TXNM Energy Inc (TXNM) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PNM Resources fourth quarter conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to introduce your host for today, Ms. Gina Jacobi, Director of Investor Relations. Ma'am, please go ahead.

Thank you, everyone, for joining us this morning for a discussion of the Company's fourth quarter 2010 earnings. Please note that the presentation and accompanying materials for this conference call and supporting documents are available on the PNM Resources website at pnmresources.com. Joining me today are PNM Resources CEO, Pat Collawn and Chuck Eldred, our Chief Financial Officer, as well as several other 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.

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

Thank you, Gina, and good morning everyone, and let me add my thanks to Gina's, to all of you who are joining us this morning.

For those of you that have been following us for a while, you'll know that we've been on a journey to improve the financial health of our Company, thereby increasing shareholder value. We have three strategic goals that allow us to accomplish that.

First, and most importantly, we focus on earning the authorized return on our regulated businesses. These businesses are the earnings power of PNM Resources. Second -- (technical difficulty) the solid investment grade credit ratings. Now, these goals span multiple years. But each year our activities listed on our checklist are geared toward accomplishing these strategic goals.

So, if we turn to the 2010 checklist on slide 5, I'll take you through a quick review of our progress. Our progress in addressing several regulatory matters was significant in 2010, as we filed four rate cases in three jurisdictions. The PNM general rate case is ongoing and I'll spend more time on that later, as is the FERC transmission case. We resolved both the TNMP transmission cost of service filings, and last month we implemented new general rates.

In addition, we have resolution of the renewable filing to add 22-megawatts of solar power to PNM's portfolio. From an operational standpoint, we had strong reliability results and stellar power plant performance. Our competitive business had mixed results. First Choice continued to demonstrate strong performance, while Optim Energy, along with other generators in Texas and in the nation, was challenged by the continued low price market. As we accomplish our objectives and meet the first two goals, we will come closer to achieving the third goal of improving our credit metrics and returning to solid investment grade.

We'll turn to slide six for an overview of our 2010 financial results. This morning we released our 2010 results and reported we had ongoing earnings of $0.87 per diluted share. Comparing the results of our ongoing electric businesses, and excluding the contribution of the gas operations in 2008, our ongoing earnings were up slightly, $0.01, on a consolidated basis year-over-year. You'll remember, we sold the gas business in January of 2009, and had booked an $0.08 earning contribution for that month.

Ongoing quarterly results were slight losses, as expected, as the fourth quarter traditionally is the weakest for our electric business. On a GAAP basis, you'll remember in 2009 our earnings included $0.72 from the sale of our gas business. This quarter, and the year, reflect PNM Resources' non-cash impairment of our investment in Optim Energy on a GAAP basis.

This shouldn't come as a surprise to anyone, as other companies have had to take impairment charges on their merchant assets as a result of the continued depressed energy market. For us, our analysis indicated that our entire investment in Optim Energy was impaired at December 31st, 2010. We have reduced the carrying value of our investment in Optim Energy to zero, resulting in a pre-tax, non-cash loss of $188.2 million, or $113.7 million after tax. Chuck will discuss this in more detail in his portion of the call.

As we stated in our news release, 2010 results reflect a stronger regulatory framework, as rates for both PNM and TNMP are better aligned with costs. First Choice Power had a second consecutive year of providing strong contributions and finished 2010 just slightly below 2009 levels, as expected. First Choice Power continued to do a good job of growing its commercial sales, managing its costs and reducing its bad debt expense.

I mentioned the continued challenging energy market, particularly in Texas. The story has not changed much for Optim Energy. Optim continues to manage through a very challenging ERCOT market, and its strong operational performance at their three power plants has greatly mitigated the negative impact of that market.

Those are the highlights for 2010. So, let's turn to slide 11, or excuse me, slide 7, and go over the status of the PNM rate case. As you know, we have filed a stipulation in the retail rate case for PNM. The stipulation calls for up to $105 million increase in rates through 2013. This includes $45 million of rate relief in 2011 starting on May 15, $40 million in 2012, and a capital additions rider of up to $20 million starting in 2013. As Chuck will discuss in more detail, if the stipulation is approved as filed, it will result in an incremental $0.23 to earnings in 2011. The stipulation also addresses a separate rate rider for the recovery of approved renewable programs, including the 22-megawatt solar project I mentioned earlier.

Another key element of the stipulation is the opportunity to file for recovery of mandated environmental projects. While the stipulation states that the next round of rates cannot go into effect before January 1, 2014, this does not preclude cost recovery for environmental mandates. A new procedural schedule has been set for the stipulation, and you can see some of the key dates on the slide. And as we have progress, we'll keep you up-to-date.

You're probably aware that we have agreed to extend the suspension period of this case. This extension is so that the Commission in New Mexico will have adequate time to hear the case. Because the stipulation is opposed, the Commission was concerned that they would not have time to hear and decide a litigated case if the stipulation was denied. Keep in mind that if the stipulation was denied, and we would have had to go through a litigated case, and the Commission would have to decide that before August 10, 2011. They were concerned that time frame might be too tight. So, we agreed to the extension. The extension does not signal that the stipulation will be denied. The stipulated filing will run its course for the schedule on the slide.

The Commission is also expecting PNM to file for interim rates. The hearing for the stipulation is scheduled to run through May 18, and then it takes several weeks for the hearing examiner to issue her recommended decision, and get that in front of the Commission. The stipulation that we and many parties signed, calls for rates to be implemented on May 15. And the Commission is mindful that we made concessions in that stipulation, assuming we would have the opportunity to implement rates on that date. So, we will be filing in mid-March for interim rates.

Aside from the PNM retail case, there are a couple of other regulatory matters not on the slide worth noting. First, the PNM rate case at FERC is moving along. As a reminder, we are asking for $11.1 million increase in revenues and a 12.25% ROE. In December, FERC issued an order accepting our filing, and suspending the proposed tariff revisions for five months. Our proposed rates will become effective June 1st, 2011, subject to refund, which is the normal course for FERC rate cases.

In terms of TNMP, on February 1st, we implemented new general rates that were based on that stipulation we reached in December. Chuck will provide detail regarding the new rates' impacts to 2011 earnings. The $10.25 million in annual revenue increase will position TNMP to earn its allowed return of 10.125 in the near future.

TNMP's advanced metering surcharge case is moving along, as well. There is a hearing set for April 18, 2011.

Now, if you turn to slide 8, we'll do a quick discussion on our economic conditions. Despite some indicators that point to continued slow economic recovery, PNM and TNMP had good load growth in 2010. Unemployment rates remain high in New Mexico and Texas, but significantly lower than the nation as a whole. We've seen modest sales and customer growth, as you can see from the chart on the right of this slide.

We think there is more good news on the horizon, if you turn to page 9, for our projected load growth at PNM and TNMP. Chuck's going to provide more details about our load growth assumptions that are included in our earnings projections, but I'm going to steal a little of Chuck's thunder now. We believe that our 2011 sales volumes for both PNM and TNMP will be very strong in 2011. We expect growth for PNM to be in the range of 1% to 2% higher than 2010. Even if we achieved a low end of our projected growth range, 1%, PNM will set a new sales volume record in 2011.

For TNMP, we are expecting better growth in the Texas economy, leading to load growth of 1.5% to 2.5% in 2011. Unlike PNM, TNMP maintained growth, albeit modest, throughout the recession, having set a new sales volume record every year since 2007. There are a number of areas in which Texas seems to be emerging from the recession quicker than the nation. The Texas leading indicators index hit a two-year high in November. And so, we expect load growth for both utilities, but more robust in Texas.

We turn to slide 10 for a discussion about First Choice and Optim Energy. Starting with First Choice, as I mentioned earlier, First Choice Power had a second consecutive year of strong earnings, and it continued its successful marketing efforts and retained a solid customer base. First Choice continues to develop a deeper commercial base, which is expected to result in lower bad debt to revenue ratio and better earnings predictability. Bad debt expense, which has been problematic since 2008, was $25 million for the year, or 5.2% of revenue. That 2010 level of bad debt is less than half of what it was in 2008. So, Brian Hayduk and his team at First Choice have done a tremendous job of managing this issue.

If we turn to Optim Energy, operationally they had an outstanding year. As a fleet, Optim's power plant had a near 100% commercial availability. This strong operational performance led to higher ancillary revenues, which helped offset the ongoing low price energy market in ERCOT. I'll reiterate what we've been saying about Optim for some time. As the down market continues, Optim is going to continue to focus on cost control, getting the most out of its operations.

Our view of the competitive business has not changed. We continue to believe the ERCOT market will rebound, and feel strongly that the combination of having both generation and retail maximizes the opportunities in that competitive arena.

I'll now turn it over to Chuck to provide more detail about our competitive business approach, after a more detailed financial discussion. Chuck?

Thank you, Pat, and good morning everyone. As Pat pointed out some of the key drivers in 2010. Let me just briefly walk you through our 2010 earnings, and then I want to move on to guidance. And if you're interested in more information on last year's performance, we've included a detailed review in the Appendix.

But as Pat already covered, we finished 2010 with ongoing earnings of $0.87, which is well above our original guidance for 2010, and in the middle of the updated range we provided in October. As you can see in the walk-across on slide 12, our ongoing earnings reflect improved performance at our two regulated utilities, offset lower earnings from our competitive businesses.

Needless to say, we're pleased with the progress we've made on the regulated side of the business. PNM Electric ongoing earnings were up $0.08 year-over-year, while TNMP was up $0.04. Some of the improvement in earnings is attributable to weather, but rate relief at both utilities and modest load growth also contributed. Offsetting the positives at PNM were higher planned outage costs, loss of income from pension and retiree medical funds, and increased interest expense.

Now, moving to our unregulated businesses, Optim's earnings were down $0.09 from 2009. The decline partly reflects the challenging low power price environment in ERCOT. Additionally, higher interest and depreciation costs at Optim also reduced our share of the Company's earnings.

The last item on the walk-across is First Choice Power. The Company's earnings were down $0.02, compared with 2009, as First Choice continued to face declining unit margins. The good news is that most of the impact of the lower margins were offset by reduced bad debt, and an increase in commercial sales, which were up $0.12 for the year, and 22% in the fourth quarter.

Before we move on to 2011 guidance, I want to take a few minutes to address the write-down of our equity investment in Optim Energy. Keep in mind that the write-down is reflected in our GAAP earnings, not in our ongoing earnings. The write-down occurred after evaluating several factors, including the low power price environment and recently reported sales of electric-generated resources in ERCOT, all of which are indicators of impairment under Generally Accepted Accounting Principles. The impairment charges are non-cash, and do not have an impact on our liquidity or our future operations. While we did book a write-down as required by current accounting standards, we still firmly believe there is value in Optim, particularly as power prices recover in ERCOT.

I also want to point out that Optim Energy performed its own impairment analysis using forecasted future cash flows on an un-discounted basis. That analysis indicated that Optim would be able to recover its investment in generating assets, and as a result the Company did not record an impairment charge. But unfortunately, GAAP rules require us to base our impairment analysis on discounted cash flows, and as a result, we had to record the impairment charge.

Now, moving on to slide 13, I'll discuss guidance for 2011. We currently expect our ongoing earnings to range between $0.80 to $0.92. While the midpoint of $0.86 is above where we ended up for 2010, there's actually quite a bit of change in the makeup of these earnings. We are projecting that our regulated businesses will earn between $0.89 and $0.96 in 2011. That's up $0.14 to $0.21 from last year.

On the other hand, we're forecasting some expected changes in our unregulated businesses this year. In 2010, our competitive businesses earned $0.32, while this year we project they will earn between $0.06 and $0.16 -- that's down $0.16 to $0.26 from last year. The main drivers of decline in earnings include lower retail unit margins at First Choice, and the expiration of Optim's above-market Twin Oaks contract at the end of last year.

I plan to walk you through each segment's guidance in more detail in just a minute. However, before we move on, I want to focus your attention on the earnings sensitivities on the bottom of the slide. We have included these to help you with the modeling activities. The sensitivities are based on our guidance assumptions, which are included in the Appendix.

Now let's take a closer look at the earnings drivers for our subsidiaries. Turning to slide 14, I'll address the regulated utilities guidance. Assuming our filed stipulation is approved by the New Mexico Commission, we expect to earn between $0.62 and $0.67 at PNM. The increase reflects the impact of the rate relief, which is expected to add $0.27 to earnings. $0.23 of the $0.27 reflect the impact of the stipulation, if it's approved, and new rates are implemented May 15. The remaining $0.04 of rate relief reflect the full-year impact of the increase we implemented in April of last year, and new FERC transmission rates, which will become effective June 1st, but are subject to refund.

We also anticipate a decrease of $0.07 to $0.09 in our planned outages. If you recall, San Juan generating station had two major outages in 2010, compared to only one major outage scheduled for 2011. And at Four Corners there will be two minor outages this year, rather than one major outage we had in 2010.

Another positive driver is continued weather normalization load growth, which is expected to add another $0.03 to $0.05 to this year's earnings. That gain, however, will be offset by an assumed return to normal weather. Last year we benefited from abnormal weather both in the winter and summer months.

Lastly, PNM's earnings reflect the expiration of Palo Verde 3 toll, which is expected to reduce net income by $0.29. The tolling agreements were negotiated when power prices were in the $75 per megawatt range, versus the current market price of about $35. In order to minimize our exposure, we did enter into a number of short-term contracts to sell power from Unit 3. However, we've only locked in prices for one year, because we don't want to lose the potential upside if power prices return to higher levels.

Now, moving into TNMP, the Company's earnings will grow $0.10 to $0.12 over 2010. The main driver of the increase is the implementation of new rates on February 1st of this year. The $0.01 improvement related to AMS, reflects the impact of a rate rider that would recover TNMP's investment in advanced metering systems. If the plan is approved, the rider would take effect on May 1st.

We also project a $0.02 to $0.03 improvement in TNMP's earnings due to weather normalized load growth. However, as with PNM, that gain will be offset by assumed return to normal weather.

The favorable category labeled Other under both PNM and TNMP's key drivers reflects, among other things, the continued tightening of our regulated cost structure to better align expenses with the proposed PNM stipulation, and the newly implemented Texas rates. Combined, our regulated businesses are projected to earn between $0.89 to $0.96, up about 25% from last year.

So clearly, we are making progress on one of our key strategic objectives -- earning our allowed returns at both our regulated utilities. However, I do want to point out that while we project a year-over-year improvement in earnings, PNM will still under-earn in 2011. Assuming the stipulation is approved as filed, PNM should earn a return of equity between 7% to 7.5% on rate base. It's until we fully implement the stipulation that the Company will be on a solid path to earning its allowed return, and returning to a solid investment grade rating.

The story is slightly different at TNMP, where we expect to earn close to our allowed return this year. So, while we're pleased with our progress on the regulated side, we know we still have some work ahead of us, before utilities are earning an appropriate return. However, we're confident that we can get there by continuing our tenacious focus on the regulated side of the business and controlling our costs.

Now, let's take a look at our unregulated businesses in 2011. We expect First Choice Power's 2011 EBITDA to range between $43 million and $53 million, down year-over-year, as margins at First Choice are expected to continue to tighten. This year, we estimate unit margins could decline slightly from 2010.

First Choice also anticipates continuing to reduce its bad debt expense. In 2010, First Choice bad debt expense was 5.2% of revenue, while the Company expects this year's bad debt expense to come in between 4% to 5% of revenue.

First Choice also plans to continue to focus on growing their commercial sales. In 2011, they project a 15% to 20% increase in commercial sales, compared to last year.

At Optim, the expiration of the Twin Oaks contract frees up about 230-megawatts to be sold at current market prices. As most of you know, the expiring contract was priced considerably above the current market, and its expiration will reduce Optim's margin. Although Optim continues to hedge on a rolling 12-month basis, the Company will not hedge its output for longer periods because it doesn't want to lose the potential upside when power prices return to higher levels.

Although we expect the adverse market conditions to continue in 2011, we remain steadfast in our belief that owning low-cost base load generation in ERCOT, coupled with our ownership of First Choice, adds value and reduces earnings volatility.

We saw the natural hedge between First Choice and Optim at work during ERCOT's cold weather snap in early February. While Optim benefited from the extreme cold conditions, First Choice Power was somewhat adversely impacted.

Even with the challenges associated with the current power price environment and the strong competition of the retail market in Texas, we believe consolidated earnings of $0.80 to $0.92 in 2011 is achievable. The regulated businesses will provide stable earnings, while the earnings potential of the unregulated side is preserved.

Now turning to slide 16. PNM Resources five year capital plan is about $1.4 billion over the next five years, and is in sync with the projected capital spend we filed in our forward-looking test year. Capital expenditures on generation, maintenance and nuclear fuel are expected to average about $110 million per year. Except for the addition of the 22-megawatts of renewable solar facilities that were approved by the New Mexico Commission, our plans don't include additional spending on new generation. Construction of our solar facility is well under way and should start to provide earnings beginning in mid-2012.

T&D capital spend is also pretty constant year-over-year. On average, PNM plans to spend about $70 million annually on T&D infrastructure, while TNMP's yearly expenditures are expected to average about $50 million. I do want to point out that our current capital plan excludes any potential environmental investments that could be mandated by the federal or state governments.

Now, turning to cash earnings on slide 17. In 2010, our cash earnings were exceptionally strong, coming in at $417 million. We currently anticipate our 2011 cash earnings will be about $25 million to $50 million below last year's level. That's primarily due to lower tax benefits, increased pension contributions, and reduced earnings at Optim and First Choice. Higher cash earnings from our regulated businesses helped to partially offset these impacts.

Before we move on to the next slide, I'd like to specifically address the bars labeled Tax Benefits and Pension Contribution on the cash earnings walk-across. In 2010, cash earnings included tax benefits of approximately $125 million. These benefits reflected the impact of bonus depreciation, changes in the accounting method for repairs, and other one-time tax benefits. For 2011, we are projecting tax benefits of $75 million to $85 million, down $40 million to $50 million from last year. The year-over-year decline reflects the fact in 2010 we benefited from net operating losses that were carried back to prior years, and are expected to result in a tax refund of $68 million.

As we move forward in 2011, tax benefits that cannot be utilized against current year income will have to be deferred to future years, as we're now in a net operating loss carry-forward position. Because of this, and bonus depreciation for 2011 and 2012, we don't expect to make income tax payments until 2013. Bonus depreciation will still be a significant source of tax benefits generated in 2011, as will the $36 million grant in lieu of investment tax credit on the 22-megawatts of solar generation.

With respect to the anticipated $24 million increase in pension contribution, as you know, there was a significant decline in equity securities held by the pension plans in late 2008 and in early 2009. As a result, PNM and TNMP began making contributions to their pension plans in 2010, and based on current law and estimates of portfolio performance, we anticipate making further contributions to our pension plans. Keep in mind that our pension plans are frozen, and so, our exposure is pretty limited.

Now I'd like to turn to our liquidity and long-term debt. As you can see from the slide, we have strong liquidity available. Furthermore, we have already begun to address the expiration of revolver facilities at PNM Resources and PNM. The current revolvers expired August of 2012, and we intend to have new facilities in place well before their expiration. TNMP's revolver of $75 million was renewed for five years in December of 2010. We have not yet made a determination of what the new revolver capacity's at PNM and PNMR should be. However, they're likely to be smaller than they currently are, given our regulated utility, PNM now has a fuel recovery clause.

Additionally, we expect to term out short-term debt at PNM later this year. We have received authorization from the Commission to issue up to $250 million of long-term debt. Other than the refinancing of our revolvers, there is minimal refinancing risk, and as you can see from the graph on the right, the first long-term issue coming due is in 2014. All in all, we're very comfortable with our current liquidity, and we'll have renewed our revolvers well before their expiration in 2012.

With that, I'll turn it back over to Pat for her concluding remarks.

Thank you, Chuck. We will finish today's presentation with the checklist for 2011. It has a slightly different look than the ones you've seen before. As I started today's call by focusing on our three extra strategic goals, this slide ties outcomes we need in order to be successful in achieving those goals.

Starting with our goal of earning our authorized return on equity in our regulated business, and as I believe Chuck reinforced, these are the earnings power of PNM Resources. We need to achieve successful outcomes in the PNM retail rate case and the FERC transmission case. We also need a fair outcome in the TNMP advanced metering system case that is ongoing. Operationally, we need to continue to serve our customers well, providing strong reliability and power plants that run as efficiently as possible. And finally, we will not let up our focus on cost control in order to meet our financial goals.

Our second strategic goal is maximizing the value of our competitive businesses. Moving forward, First Choice Power needs to continue to grow its commercial customer businesses, and increase its residential customer retention. Optim Energy will remain in cost-control mode and will need to continue to run its generation assets as well as it has done in order to capitalize on the market opportunities that arise. We believe that having both of these businesses really does provide that natural hedge for us in Texas.

Accomplishing those first two goals leads us to achieving the third, becoming fully investment-grade in our credit.

We have made much progress in 2010. Our employees and the communities that we serve have helped us move a great way along that path, and we look forward to more successes in 2011.

That ends our formal presentation. And now we can take questions.

(Operator Instructions)And one moment for our first question. Our first question comes from the line of Anthony Crowdell of Jefferies & Company.

Hi. Good morning. Just a quick question at First Choice. What was the gross margin there for the quarter?

Anthony, it's Pat. Good morning. Brian Hayduk from First Choice is here, and he'll give you a little color.

Sure. Anthony, it's Brian. I don't think we're going to give specific numbers on the quarter. I think what we can do is just give you a sense for what happened for the year on the gross margin perspective. We were down about 11% on unit margins for the year, year-over-year.

Okay. Great, thank you.

Sure.

Thank you. And our next question comes from the line of John Ali of Decade Capital.

Good morning.

Good morning, John.

Hi, John.

Just a couple quick questions. You gave the ROE at New Mexico, 7% to 7.5%. Could you give us a better number on Texas?

On Texas for 2011?

Correct.

Yes, in Texas in 2011 we should be about the 10% to 11% range.

Okay. And you're --

As I mentioned, John, we expect to earn our allowed return in Texas this year.

You wouldn't be over-earning there would you?

No. Maybe a hair but not significantly.

Okay, great. And then could you give us your hedge price at Optim for 2011?

We really don't give out information, we just have a rolling 12-month hedge, so I think you just have to go by the guidance and the sensitivities I gave you, as far as getting some idea of what that impact would be.

Understood. Okay, and could you just maybe split out the EPS you expect from First Choice versus Optim. You gave kind of a consolidate on reg, but --?

Yes, if you look in the Appendix there's a detail of the breakout of each of the businesses, along with EBITDA projections. At First Choice, the EPS range is $0.28 to $0.35, and at Optim our 50% share is minus $0.22 and a minus $0.19, which gives you the range of $0.06 to $0.16.

Got it. And has there been any changes in the amortizations in Optim? Because remember you had this on the contract ones. Is there any changes there with the write-down, or did those just stay as-is?

No, nothing on their side that would cause us any change in that.

Okay, great. Thank you.

And John, Page A-10 in the Appendix has got that guidance on it.

Got it.

Thank you, and our next question comes from the line of Brian Russo of Ladenburg Thalmann.

Hi, good morning.

Good morning, Brian.

Hi, Brian.

Does the ROE at PNM Electric in 2011 of 7% to 7.5%, does that include the PVNG3 contribution, and Firm Wholesale contribution?

It does.

That's a rate base.

That's the rate base ROE. Yes, it does not.

It does not. So could you quantify what the PVNG3 contribution, and Firm Wholesale, is in 2011?

If we go back, and the comments I made is, we expect about $35 million of revenue generated for PV3. So you just have to build that revenue addition to your model, and factor in whatever costs you have to come up with the net income and the earnings.

Okay. Got you.

We don't break out Palo Verde 3. I can just give you the revenue number.

Okay. And what's the rate base that TNMP is earning on in 2011?

It's back here in the Appendix. Let me get it for you.

And if you could break that down maybe between FERC and maybe the Texas distribution?

Well, the rate base in TNMP is all Texas distribution.

Okay.

Because they're controlled by ERCOT. And on page A-20 it's got it all in there. It's about $448 million in Texas.

Okay. So you're going to earn $0.27 to $0.29 on $448 million of rate base?

Yes.

Yes.

Remember, in Texas, the allowed equity ratio is 45%. It used to be 40% equity and 60% debt. That's the way they did the market when they split it up, and then in this past case, we were allowed to change our cap structure to 55/45.

Okay. Got you. And it seems that the 2011 revenue contribution, I guess from the Phase one from the stipulation, it looks like the entire revenue requirement is flowing to the bottom line. Could you just comment on the cost controls or other leverage you guys are pulling to have the entire amount flow down?

Sure. And just a reminder on Texas, the other thing you do see in there is the stranded cost recovery is not in that rate base. There's still stranded cost recovery in Texas. Back on Texas. When you look at New Mexico, a couple things that are different is that we are still very forceful on our cost reduction. There's also an outage difference in 2011. There were two outages last year at San Juan, and there is only one this year at San Juan. Same for Four Corners. So that, and just continued focus on cost control and scrutinizing every penny, watching our hiring, holding costs flat, that's what helps it drop to the bottom line.

Just an addition to that, Brian, we had less Pension and Medical expenses. We also had some changes in our Healthcare program that generated some additional savings. You've got to factor in some of the load increases that Pat had talked about. And then, we have lower interest costs associated with the fact that we have less in renewable that we're building, that we probably talked to you about in April of last year. So If you go back and think about the cost type initiatives that I'm referring to, basically we're adjusting our cost structure to make sure we live within our means, and assure that we line up to potential stipulation that we're trying to settle.

So we should see that ROE continue to trend higher in 2012 and 2013 with the second phase of the revenue increase, and then plus that additional rider? Is that safe to say?

Yes. And that's -- again, the message is loud and clear that we're working on a pathway to get to our allowed return, and so we have that focus and you'll continue, assuming we get the stipulation approved, to see that continue to increase in ROE.

Would you get to your allowed ROE in 2013?

We would. Assuming the stipulation is approved as filed, it would allow us to earn our ROE in 2013.

Okay. And remind me, what's the test year again in the PNM electric rate case?

June 30, 2010.

June 30, 2010.

Right.

June 30, yes.

Then the capital additions rider allows us to catch that capital up. That's why that $20 million is so important.

Got you. And then just lastly, any idea what the favorable weather in the first quarter 2011 -- the impact on the earnings outlook for PNM Electric and TNMP?

Well, we haven't released any first-quarter results. As soon as we get the heating degree days, we'll put them on the website for you. But it was really cold here, and it was really cold in Texas, I can promise you that.

Got you. Thank you very much.

You're welcome.

Thank you. And our next question comes from the line of Ali Agha of SunTrust.

Thank you. Good morning.

Good morning, Ali.

Good morning. I wanted to just be clear. The 2011 contribution from PNM Electric, does that assume rates go into effect May 15? I want to be clear, this interim rate increase -- is that mandatory once you file, or is it up to the Commission to approve it?

It does assume that rates go into effect May 15. Interim rates are not mandatory. We will file in mid-March for the interim rates, asking for them to go into effect on May 15. But it is totally up to the Commission whether or not they would let us put in interim rates. I will say, though, that they do understand that in the stipulation that the compromises we made were conditioned on the fact that rates would go into effect on May 15.

Okay. So if they don't, then that monthly number I think you gave us kind of kicks in.

Yes, we put a sensitivity in there on rates for PNM that it's $0.02 to $0.03 a month. Obviously the shoulder months are a little less. If it's a summer month, it's $0.03.

Right. And separately, the write-off at Optim, Chuck. So what kind of depreciation expense does that save you? And obviously that's factored into your still lower number for Optim in 2011?

No, has no impact, because this is PNM Resources' write-down. So Optim's depreciation remains as is. And that's why you see the continued ongoing losses that we have recorded in the earnings projections for this year.

I see. Okay.

There's no change in Optim's financial statements. It's really just a reflection of our write-down of our investment.

Okay. In the past, Pat, you folks have been telling us that you're taking a close, hard look at those competitive businesses, but it makes sense to stay in them. Does it make sense for them to operate as two separate entities? From the commentary today, I did not hear anything along a conclusion being reached on that front. Could you just tell us where you are in your thinking? Are these still Core businesses for you, and you're comfortable running them as two separate entities?

Well, let me go back to -- our main focus is our unyielding efforts to earn our allowed return on the regulated business, so that's where we're spending our time and effort. But we still see that there's value in the competitive businesses, and the natural hedge as I pointed out in my comments in February clearly showed some value in having both those businesses. We continue to look and think about strategic alternatives of the business to try to find long-term ways to maximize that value, but currently our intense focus will remain on the regulated business, and preserve the value of the earnings power of the unregulated as we go forward and think about the business.

So the impairment that you took, Chuck, we should not see that as a signal of what you may or may not be thinking about strategically on that business?

The impairment is totally an accounting-related thing that you have to do, and it doesn't signal any feeling about our business. It just signals that the accountants make us do things once in a while.

Right, got it. Final question, I want to be sure I heard this correctly. So assuming the stipulation does go through, you would still see yourselves slightly under-earning at PNM Electric in 2012, and it's really in 2013 that you would see reaching the authorized level? Did I hear that right? Or how should we think about 2012 improvement versus 2011?

You heard that correctly. Obviously, it continues to go up in 2012, but because we don't totally catch up with capital until 2013, there's still a slight lag.

Got it. Thank you.

Thank you. And our next question comes from the line of Ted Heyn of Catapult Capital.

Good morning, and I apologize because there was a couple of things going on, so I got distracted for a second. And I think these have been kind of touched on. So, just to go back -- for ROE at PNM, the thought is 7% to 7.5% in 2011, getting close to the allowed in 2012, and by 2013 being able to hit the allowed ROE. Is that right?

That's correct, that's the rate-based ROE.

And the ROE that was stipulated to was like 10.25%, is that right?

Yes, sir.

That's right.

Okay. And then I guess people have been kind of talking about Optim, as well. Is there -- I guess the frustrating thing with that -- obviously there's optional value, but it's a non-recourse sub that has $0.15 to $0.20 of drag on your consolidated earnings. Is there any thought that getting rid of that would allow you to get acceleration in your consolidated earnings at a kind of more rapid pace, as opposed to kind of keeping it?

Ted, as we continue to talk about the competitive business, we look at the net contribution of both those businesses as a positive for PNM Resources, and some ability to preserve future earnings power as we think about the ERCOT market recovering over time. That's the way we look at it. And I understand the drag at Optim, but it's also very positive at First Choice.

What I mentioned in February is a great example. Although we're not prepared to release numbers, we clearly saw the value of Optim benefiting from higher energy prices, while First Choice had to purchase for some of the usage swings that occurred during their ability to buy power in the market at higher prices. So the net effect of that certainly reflected the value of having both those businesses.

Again, our really earnings power of the business, and our continued focus, is on the regulated side of the business and getting PNM Resources back to its allowed return. We've been able to accomplish that at TNMP, and that's really the intense focus that we think will get the earnings power that we need for the business in the next few years.

Got you. And then, I was -- quickly to go back to the ROE question, when you guys talk about earning your allowed ROE, is that -- are you talking about earning on the 2011 rate base that you filed for, or on the prospective rate base that you will have in 2013?

The current rate base that we have, the $1.8 million when you look at PNM -- $1.8 billion. But it's rate base return.

So it's a rate base on the allowed rate base in the stipulation, not necessarily what the rate base would be prospectively in 2013?

Correct. But remember, in 2013 you pick up that capital additions rider, which trues up to that capital. Then remember, part of the stipulation is that we have a workshop on future test year, and that the parties won't oppose a future test year filing the next time around.

Got you. So the capital rider should true you up where you're kind of earning an allowed ROE on your current rate base as well?

Correct.

Yes.

Okay. All right. Thanks a lot.

You're welcome, Ted.

Thank you. Our next question comes from the line of Mike Bolte of Wells Fargo.

Good morning.

Good morning, Mike.

I was just wondering on the outage costs -- or the outage schedule at PNM Electric -- I was wondering in 2012, what does the outage schedule look like? I'm just really trying to get at -- what should the outage cost go back to -- more like a 2010 level?

If you look back in the Appendix, here I'm looking for it, the outage assumptions are in there. In 2012, we end up with two at San Juan versus -- which is more like 2010. We have one at Four Corners. And then Palo Verde's got outages at each of their units. So you'll see more outage cost at Palo Verde. If you look at Page A-12, it's got the details with the data and the dates, so you can take a look at that.

Okay, all right. Thank you very much.

You're welcome, Mike.

Our next question comes from the line of Ashar Khan of Visium.

All my questions have been answered. Just wanted to check if -- you had mentioned that the stipulation would help earnings, if I remember, by $0.34 in 2012. Is that forecast still correct, as we stand here?

$0.34 in 2012?

Incremental, if I remember.

Yes, we do have a -- if you look in the Appendix, we have a slide that indicates -- someone might tell me what Appendix number that is. A-19. So in 2012, we reflect what we look to be the incremental EPS of $0.56.

That's total.

Total.

It's $0.34 in 2012.

Okay. I just -- thank you.

You're welcome. Yes, that adds the $0.23 and the $0.34 together with a little bit of rounding, so --

Thank you. Our next question comes from the line of Chris Shelton of Millennium Partners.

Hi, good morning, guys.

Good morning, Chris.

Good morning.

Quick First Choice question. I wanted to see just on the bad debt, you guys have obviously worked out a lot of the balances from the sort of legacy customer bit. Is this level somewhere that we should think of as nearing a bottom, and maybe it starts leveling off, and going up with new customer growth? Or is this still an area that you guys can improve on, do you think?

Let Brian answer that for you.

Hi, Chris, it's Brian. I think you'll see our 2011 assumptions -- it's Appendix A-14 -- a 4% to 5% range, $20 million to $25 million, which is a modest decrease, and it's -- the question in terms of what the floor is, it certainly is difficult to tell. Historically, this business has been down as low as 3%, 2.5%. It really depends on what, sort of, the market dynamics are with customers, and rules, and what the split on our portfolio is with Residential and Commercial, because Commercial has a lower percent of bad debt. So I think there's certainly still room to grow. It's not going to be at the pace that we've seen over the last couple years, though.

Okay. But -- and so I guess you've worked off a lot of your -- the customers that had caused the bad debt to increase so much, I guess is the take-away?

I think that's fair to say. Always more work to do, but a bulk of that has been addressed.

Okay. Thank you.

You're welcome, Chris.

Thank you. (Operator Instructions) And our next question is a follow-up from John Ali from Decade Capital.

Hi, guys, my follow-up was actually already answered. Thank you.

Okay, John.

You're welcome, John.

Thank you. And I see no further questions in the queue at this time. I'd like to turn the call back to our speakers for any further remarks.

Thank you all for joining us on this earnings call. We look forward to our first quarter earnings call in 2011, and continued success on our regulatory fronts. We'll keep you all posted as we have news. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect. Everyone have a great day.