TXNM Energy Inc (TXNM) 2009 Q4 法說會逐字稿

Good day, everyone and welcome to the PNM Resources 2009 earnings conference call. Today's call is being recorded.

At this time I would like to turn the call over to Gina Jacobi, Director of Investor Relations.

Thank you everyone for joining us this morning for a discussion of the company's fourth 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 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.

Thank you, Gina, and thank you all for joining us this morning. As you have seen from the report that we released, our earnings report, given the circumstances that we faced in 2009, we had a very strong year, good performance throughout the entire business and certainly also through the fourth quarter. For the year of 2009, we reported ongoing earnings of $0.94 per diluted share which is a fairly significant increase over last year of $0.10 and considerably above the upper end of our earnings guidance and the consensus of the analysts that are on the call. Our GAAP results also reflect a strong turnaround compared with last year. You'll remember that our GAAP results reflect $71 million after-tax gain from the sale of PNM Gas operations, which is partially offset with some write-down on the Optim emissions allowances that I think Chuck will probably touch on later in the call.

As stated in our news release, 2009 reflects a better regulatory framework for our utilities, although we still have a ways to go there. Significant improvement by First Choice Power and modest growth for Optim Energy. We really saw improvement across all parts of the business. The only one that had earnings below the level of 2008 is TNMP, our Texas wires business and frankly that was fully expected because of the higher financing costs due to refinancing all of the debt at TNMP and when we take that into account, our TNMP business beat the expectations we had for the business, beat their budget numbers, so we saw very good success across all aspects of the business.

Let me just remind you of some of the key strategic successes we had during the course of the year which was obviously a restructuring and rebuilding year for us from 2007. We completed the sale of the gas business and used the proceeds to reduce debt. We ended up with settlements on both rate cases in Texas and New Mexico, and as a result of the New Mexico case, we were able to bring in line two of the merchant plants and place them into PNM rate base outside of our merchant operations. We made significant strides in restoring First Choice Power's earning potential and, in fact. have ended up with the highest level of earnings that business has ever had. Of course, as we've said in the past, you can't count on those things happening every year because they won't, but we do believe we have that position restructured and repositioned for stable success on the financial side.

Optim has been positioned to focus on cash conservation. It ended up with over a 10% increase or right about a 10% increase, in its EBITDA and lastly, we're in the final throws of executing what I think is truly going to be a seamless transition from me to Pat Collawn and I know this transition will work for our shareholders and our customers and our employees. And I'll talk about that maybe just a little bit more at the end.

We're going to have Pat do an operations update, give you a feel for more detail on the individual businesses and then Chuck is going to go through the detail of both 2009 performance and talk specifically then about the guidance for 2010, but before we do that, let me just refer you to slide five. This is something you've seen at every call that we've had for the last two to three years. We've had a checklist that we give you at the beginning of the year and it's the things that you can track to see how well are we doing on what we said we were going to do. And I think as you look at this list, the most important thing to me is that we did exactly what we said we were going to do. We accomplished the major objectives that we laid out for ourself. Some of these are ongoing and there will be more work to do with them as we move forward over the next set of years, but on each one of these, real significant improvement and success was seen through the course of 2009. With that, let me turn it over to Pat Collawn.

Good morning, everyone, thank you, Jeff. As Jeff mentioned, we made several strides in 2009 to strengthen the position of our utilities and I want to go through those quickly on slide seven. We still have more work to do at both PNM and TNMP and that work will start in the second quarter at PNM. We are on track to file a future test year rate period in the second quarter. This will be the first time that PNM has filed a case that is not historical in nature and it will probably be the first case that the commission hears in a future test year mode. We are on track to make that filing. The rates would go in on April 2011 and as many of you know, we're continuing to work to build consensus among our key parties about the regulatory framework for this future test year filing. We'll continue to hold these workshops and participate in discussions to address multiple issues. We also expect to file a FERC case for PNM toward the end of this year. Our last filing to increase our transmission rates was in March of 2005.

Turning to TNMP, we expect two filings this year. First we will have a T cost or a transmission cost of service filing during the second quarter. This is primarily an administrative filing where we address such things as items placed in service since the last general rate case, the related increase in depreciation and property taxes. This process is very streamlined in Texas, so we expect a resolution of that case about 60 days after we make the filing. And in the third quarter at TNMP, we're going to file another general rate case. Once we finalize these cases and have the filings, we'll communicate the amounts of their requests and, as always, our Investor Relations folks will post the key filings on our website.

We turn to the next slide, slide eight. I'd like to give you an update on the renewables filing and our legislative session that just finished here in New Mexico. PNM filed its renewable resource plan on January 26 and it calls for the addition of 80-megawatts of solar power with the first phase being constructed during the first quarter of 2011. The details of what we filed in terms of plant is on the slide, so I won't go through those with you. I want to emphasize that the addition of this renewable power to our generation portfolio here at PNM is contingent upon securing regulatory approval and cost recovery assurance. We will not pursue construction without a clear understanding and agreement of how these costs will be recovered in rates. A procedural schedule has not been issued on this case and, again, when we have one, the IR folks will communicate those key dates to you.

Our legislation session just ended here on February 18. It was a 30-day session here in New Mexico and it focused mainly on the state budget. However, there were a few other bills that passed and there's one in particular that we were watching that is very beneficial to us. It was the third-party bill and it cleared both the House and the Senate and it's now waiting for the Governor's signature and we expect him to sign it given the parties that backed this bill. The developers who own, install and operate renewable energy along with the environmentalists were behind this bill.

What this legislation says is that developers who own, install and operate renewable energy generation equipment are not considered public utilities. And there are two other key components in this bill that are very beneficial to utilities. First, the bill limits these facilities in size and location. The size of the generation facilities cannot exceed 120% of the average annual consumption of the customer it's serving and the facility is restricted to be on a customer's site, so therefore that means that there's no opportunity for retail wheeling or use of distribution facilities to move power. The second key part of the bill is it provides methods of cost recovery for the lost revenues associated with those renewables.

Moving to slide nine to talk about economic conditions, you'll recognize this slide as we have provided this for you last year to provide some insight into how the economy has impacted our regulated businesses in New Mexico and in Texas. And for the third consecutive quarter, we are seeing the recession having less of an impact on our regulated operations. We've said for some time that the economy in New Mexico and Texas has fared better than the US as a whole. However, we are seeing unemployment rates in New Mexico coming up and beginning to narrow that gap with the US and now the unemployment in New Mexico is the same as that in Texas. But as you know, unemployment rates are considered lagging indicators of the economy. New Mexico's unemployment last quarter was 7.7 and it rose to 8.3 by the end of the year. New Mexico lost 26,000 jobs from December 2008 to December 2009. That, however, is an improvement over earlier numbers that we saw, and Texas lost 276,000 jobs during the same period. Last quarter that job loss figure surpassed 303,000 jobs.

While you look at the employment in New Mexico, don't be alarmed by that increase. We've talked about this before and I think it's worth reiterating -- New Mexico is not an economic trend leader. The state lags behind when it comes to positive and negative economic trends. The recession's grip has loosened and we are seeing that in our load. If you look, currently the first quarter of 2009 was the worst that we saw and now PNM's load is recovering, albeit slowly, from that decline. We finished fourth quarter with a level of growth that we are used to seeing.

You can see on the right-hand side of the slide, we had 2.2% weather normalized growth in the fourth quarter at PNM. Overall for the year, PNM load was about 1.7%, which again is substantially less than many areas of the country saw. TNMP's load declined modestly for the year at 0.3%. In 2010, we expect to continue to see relatively flat load growth. At PNM, we anticipate no increase in load, however, that is because of our energy efficiency programs. Without those energy efficiency programs, we would expect to see load growth at 1.3% and at TNMP, we expect to see modest growth of 0.2%.

If you look on the left-hand side of the slide, you can see that we did see customer growth in 2009. At PNM, it was 0.8% and at TNMP, 0.7%. Again, not the level of growth we have seen in the past, but more than many cities saw.

I want to turn for a minute to slide ten to talk about our unregulated operations. I'll start first with First Choice Power. As Jeff mentioned, 2009 was one of First Choice Power's strongest years. That said, we do not expect 2009 to be repeated in 2010. We continue to expect margins to compress in 2010 well below the levels we saw in 2009. This is a result of lower, more competitive pricing in the market and First Choice Power's efforts to align its offerings with those prices moving forward. Chuck will discuss the impact of these lower margins for 2010 when he talks about guidance.

First Choice expects to grow its customer base in the latter half of this year. We've seen customer numbers decline for the past 18 months or so as First Choice has appropriately focused on customer credit quality rather than growing customer numbers. Today First Choice is better positioned to grow profitably and one of our goals is to add to the customer base in a way that improves the bottom line. First Choice is also going to continue to develop products and services in an effort to distinguish themselves from the other providers in Texas. As an example, you may have read that FCP was the first retail electric provider to offer prepaid electric service for customers with smart meters. FCP is very excited about this offering and they've gotten some very great media coverage on that product. So we'll keep you informed as the year goes by in terms of the progress on that. And finally, management at FCP continues to work on reducing bad debt expense and we saw a decrease of bad debt costs not only in dollars, but as a percent of revenue in 2009 as compared with 2008.

Moving to Optim Energy, last November we discussed the change in Optim's short-term strategy which focuses them on cash conservation and asset optimization. And once again, Optim had very strong power plant performance and management there continues to operate these plants efficiently. Twin Oaks had an EAF of 91.8% for the year, Altura Cogen was at 96.6% and Cedar Bayou 4 was at 89.5%. Optim's going to continue to use its assets to hedge wisely and effectively in order to maximize gross margin. As you know, the 2010 forward market remains soft and there are few buyers and sellers seeking long-term deals. Optim will maintain a fairly open position for 2010 and will be positioned to capitalize on market opportunities.

And finally, Optim is preparing for the December 1 (inaudible) market go live date. It's worth mentioning again that Optim has two very efficient plants totaling 875 megawatts within the Houston zone, specifically in the even more constrained ship channel and those two plants have the ability to quickly respond to market conditions and those plants are Cedar Bayou 4 at 275 megawatts and Altura Cogen at 600 megawatts. I'm now going to turn the call over to Chuck to discuss our financial results and 2010 guidance.

Thank you, Pat. As Jeff and Pat both mentioned, we're very pleased with our financial performance this year. Earnings at $0.94 were significantly above our third quarter guidance range. The drivers behind that were obviously the performance of First Choice Power, continued cost control at the utility, higher than expected load growth and colder than normal weather. We're also very pleased to report that S&Ts revised ratings outlook to stable which is another indication of our steps toward recovery best (inaudible) rate.

Let me talk about the major drivers on our performance. Year-over-year with the turnaround of First Choice Power which added $0.72 of earnings. Earnings improved from a loss of $0.28 in 2008 to a gain of $0.44. Most of the improvement was from higher gross margins and the function of improved portfolio management and lower short-term energy prices. The company's focus on reducing bad debt, growing the percentage of fixed versus floating contracts and increasing customer retention and satisfaction were also key to stabilizing the company.

The bad debt expense decreased from $52 million in 2008 to $41 million. As a percent of revenue, it dropped from 8.2% in 2008 to 7.8%. PNM electric's earnings more than doubled from $0.19 in 2008 to $0.50 last year. $0.26 or almost 85% of the increase reflected implementation of higher rates and the full year impact of the fuel adjustment clause. Another positive were fewer scheduled plant outages which are offset to reduce pension income and last year's decline in load growth.

Corporate and other, which you know is the holding company debt, contributed an incremental of $0.12 to earnings. This is the benefit that reflects the redemption of $157 million of our 9.25% notes, using the proceeds from the sale of the gas operations. Optim Energy was up $0.2 from 2008. The start up of Cedar Bayou 4 in June of last year, Optim's hedging activity and the optimization of plant operations helped offset the impact of lower power prices and higher O&M.

The only company that experienced a drop in earnings in 2008 to 2009 was TNMP. The major driver with the decline was higher interest expense associated with the refinancing of TNMP's long term debt in the fir quarter 2009, reduced pension income and increased maintenance and administrative costs also contributed to the decline. But certainly don't forget about the implementation of the new electric rates on September 1 of last year which allows TNMP to begin to recover the incremental costs of the more expensive debt.

Now, turning to page 13, I'd like to discuss guidance for 2010. Our consolidated earnings guidance range for 2010 is $0.60 to $0.72. While many ever you are looking ahead to 2011, at this point we are not providing any information beyond 2010. After we file our rate case with New Mexico commission in the second quarter of this year, we'll update you with our longer term expectations. Our guidance range for the year is down from 2009 as we expect First Choice Power retail margins will continue to decline throughout the year and return to normal levels. In fact, last year we saw from first quarter to fourth quarter a decline in margins of 20%.

Historical levels that we talked about publicly in previous conversations range from $25 to $30 a megawatt hour. Last year margins were 40$ to 50% higher than this normal range given market conditions and the unusual low energy prices. The expected decline in gross margin in 2009 provided to be slower than anticipated. We fully expect a reduction during 2010 as market activity returns to normal levels in taxes. But also competitive pressures on margin as well as the level of market volatility can accelerate or decelerate this rate of change.

Now, turning to guidance by segment, we anticipate our regulated business will contribute $0.66 to $0.72 and our unregulated businesses will contribute between $0.05 and $0.17, with First Choice Power earnings $0.15 to $0.22 and Optim Energy losing $0.05 to $0.10. If you look at appendix A6, we have a breakout of segments in these ranges.

Our regulated utilities are on track as Pat had pointed out and delivered solid results in 2009. The biggest unknown, as Pat pointed out, is the economy. Although conditions look much better than they did a year ago, the unemployment remains high and the rate of economic recovery is still not clear. Because of this, we have been cautious in our low growth assumptions. We are projecting flat load growth after factoring in our energy efficiency program. We could see some earnings upside in the economy in the low growth, as a result every percentage point change in PNM and TNMP load would impact earnings by about $0.035 and $0.01 respectively.

Now, on the unregulated businesses, the key determinate in our first choice performance is the rate of unit margins returning to normal levels. In a rising gas price environment, margins may contract faster than in a decreasing gas price environment. Both First Choice and Optim Energy assumed gas prices would increase from last year's low levels to a range of $5.25 to $6.50. As a result of thumb, every dollar change in First Choice unit margins would result in $3.5 million change in EBITDA or about $0.02.

The other factor that could affect First Choice financial performance is bad debt. The company has been successful in driving down its bad debt expense last year and it continues to strive to further reduce the expense from 7.8% of revenues in 2009 to about 7% in 2010. Once again, as a rule of thumb, each 0.5 percentage point change in bad debt as a percent of revenue would result in $2.5 million change in First Choice EBITDA or about $0.015.

Optim Energy faces a big challenge in today's commodity market conditions. The company's earnings projections are based on an assumption that 2010 natural gas prices will range between $5.25 and $6.50. And around the clock heat rates in the Houston zone will average about $7.50. Given the current forge and heat rate, Optim earnings would be at the lower end of guidance. Market prices will have a significant impact of the ultimate result of the performance of Optim this year.

Based on current positions, each $0.50 change in gas price would result in a $2 to $3 million change in Optim Energy's EBITDA and about a $0.01 change in PNM Resource earnings. Every change in a half a heat rate would lead to $6 million to $7 million change in Optim EBITDA and a $0.02 change in earnings.

Now, let's turn to page 14 and I'll walk you through the key drivers of our regulated business year-over-year performance. As I mentioned, we expect our combined regulated businesses to earn between $0.66 and $0.72 this year. That's up 5 to 15% from 2009. Rate relief is the primary driver. The full impact of last year's rate increases at PNM and TNMP coupled with the implementation of a second phase of the rate relief in New Mexico and an expected increase in our transmission rates in Texas are anticipated to add a total of $0.26 to regulated earnings.

Negative drivers affecting the regulated business performance include higher plant outage costs, increased interest expense, pension and retiring medical costs, and depreciation. Outage costs are expected to be up $0.05 to $0.06 from 2009. This year we're planning two major outages at San Juan versus only one last year. In addition, Four Corners has scheduled a major plant outage at Unit 4 in the first half of the year and our Rees gas plant will undergo a major planned outage in 2010.

Now turning to slide 15, I'll walk you through the drivers affecting our unregulated operations. We expect First Choice Power will generate between $25 and $35 million of EBITDA, down from 69 million it earned in 2009. The decline is more than accounted for by the expected compression in unit margins. During 2009, we saw First Choice Power's average customer count drop by 3.5% as the company was primarily focused on retaining its profitable customers. In 2010, First Choice plans to reverse the decline in customers and expects to grow its year-end residential customer base by about 5%. Positive drivers include reduced bad debt as First Choice continues to focus on driving down its delinquencies and reducing default rates. The company is also committed to slightly reducing the O&M expense.

Turning to Optim Energy. Optim Energy's EBITDA guidance for 2010 is $60 million to $70 million. Most of the year-over-year gain reflects higher market prices. Operating expenses are expected to remain relatively flat year-over-year as the cost initiatives implemented last year help offset the impact of a full year of Cedar Bayou 4 operations. Just to comment briefly on the NOx allowances writeoff which is a GAAP writeoff for 2009, this is a result of inventory of NOx allowances Altura Cogen. As you know, the accounting rules require us to value these at the lower cost or market. The fact that the market was I will illiquid and there were very few sales, market values were below the cost. Therefore the pretax write-down PNM share, which is 50%, is approximately $26 million or GAAP impact of $0.17 a share.

I'd like to turn to page 16 and discuss the five-year capital program. We currently project our core capital expenditures to total $1.2 billion over the next five years. This is down $144 million or 10% from last year's projection. Our core expenditures exclude the $268 million of renewable spending. We don't plan to spend that capital until we are assured the fair recovery of the New Mexico regulatory commission. The reduction in our five-year capital spending reflects cuts in transmission and distribution. At PNM, T&D capital is down $52 million as we delayed a number of projects and cut back on blankets due to reduced load growth. PNM's capital spending program is down $95 million as we cut $30 million that had originally been allocated for the Cres project and delayed $66 million of other projects.

In 2010, we plan to spend a total of $285 million in capital, $25 million of which is associated with our $268 million of renewable plan. Most of the spending on renewables will occur in 2011. Now turning to page 17, I'll walk you through our cash earnings guidance.

We currently expect to generate $290 million to $315 million of cash earnings. Although the amount is down from the $439 million of cash earnings we generated last year, we are considerably above 2008's cash earnings of $196. Some of the main factors that affect the 2010 cash earnings is we wouldn't expect to get the significant tax benefits of $80 million to $90 million we did in 2009, which were a result of tax refunds associated with change in depreciation methods for certain types of distribution costs and certainly the impact of the results of lower expectation of the First Choice Power and we also have a $20 million contribution to our pension plan this year.

Now, let's turn to slide 18 for a quick review of our debt and liquidity. As you can see from this graph, we have minimal upcoming and refinancing risk. Over the next four years, we have no long-term maturities coming due and the first large issue doesn't come due until 2015. Our liquidity is in good shape given our cash earnings and capital spending plans, we anticipate our year-end availability of our liquidity to range between $615 million and $660 million. And with that, I'd like to turn the call back over to Pat for some concluding remarks.

Thank you, Chuck. As Jeff began the tradition of putting in a checklist to hold us accountable, we're going to keep that tradition up. Most of what you see has been discussed during today's presentation, but I want to quickly hit on some high points. First of all, I'll put a personal one in there to not flub my speaking points on the call, so I apologize to you on the call for doing that earlier. We plan a healthy schedule of rate cases this year as we mentioned, PNM's future test year, two in TNMP, the T cost filing and the general rate case and finally the transmission rate case at FERC. We're going to strive to achieve a favorable regulatory outcome in our renewable resource plan. We're going to continue to maintain strong electric reliability and improve our plant performance. FCP had a strong 2009 and we're going to work diligently to sustain that solid performance we had from them. We don't expect the level of 2009's earnings this year, but we do expect solid results and a profitable growth of their customer base.

Optim has a goal to grow its EBITDA by 5% to 10% in 2010. They're going to be challenged by an ERCOT market that rep mains soft and provides few opportunities. That said, Optim is nimble and efficient and has great generation assets and is poised for the turn around. And finally work needs to continue to strengthen and improve our credit metrics. As Jeff mentioned, we did get the business outlook for our senior unsecured notes upgraded from negative to stable by FNP, but clearly more progress needs to be made on that front. With that I'd like to turn it back over to Jeff for closing remarks.

Thanks, Pat. Let me just say that it has been an honor and pleasure to work with each and every one of you that is on the phone over the last ten years as Chairman and CEO, but as I told my board, in fact, originally, it was only five years, but I agreed to stay for ten and that ten years has run. The great thing to me is the team that we have pulled together that I know is going to do a tremendous job in continuing to lead this company forward. Pat has the absolute confidence, not just of the board, but of our employees and our community and the senior team is well seasoned and knows its job well and I think the results of 2009 demonstrate what the team is capable of. So let me just thank each and every one of you for your interest in our company. It has truly been a pleasure to serve over the last ten years. Obviously I'll still stay engaged briefly in a less significant role, not briefly, but a less significant role, as Chairman, but I'll still keep my eye on the company and, again, it has been a pleasure knowing each and every one of you and I wish you the best. With that, we will turn it over and take any calls that we might have.

Thank you. (Operator Instructions) We'll pause for a moment to give everyone an opportunity to signal. And we'll take our first question from Brian Russo with Ladenburg Thalmann.

Good morning.

Good morning.

Would it be possible to break down the regulated utility 2010 earnings contribution by the TNMP sub and the PNM electric sub?

The answer, Brian, is yes. It's a question of if Chuck has that handy. If not, we could provide it at a later point. Have you got it, Chuck?

Give me a minute here just to kind of take a look.

Brian, have you got a follow-up while Chuck is checking?

Sure. Okay. Just based on the regulated earnings guidance you've provided, what kind of ROE does that imply for 2010?

Brian, we are still looking in the low mid-single digits for both PNM and TNMP. That's why the new rate cases are so important to us.

Okay. And just in terms of the workshops you're holding in regards to the forward test year, it's my understanding that you're going to have a lot of turnover at the commission, so how does that play into educating the major constituents on this forward test year filing?

The first line of defense, so to speak, with the workshops is with the staff, the AG and the other intervenors, the environmental groups, the industrial groups, those folks will stay constant. The commission has already named some of its replacements, so that group will stay the same. We definitely will have two new commissioners as Commissioner King is term limited and Commissioner Jones is not running again. We think that Commissioner Sloan will have some opposition, but the deadline to file papers has not passed yet. So we will just keep our issues in front of them. We can't obviously talk to the commissioners about it because it would be of a pending case. So we're going to make sure we really work first on the staff and the AG and the intervenors and then when the commissioners come into play, we think they'll take a look and any new commissioners we have will come in with a fresh new set of eyes. We can educate the candidates on general industry issues and we will do that. Chuck, I think, has your answer, Brian.

Okay.

Yes, Brian, again, the guidance range is $0.66 to $0.72 and if you were to break it down by segment showing TNMP, it will be a range of $0.15 to $0.17 and on PNM would be $0.51 to $0.55.

Okay. And the low single digit ROE in 2010 with utilities, does that include the firm wholesale margins as well as the Palo Verde three margins?

Yes.

Yes, it does.

Okay. And then just lastly, if I could, on the renewable pending filing, how do you plan on financing that and will you use any ITC credits?

Yes. As we've talked before that there is no plans for issuing equity, that we have enough cash from the ITC credits as the project is completed to allow for some cash generation to support that as well as any revenue requirements as a result of the recovery from the commission's approval to proceed with the investment and that in itself builds up enough equity to allow us to proceed without issuing equity and then we would finance the balance with debt.

And then, Brian, in addition to the 30% federal credit, there's a 5% tax ITC in the state of New Mexico.

Okay. Great. Thank you very much.

And we'll go next to Chris Shelton with Millennium Partners.

Good morning, guys.

Good morning, Chris.

Hey, Chris.

Just a couple of questions. On the FERC rate base, do we have what the FERC rate base is and what the earned ROE is currently or in guidance?

I don't have it for you, Brian, but we can get that.

Okay. And is it included, I guess there's this final slide which has all the rate bases, would it be included in the PNM rate base or --?

I'm sorry, Brian, I didn't -- what was your second question?

It's Chris Shelton.

Sorry, Chris.

That's okay. I was just looking up the utility rate base slide and the --

In the appendix?

Yes. Is it additional to these numbers, the FERC base, I mean, additional in these numbers or is it included in these numbers?

It's additional.

Okay. Okay. I'll follow up on that.

And, Chris, just on the issue of the FERC rate base, the FERC rate making methodology is a fair amount different than it is within the states. One of the things they do is they give you more flexibility in terms of adjustments and so what may be provided will be, for example, year-end 2009 rate base for the FERC side and it won't even be rate base, it will be kind of a ratio to allocation because the process of actually making that calculation is a little more complicated and it won't be filed until next year, end of this year.

And the last stuff we have on the case is 2005, but we can get you that.

Got it. Okay. And then can you elaborate a little bit more on the third-party bill that just went in or that's on the Governor's desk? Is the implication there that utilities are going to need to own any large scale renewables if that bill passes or am I reading that wrong?

No. We still will need to own or want to own our large scale renewables. The large scale renewables are still the most cost effective in terms of the renewables overall and particularly with solar, you get a big scale advantage, but what this is is this does allow, as you know, there's a lot of solar industry here and we have a lot of solar plants. This allows folks that want to actually own it themselves to be able to do that and it's beneficial for us because it really carves it out as just the renewables and not other forms of generation. It limits its size and I think as you know, one of the issues when these kinds of bills come in in other states is the fact that the utility is still there providing backup power, but it's not being compensated for that and this bill allows us to apply for some rate making treatment that keeps us whole for that backup power and we set those rules up front so we don't get far into customer renewable ownership and all of a sudden having to go, oh, wait a minute, we're not being compensated. So that's why we were very supportive of that. It doesn't change the profile of what we filed in our renewable filing.

Chris, let me back it out, maybe, and just talk more strategically about what the intention is, not just of that bill, but how we're trying to position. First, as Pat said, yes, we are absolutely going forward with the intention of owning larger scale solar projects that are integrated into the grid. But second, we also have agreement and have put forward to the commission an approach where we can install, we won't do the installation, but we will own facilities that are installed on consumers premises. All this does is provide an option for a third party to also own something inside the fence, if you will, but it's limited in size and that limitation is a very good thing for us and then, as Pat said, the recovery of the lost margins because of that being installed. And making clear that the power from that resource cannot be used to serve other loads. So there's really very good protection for us in there. It clarifies what was a point of disagreement about someone else owning a power plant, a solar facility inside the customer's property, which in fact, is at the court, so it helps clarify that result and provides us protection.

I see. So if I can paraphrase it, basically allows only the utility to own renewable generation inside customer premises?

No. It allows a third party to own inside the customer premises, but it's limited in size to 120% of the load.

It prevents retail wheeling for those ones owned by the customer and it allows us to make sure that we're made whole.

I see. Okay. Thanks. And I guess just on First Choice, maybe for Chuck, can we assume that the bad debt levels will continue to decrease over time and have you made an assumption in guidance of that?

Yes. Brian's here, so I'll let Brian Hayduk, the President of First Choice comment on it.

Good. Hey, Brian.

Hey, Chris, how are you?

Good.

I think it was actually in Chuck's comments, our assumption for 2010 is 7% of revenue.

Okay. Great. Sorry I missed that. Thanks very much, guys.

Thanks, Chris.

And we'll go next to Ali Agha with SunTrust Robinson Humphrey.

Thank you, good morning.

Good morning.

Assuming that you file your next round of rate cases as planned, forward test year, et cetera, should we assume that, again assuming reasonable regulatory treatment that the regulatory lag that you currently face should be largely eliminated following those next round of rate cases?

In New Mexico, it should be largely eliminated because of the forward-looking nature. In Texas, you will still have some regulatory lag because the base rates case there are done on a historical basis. The transmission cost filings in Texas are more contemporaneous, but you still have some regulatory lag in Texas, not a significant amount.

Okay. And separate question on First Choice. As you all have indicated to us repeatedly, the margin, we should assume them to be compressed from 2009 levels. Can you remind us in terms of as you go into the year, how much hedged are you versus the volume that you expect to sell in 2010 ? In other words, are those margins already locked in and hence, you're convinced that they're coming

Hi, Ali, this is Brian again. No, I don't think anybody in this space would have all of their volume locked down for the full year. We certainly have some sales to do. I don't think we give out specifically the go get percentage, but one thing I can say from a hedge perspective, the fixed price that we have sold is in the 100% range in terms of the hedge.

Okay. Okay. But the total volume, that's not a number you've disclosed?

No.

Okay. And final question related to that, I know you focused on 2010 guidance, but generally speaking, to your point, just to clarify, should we look at the margins that First Choice is getting in 2010 as kind of the trend going forward as well, assuming (inaudible) dislocation and gas prices, et cetera, I mean is that the real norm we should be thinking about from a longer term perspective?

Yes, that's very difficult to tell. I think we're going to have to see how the year plays out. There's so many factors that play into gross margin from customer behavior to competitive pressures that we don't know exactly how that trend line, how steep that trend line is going to be throughout the year, therefore, it would be sort of misguided for me to tell you that 2010 is going to be a good indicator of 2011.

I see. And last question, with regards to both Optim and First Choice, obviously these are considered core businesses for PNM, but as you look forward, are there any matrices or any benchmarks you're looking at that may cause you to reevaluate that or should we just assume these are core businesses going forward?

I think that you can assume for now that they're core businesses. What we're working on doing for both Optim and First Choice is stabilizing their performance. As we said, 2009 was a great year for First Choice, we want to get another year or so under our belt and see where the Texas market goes. After that we may make different decisions, but we are keeping those businesses and making sure that they optimize their performance.

Fair enough. Thank you.

Let me add one other thing to the issue on First Choice. One of the major challenges Brian has had this year is really to focus on de-risking that business because what we saw in 2008 was too much volatility, too much risk and frankly not well managed risk, if you will, on the retail side. And so I think what Brian has done a good job of is in narrowing the band of performance that it will have. So as you look at whatever the 2010 results are, as they turn out to be, when you look at 2011, sure, it's going to vary, but the band, particularly the down side band will be substantively less than that business had in 2008 and frankly carrying earlier in the business. Part of that is removal out of the trading side, but it's also the way in which the retail side is positioned.

Thank you, Jeff.

And we'll go next to Paul Fremont, Jefferies.

Thank you. With respect to the gross margin at First Choice, can you remind us what the margin was in the third quarter and can you update us as to what it was in the fourth quarter?

Third quarter I don't have off the top of my head. I think what you'll see is a mid-$40s for the fourth quarter, you'll see that in the K.

Okay.

And it was higher than that in third quarter, but I don't know the specific number offhand.

It was probably closer to like the $50 level, right?

I think it was high $40s, Brian.

$49, something like that.

$48, $49, in that range.

And where are you so far in 2010? Are you closer to that mid-$40s number for the first month and a half?

Yes. I don't think we're going to give out any more guidance than what Chuck has already disclosed. As we've said, we certainly see that trend we saw first quarter to fourth quarter in 2009 , 20% reduction in gross margin, we would expect that declining trend to continue, but I don't think we're going to give any early guidance on where we are so

Paul, as you know, we'll have to wait until the first quarter results. I think we can say that in Texas, it has been unseasonably cool in January and February and so that's something that's pretty well known.

Okay.

But outside of that.

And in terms of customer growth, you talked about an expectation that customer growth would increase in 2010. Can you give us a percentage number that you're thinking about?

Sure, Paul, it's Brian again. 5% is on the residential side, the expectation in terms of growth.

Thank you very much.

Thanks, Paul.

And we'll go next to Mike Bolte with Wells Fargo.

Good morning.

Good morning.

I just had a follow-up question to Chris' question on bad debt and SEP. I know in the past you have talked about efforts by a group of retail providers in Texas to, I guess, create like a customer database that might help reduce bad debt. I was wondering if you have any update on that?

Sure, Mike, it's Brian. Not really. There's still some efforts going on at the commission. I do not expect that to have an impact in 2010. I think we're still very hopeful. We're certainly in need of that type of solution in Texas. But the effort is fairly slow. There may be a pilot type effort that could get in this summer, but I don't think it will be material enough to have much of an impact on our bad debt.

What about maybe like by 2011, what do you think the odds are that it maybe helps out 2011?

If I had to put a percentage on it, 40%.

Okay.

It's a tough one.

All right. Thanks a lot.

Thank you.

And we'll go next to Ted Heyn with Catapult Capital.

Good morning.

Good morning, Ted.

Just had a few quick questions. You mentioned the rate case schedule. I don't hear you mention PNM south and just want to know what the thought process is there, is there going to be a separate filing in the south or are you looking to roll that into the larger northern rate case?

Right now that's one of the things that we're discussing with the intervenors. Our hope and we think we're close is to roll it into the north rate case.

Okay. So that would --

If not, it would be a separate case, but right now we're trying to roll it into the north case.

And you're working with the intervenors to try to get that?

Absolutely.

Okay. Great. And then I think you briefly mentioned that you would update us a little bit more on 2011 once you've filed the rate case. Is the thought process that you're going to give 2011 guidance sometime in the second quarter or is it more just a thought process of kind of what the drivers would be?

It's more just an update in terms of what's in the rate case, the amount of the rate case, the schedule and some of the drivers on that as opposed to actual guidance for 2011.

Okay.

You remember what we did when we had the rate case and the earnings discussion for 2009, we showed by component of the business what the potential rate case impact would be, if it was zero, if it was 100%, so that each analyst can kind of make their own judgment about what the outcome will be. We'll probably also show a phase in alternative. Just to give you a sense and then you all would have all the information to make a judgment on what you want to assume.

Got it. Okay. That's helpful. Thanks a lot.

Thanks, Ted.

And we'll take a follow-up from Chris Shelton with Millennium Partners.

Oh, hi, just one quick follow up on First Choice. The 5% customer growth guidance, what does that usually translate into as far as a megawatt hour sold or is there some correlation there?

Hey, Chris, it's Brian. You're looking at about 10,000 customers, a little over a megawatt hour for the average size, sorry, it's closer to 13, 14-megawatt hours for a year, so that's the math.

So you add 13 to 14-megawatt hours per customers added, I guess?

Yep, yep.

And what was the customer count in the fourth quarter or as of the end of the year?

186 was the residential customer count at the end of the year.

Okay. Great. Thank you.

And with no further questions in the queue, I'll turn the conference back over for any additional or closing remarks.

Well, this is Jeff. Let me just quickly close and, again, thank you for taking the time this morning to visit with us and I know that Pat and Chuck and other members of the team will be out in New York in the not too distant future to visit with you and hope you have a great rest of the day. Bye bye.

And that does conclude today's presentation. We thank you for your participation.