Gina Jacobi - Director IR Pat Collawn - President, COO, PNM Resources Chuck Eldred - CFO, EVP

Lasan Johon - RBC Capital Brian Russo - Ladenburg Thalmann Paul Fremont - Jefferies Mike Bolte - Wells Fargo Nathan Judge - Atlantic Equities [Jose Gaza] - Gabelli & Company [Edward Payne - Catapult] John Ali - Decade Capital

Thank you, everyone, for joining us this morning for a discussion of the company's second quarter 2010 earnings. Please note that the presentation and accompanying materials for this conference call and supporting documents are available on PNM Resources' website at www.pnmresources.com.

Joining me today are PNM Resources' CEO, Pat Collawn, and Chuck Eldred, our Chief Financial Officer, as well as several members of our executive management team. Before I turn the call over to Pat, I need to remind you that some of the information provided this morning should be considered forward-looking statement pursuant to the Private Securities Litigation Reform Act of 1995.

We caution you that all of the forward-looking statements are based upon current expectations and estimates and that PNM Resources assumes no obligation to update the information. For a detailed discussion of factors affecting PNM Resources' results, please refer to our current and future annual reports on Form 10-K and the quarterly reports on Form 10-Q as well as other current and future reports on Form 8-K filed with the SEC.

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

Thank you, Gina. Good morning, everyone, and let me add my thanks to Gina for having you join us this morning.

I'm going to start with slide 4 this morning. By now most of you probably have seen our second quarter news release that was issued earlier this morning reporting our ongoing earnings of $0.21 per diluted share.

This equaled our quarterly results from a year ago. Our GAAP earnings are up significantly compared with last year.

You might remember that in 2009 we had several special items including regulatory disallowances and increases in legal reserves that lowered our GAAP results. As we stated in our news release, quarterly results were driven primarily by modest improvement from our utilities, PNM and TNMP, both which benefitted from low growth compared with last year and higher rates that were in effect this year.

While both utilities improved slightly, we still have numerous regulatory matters to address in order for PNM and TNMP to have an opportunity to earn their allowed returns. As expected, First Choice Power was down from a year ago as we saw average retail margins compressed.

However, First Choice Power continues to do a good job of reducing its bad debt expense. As all of you follow the energy industry, you are well aware of the continued low-price market in Texas that has had a negative impact on generators throughout ERCOT.

Optim Energy is no exception. But because of strong operational performance at their three power plants, Optim Energy has been able to minimize the impact of ERCOT's depressed power market.

I will discuss First Choice and Optim Energy in more detail in a minute. If we turn to slide 5, I'll provide an update on our regulatory activities.

This is a new slide in our presentation and we are hopeful it helps you track our regulatory matters for both PNM and TNMP. I won't go through each of the cases but I wanted to let you know we will add this slide to our appendix moving forward and we will update it as things change.

A couple of cases to note; the first is the 2010 Renewable case, the first item on the list. On Tuesday a hearing examiner issued a recommended decision to deny the stipulation reached in this case.

You'll remember that this is the 80 megawatt solar plant. We are disappointed in the hearing examiner's recommended decision especially because the stipulation we filed included a great deal of input from stakeholders and was signed by numerous parties including Western Resource Advocates, the Coalition for Clean and Affordable Energy, the City and County of Sante Fe and the New Mexico Department of Minerals and Natural Resources.

We are also disappointed that the hearing examiner did not provide direction on what an acceptable plan would look like. The next step in this case are for exceptions to be filed by August 11 and then the Commission will address the case by August 31.

We have to recognize that this is just a recommended decision and not the final order. In the past, the PRC has departed from a recommendation in making its final order and we are hopeful the Commission reaches a difference conclusion but we remain committed to not turning any dirt until we have regulatory approval for cost recovery.

The second case of note, of course, is PNM's Future-Test-Period filings. Let's turn to slide 6 for a discussion of that case.

As most of you know by now, on July 27, the New Mexico Public Regulation Commission issued an order that extended the suspension period by one month and required PNM to file additional budgetary information. Late yesterday we filed the data requested by the Commission.

It is the filing that is literally larger than the original rate case application. This is primarily the same data we've provided to an intervener doing the routing interrogatory process.

That data is posted on our website at PNM Resources and I will warn you that some of those files are pretty large. We firmly believe we made a complete filing based on the established rule 530 and do not believe the additional detail provided to the interveners during the discovery process should be part of the record.

Nevertheless, we complied with the Commission's order and are looking to get the rate case back on course. Also yesterday, we filed a petition with the New Mexico Supreme Court asking the court to vacate the Commission's July 27 order and to reinstate the suspension period to begin on the original date.

We filed the petition for writ of mandamus which is an expedited process with the Supreme Court. While we understand that this step is extraordinary, we strongly believe that we are paving a new road with this rate case and establishing proper precedent is crucial.

So where does that leave us? With the filing of our supplemental document, we have await the Commission's next move to reinstate the suspension period.

In the meantime, we are continuing to respond to interrogatories. During the current process we expect for a new procedural schedule to be established based on the Commission's July 27 order to suspend the suspension period.

We hope that that occurs in the next 30 days or so. We will also wait to hear from the New Mexico Supreme Court.

The writ is posted on the PNM Resources' website for your review. Now let's turn to slide 7 to discuss the economic conditions in New Mexico and Texas.

For the past several quarters, we saw New Mexico's unemployment stay lower than Texas' and the rest of the nation. We saw that trend end last quarter as unemployment in New Mexico was higher than in Texas.

But now we're glad to see that unemployment in New Mexico seemingly reached its peak in Q1 as it is now at 8.2% which is equal to Texas' rate. The US rate, which just came out today, is the same as it was last month at 9.5%.

Customer growth remains positive but still modest. PNM is seeing a 0.5 growth year-over-year while TNMP is a little less at four-tenths of a percent.

Generally speaking, the number of residential building permits is one leading indicator of customer growth and we're still not seeing much of a pickup in housing starts in Texas or New Mexico. Turning to slide 8 to discuss load growth, we reported today that quarterly, weather normalized, retail load growth for PNM and TNMP was 1.5% and 2.5% respectively.

Those are about the same levels we saw last quarter. The right-hand side of the table has the year-to-date data.

While we are seeing growth we should put it into context. Despite a modest trend to load growth in the past three quarters for PNM, we are still below the yearly sales growth rates we saw prior to 2007.

So while it is safe to say that load is improving, albeit slightly, demand response from price increases and efficiency measures will have an impact on our utilities load growth in the near future. We turn to the next slide for a brief discussion of First Choice Power and Optim Energy.

Low prices in ERCOT continue to pose challenges for power producers like Optim Energy but have provided good opportunities for retail electricity providers like First Choice Power. While ongoing quarterly earnings are down from last year at FCP, bad debt expense continues to trend downward as you can see on this slide.

As Chuck will discuss in detail momentarily, we are increasing First Choice Power's EBITDA guidance range. Regarding Optim Energy, Optim continues to have solid results from an operational standpoint.

Their power plants, again, had excellent availability numbers and those are in the appendix on slide A5. As we raise FCP's EBITDA range, we are narrowing Optim's and Chuck will provide those details.

Before I turn the call over to Chuck I want to briefly address the new transport role which will replace the current version of [Care] and impact mainly the eastern portion of the US. There are some implications for Texas which would be controlled for [Knox] only during the ozone season.

There are many details to be worked out in the role but we believe it will have little impact for Optim. Optim's coal plant, Twin Oaks Power, controls [Knox] but the ejection of ammonia and additional ammonia can be injected for additional control if needed.

We will continue to follow this issue, provide input on the proposed rule through industry group participation and provide you with any updates as necessary. At this time, I'll turn the call over to Chuck for a discussion on the company's finances and outlook.

Thank you, Pat, and good morning, everyone. As Pat mentioned earlier, on an ongoing basis we earned $0.21 which is the same as last year.

If you break down our earnings by segment you'll see that we're making progress on the regulated side of our business. Total regulated earnings were up $0.03 from last year due to modest load growth and our continued efforts to earn our loud return.

Earnings from our competitive businesses were down from last year, offset in the gains on the regulated side. But this trend has been fully expected given the low price environment in Texas.

Our year-to-date cash earnings of $151 million came in about 10% above our original projections reflecting the First Choice Power's strong year-to-date performance and helps support our progress to regain investment grade ratings. Now let's turn to the major factors that drove our second quarter results compared to last year.

If you turn to slide 11, we've summarized the main drivers affecting our performance. Load growth and weather added $0.04 to earnings this year.

Weather, particularly in New Mexico was a positive during the second quarter and added $0.02 to earnings. While April and May in New Mexico were pretty close to normal, June's weather was considerably warmer than last year's with cooling degree days for the month almost 60% from June of 2009.

As Pat mentioned earlier, we also saw modest load growth in both PNM and TNMP's service territories. In total, the increase in load added another $0.02 to this year's second quarter earnings.

Rate relief in Texas and New Mexico was also another positive driver. In Texas we benefitted from the implementation of new base rates in September of 2009 and the more recent increase in our T-cost rates that went into effect in May of this year.

Quarter-over-quarter, TNM benefitted from implementation of both phases of our 2009 rate increase. If you recall, the first phase went into effect on July 1 of last year while the second phase was implemented on April 1 of this year.

Higher outage costs at San Juan partially offset the favorable drivers. This year two of our units at San Juan were down for maintenance while last year only one unit was undergoing a planned outage.

Turning to the unregulated business, First Choice Power ongoing margin declined $8.5 million from last year reducing earnings by $0.06. The decrease in margins reflect both the expected compression in unit margins as well as lower sales volumes.

First Choice's residential sales were down about 15% from last year but commercial sales were up due to a 25% increase in the average number of large commercial customers. That helped to offset most of the decline in residential sales.

The growth in large commercial customers reflects an increased focus on marketing and products offered to this class of customers. Given current customer counts, First Choice expects their year-end residential count to be at or slightly below 2009 year-end levels.

Partially offsetting the impact of declining margins at First Choice was lower bad debt expense. As Pat mentioned earlier, bad debt continues to trend downward reflecting initiatives First Choice implemented last year.

Although bad debt in the second quarter came in about 5% of revenue, we don't expect a repeat performance in the second half of the year as bad debt tends to rise during the high usage months. However, given First Choice's favorable trend and first half of the year, we do expect bad debt to come in below our initial projection of 7% and be closer to 6.5% of revenue.

Our share of Optim Energy's earnings were down 2% from last year but that was expected. The decline primarily reflects the increase in interest expense and depreciation associated with the startup of Cedar Bayou 4 in late June of last year.

Optim's EBITDA on the other hand was up slightly from last year and I'll talk about that in a minute. A negative $0.02 variance labeled other encompasses a lot of different factors, the major ones being higher pension and medical expense of about $0.01 and slightly higher property taxes.

More detailed quarter-over-quarter drivers for each of our segments have been included on pages 12 and 13. However, since I just covered the key earnings drivers, let's move on to page 13 to briefly touch on Optim's EBITDA performance.

Optim generated EBITDA of $17.8 million in the second quarter, up slightly from $16.2 million they earned last year. The major positive drivers include a $3 million increase in the sales of ancillary services reflecting a full quarter of Cedar Bayou 4's operations; Lyondell chemical plants returning to a more normal operation following last year's economic downturn.

The increase in Lyondell's output added both sales revenue and allowed Optim to better optimizd the plant's performance. Lastly, lower O&M as Optim continues to focus on cost control and enhancing free cash flow.

These positive factors will more than offset the unfavorable impact of market and fuel prices reflecting lower realized power prices to the roll off of favorable hedges and higher gas and lignite fuel prices at Twin Oaks. Now moving on to the guidance for the year; given First Choice's better-than-expected performance in the second quarter we are raising our guidance range for the year from $0.60 to $0.72 to a range of $0.65 to $0.75.

We still anticipate our regulated earnings will come in between $0.66 and $0.72, however, we are raising the EPS guidance for First Choice from $0.15 to $0.22 to a range of $0.27 to $0.33 and narrowing our EPS guidance for Optim Energy to a loss of $0.07 to $0.10. Correspondingly, we are also changing our unregulated EBITDA guidance ranges.

We're increasing First Choice Power's EBITDA range to $40 million to $50 million to reflect our year-to-date performance. Their previous guidance range had been $25 million to $35 million.

We still expect Optim to come in at the lower end of their EBITDA guidance range, however, we've narrowed the spread by $5 million to reflect the continued low-price environment. We now expect Optim to earn between $60 million to $65 million of EBITDA, down from original guidance of $60 million to $70 million.

We're also increasing our cash earnings outlook to better reflect the expected results at First Choice. We currently anticipate our cash earnings to come in between $305 million to $325 million, which is up from $290 million to $315 million.

So all in all we're relatively pleased with our year-to-date progress and I say relatively because we all know the regulated business is still not performing as it should financially. With that, I'll turn it back over to Pat for her concluding remarks.

Thank you, Chuck. We'll end our presentation as we always do, updating you on the progress of our 2010 objectives.

I won't go through each item, but I want to leave you with three takeaways. First, we are on track to meet or exceed five of the six major objectives set forth at the beginning of the year including increasing First Choice Power's EBITDA guidance range.

Second, we narrowed Optim's EBITDA guidance range, so the fifth objective listed here might not be achieved if the current natural gas price trend continues. Finally, we have consistently said that restoring the financial health of PNM Resources in earning our allowed ROEs in the regulated parts of the business are not a single event but a journey and journeys are not always smooth.

Rough seas, turbulence and occasionally a diversion to an alternative airport are all part of the package but we will arrive at our destination. That concludes the presentation portion of the call.

Operator, we can start the Q&A session if there are any questions.

Pat, what's the reason that they gave you for requiring an extension of the forward-looking test cases? Is there anything specific that we need to be concerned about?

No, Lasan. Thank you for the question.

What they said was that they wanted to see supplemental data on the budget documents and that there was concern that the documentation that we had wasn't deep enough. Obviously, going to be a subject in the rate case is on a forward tester how do you prove your assumptions?

So what the Commission said in their filing was that they wanted to see all of that supplemental data and literally we delivered it yesterday and the boxes were 40 pounds. Once they could take a look at that and deem whether or not they felt the filing was complete they could reinstate the suspension period.

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

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

Is it fair to say right now that at First Choice Power that you are taking a lot of customers away from your competitors and TNMP is losing some customers?

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

Nevermind, I'm thinking more First Choice Power, sorry.

So repeat your question then, Lasan, on First Choice Power.

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

Well, actually, as we mentioned, residential sales are down, which really customers are down from where we were quarter-over-quarter last year, probably about 11%. But the other side of that is we're picking up sales volume on commercial customers, so we're picking up and having success on that side.

So at this point, given our projections, we look to be pretty close to where we'd be at last year or slightly under on the residential side. Again, the commercial side is picking up on the sales volume, so it's not affecting the financial performance of the business.

I think you see two trends at First Choice and in the Texas market. The big reps, many of them are losing some residential customers and have all said that they don't want to get into price wars with some of the new entrants.

We don’t want to get into price wars. That’s part of it.

Remember, we are being very careful about who we accept as a customer now, so some of that customer decline is purposeful because of the better credit quality that we're getting in the customers.

On the Optim situation, are you guys trying to do more -- it seems that FCP -- and kind of tie in your hedging [styles] with FCP?

No, we've talked about -- the focus is we see the natural hedge and the benefits of having both businesses as the market is trended and developed and shown more strength in the integration of that business. Our focus, Lasan, as we've talked about from last year and continued efforts this year, is to make sure that we stabilize that business and have a good grasp and understanding of how that business looks going forward.

Then from that point we'll begin to look at optimal options and other alternatives to think about even further integration or ways in which we can benefit from those two businesses.

So no direct tie in, still kind of [loosey goosey]?

Well, just no direct tie now because both business are separate and independent and how they operate. But certainly we're looking at any alternatives and ways in which synergies and integrations might be recognized in the future.

But it's too early at this point for us to talk about it.

One last question; is it fair to say that First Choice Power's margins are starting to improve going forward?

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

The market's just not that pointed out. You're not seeing the larger reps, and us as one, not responding to the competitive pricing signals where those margins might compress more aggressively.

So we are seeing higher margins, just a slight decline but not nearly the rapid pace we saw last year.

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

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

Yes, Brian, it does.

Yes, it does have AMF added to that. If you look at the slide you'll see that piece of it is in addition to what you probably have not seen in the past.

That's the AMF filing in Texas.

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

I think that would be the right way to look at it. Any circumstance that's based on a regulatory environment is challenging.

They want to see more certainty and outcome of the rate proceedings before actions are taken but the good news of that, Brian, is you've seen that the cash flows and the performance of last year and, frankly, the performance this year are showing strong FFO to debt levels that would put us back at investment grade. But the uncertainty in the rate case is one outlier that has to be addressed until they will take any final action.

The guidance that you guys had laid out for 2011 and 2012 in your analyst conference, I believe, in early June, are those still applicable or has the holdup and the issues with the PNM electric rate case kind of maybe pushed that out or possibly changed it?

Brian, I cautioned that that wasn't really guidance. We just gave some outlook and some possible numbers.

It's too early to tell. The suspension period could be reinstated and we could still be back on track in terms of that and we hope the Commission does that.

But if you wanted to look at some delays on the phased-in approach, you could do that.

I'm sorry, insist on sensitivities and this is stuff you can calculate. But, again, it's -- we're not giving guidance for 2011 but going back to the data we provided at the analyst presentation in June, one month on the phased-in approach which cost us about $0.05 on the earnings and the non-phased-in approach, about $0.08 on earnings.

So whatever comes out of this thing, you can kind of look at it from that standpoint.

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

Well, we're still looking at that depending along what the Commission says. We are quantity compliant with the law in 2010 through buying [reps] and in 2011 we filed the plan for 2011 where we would be quantity compliant with [reps].

I think it depends upon what the Commission says in their order in terms of whether or not we would file something to preserve that earnings driver. I think the issue for us, this is the second time we've tried to plan and had agreement with some parties on the first and some on the second.

So I think we really want to wait and see what that order says before we make a determination on that.

Then lastly, just on A4, you've got your plant outages laid out for 2010 and 2011. Is there any way your can quantify the cost of the outages at Four Corners and Palo Verde in 2011?

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

Or we could just look at kind of the cost of the outages you guys have incurred in 2010 and maybe extrapolate that to '11?

Yes.

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

I guess I’m a little confused about something. I had thought that the [NNPRC] could move the suspension period at its discretion from nine to 13 months.

So I guess what I'm confused about is even if you win at the New Mexico Supreme Court, wouldn't the Commission still be able to move the suspension period?

Yes, the Commission can have 13 months. They automatically suspend for 30 days, then another nine months and then three at their discretion.

But part of what the Supreme Court does is help us set precedent and rules for documentation. One of our points in the filing is that you can't make up the rules as you go along in terms of documentation and other things and we don't want to be playing that game.

The Commission can move the suspension period but I think what you've seen up to that 13 months is in the last case they have tried to move things along much more quickly and even have said in their order that, for example, they rejected the four-phase approach of WRA, that one of the reasons they did that is because it may take too much time. The Commission has a lot of latitude in moving to that 13 months but they have said they wanted to prosecute these things relatively quickly.

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

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

Then the second question I have -- I just want to make sure I'm picking up the right gross margin number at First Choice. Using your 3% decline in gross margin per megawatt hour I’m coming out at about $39 million of First Choice gross margin for the quarter.

Is that a correct number?

No, that's -- actually, why don't we just have you call back and talk to investor relations to calculate the number. What margin number are you actually calculating to?

What's the number per megawatt hour basis?

$43.12 per megawatt hour.

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

The (inaudible) numbers are in the queue, Paul, but you're in the ballpark.

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

We haven't hit the trends because they continuously don't compress as quickly. So I would be more conservative because we've talked before about levels of $25 to $35 and we're not seeing that level of pricing at this point.

So I would just be probably more reasonable and thinking about it to be a slower trend than what you've seen in the past. But given what we see today of around 3%, maybe the 3% to 5% is reasonable.

I have a follow-up question on I guess Lasan's question on the [SCP]. So basically your comments -- is it a correct interpretation that you guys expect weather-adjusted sales to be flat versus 2009 but the mix of sales might shift more towards commercial versus residential?

Well, the sales there -- because we're actually picking up more commercial customers. So it's not necessary on a weather-adjusted basis.

You should look at it in terms of we have a slight decline in the number of residential customers, which reduces the sales volume that we have in the residentials group. But on the other hand, the offset of that is we're picking up and having more success in our marketing efforts.

We're signing up more commercial customers which is increasing our sales volume and helping to offset that residential decline.

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

Yes, we really can't comment. It's very competitive, as you can imagine, in that market.

So we really don't want to get into discussions of margins.

I have a couple questions on the renewable standard. If this solar option is not adopted by the PRC -- and clearly you're buying renewable credits -- but what's the ultimate solution here?

I guess, generally, as you see it long term, how do you comply with the law and what happens if you can't?

There's a couple options here. First of all, the RPS is a statutory requirement which the Commission cannot waive.

However, we can go back to the legislature and ask for them to relook at the law and there has been some discussion in this state about is that an appropriate thing to do right now given where the economy is as opposed to where the economy was when that law was put into place. So that is one option is to go back and look at the legislation.

The statute also provides that if the utility can't meet the RPS without exceeding the RCT we're not required to incur costs in excess of that so we could go back and file another plan that doesn't get to the RCT but is a little less -- it doesn't get to the RPS but is a little less expensive. One of the issues, however, has been throughout these filings is how you calculate that RCT or reasonable cost threshold.

There is not guidance in the legislation and that's one of the things the Commission has not yet done for us. There is no penalty prescribed in law for not meeting the RPS.

If you just look at general principles, if we were derelict in our responsibility they could try to put penalties in but there's no penalty for non-compliance written into the law. So we are going to work to seek some clarity through the Commission process and probably through the legislative process this year.

Just on the transport rule that you mentioned and I think you pointed out Four Corners -- but I was a bit unclear. Did you also discuss San Juan and the potential for the required investments in those plants not only with the transport but also the CTP rules?

Can you just give us an idea what we're looking at there?

Sure and actually technically the transport rule would not affect San Juan and Four Corners because it affects the eastern states including Texas. So the one plant that we have that the transport rule would have some bearing on is Twin Oaks but Texas is a state that's controlled for [Knox] only during the ozone season and Twin Oaks does that through ammonia injections.

So the transport rule is probably not going to have any impact on PNM Resources. In terms of San Juan and Four Corners and the coal combustion byproducts, EPA has a decision to develop separate federal regulations for min placement of coal ash, which is a method that San Juan uses.

EPA has indicated that they're going to work in conjunction with the Office of Surface Mining because the latter is very familiar with the mining industry and mine reclamation activities. Four Corners could be affected because it employs wet handling of ash, [Ashcon] and onsite landfills.

But we can't predict the outcome of EPA or Office of Surface Mining, so we haven't developed the costs with that yet because we just don't know how the rules are going to play out.

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

The contracts at Four Corners are up on 2016. Depending upon what happens in California, right now the law in California says that the California owners would have to be out of those plants by 2016 because you couldn't sell any coal into California.

So all the owners are looking at what the various options are in terms of does it make sense to shut down some of the units, put the money in the others. But that's an ongoing discussion right now which no conclusions have been reached.

When do you expect the conclusion to be reached?

Boy, I wish I knew the answer to that. I think it's going to take a while because we've got multiple owners in there with multiple paths.

So I don't think it will be any time in the next few months. It might even take a year.

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

Well, the California owners have to get out of Four Corners and the other owners decide it makes sense to keep Four Corners open PNM would probably have an opportunity to buy more of Four Corners. The issues would then become what does our financial condition look like?

Do we need the power and does it makes sense to buy them given the environmental upgrade that will be required? The EPA has not determined yet what [bar] at Four Corners is.

We continue to wait on that decision. But I think we have to know all of those things before we can say definitively what's going to happen.

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

Just one last question; if you could just give us the numbers on your CapEx expectations for First Choice and how that's changed recently.

First Choice, CapEx on First Choice?

Yes.

$3 million. It's very insignificant.

Yes, the only CapEx First Choice really has is IT systems.

It's about $10 million over five years.

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

No, are you thinking of Optim or are you really thinking First Choice because it's very insignificant.

No, it's First Choice. I know that there was some IT systems and customer [Cloud services] and things that have been done and I just wanted to see how that was trending.

Yes, no, it's about $3 million, about $10 million over five years and it's really toward the infrastructure, systems, applications, etcetera.

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

Well, I think, again, we're seeing a slight decrease in residential sales and right now we're basically seeing around 11% reduction in residential customers. We do think that the balance of the year we still will be at or slightly below 2009 numbers.

So at this point, as I mentioned earlier, the key is that the sales volumes that we're seeing in slight increase on the commercial side is offsetting that decline and, to reiterate what Pat said, is some of the customer turnovers are frankly because we've tightened up on credit implications and the type of customers that the business is willing to establish in its risk profile. So we're not concerned.

We're watching it carefully. Then you also have a little bit of competition as some of the smaller reps and price signals that are taking customers away from the larger reps but we're all -- certainly we're going to show discipline in how we think about pricing margins for new customer sand new contracts, what we put on, to make sure that we establish a very solid financial performance in margins that we think maintain profitability for that business.

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

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

Then I guess a couple of -- if you could touch briefly on a couple of the talking points that you guys would bring before them as it relates to the examiner's ruling.

I think we would make a couple of points. One is that this was a plan that was worked out with a variety of stakeholders, not only some of the environmental groups but some of the state groups.

It is partially designed with the solar industry in mind here, which is one of the state's economic development thrusts and we think that this is -- in the signatory that this is the least cost way to bring that solar into the state and that, I think, is our main talking point. The second talking point would be is ask -- if they don't like that, asking for some direction in terms of how they want to calculate the reasonable cost threshold so that we could come back with another plan.

So I guess the first question is just on -- I know that there's an asterisk that says the segments aren’t cumulative, but it looks in your new segment guidance range that the First Choice Optim has been a net about $0.10 increase in the range and the overall range has only gone up $0.04. Is there some weakness in the other segments that kind of we should be thinking about?

Or how do we think about the additive quality of the segments?

Well, you should look at the regulated side of the business we've kept within the current range without changing guidance and think about where we might be within those ranges that would probably help offset some of what you're seeing as the increase in First Choice of that $0.10 or $0.11. Of course, we brought down Optim to be in the tighter end of that -- lower end of that range of $0.60 to $0.65.

So it's not additive but it's really relative to where we are within those ranges.

So maybe the regulated's at the lower end of that $0.66 to $0.72 range?

No, we don't want to say at this point where we are but I think you can see the relative nature of how we're thinking about it without changing the regulated side of the business and changing our outlook at this point.

Then just on the First Choice, the new guidance range, I think you mentioned that you have a lower assumption for bad debts, 6.5% versus 7%, and obviously the margins are coming down lower than you expected. When we're thinking about 2011 is your expectation that long-run margins are still going to be where you were expecting at the beginning of this year and that the earnings power could be down in '10 versus '11 or how should we think about that?

Ted, we're not talking about 2011 but I think to kind of comment on the trends, certainly we are seeing the trend in bad debt going down, so if we were thinking 7% this year moving to 6.5% by the end of the year and given the initiatives we see in First Choice, I would like to expect that those trends would continue to move in that direction. So that would be one factor.

Then the margins, as I mentioned, 20% decline last year and maybe a 3% to 5% decline this year. Margins are not as compressing as quickly.

We talked before about margins for that business in the $25 million to $35 million level. Certainly if you're seeing margins above that $35 million level then I'd probably stay on the high end of that thinking about the longer-term view of that business.

But, again, just work with the trend I think is probably the best you can do at this point.

So maybe the best guess of the longer-term outlook is kind of the high-end of your old range for -- .

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

Then you guys had talked in the past about the bad debts look like they're getting better but you had also talked about some rule makings. I think the PUCT was addressing some rules related to customers that were on deferred plans not being able to switch before they cleared up.

Has that been ruled on and what about other kind of paying last month bad debts and stuff like that? Where is -- I guess where is an update on the PUCT process on bad debts and rule making there?

Ted, unfortunately the process has been slower than anyone likes. What the PUCT is looking at now is if you are convicted of energy theft you wouldn't be able to switch until you paid your bill.

But with election year coming up I think it's a little slower on the other movement and I think most of the reps are trying to manage that through watching out for those credit quality customers and making sure they get deposits and prepays, but not a lot of movement on that.

I guess the last was on Twin Oaks. You mentioned that you do ammonia injection.

So for any issues on care you should be in place. Can you remind us, what about for sulfur?

Is there a scrubber on that plant and kind of if we were to see these kind of macked rules that everyone's talking about, is there incremental environmental spend you'd have to do on Twin Oaks?

No, they do limestone injection at Twin Oaks and given the fact that they can burn other fuels there we don't see -- I mean, obviously it's hard to tell unless you know how severe the rules are. But we don't see a lot of downside for Twin Oaks in the environmental space right now.

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

Yes, and if they have to go to anything, it might be SMCR as opposed to SCRs. But as you know, with all that rule making, the devil is in the details.

I just had a couple quick questions, one regarding the lawsuit. It sounds like you're suing, one, just to get precedence and, two, to get the extension period shortened.

If you do lose this case, you already filed all the supplemental material though, correct?

Correct and we're really going down a two-prong path. One is filing to get the Commission to deem the case complete.

The court case is really about sort of establishing that precedent and what are the limits on the PRC's power to do things like on the suspension period and what is their responsibility to tell utilities ahead of time of what's needed for complete application. So it really helps lay out those precedents and the steps so that three months from now we're not back here in the same place.

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

No, I think filing the supplemental information is just, to us, a good faith show to the Commission that we have the documentation that they wanted. I mean, we had it.

What took us a few days to get it filing was that we put together a user-friendly index because it was so voluminous. So we think -- we just said we've got the information.

We'll be happy to share it with you.

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

John, we talked a little bit about it. We're hedged through the end of this year and certainly with Twin Oaks rolling off we're looking at -- which is a three-year contract, as you know.

We're looking at multiyear hedges and working through that. But it's too early for us to talk about that.

We're covered on the downside, so when I show the range of $0.60 to $0.65, we have hedges in place to protect the downside if gas prices drop even lower, so that's why we're comfortable with that tightening of that range.

I meant for '11. What is your hedge percentage ballpark?

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

Have you started - is it fair to say you started layering in hedges?

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

It sounds like SCP is moving deliberately towards a CNI strategy. Am I misunderstanding the change?

Yes, they have increased their marketing efforts, Lasan, on the commercial side. I wouldn't say at this point we're announcing any new strategy or new focus on the CNI side.

But they are looking at providing through some marketing initiatives and some products that they've developed ways in which they can begin to approach commercial customers and increase the sales volume in that front. But it's really too early at this point to really say that we're aggressively pursuing that but we are seeing some progress and some success in that area.

Lasan, these aren't large CNI customers. These are small, mid-size CNI customers.

So it's really kind of the math commercial market as opposed to the larger customers.

So you're talking about retail stores, small -- ?

Yes, the (inaudible) kind of deal.

Strip malls, that kind of stuff, yes.

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

Let me clarify. There's nothing in the law that says that there are penalties.

If someone decided that we were derelict in our duty, they could probably try to force a penalty on it. But it's not in the legislation.

The Commission can't waive the RPS requirement for us. We can go to the legislature and ask them to change the law or the statute provides that if we can't meet it without exceeding the RCP we don't have to incur that.

So we would have to go to Commission and ask for that.

So if you cannot meet the RCP then you ask the Commission for a change in law?

We would ask them for a waiver.

In the law.

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

Well, again, thank you all for your time this morning. We appreciate you joining us.

A lot of filings on the website; we've posted all the supplemental filings and the writ, so if you have any questions after reading those, please feel free to call the investor relations folks. Thank you very much.

As we continue on our journey we look forward to talking to you in the third quarter.