TXNM Energy Inc (TXNM) 2009 Q3 法說會逐字稿

Good day and welcome to the PNM Resources' Third Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to your host, Ms. Gina Jacobi, Director of Investor Relations. Please go ahead, ma'am.

Thank you, everyone, for joining us this morning for a discussion of the Company's third quarter 2009 earnings. Please note that the presentation and accompanying materials for this conference call and supporting documents are available on the PNM Resources 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 upon current expectations and estimates, and that PNM Resources assumes no obligation to update the information. For a detailed discussion of factors affecting PNM Resources' results, please refer to our current and future annual reports on Form 10-K and the quarterly reports on Form 10-Q, as well as other current and future reports on Form 8-K filed with the SEC.

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

Thanks Gina and thank you for joining us this morning. As you saw when you read the release that we issued this morning, our third quarter was a strong third quarter performance and it was led by our competitive retail operation in ERCOT First Choice Power. But as we'll talk through, frankly the entire business has performed well given the economic conditions that we and others throughout our industry and the country are facing.

For the quarter, our ongoing earnings per share were $0.63 versus $0.27 for last year, which means year to date, we're at $0.94 versus $0.24 year to date for 2008. I'd remind you that since the sale of the gas business, our earnings profile will be much more seasonal as we've talked about before with quarter three being the most significant quarter for our earnings and Q1 and Q4, frankly, being potential or probable loss quarters without the gas business in place.

Our GAAP earnings also reflect that significant improvement with the quarter at $0.59 versus a slight loss last year. Year to date at $1.61 of earning versus $2.40 loss, largely driven by the gain on the sale of the gas business as well as a number of the write-offs that we had last year that we have talked about last year.

While First Choice generated most of the higher than expected earnings for the quarter, and recall that we advised you in September that we were adjusting First Choice Power's earnings for the year, our regulated operations have been able to hit their numbers in spite of an almost 3% load decline in New Mexico. And this has obviously been done through solid operational performance, which Pat will talk about as well as continued cost control throughout both the corporate and the utility areas.

We're pleased that we have both of the rate cases, both Texas and New Mexico, behind us. The Texas rate case was approved by the commission in the third quarter and the rates for the PNM rate case went into effect in the third quarter. And after Pat spends a little bit of time talking about our regulated operations, I'll make a few more comments about First Choice Power.

But first, Pat.

Thank you Jeff and good morning everyone. Start on slide 6 this morning. For the past several quarters, we have really been tuned in to what is happening on the regulatory front at PNM and TNMP, particularly with respect to their rate cases. And I'm pleased to say, as Jeff mentioned, that we received the outcomes we needed to continue to restore financial health to both utilities.

The first phase of the new PNM rates were effective July 1. That was 65% of the rate increase. The second phase, 35%, goes into effect April 1st of 2010.

I also continue to have the pleasure to report that our power plant performance has been strong. Although we now have a more traditional fuel clause, power plant performance remains very high on our radar screen as an operational measure.

Year to date, our weighted average base load, equivalent availability factor, was 86.7% compared with the 78.5% equivalent availability factor year to date in 2008. The details for each power plant are located in the appendix on page A8.

On the renewables side, we've told you about our plan to add some ownership of renewables to our rate base. We are in the process of working with our key stakeholders to come up with an agreement. So we'll have the support of not only our traditional interveners, but also the environmental energy groups or the environmentalists and the renewable energy companies. We have until early January to file the details of how we will add additional wind and solar to our generation portfolio and discussions continue with our interveners.

Also at PNM, much activity is focused on the future test year, both internally in terms of preparing ourselves but externally. We have started a series of workshops with the interveners to talk about such things as rate designs, documentation and process for the filing that we will make next year. And as Jeff mentioned, the TNMP rate case that the commission approved was successfully implemented on September 1st.

We turn to slide 7. I want to spend a little bit of time discussing the economic conditions in both New Mexico and Texas. Last quarter, we said that while we couldn't see the recession necessarily ending, we felt that the effects of the recession would start to fade. And I think we're seeing that in our numbers. Unemployment does still continue to rise. It's 7.7% in New Mexico and 8.2% in Texas. However, we are still well below the national average of 9.8%.

Our economists here in New Mexico are forecasting that that 7.7% unemployment rate will probably hold into 2010. They think it may go up for a while and then come down. But it will be at that level for a while. New Mexico lost 32,400 jobs from September of 2008 to September of 2009. However, that was a slight improvement over August year-over-year loss of 35,200. And Texas has lost 303,500 jobs over that same period.

One point that I think is worth reiterating is that New Mexico is not an economic trend leader. When the recession began to take its toll around the country, it made its way more slowly to New Mexico and its impact was not as severe. That's the good news part. I think the bad news is similarly as the country starts to come out of the recession and shows signs of recovery, we expect New Mexico will lag those trends a little bit.

So let's go to retail energy sales. Jeff has already talked about this a little. We continue to see some load loss but it is improving. We think that the 3.7% loss we saw in the first quarter was the bottom. Our loss in the third quarter was 2.5%. And so year to date, we're at a 2.9% load loss. And you'll remember at the beginning of the year, we indicated that we could see as much as a 3.5% load loss in 2009.

TNMP's story is a little bit better than PNM's. We actually saw some increase in load this quarter at 0.6%. Now that is weather adjusted and Hurricane Ike adjusted. As you remember, last year in the third quarter was when Hurricane Ike slammed into the Gulf Coast. If we took Hurricane Ike effects out or left them in, we would have seen a 6.1% load growth in the third quarter. But we think the comparison at 0.6% is a much fairer comparison.

Customer growth is another positive sign for us. While we are not seeing the 3% to 4% customer growth that we've had in the past, year to date in both Texas and New Mexico we are up 0.8% , to almost 1% customer growth. And we continue to see that strengthening in our service territory.

With that, I'm going to turn it back over to Jeff to talk about our unregulated

Thanks Pat. Maybe just one other anecdotal thing. I don't know how many of you saw this, but there was a US News and World Report that I read over the weekend of the 40 cities with the least economic impact from the recession. In the top 20, I believe 7 of them were in Texas and Albuquerque was also in the top 20. So just another indication that our territory, while we're all feeling it, our territory is having a bit of a lesser impact.

But let me just briefly move to page 9 and talk about First Choice Power. Recall, that earlier in September we advised you that we were now expecting a range of EBITDA for First Choice to be in the $55 million to $60 million. And their third quarter performance has certainly shown that we will be in that range. Obviously, this was a year of rebuilding for First Choice after a dismal 2008 performance. And we're very pleased with what they have done.

Part of this is just market conditions. When you have a falling market, a falling price market, margins in the retail business should move up and should move up fairly sharply, because you're going to have a lag between retail prices and wholesale costs. And that's certainly been reflected and it's the lower purchased power prices that have contributed to the greatest degree in the improved performance at FCP.

As we've said before, we do expect to see these margins compress. That'll certainly happen in Q4. And as we move into 2010, we expect margins to compress to more historical levels.

FCP has, obviously, also responded competitively relative to its price offerings, which will reduce margins. I think we've had 5 significant reductions that total I think as much as about a 22% reduction in some of the prices that we have offered to customers. But I think that the, as we've talked before, First Choice has also solidified and improved the quality of its customer base, moving from less than 50% of its customer base being under long-term contract to now, close to 80%. I think it's about 75% to 80%. And the quality, in terms of credit quality of the customer mix, has improved, which is one of the key components of continuing to work on a nagging and problematic issue of bad debt.

In Q3, we saw a reduction in bad debt year over year of about 11% to the third quarter of 2008. So I think things are starting to pay off. But as I've said to you before, this is a challenge within that marketplace particularly with the many of the kinds of customers that First Choice Power serves. And we are continuing to work with the commission and the other retail electric providers to get changes in the rules to help facilitate resolving the bad debt issues so that all customer prices don't have to go up to reflect those that don't pay their bills.

Moving on to slide 10, just briefly on Optim. We expect that their EBITDA range will be in the $60 million to $65 million. And this is in the middle of the broader range that we gave you in February. Obviously, the market has deteriorated, not improved. And so, it's been through very hard work and strong operational performance that Optim has been able to continue to hit its numbers in spite of a very weak wholesale market.

Recall that Cedar Bayou, the last resource addition came on and it has performed very well. It's in the top quartile of operating performance with an availability greater than 95%, particularly in the marketplace that we've had this year. It has been able to add, as we expected it would, to the margins of the business.

All of the units within the fleet, Optim fleet, are operating in the top quartile of performance for the year so far. We expect that to continue. We have also, though, because of the-- our expectation that this market condition is not going to change quickly, we expect to see a continued depressed marketplace as we move through 2010. We have strengthened our focus on cash conservation and current asset optimization and less on growth.

And that has included some restructuring of the business, some cost reductions that will amount to $12 million to $15 million a year, and it's just the right thing to do, given the marketplace that we face in Texas. We think that'll position this business to certainly provide some contribution to earnings as it did in the third quarter. And we expect it to do as we go through. But positioned that business so that it can turn around quickly as the marketplace improves as we go forward.

With that, let me turn it over to Chuck to go into more detail on the financial performance.

Thank you Jeff and good morning. Obviously, we're very pleased with our financial performance this quarter. The $0.63 is more than double last year's third quarter earnings of $0.27. And our year-to-date cash earnings are up 61% from last year and our available liquidity remains solid.

The favorable results are largely due to improved performance as we talked about with First Choice which added $0.23. However, we don't want to minimize the contribution of our other businesses. With the exception of TNMP, which reflected higher interest cost, all our segments reported higher earnings this quarter despite difficult economic and market conditions.

Before we move on to discuss each segment in detail, I want to briefly touch on the $0.05 favorable variance in corporate and other. This year's repurchase of the holding company's 9 % senior notes contributed about $0.03 to earnings. The remaining $0.02 is associated with lower debt balances and reduced short-term rates.

Now turning to slide 13, I'll discuss the major drivers of the regulated business. PNM Electric's earnings of $0.35 were up $0.02 from last year. Implementation of new rates on July 1st added a total of $0.05 to PNM Electric's earnings. Favorable interest expense, due to lower short-term debt balances, added $0.02. And warmer weather added $0.01.

Offsetting the positive variances was a 2.5% decline in load that Pat discussed earlier, which reduced earnings by $0.03. Lower pension income and dilution associated with last year's conversion of the equity linked securities also reduced earnings.

TNMP earned $0.06 for the quarter, which is down $0.04 from last year. Positive drivers included the benefit associated with the implementation of new rates on September 1st and the absence of Hurricane Ike that reduced earnings last year. Negative drivers include $0.03 higher interest expense associated with the refinancing of TNMP's long-term debt. However, the new electric rates we put into effect on September 1st allowed TNMP to recover the incremental cost of debt. Lastly, reduced pension income, slightly higher property taxes, and increased tree trimming expenses reduced earnings by another $0.02.

Now turning to slide 14, I'll walk you through the performance of the unregulated business. First Choice Power generated ongoing EBITDA of about $30 million in the quarter, up dramatically from a loss of $3 million last year. The improvement was mainly driven by increased margins, which were up about $30 million year over year. This year realized margins were up from those we saw in the third quarter of last year, primarily due to lower purchased power cost. During the quarter, purchased power prices averaged about $58 a megawatt-hour compared with last year's average price of about $129 a megawatt-hour.

But keep in mind, the benefit from higher unit margin was partially offset by a 5% drop in sales volume, due in part to lower customer accounts. The decline in customers was expected as First Choice is focusing on attracting higher credit quality customers. In addition, the absence of Hurricane Ike and the non-recurrence of the Lehman bankruptcy gave First Choice a $7.2 million pickup. Another favorable driver was the lower bad debt expense of about $1 million.

Partially offsetting the positive drivers were higher marketing costs of $2 million associated with First Choice's customer retention and acquisition programs.

Now turning to Optim, Optim Energy generated EBITDA of about $29 million, which is up about $11 million last year. The biggest driver by far was the $10 million realized gain from hedging activity. In October of 2008, Optim increased its credit facility size allowing for long-term hedges. Subsequently, Optim entered into hedges when gas and power prices were considerably higher. Other positive drivers include the addition of Cedar Bayou 4 to Optim's fleet, which contributed $3.5 million in EBITDA, $2 million of lower O&M cost and $2 million of fuel savings at Twin Oaks.

Now turning to slide 15, we are raising our outlook for 2009 and now project we'll earn between $0.76 and $0.81. The drivers behind our upward revision are as follows. We added $0.15 for rate relief at PNM and TNMP after our rate case outcomes were known. One word of caution though, the original guidance issued in February assumed we would increase depreciation rates at PNM based on our latest depreciation study. However, during our settlement discussions, it was agreed to maintain our old depreciation rates. As a result, the $0.12 improvement in PNM earnings shown in the schedule reflects not only our incremental revenues, but the benefit from lower depreciation rates. Of the $0.12, about $0.08 reflects our incremental revenue while $0.04 reflects the depreciation benefit.

We're also raising our guidance about $0.28 to reflect this year's better than expected performance at First Choice Power and Optim Energy. If you reference page A15 in our appendix, you'll find our outlook by segment.

I do want to point out that we do expect a loss in the fourth quarter. With the sale of the gas business, the bulk of our earnings are generated in the third quarter. Last year, all our operations except TNMP and the gas company incurred fourth quarter losses.

In addition to revising our earnings outlook, we're also updating the EBITDA outlook for our unregulated operations. We currently expect First Choice Power to generate between $55 million and $60 million of EBITDA for the year. And we have narrowed Optim's EBITDA guidance in a range of $60 million to $65 million.

Now turning to slide 16, I'll walk you through our cash earnings. In July, we expected to generate about $305 million to $325 million of cash earnings. We now project our cash earnings to come in about $75 million higher for the year. One major driver of the increase in cash flow is $50 million of lower taxes. Some of the gain is associated with the increased bonus depreciation. We also deduct our casualty loss associated with Hurricane Ike in this year's tax return and accelerated our deduction methodology around certain types of costs. Improved performance at First Choice and Optim is also expected to increase cash earnings by a total of $29 million to $33 million.

Now turning to slide 17, we'd like to discuss some of the drivers in 2010. Many of you have already-- are trying to model 2010 earnings outlook. However, we don't-- we won't be providing 2010 guidance until early next year. In the meantime, you should be considering these major factors. Starting with the positives, the full-year impact of the rate cases at PNM and TNMP are expected to add up a total of $0.25 to earnings. Keep in mind, that impact reflects only the expected year-over-year increase in revenue. The benefit from the lower PNM depreciation rates I discussed earlier is excluded because 2009's outlook already reflects the lower rates. Also for PNM Electric, the $0.21 increase reflects the full-year impact of the first phase of rate relief, implemented this year and the second phase, which will go in effect in April 2010.

Now let's talk about the negative drivers. First of all, the sale of the gas company means that we lose the benefit from this year's earnings of $0.08. We're also projecting our load to remain flat in 2010. Although we believe the economy has essentially bottomed out, we expect a very slow economic recovery. While we may see some slight growth in load next year, we anticipate it will be completely offset by energy efficiency programs and the potential demand response to our rate increases. We also anticipate about 15% more planned outages, hours next year reflecting one additional outage at San Juan, an outage at Reeves Gas facility, and a major outage instead of two minor outages at Four Corners. The incremental costs associated with these outages is currently projected between $0.03 to $0.05. We have an updated outage schedule, if you refer to the appendix in A8. Higher pension and retiree medical costs are also expected to reduce earnings by $0.03 to $0.05. Lastly, and most importantly, we expect unit margin compression at First Choice to reduce earnings by $0.25 to $0.30 versus this year.

Please keep these factors in mind as you revise your models and until we provide the 2010 guidance early next year.

And now, I'd like to turn it back to Jeff for closing remarks.

Thanks Chuck. Page 18 provides the checklist that we started the year with, that we said these are the things that you ought to not only hold us accountable for but would be the indicators of the progress that we make in the recovery that we've been going through this past year and the execution of the four-pronged strategy we've talked a lot about. As you can see, each one of them is in the green. I'm very pleased with the progress that has been made. That certainly doesn't say that we're done by any means. We are well under earning, particularly in our regulated operations. And that's got to turn around. But I am pleased to see how well we've been able to respond to the difficult economic conditions that have been faced, the cost control, and the operational improvements that have been made.

Over the last two years, we have been consumed with both the downturn that we incurred and the recovery that we've been going through since then. And through that period, we've stayed very short-term execution focused, as we needed to be. At the same time, however, we have been continuing to lay groundwork for the long-term financial growth of the business.

And on slide 19, I just want to touch on a few of the things that we see as incremental long-term value adders as we go forward over the next 3 to 5 years. First, the future test period rate case, which we've talked a lot about, and that we anticipate filing in 2010 is one that we think will benefit not only our company but also our customers. And get costs and prices more in line. Pat talked about our decision to go forward with ownership of additional renewable assets. That could be an investment of about $250 million up to $300 million. That will only occur if we have the kind of automatic regulatory treatment that is necessary for that capital to be deployed. We're optimistic about that, but we certainly haven't made the commitment yet until we have the regulatory agreement in hand.

As you also know, we have been pursuing energy efficiency within our territories, but we have not had a rate agreement in place, other than the recovery of the energy efficiency costs. We have a very good statute on the books and we have a rule making in New Mexico that's ongoing right now that we expect to have resolved as we enter into 2010 that will remove the disincentives and provide an incentive as required under the law. So I think as we-- it won't-- that's not going to be a significant contributor to earnings in 2010. But as we move into 2011 and beyond, we believe it will be a more significant component.

Obviously, transmission is a hot topic throughout the country for a number of reasons. One certainly is renewables and the movement of renewables to load centers. New Mexico is very well situated for both wind and solar. And obviously, we have pursued both largely to serve our own needs. But we're hitting the point where transmission constraints in New Mexico are going to require additional transmission to be built. We're certainly looking at our role in helping to facilitate the export of renewables from New Mexico.

One project that you may have recently heard about called Tres Amigas, which is a project to create the first interconnection of the three grids. And it would be located in New Mexico. We have worked with that group of folks and we certainly are interested in pursuing how we can help facilitate transfers between these grids. That's something we've looked at a number of times before from a merchant perspective. I think this-- the approach that's coming forward from Tres Amigas is interesting and holds promise for our system and its utilization and its profitability.

So those are just a few items that we see as we go forward. Now that we can start to poke our head out of the foxhole we've been in, focused on execution and recovery.

With that, we would be happy to answer any questions that you.

Thank you. (OPERATOR INSTRUCTIONS) We'll take our first question from Emily Christy with RBC Capital Markets.

Good morning.

Morning.

A question on the Tres Amigas great connection project. Are you talking about having an ownership interest in that project? And is there a timeline at this point for expected earnings?

We're not talking about an ownership in the hub itself. I mean the hub itself will just be equipment that will facilitate the transfer between. Our interest will be on the transmission interconnects on either side. We, today, own 1.5 roughly of the 2 major interconnects that exist between the western grid and southwest power pool in the southern part of the country. And this would facilitate even greater flow, not just with them, but then also into ERCOT. So, probably at this stage, we have no interest in the participation. This is also not a near-term project. Even if, I think on a rapid schedule, probably you wouldn't see power flow till 2014, 2015. So this is longer term looking.

Okay. And then in terms of the renewable development that you're working on, can you give us a little more color as to the types of discussions you're having? Are they around the type of energy or the ownership structures? What's kind of the point of talk there?

Morning Emily. There's a couple topics that we're talking about. One is the third-party ownership issue is being discussed. And that's more for smaller, solar. Our ownership, not in so much in the larger solar, but in the smaller solar. If you remember, we proposed a customer sited PNM-owned program. We're also discussing the level of renewable energy credits, the length of time of the renewable energy credits, and what the renewable cost threshold should be. Those are the major issues that we're discussing with the interveners.

Okay, and if I can just have one more question on the smart grid developments at TNMP. I know that the DOE grant, you weren't on that list. What's the status of that project at this point?

What we're doing Emily is looking at rolling out the smart meters in Texas but over a longer period of time. What the DOE grant would have allowed us to do us is to really jump start that program. So we will just be looking at a longer scale deployment schedule.

Okay, thanks very much.

Thank you. We'll take our next question from Paul Fremont with Jefferies.

Thank you very much. I guess my first question has to do with 2009. You talked about a loss in the fourth quarter. How much of that would be driven by First Choice? And I guess First Choice last fourth quarter lost $0.09 per share a year ago.

That's my recollection. We'll I'm not going to give you a number Paul of what we expect as a loss in First Choice. Frankly, on a cents per share basis I don't have anything that relates to that. But we do expect that they, because sales drop off so much in that period, that we would-- we will see a slight loss at FCP in the quarter. Probably, not as big as last year.

And then I guess my second question is, if I look at the drivers, should we-- should our takeaway basically be that the level of 2010 earnings when you do give guidance will likely be lower than what-- than the number that you're guiding to in 2009?

That's right Paul. I mean based on what I'm trying to point out is the major drivers in 2010 that will have an impact when you look at what the earnings are in 2009, with the largest being First Choice.

And I guess my last question is, I think NRG seems to be pointing to 11 of margin realization in 2010. That's very close to the levels that they're seeing in 2009. Is there something that's different in terms of the markets that they're operating in, in Texas versus your expectations on margins next year?

You know there is-- they are more concentrated in Houston. Houston is a slightly higher-priced market. While we do have customers in the Houston region, they're much more concentrated in that area. And they also have a much higher percentage of commercial property. The commercial rates are not, frankly, as volatile as the residential retail rates. So whereas we may be 20%, 15% commercial, they're I believe more in the 40% commercial and industrial. And those rates have a tendency to be a bit more stable. So that would be part of it. I think also they may have a different outlook than we do. And if general market conditions continue to allow higher than average margins, then we'll be pleased. But there certainly is an explanation because of the higher concentration in Houston and higher concentration in commercial.

Thank you very much.

Thank you. (OPERATOR INSTRUCTIONS) We'll take our next question from Brian Russo with Ladenburg Thalmann.

Hi, good morning.

Morning.

So just to be clear on the 2010 drivers on slide 17. If you take your '09 midpoint and you assume the positive and negatives, it looks like the midpoint for 2010 is somewhere in the range of $0.64. Is that accurate or are there other positive drivers that may materialize that in 2010 that aren't included in this slide 17?

Yes, we're really trying to give you drivers-- to give you some indication on how you can work that against what your projections are. But we're not in a position of giving you specific guidance in 2010.

I do want to make a slight correction, just from the notes I was working from. But in First Choice, we talked about returning to normal margins in 2010. I mentioned a range of $0.25 to $0.30. I really meant to say $0.25 to $0.22. So let me just make that on the record to be a correction, okay?

So we don't want to give anymore than just make user that these are the things that we talked about throughout the year in drivers for 2010. And wanting to making sure that as the analysts look at their modeling for next year that they take these things in consideration and make sure they make the necessary adjustments. As we begin to focus on 2011 and the forward test year to address the additional positive opportunities for the company in the regulated side of the business.

One of the things Brian that we found as we talked with folks is that some of the things that they've built and people have built into their models are a bit off in terms of either understanding how the rate case and what the rate case impact really is. Or, for example, forgetting about the-- we don't have normalized outage cost recovery in our rates. And so, given our fleet, when we have significant shifts and outages that can drive our earnings $0.05. And so 2010 is a little more heavy. So this is trying to identify those known kinds of things we want to make sure you all are taking into account. We'll come out and give you guidance as move into the first of the year.

All right and just a little-- to dig a little deeper into First Choice Power. What are considered normalized margins? I think historically they were in the mid-20 range. Is that safe to assume going forward? And then how does that compare to what the margins you're assuming in 2009 relative to your '09 outlook?

Yes Brian Hayduk is with us this morning. Let me ask him to handle that.

Yes, hi Brian. I think in 2009 you're certainly look at higher historical numbers, you know north of 40 on a portfolio basis. And you're right in terms of historically you've been in the mid 20's to I think as high as low 30's. And essentially what we're going to be doing, as you get into 2010, is trending towards that number. It's always a little hard to guess exactly how you stair step down. But certainly, we're going to be trending to those historical numbers.

Okay. And then in-- I think you mentioned earlier that in First Choice Power you actually saw a decline in the number of customers. Are you assuming any sort of customer growth in 2010 in terms of a shift in strategy? Or should we expect that trend to continue?

No, certainly at some point we have to-- we have to turn that trend around. We do expect customer growth next year. And there's a lot of nuances there in terms of the average usage per customer both on the commercial side and the residential side. But we are expecting gains on the customer account side, both on the commercial and the residential side next year. Again, it's a little hard to tell when you turn the corner from the decline to the increase. But we do expect that to happen next year.

Let me add two things to that Brian. On the decline, obviously a lot of that-- this was intentional as we try to change the quality of customers that we have and the characteristics of those customers. And the kinds of growth that Brian is mentioning as we move into next year, they clearly have the challenge to turn it. But we're not looking at double digit kinds of growth. That's not what you will see as we move into next year.

And in terms of bad debt expense, I think you mentioned it declined about $1 million in the quarter. Can we expect that trend to continue in the fourth? Or is there some sort of seasonal nature that customers may look to gain the system a little bit more as they receive their summer peak cooling electricity bill?

Are you telling us Brian, you think like those customers?

No, not me, but apparently it goes on a lot in Texas.

Yes, in terms of the dollar amount, frankly, we do expect that, because third quarter bills are highest because of the load increases that tend to-- you'll tend to see a little more activity on the bad debt side in the fourth quarter. But we do not expect it to be at the level it was the fourth quarter last year.

Okay great. And just a few more questions, if I may. The flat load growth you're expecting at PNM Electric next year, does that impact your ability to earn an appropriate ROE?

Brian, I think the biggest lag on earning the appropriate ROE is still the regulatory lag more than the load growth that we're seeing.

Okay.

The lack of load growth that we're seeing.

Yes, remember Brian what we've said is that it was going-- it was multi steps to kick-- to get, straighten the regulated business in New Mexico out. And it's really the move to the future test year that will help get us out of that regulatory lag problem.

And, and--

We see from energy efficiency for example, it will be-- should be covered in margin when we get regulatory order.

And remind me with the new Senate bill on forward test year, is the commission required to utilize a forward test year? Or do they only have to consider a forward test year and the utilities can file for one?

They only have to consider it. They're required to consider a forward test year filing. What they're really required to do is to consider the filing that best represents the utility's circumstances, which we obviously believe is a forward test year because our costs go up as we go into the future.

Okay, and excluding the renewables, are you still forecasting a forward test year for-- of about 2.5 billion for your entire regulated utility rate base for 2011?

We haven't really made any forecasts yet on what our rate base would be in 2011 yet.

Not on a specific in terms of how.

Not on a specific basis, right.

We've given an indication of-- at the end of 2011 what the total investment rate base would be. Part of that is FERC, part of that is TNMP, part of that is PNM.

Okay great. Thank you very much.

And we'll take our next question from Robert Mullin with Duquesne.

Hi, earlier in the prepared comments, when you were talking about Optim Energy. You were talking about hedges that were put in place in a point in time when prices were pretty friendly. I was kind of curious if you talked about the duration of those hedges?

I honestly--

If I heard that correctly.

There will be a slight gain in fourth quarter, but beyond that, then the hedging strategy will be different going in 2010.

Okay so we-- so those hedges sort of-- we should think of that as one of drivers between '09 and '10 is that the hedges were of 2009 kind of maturity?

That's correct.

Okay I got it. That's very helpful. Thank you very much.

Thank you. That concludes the question and answer session today. At this time, I'd like to turn the conference back over to our speakers for any additional or closing remarks.

Well I appreciate your time this morning and certainly if you have any follow-up questions, feel free to get a hold of Gina or Frederick. And for those of you that are going to Florida, we will see you down there next week. Have a safe weekend.

Thank you. Ladies and gentlemen, this does conclude today's presentation. We appreciate your participation. You may now disconnect.