last year or maybe slightly under on the residential side. But again, the commercial side is picking up on the sales volume, so it's not affecting the financial performance of the business.

I think you see two trends at First Choice and in the Texas market. The big reps, many of them are losing some residential customers and have all said they don't want to get into price wars with some of the new entrants, and we don't want to get into price wars. That's part of it, and remember, we are being very careful about who we accept as a customer now. So some of that customer decline is purposeful because of the better credit quality that we are getting in the customers.

Okay. On the Optim situation, are you guys trying to do more things with FCP to kind of tie in your hedging strategy with FCP?

We've talked about the focus, is we see the natural hedge and the benefits of having both businesses as the market has trended and developed and shown more strength in the integration of that business. Our focus, Lasan, as we talked about from last year and continued efforts this year is to make sure that we stabilize that business and have a good grasp and understanding of how that business looks going forward. And then, from that point, we'll begin to look at optable options and other alternatives to think about even further integration or ways in which we can benefit from those two businesses.

So no direct tie-ins, still kind of loosey goosey?

Well, just no direct tie right now, because both businesses are separate and independent in how they operate. Certainly we're looking at any alternatives and ways in which synergies and integrations might be recognized in the future, but it's too early at this point for us to talk about.

One last question -- Is it fair to say that First Choice Power's margins are going to start to improve going forward?

We saw a 20% decline last year, but we're not seeing the decline as rapid this year for the first two quarters. We're seeing a slight compression of margins.

Going forward?

Not nearly at the levels we saw last year; and the market is just not, as Pat pointed out, you're not seeing the larger reps -- and us as one, not responding to some of the competitive pricing signals where those margins might compress more aggressively. So we are seeing higher margins. Just a slight decline. But not nearly the rapid pace we saw last year.

Margins were down 3% Q2 over Q1, and we expect to see some continued compression.

Thank you very much.

Thank you. Our next question or comment is from Brian Russo of Ladenburg Thalmann. Your line is open, sir.

Yes, hi, good morning.

Good morning, Brian.

The CapEx slides that you have in the back, are those consistent with your previous disclosures, and does all of that coincide with the Rate Case filing on PNM?

Yes, Brian, it does.

It does have AMS added to that. So if you look at the slide, you'll see that piece of it is in addition to what you have probably not seen in the past.

That's the AMS filing in Texas.

All right, you mentioned earlier, your pursuit of investment grade rating. I would imagine -- have the rating agencies expressed any views of this PNM pending Rate Case, and is it safe to assume that they're going to want to see conclusion of this before they move forward with their rating adjustments?

I think that would be the right way to look at it is that any circumstance that's faced in a regulatory environment, that's this challenging, they want to see more of a certainty and out come of the rate proceedings before actions are taken. But the good news of that, Brian, is you've seen that the cash flows and the performance of last year, and frankly the performance this year are showing strong FFO to debt levels that would put us back at investment grade, but the uncertainty in the Rate Case is one outlier that has to be addressed until they will take any final actions.

And the guidance that you guys had laid out for 2011 and 2012 in your analyst conference, I believe, in early June, are those still applicable, or has the holdup and the issues with the PNM Electric Rate Case maybe pushed that out or possibly changed it?

Brian, I caution that, that wasn't really guidance. We just gave some outlooks and some possible numbers. It's too early to tell. The suspension period could be reinstated, and we could still be back on track in terms of that, and we hope the Commission does that. But if you wanted to look at some delays in the phased-in approach, you could do that.

There is some sensitivity. This is stuff you can calculate; but again, as Pat pointed out, we're not giving guidance for 2011, but going back to the data we provided at the analyst presentation in June, one month on the phased-in approach would cost us about $0.05 on the earnings and the non phased-in approach about $0.08 on earnings. Whatever comes out of this thing, you can look at it from that standpoint.

Great. And what happens if the PRC chooses with the hearing examiner and disallows this renewable filing? Will you refile with a different mix and try to preserve what is a reasonable earnings driver in 2011 and 2012, or is it just dead?

Well, we're still looking at that, depending on what the Commission says. We are quantity-compliant with the law in 2010 through buying RECs; and in 2011, we filed a plan for 2011, where we would be quantity-compliant with RECs. I think it depends upon what the Commission says in their order in terms of whether or not we would file something to preserve that earnings driver. I think the issue for us, this is the second time we tried a plan and had agreements with some parties on the first and some on the second. So I think we really want to wait and see what that order says before we make a determination on that.

All right. And then, lastly, just on A-4, you've got your plant outages laid out for 2010 and 2011. Is that any way you can quantify the cost of the outages at Four Corners and Palo Verde in 2011?

No. We haven't taken a look at that yet. There's obviously data in the forward test year about what we would assumed those are, and that would be the data I would look at.

Or we could just look at the cost of the outages you guys have occurred in 2010 and maybe extrapolate that to 2011?

Yes, that's a pretty good way to look at it. If you look at Palo Verde their cost trends are down slightly. We don't see anything extraordinary going on.

All right. Thanks a lot.

Thank you. Our next question or comment is from Paul Fremont of Jefferies. Your line is open.

Thank you very much. I guess I'm a little confused about something. I had thought that the NMPRC could move the suspension period at its discretion, from nine to 13 months. So I guess what I'm confused about is, even if you win at the -- at the New Mexico Supreme Court, wouldn't the Commission still be able to move the suspension period?

Yes, Paul. It's Pat. Good morning. Yes, the Commission can have 13 months. They automatically suspend for 30 days. Then another nine months, and then three at their discretion. But part of what the Supreme Court does is helps us set precedent and rules for documentation. One of our points in the filing is that you can't make up the rules as you go along in terms of documentation and other things that we don't want to be playing that game. The Commission can move its suspension period, but I think what you've seen up to that 13 months is, in the last case, they have tried to move things along much more quickly and even have said in their order, for example, they rejected the four-phase approach of WRA that one of the reasons they did that is because it may take too much time. So the Commission has a lot of latitude in moving to that 13 months, but they have said they want to prosecute these things relatively quickly.

Okay. So just to clarify, even if you were to get a positive decision out of the Supreme Court, it wouldn't necessarily mean that the suspension period would move back to nine months?

No, it does not have to mean it would move back to nine months.

Okay. And then the second question I have, I just want to make sure I'm picking up the right gross margin number at First Choice. Using your 3% decline in gross margin per megawatt hour, I'm coming out at about $39 million of First Choice gross margin for the quarter. Is that a correct number?

That's -- why don't we just have you call back and talk to Investor Relations to calculate the number? What margin number are you actually calculating to? What's the number?

Forty --

On a per megawatt hour basis.

$43.12 per megawatt hour.

Okay. Okay. So you're -- I would say the market is probably in that type of range, and we see that trend continue to go down, and so you might think of new customers could be priced in the range of $30 to $35, but that's, again, a very slow process as to how you get there.

That number is in the queue, Paul, but you're in the ballpark.

And the last question, I guess, is you guys had previously talk about that price declining at a rate of on average 5% a quarter. Is the second quarter indicative of the fact that we should use maybe a smaller quarter-over-quarter decline, like 3%?

We haven't hit the trends, because they continuously don't compress as quickly. So I would be more conservative, because we talked before about levels of $25 to $35, and we're not seeing that level of pricing at this point, so I would just be probably more reasonable in thinking about it to be a slower trend than what you've seen in the past; but given what we see today of around 3%, maybe 3% to 5% is reasonable.

Thank you.

Thank you. Our next question is from Mike Bolte of Wells Fargo. Your line is open, sir.

Hi. I have a follow-up question, I guess, on Lasan's questions, and that's FCP. Sort of based on your comments, is it a correct interpretation that you guys expect weather-adjusted sales to be flat versus 2009, but the mix of sales might shift more toward commercial versus residential?

Well, the sales -- we're actually picking up more commercial customers. So it's not necessarily -- on a weather-adjusted basis. You should look at it in terms of we have a slight decline in the number of residential customers, which reduces the sales volume that we have in the residential group; but on the other hand, the offset of that is we're picking up and having more success in our marketing efforts with signing up more commercial customers, which is increasing our sales volume and helping to offset the residential decline.

Okay. And then do you have any -- can you provide any comment on what you're seeing in terms of the margins on the new commercial contracts versus margins that you currently have on your existing customers?

Yes. We really can't comment. It gets very competitive, as you can imagine, in that market. So we really don't want to get into discussions of margins.

Okay. Thank you very much.

Thank you, sir. Our next question is from Nathan Judge of Atlantic Equities. Your line is open.

Hi. Good afternoon. I have a couple of questions on the renewable standard. If this solar option is not adopted by the PRC, clearly you're buying renewable credit. What's the ultimate solution here, and I guess, generally, as you see it long-term, how do you comply with the law? What happens if you can't?

Well, good afternoon Nathan. There's a couple options here. First of all, the RPS is a statutory requirement, which the Commission cannot waive. However we can go back to the legislature and ask for them to re-look at the law. And there has been some discussion in the state about is that an appropriate thing to do right now, given where the economy is as opposed to where the economy was when that law was put into place. So that is one option is to go back and look at the legislation. The statute also provides that if a utility can't meet the RPS without exceeding the RCT, we're not acquired to incur costs in excess of that. So we can go back and file another plan that doesn't get to the RCT, but is a little less, doesn't get to the RPS, but is a little less expensive. One of the issues however, has been throughout these filings is how you calculate that RCT or Reasonable Cost Threshold? There is no guidance in the legislation, that's one of the things the Commission has not yet done for us. There is no penalty prescribed in law for not meeting the RPS. If you just look at general principles, if we were derelict in our responsibilities, they could try to put penalties in. There's no penalty for non-compliance written into the law. So we are going to work to seek some clarity through the Commission process and probably through the legislative process this year.

Okay. Just on the transport rule that you mentioned -- and I think you pointed out Four Corners; but it was a bit unclear. If you also discuss San Juan, and the potential for the required investments in those plants, not only with the transport, but also the CCB rules. Can you just give us an idea of what we're looking at there?

Sure. Actually, technically the transport rule would not affect San Juan and Four Corners, because it affects the eastern states, including Texas. So the one plant we have that the transport rule would have some bearing on is Twin Oaks; but Texas is a state that is controlled for NOx only during the ozone season, and Twin Oaks does that through ammonia injections. So the transport rule is probably not going to have any impact on PNM Resources. In terms of San Juan and Four Corners and the coal combustion byproducts, EPA has a decision to develop separate federal regulations for mine placement of coal ash, which is the method that San Juan uses. EPA has indicated that they're going to work in conjunction with the Office of Surface Mining, because the latter is very familiar with the mining industry and mine reclamation activities. Four Corners could be affected, because it employs wet handling of ash, ash ponds and on-site landfill. But we haven't -- can't predict the outcome of EPA or Office of Surface Mining, so we haven't developed the cost with that yet, because we just don't know how the rules are going to play out.

Is there -- as the contracts come up, I think there's one due in 2017 with ATS and some of the other owners of that. Is there any risk of them saying, we really just don't want to put the investment into these plants given some of the new rules and issues coming out potentially with mercury and where does that position PNM?

Yes. The contracts at Four Corners are up on 2016. Depending upon what happens in California, right now the law in California says that the California owners would have to be out of those plants by 2016, because you couldn't sell any coal into California. So all of the owners are looking at what the various options are in terms of does it make sense to shut down some of the units, put the money in the others? But that's an ongoing discussion right now, which no conclusions have been reached.

When do you expect a conclusion to be reached?

Boy, I wish I knew the answer to that. I think it's going to take a while, because you've got multiple owners in there with multiple paths. I don't think it will be anytime in the next few months. It might even take a year.

I guess it sounds like there's really no other option then for perhaps PNM to step up and make that additional investment especially as it pertains to the mercury rule.

Well, if the California owners have to get out of Four Corners and the other owners decide it makes sense to keep Four Corners open, PNM would probably have an opportunity to buy more of Four Corners. The issue would then become -- what does our financial condition look like? Do we need the power, and does it make sense to buy them, given the environmental upgrades that will be required? The EPA has not determined yet what BART at Four Corners is. We continue to wait on that decision. I think we have to know all of those things before we can say definitively what's going to happen.

Nathan, just to add to that, too, we have an exposure of about 66% coal right now in our generation portfolio. We'll take all that in consideration as to what we think is the right mix of coal and other generation sources as we make these decisions going forward.

Thank you. I appreciate that color. Just one last question -- If you could just give us the numbers on your CapEx expectations for First Choice and how that's change recently?

First Choice?

Yes.

CapEx on First Choice? $3 million. It's very insignificant.

The only CapEx First Choice really has is systems -- IT systems.

It's about $10 million over five years.

Has that changed materially in the last six months since some of the investments you made --

No, no, are you thinking of Optim? Or are you really thinking First Choice? It's very insignificant --

First Choice, I know there was some IT systems and customer service and things that have been done, and I just wanted to see how that was trending.

Yes, you're right. No, it's about $3 million, about 10% over five, and it's really towards infrastructure and systems applications, et cetera.

Thank you very much.

Thank you, Nathan.

Thank you. Our next question is from Jose [Garza] of Gabelli & Company. Your line is open.

Good morning.

Good morning, Jose.

I just wanted to get some color in terms of customer demand for First Choice and contracting, not necessarily margins; but just in this quarter, how you guys are doing.

We're seeing a slight decrease in residential sales, and right now we're basically seeing around 11% reduction in residential customers. We do think that the balance of the year, we still will be at or slightly below 2010 numbers or 2009 numbers. So at this point, as I mentioned earlier, the key is that the sales volumes that we're seeing and some slight increase on the commercial side is offsetting that decline, and to reiterate what Pat said is, some of the customer turnover is frankly because we tightened up on credit implications and the type of customers that the business is willing to establish in its risk profile. So we're not concerned. We're watching it carefully. Then you also have a little bit of competition as some of the smaller reps send price signals that have taken customers away from the larger reps, but we're all -- certainly we are going to show discipline in how we think about pricing margins for new customers and new contracts, that we put on to make sure we establish a very solid financial performance and margins that we think are maintaining profitability for that business.

And then on the renewable plan, do you guys have any time before the PRC before their ruling, on the 31st?

They haven't said when they're going to hear it; and unfortunately we cannot talk directly to the PRC about the matter, because since it's a pending case, that would be ex parte consideration. But when they do have their hearing on it and their meeting we will be able to speak then.

If you could touch recently on a couple of talking points that you guys would bring before them as it relates to the examiner's ruling?

I think we would make a couple of points. One is that this was a plan that was worked out with a variety of stake holders, not only some of the environmental groups, but some of the state groups. It is partially designed with the solar industry in mind here, which is one of the state's economic development thrusts and that we think that this is, and the signatory, that this is the least cost way to bring that solar into the state. And that, I think, is our main talking point. The second talking point would be is, ask if they don't like that, asking for some direction in terms of how they want to calculate the reasonable cost threshold so that we can come back with another plan.

Okay. Thanks, guys.

Thank you. Our next question is from Edward Heyn of Catapult. Your line is open.

Can you hear me?

Yes. Good morning.

The first question is I know there's and asterisk that says that segments aren't cumulative, but looks in your new segment guidance range that the First Choice Optim has been a net $0.10 increase in the range; and the overall range has only gone up $0.04. Is there some weakness in the other segments that kind of we shall be thinking about, or how do we think about the additive quality of the segments?

Well, you should look at the regulated side of the business. We've kept within the current range without changing guidance, and think about where we might be within those ranges that would probably help offset some of what you're seeing as the increase in the First Choice as that $0.10 or $0.11. We brought down Optim to be in the tighter end of that low end of that range of $0.60 to $0.65. So, it's not additive, but it's really relative to where we are within those ranges.

So maybe the regulated is at the lower end of that $0.66 to $0.72 range.

We don't want to say at this point where we are, but I think --

Okay.

I think you can see the relative nature of how we're thinking about it without changing the regulated side of the business and changing our outlook.

I've got you.

At this point.

Okay, then just on the First Choice, the new guidance range, I think you mentioned that you have a lower assumption for bad debts, 6.5% versus 7%. Obviously the margins are coming down lower than you expected. When we're thinking about 2011, is your expectation that long-run margins are still going to be where you were expecting them at the beginning of this year and that the earnings power could be down in 2010 versus 2011? How should we think about that?

[Ted], we're not talking about 2011, but I think to kind of comment on the trends, certainly we are seeing the trend in bad debt going down. So if we were thinking 7% this year and moving to 6.5% by the end of the year, and given the initiatives we see in First Choice, I would like to expect that those trends would continue to move in that direction. That would be one factor. And in the margins as I mentioned, 20% decline last year, and maybe a 3% to 5% decline this year. The margins are not compressing as quickly. We talked before about margins for that business in the $25 million to $35 million level. Certainly, if you're seeing margins above that $35 million level, then I'd probably stay on the high end of that, thinking about the longer-term view of that business. But again, just work with the trends, I think, is probably the best you can do at this point.

Okay, so maybe the longer -- the best guess of the longer-term outlook is the high end of your old range for --

I think that's probably fair to think that way. That's reasonable.

Okay. And then you guys have talked in the past -- bad debts look like they're getting better, but you had also talked about some rule makings. I think the PUCT was addressing some rules related to customers that were on deferred plans not being able to switch before they cleared up. Has that been ruled on, and what about other kind of paying last month bad debts and stuff like that? I guess where's an update on the PUCT process on bad debts and rule making there?

Ted, unfortunately the process has been slower than anyone likes. What the PUCT is looking at now is, if you are convicted of energy theft, you wouldn't be able to switch until you've paid your bill. But with election year coming up, I think it's a little slower on the other movement, and I think most of the other reps are trying to manage that through watching out for those credit quality customers and making sure they get deposits and pre-pays, but not a lot of movement on that.

I've got you, and then sorry for all of the questions. But I guess the last was on Twin Oaks, you mentioned that you do ammonia injection. So for any issues on CAIR, you should be in place. Can you remind us, is it -- what about for sulfur? Is there a scrubber on that plant, and kind of if we were to see the Macked rules that everyone is talking about, is there incremental environmental spend you would have to do on Twin Oaks?

They do limestone injection at Twin Oaks, and given the fact that they can burn other fuels there, we don't see -- I mean, obviously it's hard to tell in terms of unless you know how severe the rules are, but we don't see a lot of downside for Twin Oaks in the environmental space right now.

To add to that, as Pat pointed out, the limestone can be used also to control the mercury, and there can be, theoretically, if you get to the point where you're having to add some additional capital to inject more limestone, it can be around a $10 million type of investment on the capital side. So not nearly as significant.

Yes. And if they had to go to anything, it might be SNCR, as opposed to FCR, but as you know with all the rule making the devil is in the details.

Exactly. All right, thanks a lot. Appreciate the time.

Your welcome, Ted.

Thank you. Our next question is from [John Ali] of Decade Capital. Your line is open, sir.

Good morning, guys.

Good morning.

I just had a couple quick questions, one regarding the lawsuit. It sounds like you're suing one just to get precedence and, two, to get the extension period shortened. If you do lose this case -- you've already filed all the supplemental material, though, correct?

Correct. We're really going down a two-prong path. One is the filing to get the Commission to deem the case complete, and the court case is really about sort of establishing that precedent and what are the limits on the PRC's power to do things, like on the suspension period, and what is their responsibility to tell utilities ahead of time what's needed for a complete application. So it really helps lay out those precedents and the steps so that three months from now we're not back here in the same place.

Do you think filing that supplemental information is kind of hamstringing your case, though, or is it just insurance in case you lose?

No. I think filing the supplemental information is just, to us a good faith show to the Commission that we have the documentation that they wanted. I mean, we had it. What took us a few days to get it filing was that we put together a user-friendly index, because it was so voluminous. So we think we just said, "Okay. We've got the information. We'll be happy to share it with you."

Sure. And I guess the other question is on Optim. Can you remind us what the hedge profile is there?

John, we talk a little bit about that. We're hedged through the end of this year, and then certainly, with Twin Oaks rolling off, we're looking at -- and which is a three-year contract, as you know. We're looking at multi-year hedges and working through that. But it's too early for us to talk about that. So we're covered on the downside. So when I show the range of $0.60 to $0.65, we have hedges in place to protect the downside if gas prices drop even lower. So that's why we're comfortable with that tight narrowing of that range.

I meant for 2011. What is your hedge percentage ballpark?

We're not in a position -- we don't want to talk about that at this point. As I mentioned --

Would it be fair to say you started layering in hedges?

We're always looking at a rolling 12 months of moving hedges that we put on that business, and as I mentioned, we're looking at even multi-year type hedging strategies as well.

Got it. Okay. Great. Thanks, guys.

Thanks, John.

Thank you. Our next question is from Lasan Johong of RBC Capital. Your line is open.

Thank you. It sounds like SCP is moving delivery towards a C&I strategy. Am I misunderstanding the change?

They have increased their marketing efforts, Lasan on the commercial side. I wouldn't say, at this point, we're announcing any new strategy or new focus on the C&I side, but they are looking at providing, through some marketing initiatives and some products that they've developed, ways in which they can begin to approach commercial customers and increase the sales volume in that front, but it's really too early at this point to really say that we're aggressively pursuing that but we are seeing some progress and some success in that area.

And Lasan, these aren't large C&I customers. These are small, mid-size C&I customers. So it's really kind of the mass commercial market as opposed to the larger customers.

Got it. So you're talking about retail stores, small --

Yes. The 1 megawatt kind of deal.

Strip malls, that kind of stuff, yes.

Okay, all right. Did I understand you correctly, Pat, when you said that there is no penalty for not meeting the RPS standard and that you could go back and ask for a waiver if you cannot meet the reasonable total cost standards.

Let me clarify. There's nothing in the law that says that there are penalties, right? If someone decided that we were derelict in our duty, they can try to force a penalty on it. But it's not in the legislation. The Commission can't waive the RPS requirement for us. We can go to the legislature and ask them to change the law, or the statute provides that if we can't meet it without exceeding the RCT, we don't have to incur that, so we would have to go to Commission and ask for that.

If you cannot meet the RCT then, you ask the Commission for a change in law?

We would ask them for a waiver.

In the law?

Yes.

Okay. Understood. Thank you.

We're just trying to make sure on that one, that it's no good deed goes unpunished. So we're not going to spend the money to do it before we get clarity.

I've got it.

Thanks.

Thank you. I'm not showing any further questions or comments at this time. I would like to turn the conference over to Pat Vincent Collawn for any closing remarks.

Well, again, thank you all for your time this morning. We appreciate you joining us. A lot of filings on the website. We've posted all of the supplemental filings and the writ. So if you have any questions after reading those, please feel free to call the Investor Relations folks. Thank you very much, as we continue on our journey. We look forward to talking to you in the third quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.