PNM Resources, Inc. Q1 2009 Earnings Call Transcript

| About: PNM Resources, (PNM)

PNM Resources, Inc. (NYSE:PNM)

Q1 2009 Earnings Call Transcript

May 1, 2009 9:00 am ET


Gina Jacobi – Director, IR

Jeff Sterba – Chairman and CEO

Pat Vincent-Collawn – President and COO

Chuck Eldred – EVP and CFO


Paul Fremont – Jefferies

Brian Russo – Ladenburg Thalmann


Good day, and welcome to the PNM Resources conference call. Today’s call is being recorded. At this time, I would like to turn the conference over to your host, Ms. Gina Jacobi. Please go ahead, ma’am.

Gina Jacobi

Thank you everyone for joining us this morning for a discussion of the company’s first 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

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 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.

Jeff Sterba

Thanks Gina, and welcome, good morning. Thanks for joining us today. In spite of the challenging economic conditions that all of us face, not just our country, but the world, we frankly had a very solid quarter across virtually all of the areas of operations, but particularly at our New Mexico utility, PNM, and at First Choice Power.

Starting on slide four of the presentation, you can see that our ongoing earnings were $0.10 per share, this is compared to $0.05 per share for the same quarter last year, and keep in mind that we only had the gas operations this year for a little less than half of the period versus obviously all of the period for 2008.

As we talked before, we had faced a challenging year in 2008 and we took a number of difficult strategic actions that really are beginning to bear fruit. And I think the focus on our operational efficiency and execution is allowing us to hit the numbers in the face of lower sales in both of our New Mexico and Texas markets.

Progress on critical regulatory, strategic and financial initiatives have helped us position continued financial performance improvement as we go through this year, and head into 2010, because as you certainly know, in the regulated world it takes time for actions to translate into particularly when the regulatory actions to translate into enhanced revenues.

Moving on to slide five, we have delineated a number of the achievements that will help drive operations as we go forward. Just to touch on them quickly, as you know we completed the gas sale and it went very smoothly. I was very pleased as was the buyer and how smoothly the transaction went through, and there are still a few transitional elements that are still going on in, but we have been very pleased with that process. Obviously, the cash that was generated from the sale was largely used to buy down debt.

As we have talked before, we have reached an unopposed stipulation in the PNM rate case, which is now – which is being heard before the commission and is pending before the commission for decision. Pat will touch on that in a few moments as well as passage of some very important legislation for us this year that will enable us to use a future test year, and help mitigate the regulatory lag that has been such a chronic challenge in New Mexico.

I just want to reflect that we have now had two major pieces of legislation passed in the last two years with no negative legislation frankly passed that would impair us in New Mexico. Last year, it was the legislation that directed the commission to provide us recovery of all disincentives plus an incentive greater than the value of building new generation for energy efficiency, and this year on the future test year.

Relative to TNMP, we accomplished a couple of important financing efforts; one was to put in place about $350 million of long-term debt. We also entered into a two-year $75 million revolver. Between these two items that secures sufficient liquidity for TNMP for the next two years, and we have also have amended the TNMP rate case to enable full recovery of the higher interest expense associated with that long-term debt as well as the timely recovery of the Hurricane Ike costs.

On the unregulated side, as you know we have project with NRG Cedar Bayou 4 in the Houston zone, which has already synchronized to the grid in start-up mode with testing, and we believe it is clearly on schedule to be turned over for operations in June, and it is slightly under-running its budget, and we will talk about in a little more in detail. We are considerably improved performance at First Choice Power.

In fact before I go into talking a little bit more about First Choice Power, let me have Pat talk about our regulated operations.

Pat Vincent-Collawn

Thank you, Jeff, and good morning everyone. I am on slide seven right now, and as just mentioned we have spent significant amount of time concentrating on achieving appropriate regulatory treatment at PNM, and we're beginning to see the fruits of those labors.

We reached an unopposed stipulation regarding our rate case. That stipulation calls for $77.3 million increase to base rate that would be implemented in two phases starting this year in July in 2009. It also allows us to bring in some of the merchant assets, Luna, Lordsburg, Valentia, and an ownership interest in PV2 [ph] in the rate base.

Another very important component of the stipulation is a more conventional fuel and purchase power clause, one that is not capped and does not set a floor for power plant performance. As Jeff mentioned, the commission has had public hearings, public common hearings, and their hearings, and we expect a ruling on the stipulation later this month.

Jeff also mentioned Senate Bill 477, which is the future test year legislation. This is a very progressive piece of legislation passed by the State of New Mexico and signed into law by the Governor. The bill actually goes into effect on July 1, and we are currently working processes internally to prepare for a future test year filing.

We also do continue to be successful in streamlining our capital deployment, in managing our cost as Jeff said. San Juan has completed its environmental upgrade. The outrage on unit two was finished and that was the last of our four environmental upgrades, and Palo Verde has been recognized by the NRC for the work that they have done, and they have been removed off of the watch list.

We also continue to not lose sight of our T&D business. Public service of New Mexico has long had a history of having top quartile reliability, and it achieved that mark again last year, and is on track this quarter to achieve that again.

If you turn to side eight, and spend a moment also on TNMP. Our focus there is also on achieving appropriate regulatory return. As Jeff mentioned, we amended our 2008, August 2008 filings to put in the higher interest costs for refinancing, and the restoration cost from Hurricane Ike. I will point you to slide A-3 in the appendix, and there is a slide in there that provides the details of the amended case along with the current procedural hearing that the ALJ approved yesterday.

We are working with parties to reach a settlement in that case, however, if we cannot we will be prepared to go to hearing, which will be June 16th through the 26th. We have also so far had a good legislative season over in Texas. The Governor signed a bill that permits electric utilities to obtain timely recovery of system restoration cost without having to file a general rate case. So that helps us in this current rate case, and in future rate cases in terms of recovering any kind of system restoration costs. That bill has already went into law on April 16, when the governor signed the bill.

Similar to PNM, we continue to streamline our capital deployment, focus on the fundamentals and manage costs. We are closely monitoring our capital budgets to see if there are any reductions we can take due to reduced meter sets and other slowdowns. We are also piloting a 10,000 meter, smart-meter pilot in our TNMP territory to continue to focus on the technology, and to see what kind of customer benefits we can get out of that pilot. And TNMP is also on track to keep its top quartile reliability.

Let me turn now to page 9 and spend a moment on talking about the current economy. The current economy has added a layer of complexity and uncertainty to our business. So I wanted to spend this time updating you on the economic conditions in both New Mexico and Texas. And if you can see from the upper left hand corner of your slide, the unemployment rates in New Mexico and Texas are significantly below the national average. The unemployment rate in Texas is about two points below the national average and almost 3 points below the national average in New Mexico.

We hope that it stays that way in New Mexico and Texas, tend to not run up as fast as the rest of the economy or go down as significantly in recession. If you look at the bottom left-hand corner of that slide, you can also see that the employment growth rate or in this case the crime rates in New Mexico and Texas are also significantly better than the economy as a whole.

And while modest, we have continued to see customer growth. If you look at the upper right hand corner of slide nine, you can see that quarter one of last year to quarter one of this year, we have seen almost a 1% growth in customers in New Mexico, and about 1.2% growth in customers in Texas, which is not much of a decrease from our historical growth rate of 2% in Texas.

Those of you that did have a chance to read our news release this morning will notice that we have seen some decrease in our load, and if you look at it at the bottom of slide nine, you can see that we are seeing a decrease in our use per customer. If you go to the last column, and focus on the leap year adjusted, you can see that our residential is down about 3.2% and our commercial is down about 5.8% in Texas.

Our industrial load overall is down about 7.2%, but half of that was expected. We had one company who had notified us last year that they were shutting down operations. This is well in advance of the recession, and part of this is Intel. Intel was in the midst of retuning its fab. In February, they announced that they were spending $7 billion in the United States, $2.5 billion of that is in their facility at Rio Rancho. So they are retuning their fab to make their latest generation of chips.

In TNMP, we are seeing about a 5.2% decline in residential use per customer and a 3% commercial decrease when you look at it on a leap year adjusted base. We believe what is going on here is a matter of consumer confidence, and even though our unemployment rates here are good, customers are just keeping that thermostat a little warmer, and trying to conserve, while the economy is in the shape that it is in.

Despite that and Chuck will talk about this later, we're still on track with our earnings, given our cost reduction efforts. Another piece of the economy, as you all know, is the stimulus. We're starting to see some of the stimulus funds that go to individuals trickle into New Mexico and Texas, and on the opportunities for the company, we have a team together that is looking at various packages from the stimulus, specifically we are looking at funds generated by loan guarantees and grants, we could possibly use to upgrade our transmission system.

We're looking at deploying additional smart meters. We are planning for additional wind and solar development, and we're looking to enhance our specific energy efficiency programs. No project has been launched yet, and we have not applied for funds, but those of the general areas in which we are looking.

With that I will turn it back over to Jeff for some discussion on our unregulated operations.

Jeff Sterba

Thanks, Pat. Let me spend a minute on First Choice Power and flip to slide 11, if you will, Brian Hayduk, who joined us at the end of December last year and his team has been hard at work. Redirecting FCP to some extent but really focusing on the things that can be done to improve the execution of the marketing strategy, and particularly focused on bad debt.

The specific areas that they focused on and I think having good success in involved first increasing the number of our customers, the percent of our customers that are in term contracts, and not on month-to-month transactions. They are now up to about 75% of our residential customers under our term contracts, and they have had a lot of success taking some of those contracts that were entered into in the summer at high prices, and modifying them such that they are extended, and can have more competitive terms. So we don't aggravate one of the situations that we have with bad debt, which is people on high contracts, (inaudible) and leave you hanging with a bill.

The second major initiative has been to obviously focus, continue to focus on customer retention, because it is a lot less costly to keep a customer than it is to try to attract a new one, and certainly that is price based, but it is also very heavily affected by service and service quality.

Our third area has been to grow the commercial segment, and they have had good success in that. In fact in the first quarter of 2009, the signed margin, if you will, is up about almost double of what it was in the same quarter in 2008. Probably the biggest area though that we have been concerned about has been on the bad debt side. And it remains a concern, it remains a key area of focus, and there are a number of things that our folks have done to address it, but frankly it isn't going to be adequately addressed until the commission makes some real changes that keep the reps skipping without payment of bills from being the kind of problem that it is today.

You'll see that the bad debt as a percent of revenue is in fact higher in the first quarter. That is largely because revenues are down due to lower energy prices. But even when you normalize that out, because that was bad debt that was largely incurred during higher energy price periods, it is still too high, and continued effort will go forward on that. But they had a solid year, and on the basis of that, while we feel very good about what they've done, it has largely been driven by increased margins.

We are going to at this point indicate that we believe they will still be within the guidance range that we had provided before of $20 million to $35 million. I'm sure there are things that could drive it up, but it is obviously in this market there are things that can drive it down to. So we're comfortable staying in the guidance that we are provided so far.

Moving briefly over to Optim on page 12, obviously low-energy prices are not Optim’s favorite things to see, but in spite of really low prices in the Texas marketplace, they are continuing to hit their numbers, and are on track to hit the $55 million to $70 million of EBITDA for the year. They have had very good performance out of all the operating units, and as I mentioned to you before, Cedar Bayou 4 is coming online in fine shape, and because of its efficiency and being in the Houston market, it will certainly add value to Optim this summer.

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

Chuck Eldred

Thanks, Jeff, and good morning everyone. I am going to begin on slide 14, as mentioned in this morning's news release, we are in $0.10 per share, which is up from $0.05 from last year's results, but keep in mind the results reflect a 3-month contribution from the gas business, which was sold on January 30th of this year. So 2009 reflects only one month of contribution from the gas business.

As you can see without the gas business, ongoing earnings per share increased $0.22 from last year, largely due to the improved performance of PNM electric. We are extremely pleased with our performance this quarter, because of the sale of the gas company, we are expected to shift in quarterly earnings distribution, and have been anticipating the relatively weak first quarter.

However, continued focus on the regulatory activities, efforts to delever the business itself, our focus on process improvement and cost management at the utilities, coupled with better-than-expected performance at First Choice Power drove our favorable results.

Our goal is to keep O&M as flat as possible year-over-year, at PNM electric, O&M costs were actually down 1% quarter-over-quarter despite increased pension, medical and labor costs.

Clearly, our initiatives are delivering the results and we expect them to be sustainable in the future. Now turning to the individual business units, on slide 15, this lists the major drivers of our quarter-over-quarter improvement in our regulated businesses, PNM electric and TNMP.

Starting with PNM, last year the utility lost $0.19, while this year's significant improvement brought PNM to breakeven. The implementation of the new base rates and the fuel and power purchase costs adjustment clause added $0.08 to earnings per share, lower fuel and purchase power prices increased earnings by $0.20 per share. This $0.20 improvement primarily reflects the cost of energy that we were not able to recover last year.

If you recall, the fuel adjustment costs did not go into effect until the second quarter, and last year during the first quarter we had high energy costs, which were driven by multiple planned outages that caused us 20% more in purchasing power in the market, and purchase power prices were about 40% to 50% higher.

Offsetting the favorable drivers were a 3.7% decrease in load, which lowered earnings $0.04, milder weather, which reduced earnings by another $0.02, and higher interest expense and lower pension income.

At TNMP, earnings were down $0.03 per share, compared with last year due to the 3% load decrease, and higher pension, medical and other costs. I'm going to turn to slide 16, and walk you through the unregulated operations.

First Choice Power generated ongoing EBITDA of $12 million in the quarter, which is up $4.6 million last year; a major driver of the improved performance was an increase in gross margins. Realized margins were up $22 million, largely due to lower purchase power cost. This year purchase power prices averaged about $62 per megawatt hour compared with 2008 prices of about $85 per megawatt hour.

Quarter-over-quarter, we did see a reduction in sales volumes due to lower average customer usage and a 4% decrease in customer account. However, I do want to reiterate that we do expect margins to tighten over the next couple of quarters as rates become more aligned with market costs. However, we built this into our 2009 outlook.

Quarter-over-quarter, bad debt expense was up $10.7 million this year, reflecting the current economic environment and the impact of last year’s higher power prices. However, as Jeff mentioned earlier, First Choice is aggressively addressing the bad debt issue, and has undertaken a number of initiatives designed to reduce default rates, and target new customers who are more likely to demonstrate good payment behavior.

First Choice marketing costs were also up as the company continues to implement its targeted marketing strategy. At the bottom of this slide, Optim Energy generated EBITDA of $8.5 million, which is down from last year's results of $15.1 million. One major reason for the decrease in EBITDA was a planned outrage at Twin Oaks, which reduced margins by $2 million. Another factor affecting Optim EBITDA was lower power prices, which also beneficial to First Choice were detrimental to Optim Energy.

The depressed prices reduced the company's EBITDA by $1.5 million; however, the effect was mitigated by Optim Energy’s hedge positions and its fixed contracts.

O&M increased $3.2 million from last year as Optim completed implementation of its organizational and system plans. Now turning to slide 17, I want to talk about our outlook for 2009. Because we have not yet received the commission’s rulings on a stipulation, we are not changing our outlook for 2009. For those of you who want to update your projections for the year, we provided information on the slide, and in the appendix regarding our rate case filings, as well as the stipulation that was heard by the public service commission in early April.

I will review how both PNM and TNMP have experienced a decline in load as have many utilities in the nation. As a result, we have revised our load forecast for the year, and have included a 3.5% decline. If you recall the outlook we had provided in February, it assumed a load growth of negative 0.7% to a positive 1.3%. However, even with the low decline we are maintaining our 2009 EPS outlook of $0.25 to $0.40. Keep in mind this range assumes no rate relief at PNM or TNMP both of which are pending cases this year.

Outlooks for First Choice Power and Optim Energy also remain unchanged. We still expect First Choice Power to generate EBITDA of between $20 million to $35 million, and Optim energy to generate EBITDA of $55 million to $70 million and that is at 100%.

I do want to point out that we face a number of risks that could potentially impact our performance for the year, the biggest is the economy. We have reduced our load forecast for our original projection based on what we saw in Q1. At this point, we feel comfortable to achieve our target. However, it is still early in the year to project the full impact of the economy on all our service territories.

As a result, we are watching our load closely and continuing to manage our O&M costs for possible offsets. The other major factor that could possibly affect our earnings for the year is performance at First Choice Power. The company is off to a good start and management's initiatives are beginning to show some success. First-quarter performance was also better than expected; however, as Jeff mentioned First Choice is a work in progress, but we are seeing clear results of restoring profitability this year.

Now I would like to turn to the next slide 18, in an effort to provide more transparency and insight into our company's performance, we are enhancing our guidance practices and will be providing annual cash earnings outlook along with our traditional EPS guidance. I want to quickly walk you through the calculations of our cash earnings measure.

The metric starts with net cash flows from operating activities, excluding changes in working capital. All these amounts are straight off the statement of cash flows. We also make a few adjustments to better reflect our true operating cash flow. First of all, we had the principal paid to us on the Palo Verde [ph] as this reflects a return of a portion of Palo Verde lease payments as a result of us purchasing debt some years ago.

We also had the payment received on the Palo Verde 3 [ph]. Last year we received a total of $89 million from a total arrangement of $71 million of which was a prepayment. Both of these items are itemized on the cash flow statement, but reside below net cash flow from operating activities.

Lastly, we at PNM Resources share of Optim Energy’s cash earnings to ensure the (inaudible) from all business activities.

Now turning to the next page, let me give you a walk through cash earnings outlook for 2009. Starting with last year’s cash earnings of $267 million, as a mentioned $71 million of last year's cash earnings were associated with the prepayment received on our Palo Verde total agreement and was one-time in nature.

Excluding the prepayment, we generated a total of $196 million of cash earnings in 2008. This year, we expect to generate a total of $250 million to $270 million of cash earnings. If you go from left to right, I will walk you through the drivers of our growth.

The sale of PNM gas was reduced to cash earnings by $26 million this year. Last year the business generated $35 million. Prior to its sale in January, it generated $9 million of cash earnings.

The improved performance at First Choice Power is expected to increase cash earnings by $50 million to $58 million. Last year, First Choice Power had negative cash earnings of $39 million, while this year we project the company will generate cash earnings in the range of $11 million to $19 million. Keep in mind that this is not an EBITDA metric and cash earnings are net of interest and taxes.

Bonus depreciation is expected to generate $18 to $22 in cash earnings and higher margins at our utilities, and another $8 million to $14 million. Note the increase in cash earnings resulting from utility margins includes a 3.5% decline in load and no incremental rate relief. Last, Optim Energy is expected to provide $2 million to $8 million more in cash earnings year-over-year.

As a result of the first quarter, our cash earnings were on target, and as we go through the year we will continue to update your regarding the progress in our outlook.

Now I would like to turn it back over to Jeff for his concluding remarks.

Jeff Sterba

Thanks, Chuck. If you go to slide 21, you'll see the checklist, which we have used over to the last set of years, as an annual check on the things that you can hold us accountable for, and you can see that in each of the items that at least through the first quarter we are making good progress. Pat talked about the status of the two rate cases and I have talked about FCP. We believe it is very much on track.

Optim Energy, even in spite of the tough market is on track. On the capital deployment and managing costs, obviously this is a major element of focus starting with our ABI [ph] initiative, where we drove $35 million out of our operating costs, but the capital side as Pat mentioned is also still under high scrutiny.

We returned about $350 million out of the 5-year. Frankly, we will return some more both out of this year and next year, but we're very cognizant of those capital costs that will be affected by the stimulus and their investment can be improved by the stimulus provisions both the bonus depreciation as well as in ITC and the like.

Through the process, one of the things we wanted to make sure is that we don't let our service quality and our reliability slip. I think the folks are doing a good job in maintaining top quartile reliability, and a very strong focus on service quality. The baseload units are doing well, obviously the removal of Palo Verde from the multiple degraded cornerstone was a significant step, but we are seeing very good performance out of San Juan as it comes out of this very extended environmental related outages and the environmental performance of these units has been exceptionally strong.

All of this helps improve our financial performance and obviously our credit metrics. So in summary, we are pleased with the first quarter, but we also know that we got a lot of work ahead of us to continue that path towards restoring the financial performance of the company to where it should be.

With that operator, we will be happy to move into questions.

Question-and-Answer Session


Thank you. (Operator instructions) And we will take our first question from Paul Fremont with Jefferies.

Paul Fremont – Jefferies

Thank you very much. I guess the first question would be in terms of First Choice gross margin, what was the gross margin first-quarter in ‘09 and what was it in first-quarter of 2008?

Jeff Sterba

Hi Paul. Welcome back by the way. Hope you're feeling well and have recovered well from your accident.

Paul Fremont – Jefferies

Thank you very much.

Jeff Sterba

Yes, we know that it was pretty serious, but glad to hear your voice again. You know, we've certainly expressed that we've received higher margins during the first quarter that carried from last year with higher energy prices. We are reluctant to give out margin information first on sensitivities, given the market conditions within Texas right now. But as I mentioned, going forward we expect the margins to return to more traditional levels, which put us around a low to mid $20 per megawatt hour. And first quarter was obviously significantly higher but again we're factoring in our projections are more traditional margin returning over the year into that lower range.

Paul Fremont – Jefferies

Okay, and will that debt expense be also part of why the first-quarter is unlikely to be replicated in the remaining three quarters of the year, is that something that potentially reduces the other quarters?

Jeff Sterba

No, in fact we expect to see that debt expense continue to decline Paul. We're still having roll off of bad debt that was associated with flare-up in energy prices, and so the higher quantities we're still working through, but we do expect to see bad debt come down. Our concern is as a percentage of revenue it’s still going to stay too high compared to where it needs to be, and there are only so many things, a lot of which we've got in place today that we can take actions, we can take to help mitigate that, and so we are obviously doing that in terms of the kind of customers that we are cultivating, et cetera.

But some of this piece really is going to have to take a change on the regulatory side. Because of this pattern of a certain group of customers that are doing (inaudible) in a way in which they are leaving you with two months of bad debt, and the entity picking it up has no idea what they are picking up. So, in fact the commission in Texas has started a process to investigate two of the – a couple of the alternatives, and I think look favorably to it. We don't expect to see results of that affect performance during the course of 2010. So we expect that debt with start, will continue to trend down, but it's going to stay too high for our liking.

Paul Fremont – Jefferies

And the last question is just a point of clarification. The annual guidance this year includes the – it is an ongoing contribution, which is your share of the PNM gas.

Jeff Sterba

Yes, that's right Paul.

Paul Fremont – Jefferies

Okay, thank you.


(Operator instructions) We will take our next question from Brian Russo with Ladenburg Thalmann.

Brian Russo – Ladenburg Thalmann

Good morning.

Jeff Sterba

Good morning.

Chuck Eldred

Hi Brian.

Brian Russo – Ladenburg Thalmann

I'm sorry if I missed this earlier, but did the customer count increase or decrease at First Choice Power in the first quarter?

Jeff Sterba

The customer count slightly decreased in the first-quarter.

Brian Russo – Ladenburg Thalmann

Okay, and also in terms of the Optim stuff, can you just remind us of the contract terms you have on the assets, the generating assets?

Jeff Sterba

Yes, the primary contract is a lay-off contract that runs through September of 2010, and that's on Twin Oaks, and it is for 75% of the capacity of Twin Oaks, and that rolls off at that point. We today take 25% and then there is no real contract on power out of the other units. There are hedges in place obviously, but.

Brian Russo – Ladenburg Thalmann

Okay. What's the hedge profile like on the other assets?

Jeff Sterba

We are about 50%. I mean one of the things that we do believe is the gas is bottoming out, and a lot of this obviously is tied to the economy. So we're careful about hedging too much in a period of time when the economy is in recession mode it is today. We think that market prices will move up as the economy moves up. So, we're careful about hedging too much long-term, even out 9, 12 months at this stage because of that but we're carrying about 50% hedge.

Brian Russo – Ladenburg Thalmann

Okay, and with the recent step on the PNM electric case, what type of ROE do you think you guys can earn, say you know in 2010?

Pat Vincent-Collawn

Brian it is Pat. The stipulation had a $1.5 billion rate base with a 10.5% ROE, and obviously the next case that we file will be a future cash share, which virtually is a very progressive, which can virtually eliminate regulatory lags.

Brian Russo – Ladenburg Thalmann

Right, so we should see, maybe a couple of 100 basis point delta between the allowed and the actual due to the regulatory lag?

Pat Vincent-Collawn

Yes, absolutely.

Brian Russo – Ladenburg Thalmann

When do you expect to file your next rate case?

Pat Vincent-Collawn

We’re going wait and see when we get the outcome of this one, which should be sometime this month, and then will go ahead and make that decision.

Brian Russo – Ladenburg Thalmann

Sure, and in terms of your pursuit to get back to investment grade, are we going to have to see another rate case and see that forward test year to alleviate the regulatory lag, you know, before the rating agencies would really consider bringing guys backup to investment grade?

Jeff Sterba

Brian, we have learnt not to speak for rating agencies at all, but you know we have a tendency to think that we’re going to have to show numbers for a period before they will take the action, but we certainly expect as we said before as we move into 2011, which does mean in all probability another rate case coming into effect in 2011. Because remember that under the stipulation we have signed the next rate case can’t go into effect before March of 2011.

Pat Vincent-Collawn

March 31st.

Jeff Sterba

March 31st or really April 1st that it's really going to be in that window.

Chuck Eldred

Yes Brian, this is Chuck. Obviously, they look at it very favorably that we're working to take all any initiatives necessary to restore the investment grade credit of the utility, and then they take each decision by the commission. The more recent one of the stipulation is critical to their outlook towards our regulatory success. So we just take it one decision at a time and continue to look to pursue a strategy to get us back to investment grade. I do want to add one more comment on the earlier question regarding some of the contracts, if you recall with Lyondell, we do have a steam [ph] contract with Lyondell, which gives us some additional, and they continue to use that, even despite some of the economic conditions and concerns with their operation, but that particular facility is very solid within their operations. Just keep that in mind and then we have excess power on that too that gets hold in the ancillary market in Texas.

Brian Russo – Ladenburg Thalmann

Okay, and then just lastly assuming you guys get back to investment grade, are there any step downs on your debt or do you have any ability to refinance or call some of the high cost debt?

Chuck Eldred

There are no step downs in regards to the existing debt, PNM utility we issued 795 last year, and then we at the holding company the issuance there, we have bought back at a discount about $157 million, and then the TNMP issuance that we did earlier this year does have a (inaudible) provision, but no call option.

Brian Russo – Ladenburg Thalmann

Okay, thank you very much.


And there are no further questions. Thank you. At this time, I'd like to turn the conference back over to Jeff Sterba for any additional or closing comments.

Jeff Sterba

Well again, thank you very much for joining us. If you have any follow up questions, feel free to call Gina or any of our folks with them, and we look forward to talking with you at the next quarter, and I hope that it is as good as this one. Thank you.

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