Nov 20, 2008
Executives
Gina Jacobi – Corporate Communications Jeffry E. Sterba – Chairman, Chief Executive Officer Pat Vincent-Collawn – Chief Operating Officer Charles N.
Eldred – Chief Financial Officer
Analysts
Lasan Johong – RBC Capital Markets Paul Patterson – Glenrock Associates Paul Fremont – Jefferies & Co. Chris Taylor – Evergreen Investments
Operator
Good day and welcome to the PNM Resources conference call. Please be aware that today’s conference is being recorded.
At this time I would like to turn the conference over to Gina Jacobi. Please go ahead.
Gina Jacobi
Thank you everyone for joining us this morning for a discussion of the company’s third quarter 2008 earnings. Please note that the presentation and accompanying materials for this conference call and supporting documents are available on the PNM Resources website at www.PNMResources.com.
Joining me today are PNM Resources Chairman and CEO, Jeff Sterba; PNM Resources Chief Operating Officer, Pat Vincent-Collawn; and Chuck Eldred, our Chief Financial Officer as well as several members of our executive management team. Before I turn the call over to Jeff, I need to remind you that some of the information provided this morning should be considered forward-looking statements, pursuant to the Private Securities Litigation Reform Act of 1995.
We caution you that all of the forward-looking statements are based upon current expectations and estimates and that PNM Resources assumes no obligation to update the information. For a detailed discussion of factors affecting PNM Resources results, please refer to our current and future annual reports on Form 10-K and the quarterly reports on Form 10-Q as well as other current and future reports on Form 8-K filed with the SEC.
And with that I’ll turn the call over to Jeff.
Jeffry E. Sterba
Thanks Gina and again thank you for joining us today on the call. I’m sure that you all have seen the release that we made early this morning.
You note that our, on a GAAP basis, we had losses of $0.06 per diluted share. On an ongoing earnings basis we earned $0.27 per diluted share for the third quarter.
Chuck will spend more time on going through this in detail but the major elements that rationalize the difference between GAAP and ongoing earnings are really associated with the write off at the EnergyCo side of the CAIR NOx credits, the finalization of the FCP First Choice Power goodwill impairment which we talked about in the second quarter, and then the ongoing mark to market accounting issues. A year ago recall that we laid out four key strategic objectives that we had for 2008 moving into 2009 that we were going to be executing on.
Remember that the first one was to reposition our regulated utilities to earn their cost of capital. And you can see from the results of the third quarter that those strategies are starting to pay off.
PNM Electric ongoing earnings are up about 22% year-over-year for the quarter. This is as a result of the modified fuel adjustment clause that got put in place and the rate relief in the last rate case.
We previously told you about the filing of the electric rate case in New Mexico and Pat will talk about that in more detail, as well as the rate case in our Texas jurisdiction for TNMP. And I think one of the things that we were pleased to see is the commission agreeing to allow us to modify that Texas case to include the $25 to $30 million of costs that we incurred in the reparations for Hurricane Ike.
The second major objective that we laid out was that we would focus on our electric businesses and that meant exiting the retail gas operation that we have within New Mexico. We earlier let you know of the stipulation that we entered into.
The hearing and the briefing process on that stipulation has been done and we expect to see a decision coming forth – a recommended decision before the end of the year. The third key objective was to rationalize those remaining merchant assets, unregulated generation assets that sat within PNM the utility.
Earlier this year we entered into tolling arrangements for the output of Palo Verde 3 which is one of those unregulated assets. And earlier this quarter we entered into a stipulation to enable the gas assets, which are the only other unregulated assets within PNM, to be moved into our regulated PNM business and are included in the rate case that we filed about 60 days ago.
So that was the third piece. And the fourth key objective was to reduce our operating cost structure.
There’s a lot of aspects of that which Pat will talk about in more detail, but clearly we are continuing to see good performance out of our base load power plants which is critical. We’re on schedule for the $35 million cost reduction effort that we announced.
And we’ve now finished the major environmental work at three of the four San Juan units. There’s one unit left, which will go into that environmental outage early in 2009.
Obviously one of the main issues that we wanted to touch on is regarding our liquidity position, and Chuck will go through this in more detail, but we’re in a good – what I would call adequate liquidity position. Recall that we went to market in May and some people questioned why we decided to go in May.
All I can say is I’m very thankful that we did decide to go to the market in May and issue debt. And as a result, we’ve got about $800 million of cash and untapped lines within our credit facilities for PNMR and its subsidiaries, not including roughly $400 million of available liquidity at EnergyCo.
In addition, we like most companies are doing, are going through a thorough scrub of capital expenditures. We expect that in 2008 we’ll probably be down about $30 million or so in our CapEx.
Next year the number will be more like $90 million. We’ll be removing almost 25% out of our capital expenditures forecasted for next year.
And over the five year period from ’09 forward, we’re looking at almost $500 million of reduced capital. Some of this is certainly recession costs, but another chunk of it is just being able to really take a hard look at some projects that are somewhat discretionary and deciding no, we’re not going to need to go forward with those projects.
I also think we’ll start to see some capital costs go down over time as we’re seeing commodity costs, particularly copper, steel, aluminum, cement come down 20 to 30% so far. It’ll take some time for those to translate into component costs, but I think that will take some additional pressure off as we go forward.
Hurricane Ike was obviously a significant event for us. While our territory in that part of Texas is fairly small, it was the largest hurricane damage we’ve withstood.
And it affected all of our operations from SEP to TNMP to EnergyCo. But the pretax impact we think is only about $7 to $8 million not inclusive of the reparation costs that Pat will talk about in more detail.
So all of that rolled in and when we take into account Ike as well as the continued inadequate performance of FCP largely because of Ike, and bad debt, and things that Chuck will talk about, we would still affirm the low end of the ongoing earnings guidance range that we’ve previously provided you. Let me spend just a moment moving to Slide 5 to talk briefly about FCP.
We told you at the second quarter call that we were commencing a strategic evaluation as to what should be done with First Choice Power. We’ve completed that and the outcome of that is that we believe the retention of First Choice Power at this time provides the best long term value for our shareholders.
This is obviously has been affected by not just what’s going on in Texas but certainly including that where you have seen a number of our competitors, we’ve had a number that have gone belly up and others that have run into significant challenges in the operation of the rep market. But that, coupled with the deteriorating credit market, while we had a number of folks that were very interested in the property and believe in the value and the potential for it, frankly we could not see that we would get an adequate element of value if we were to sell First Choice Power at this time because of a less than conducive market and so we believe that the best path to value is to recommit to operating that business as effectively as we can.
And recall that this is a business that for the three years prior to 2008 generated plus or minus $10 million but roughly $45 to $50 million of EBITDA in each of those years, and has really stumbled this year. So a lot of our effort has been on refocusing and altering the way in which they operate, their market strategy, their operational strategy as it relates to bad debt and renewals, a whole host of things.
And putting in much stricter guidelines for their marketing process and their operational practices, we think that that will pay off. We’re already starting to see significant turns in the performance.
But the bad debt issue which is really the result of what happened this summer through September will – is obviously already in the cards. And all we can do is manage that as best as we can.
So that’s where we are with FCP. With that, I’d like to turn it over to Pat to go through the utility operations.
Pat Vincent-Collawn
Thank you Jeff and good morning everyone. Turning to Slide 7, I’m going to start with PNM Electric.
And I think many of you know that PNM this September filed its integrated resource plan which was developed during a year long, public involvement effort that included 19 public meetings and a large amount of stakeholders here in New Mexico. And that plan calls for us to add some more renewable resources, to approximately double our energy efficiency programs and very importantly add the two existing natural gas fired plants to our energy portfolio.
Those two plants, which are Luna and Lordsburg, were part of that stipulation that Jeff mentioned earlier. An agreement among key parties is going to allow us to move about 357 megawatts of jurisdictional generation portfolio into rate base at PNM.
In addition to moving Luna and Lordsburg, the stipulation allows us to acquire the beneficial interest in Palo Verde Unit 2 which is about 30 megawatts and it also allows us to include the recovery of the purchase power agreement, including the capacity recovery from the Valencia power plants that we have here. We estimate that moving Luna and Lordsburg into rate base will save our customers about $144 million over the next 20 years.
And for purposes of rate making those two plants are going to be put in at net book value which is $38.7 million for Luna and $40.2 million for Lordsburg. Since we had our last earnings call we also filed a new rate case.
It totaled $123 million. That was based on a revenue requirement of $807.4 million.
Our new rate base is $1.6 billion and our requested ROE in that case is 11.75%. There’s a tentative schedule in the presentation appendix.
Most of the key dates occur after the first of next year and the hearings are set to start on March 30 and a recommended decision could be given as soon as May 29. Last night as you know the elections took place and we had some key races up here in New Mexico.
Two of the five seats on the Public Regulation Commission went before our voters yesterday. In District One, that’s the district primarily here in metro Albuquerque, we have 98% of the results in and Commissioner Marks retained his seat with 58% of the votes to Tim Cummins’ 42%.
I think you know that Commissioner Marks is known for his commitment to renewable energy. He’s got a lot of work on getting renewable energy in and carbon planning and he, for example, standardized needs of carbon planning in utilities integrated resource plans.
The whole Albuquerque metro area went very much Democratic. We have the first Democrat going to Congress from the Albuquerque metro area this year also.
In PRC District Three, which is our northern district, the seat that’s being vacated by Commissioner [Luhan] who is now Congressman-elect Luhan, Jerome Block, Jr. won.
He received 56% of the vote to 44% for his opponent. Mr.
Block is experienced in banking and title industries and he’s the son of former Commissioner Jerome Block, Sr. So we look forward to working with both of those two gentlemen in their new roles.
The seats for Commissioners King, Sloan and Sandy Jones are up again in 2010 and they did not stand for re-election in this time. Jeff mentioned our proving plant availability.
If you turn to Slide 8 you can see that consistently over this year the equivalent availability factor of our plants has increased. The weighted average for this quarter is 87.2 which is an increase of 81.5 for the last quarter.
We’ve completed three out of the four environmental outages at San Juan. We are just finishing the unit San Juan is going.
It is in start up right now and start up is going as expected. Palo Verde is continuing to make strides on their plant performance.
Unit 1 is a bit behind in its refueling outage primarily due to some equipment issues and they are scheduled to come back up probably some time next week. Most importantly we’re currently projected to be under our recovery cap in the fuel clause.
As you know we’ve got a cap on the recovery of our fuel and we are currently 0.2 of 1% under the recovery cap in our fuel clause. We turn next to Slide 9 and TNMP.
In late August we filed a rate case for TNMP which is a distribution and transmission utility in Texas. It’s our first rate request in over five years there.
We’re seeking a system wide transmission and distribution increase of $8.7 million, which is an increase of 5.6%. This filing helps us unlock the first transmission rates that allow for an almost simultaneous recovery of transmission investment.
Of that $8.7 million, a $3.4 million is transmission and $5.3 million is distribution. We’ve requested an ROE in Texas of 11.25.
I mentioned we requested an 11.75 in New Mexico. The higher rate in New Mexico reflects the fact that we are also a generation utility in New Mexico.
Our filing in Texas is based on a rate base of $399.6 million and a revenue requirement of $162.9 million. As Jeff mentioned we have been allowed to amend this case to seek recovery of the costs of Hurricane Ike restoration.
We are estimating these costs to be about $25 to $30 million. We expect to have a hearing begin in mid-February on the TNMP case with a final order and new rates in effect in the third quarter of 2009.
However, that could happen earlier. Late in November we are starting settlement talks with the staff and the other interveners in that case.
We turn to Slide 10, that gives you a real good visual look at the damage that our system sustained during Hurricane Ike and the logistics efforts that took place to get customers restored. We’re very proud of how our crews responded.
One, in terms of their safety record we had no reportable incidents for our crews or any of our contractor crews during the restoration. We’re thankful for the help that we received from others.
Jeff said this was the largest restoration effort we’ve had on our system and we were able to restore 75% of our customers within six days and actually the day after we had all essential services back on. Within two weeks we had 100% of our customers restored and despite the conditions they were living under we had incredible amounts of compliments from our customers and the local officials in the towns that we serve.
As we mentioned, our estimated restoration costs for that effort are between $25 and $30 million. And then finally on Slide 11, Jeff mentioned we’re achieving milestones on our gas sale.
The Attorney General’s office, the New Mexico Public Relation Commission and the IBEW and PNM all entered into a stipulation supporting the gas sale. The parties support the $620 million sale price and PNM retaining the gain on sale.
As part of that stipulation if the transaction closes, PNM and the Attorney General have agreed to drop their appeal that we had in 2007 on the gas rate case. The next step from that we are waiting for a recommended decision from the hearing examiner.
The parties had the hearings and filed their briefs and it is now with her to render a schedule. On the operational schedule, we are very much on track.
We have met all of our key milestones. On Monday, New Mexico Gas Company made offer letters to the employees from PNM that are going over to the Gas Company.
They have hired a president to take on the responsibilities of New Mexico Gas and all of the systems splitting and customer splitting is going on as established. Pending all approvals the closing date for the sale is expected to be either late this year or early next year.
With that I’d like to turn it over to Chuck.
Charles N. Eldred
Thank you [Patty] and good morning everyone. Let me just add a few comments to what Pat said about the gas sale.
As you can tell from her comments those parties do remain committed to completing the transaction. But in addition to that there’s been a lot of questions on the ability of financing through Lindsay Goldberg and the acquisition of the gas business.
I just want to remind everyone that Lindsay Goldberg did provide a commitment letter for the financing from a lead bank at the time we entered into the transactions. And there’s been no issues raised on their ability to provide that financing and in the agreement itself there is no financing out that allows them to use that as a reason not to pursue the transaction.
Now turning to Slide 13, I’d like to just hit some of the highlights to give a little more detail around the comments that Jeff has made earlier. For the quarter we reported GAAP losses of $0.06 which is down from $0.11 gained last year.
The losses reflect two non-cash charges, one of which is the EnergyCo writing off their inventory balances of mission allowances under the [inaudible] Interstate Rules. Our share of that write down is $9.6 million after tax.
EnergyCo does still have about $118 million in inventory for other additional allowances that are not related to the care program. At First Choice we completed our impairment analysis and recorded an additional $7.3 million after tax charge which related to customer contracts and trade name.
That brings to a total impairment when you add to the Q2 write downs of $147 million approximately for First Choice. As we report earnings, ongoing earnings of $0.27 this year was down from $0.46 last year.
You can see from this walk across implementation of the new base rates at PNM Electric, coupled with the fuel clause revenues added a net total of $0.19 to earnings this quarter. The base rate added about $0.16 and the fuel clause revenues about $0.15.
Partially offsetting the favorable impact of the rate increase were lower earnings at both First Choice and EnergyCo. At EnergyCo the major driver of the $0.08 decline in EPS was a lower revenue from the amortization of [outer working] contracts.
You recall Twin Oaks had an underwater contract that generated purchase accounting revenue that expired at the end of September of last year. Both First Choice and EnergyCo earnings were also impacted by Hurricane Ike.
Increased financing costs as you’re aware and dilution also reduced earnings. Financing costs were up $0.04 reflecting our downgrade in financing activities that occurred earlier this year.
Dilution is associated with conversion of the equity linked securities which reduced earnings by another $0.05. We also incurred a $0.03 hit due to Lehman bankruptcy at both First Choice and EnergyCo as they terminated our power contracts and settled their [four] positions.
However, we do anticipate recovering most of those losses during the fourth quarter and most of the impact pertains to First Choice Power. Now I’d like to go over the individual segments starting with the regulated utilities, turning to Slide 14.
The financial performance at regulated utilities clearly showing results. EPS was up 22% from $0.27 last year to $0.33 this year.
There’s no net impact of the rate increase and the [inaudible] Jasmine clause added the $0.19. Negative drivers affecting performance include the higher OEM, the shorter plant maintenance and scheduled averages, higher financing costs that I referred to earlier, and an unfavorable variance in income from the Nuclear Decommissional Trust.
At PMP earnings were down $0.03 from last year due to two factors, Hurricane Ike which we estimate reduced margins by about $1.6 million and lower revenues associated with PMP’s [train] of cost recovery due to an order that resulting in a reduction of carrying costs from 10.9% to 8.3%. Looking at the fourth quarter, I want to point out some factors that could affect the utilities earnings.
One, on opportunities there could be some savings as a result of early completion of the outages that are currently planned and also we continue to drive costs out of the business through our business and planned projects. Some of the risks certainly the weather in New Mexico so far has been milder than normal.
If this continues that could adversely impact the earnings particularly for PNM Gas. And the other risk is the economy.
We’re beginning to see some very early signs of slowed growth in New Mexico. Now turning to Page 15, looking at First Choice Power we incurred EBITDA loss of $3.3 million which is down from an $11.8 million gain last year.
The major drivers affecting the company’s performance this quarter were the Lehman bankruptcy, Hurricane Ike, lower sales volume and higher bad debt. I mentioned the Lehman bankruptcy resulted in a 3.9% charge to determination of Lehman’s supply contracts and a settlement of forward, unrealized mark to market losses.
However, we do expect to recapture about $2.5 million of these losses next quarter since First Choice will be able to purchase replacement power at lower prices. Sales volumes were down $0.12 due to increased customer churn, reduced new customer growth, the impact of Ike and lower average uses.
First Choice number of customers were down 9% year-over-year from $259,000 to $234,000. We continue to see bad debt expense increase at First Choice at $6.4 million due to higher power prices, increased churn in higher default rates.
We expect this adverse trend will – could continue in the fourth quarter given current economic conditions. Looking at some of the fourth quarter outlook and the opportunities at First Choice, we would anticipate key four margins will exceed $22.00 a megawatt hour as the ERCOT market begins to show some stabilization.
We believe this is reasonable given the First Choice unit’s margin averaged around $22.00 a megawatt hour the third quarter if you exclude the impact of Lehman bankruptcy and Ike. We also expect roughly around 2% increase in customers by year end compared to third quarter.
On the downside at First Choice, given economic conditions, First Choice could see higher customer default rates resulting in increased back [inaudible]. I’d like to turn to EnergyCo on the next slide, Slide 16.
On 100% basis EnergyCo EBITDA was up $7.5 million. Looking at some of the positive drivers they have very strong plant performance at Twin Oaks which allowed us to earn contractual bonuses of $10.5 million at favorable Twin Oaks pricing which also added to EBITDA.
EnergyCo was able to sell its uncontracted 25% output at market higher prices. And Altura Cogen contributed an incremental roughly a little over $2 million in EBITDA because of the one extra month we had Cogen operations this year.
On the down side, Hurricane Ike reduced earnings by $4 million due to the lost sales opportunities and lower wholesale prices, but there were no permanent physical damage as a result of Hurricane Ike to the physical assets at EnergyCo. The Lehman bankruptcy I mentioned earlier had an impact on EnergyCo of $1.1 million but the company does anticipate they can recover the loss in the fourth quarter through additional power sales.
Opportunities we’ve improved the liquidity position within EnergyCo through its existing credit facility which will allow the company to continue to pursue the additional hedging and asset optimization opportunities. And also we’ve found ways to improve the dispatching of its Cogen facility to offer increased sales of power and accelerate services.
On the downside although EnergyCo plants have been operating very well, weather, economic conditions and decreased demand for power could adversely affect EBITDA in the quarter. As a result, we’re lowering the fourth quarter wholesale power prices – as a result of the fourth quarter wholesale power prices being lowered and the impact of Ike, EnergyCo is lowering its EBITDA estimate for the year from $50 to $55 million which is down from the guidance range of $60 to $70.
Now looking at Slide 17, I’d like to address liquidity. As Jeff pointed out we consider to be efficient or adequate.
The table shows our liquidity position as of October 30. We clearly benefited from the accessing the market of $750 million of long term debt that we issued in May of this year.
That freed up our credit facilities as you can see from this table, the total facilities at $1.4 billion. That includes two facilities that we put in place in May to provide additional liquidity and financial flexibility.
We drew on these facilities in early third quarter to make cash available and also to test the banks. Our net available liquidity as of October 30 is roughly $785 million.
Available liquidity is down from second quarter because we drew down the $240 million from PNM facilities to fund a debt maturity that expired in September. In addition, we currently expect to pay off the balance with the proceeds on the sale of the gas business.
We’re also getting a lot of calls from investors and analysts concerning the liquidity position under various scenarios. We’ve looked at actively learning different sensitivities to proactively manage our position and we’re confident that we can continue to handle sufficient liquidity.
I’d like to turn to Slide 18 to walk you through some key financing events. This Friday the company will be remarketing $100 million of equity linked securities.
We’ve had the option to allocate roughly $80 to $90 million of this debt back to the company. There would be two reasons why we would choose or consider to do that.
One, given the market conditions and the central risk of higher costs of debt. The second would be the extra $100 million in debt that we’d issued in May gives – provided some additional liquidity that frankly is like almost like a pre-funding of that remarketing of this $100 million.
Second event is the sale of the gas company which we’d expect to provide $463 million in net proceeds. As I mentioned earlier we plan to use a portion of the proceeds to pay down debt and the balance to be used for corporate purposes.
In mid-January of next year PMP will reduce some refinancings, 6.25% refinancings and also 6 and an eighth. We’ll be looking to access the market when we feel market conditions have stabilized but allow ourselves some flexibility in timing of those offerings, we put in place a new $100 million capital markets grid facility which can be expanded by another $50 million.
During the second quarter of next year, the $150 million delayed draw term loan will expire and is not expected to be renewed given the anticipated sale of the gas business. Once again we continue to proactively manage our liquidity and we’re confident we have sufficient liquidity to support us during the credit market stabilization as we begin to manage through the balance of this year and next year.
I’d like to turn to Page 19 to give you some update on guidance. As Jeff mentioned earlier we’re affirming the low end of guidance including the impact of Hurricane Ike and First Choice Power’s performance.
However, we could fall below guidance range if weather is milder than normal or if First Choice Power performs below our expectations. If this becomes the situation, we’ll provide you with an update in early December after November close.
Given we reported year-to-date and ongoing earnings of $0.24, the low end of guidance implies that we expect a loss during the quarter. I’d like to explain that.
Although we expect improvement in First Choice performance we still anticipate they will incur a loss in the fourth quarter. In addition, despite the rate increase at PNM Electric we expect higher financing costs, lower income from Nuclear Decommissioning Trust and increased LNM due to plant outages would have some bounce out effect to the fourth quarter performance at PNM Electric.
Regarding the outlook for 2009, let me just mention a few things to ask you to consider as you look through projecting for ’09. We’re currently in the process of developing our own budgets for the next year and updating our long range financial plans.
As a result, we plan to update you at the outlook for 2009 during our year end call. I want to point out some factors that I think you should take into account as you model next year performance.
First of all, as I mentioned, economic conditions could continue to weaken and we could see some slow growth in our load. Given the markets performance this year, we expect the pension expense to increase next year.
We’ll feel much better regarding this impact as we get closer to year end when we value the actual fund itself, but currently, given the fact that we were well funded at the end of 2009 we don’t anticipate having to fund in – excuse me, 2007, we don’t anticipate having to fund in 2009 and possibly we will fund in 2010. Although we will see an increase in expense in impact to earnings in 2009 for the pension fund.
Financing costs are expected to be higher when we finance or refinance the $300 million at TNMP. In addition the result of the two most recently filed rate cases will also impact earnings next year.
As Pat talked about we’d expect to see Texas and New Mexico decisions to be implemented by fourth quarter next year. Of course the other factor is the timing of the gas sales and last as Jeff mentioned earlier we’re going through a rigorous analysis of our capital budget, looking for cuts around 20% of the five year capital plan and we’ll provide more details of that at that time when we update you on 2009 guidance.
Now I’d like to turn this presentation back over to Jeff to talk about milestones for this year.
Jeffry E. Sterba
Thanks Chuck. If you’d look at Slide 20 that’s the checklist that we provided you each quarter and except for First Choice Power and the challenges that we face with that this year, all of the other items seem to be moving well on track.
Let me make just a few last comments about not just First Choice Power but also the Texas market. Obviously the Texas market has gone through a lot of ups and downs through the course of this year, largely driven by the volatility of natural gas prices.
Early in the year, by what I will call questionable management of congestion by ERCOT which I believe they have really focused on trying to improve. And they in fact have improved substantively.
I think the rep market is obviously an issue of significant concern to the Commission. They clearly understand that the retail market is a key to their market structure, that there are things that probably need to be changed in terms of the rules of operation.
We are certainly working hard and suggesting a number of changes that we think can help make it more effective. I continue to believe in that market structure and what can be accomplished.
But we are obviously changing the focus and the direction that FCP is taking compared to what it had been doing earlier in the year to help improve its financial performance regardless of whether we’re successful in getting some of the market rule changes that we believe need to take place. So I guess in summary, I think we are making substantive, significant progress on our major initiatives.
We’re obviously not there yet and we told you it would take 18 to 24 months. And we believe that we’re still another year out in order to get everything back in line, but our goals of getting the regulated business to earning its cost to capital, to developing the capacity to move back into an investment grade credit rating, these will take time.
But we’re committed to doing them and I think we’re making progress. With that we’ll open up for any questions that you all may have.
Operator
Your first question comes from Lasan Johong – RBC Capital Markets.
Lasan Johong – RBC Capital Markets
Did I hear correctly, Chuck that you plan to pay down $317 million of TNMP debt in the first quarter of ’09?
Charles N. Eldred
It’s not paying it down. They’re actually refinancing.
There’s 6.25 and 6 and an eighth that needs to be refinanced and we’re prepared to go to the market, but we’re really waiting for market conditions to stabilize. So within the next several months we’ll be looking for that opportunity to refinance that come out.
Lasan Johong – RBC Capital Markets
And that means interest rates are probably headed up on those?
Charles N. Eldred
Interest rates would be headed up on those offerings, yes.
Lasan Johong – RBC Capital Markets
And that’s in your expected ’09 outlook?
Charles N. Eldred
Yes, it will be reflected in guidance for ’09 when we provide that information.
Lasan Johong – RBC Capital Markets
And on First Choice Power I think your decision to keep it is probably a correct one but just curiosity drives me to ask this question. How different were the offers versus the net profit value you thought First Choice Power was worth?
Jeffry E. Sterba
Well, Lasan, I guess the best way to answer it is different enough to say it’s worth the risk to refocus and retain it. More than that, I probably wouldn’t give you any sense of specifics.
But you know better than I the royal that the market, the overall financial market is in. And particularly related to some of the players that are in the retail competitive markets.
So this is not a great time to try to sell that property. I think that was generally reflected in what we saw and the gap between that and what we think this business is really worth was enough to make us want to say we’ll hold onto it.
Lasan Johong – RBC Capital Markets
Then the question begets obviously in normal – when increased [weather] deviations normal, weather patterns typically First Choice Power is going to be a decent money maker for you. The problem is once in a while we have some severe disruptions that causes these what I would call – characterize bill out losses temporarily.
The problem is as an equity investor you really don’t know when that’s going to happen and what that means. And so is there a way that you can give us comfort that there’s a way to mitigate those kind of blow out risks?
Jeffry E. Sterba
Yes, I do believe Lasan that there are ways to mitigate those risks and I think there are a number of learnings for our folks in this past summer. Some of the ways to mitigate these risks involve market rule changes associated with bad debt and associated with customer switching.
Others of that will involve a moderation or a modification to the customer mix that we have which is largely very heavily residential. And one of the things that the Commission did is they – and this happened last spring, they prohibited reps from taking customers who were on a term product and rolling them over to a term product if you couldn’t reach them.
So what happened is you automatically move them to a month-to-month product which by nature is higher priced and obviously has more volatility associated with it. And that coupled with having probably only 20 to 25% success rate in making contact with customers and getting them to renew for a term product, creates higher volatility for customers.
We don’t think this is a good outcome. So we’re working with the Commission on alternative ways, whether they be kind of evergreen renewal approaches or others that will help move more off of month-to-month kind of contracts and into term product contracts.
The term product will help take some of that volatility out of the marketplace or at least out of our performance. Because a lot of what happened this year was associated with customers moving into term product, the enormous fly up in gas prices we don’t hedge out for month-to-month customers because you don’t know if they’re going to be there.
That’s why they’re month-to-month and their prices float. But when their prices jumped as much as they did, a lot of them said, “I’m not going to pay that bill” and so consequently we’re racking up large bad debt amounts.
And on the bad debt side, one of the things that can be done is that create some kind of a mechanism to help insure that the customers can’t just switch without some obligation to pay off bills. And that’s one of the challenges that exist in the current market in Texas.
So we’ve got some ways that I think will help mitigate that. But you’re right, there will always be some volatility within the marketplace.
But it doesn’t need to be nearly what we and others have experienced this summer.
Lasan Johong – RBC Capital Markets
And I’m assuming the change regulatory model is going from a zone system to a normal system?
Jeffry E. Sterba
Well, I continue to believe that ultimately that’s going to happen. My personal view is that that’s going to slow down in Texas.
You’ve got two new commissioners who are just coming on board. Obviously the move to Noodle has already been delayed.
I certainly don’t know what it will be delayed to but I think it’ll be longer rather than shorter. But obviously we’re focused on getting into another market because that benefits we believe our EnergyCo assets.
Lasan Johong – RBC Capital Markets
One last question on the economic front, you kind of alluded to and hinted to a slowing down in New Mexico’s economy. Can you kind of give us a sense so where these sources of slowdowns are coming from?
Industry, housing, service businesses and what do you think is the net impact actual contraction in the economic activity? Or are we talking about a slowing down in the growth?
Jeffry E. Sterba
No, it’s going to be a slowdown in the growth. If you look at New Mexico’s economy it has never even through all the recessions that we’ve had going back to ’82 which is a pretty deep recession, it has never gone to negative.
It just is a question of how much slower is the growth rate? Like many places, we’re seeing a slowdown in housing.
We’re certainly not seeing the collapse in housing that some other markets are. We have had some industrial slowdown and I frankly expect to see a little bit more of that.
But remember the economy of New Mexico is fairly well diversified. It’s still got a very large federal government element with the labs and with the major military installations.
Those will not be significantly adversed but we have high tech manufacturing that is a function of the global economy. We also have some other what I will call some light manufacturing which is consumables.
Things like Tempur Pedic beds and all that other kind of stuff, and I expect to see some of that slow down. But instead of seeing 3, 3.5% growth rates we’re probably 2 below, a little bit below 2.
And how deep and how far and how long is the real question. So this is one of the things that Pat and her team are taking into account at this stage is what does this mean relative to resource acquisition?
We’ve got efforts out today for renewables. What does it mean to the procurement of renewables?
What does it mean to any other expansion on our gas generation side?So all of that’s getting rolled in and we need to a see a little bit more of the slowdown. But typically what happens is the New Mexico economy is affected but it’s not as affected by far as the national economy on average.
We still have very high employment rates. We’re seeing a slight increase in unemployment but not nearly what you’re seeing in other areas.
In fact, one of the most recent industrial additions into the economy is having difficulty hiring people for their start up which is supposed to occur early next year. Pat, anything you want to add on that?
Pat Vincent-Collawn
I think you got it, Jeff.
Operator
Your next question comes from Paul Patterson – Glenrock Associates.
Paul Patterson – Glenrock Associates
First of all, why did the First Choice customer count go down? Was that simply bad debt expense?
And exactly what’s sort of affecting the fourth quarter here? Is it just effectively again bad debt is going to – the margins just don’t keep up with bad debt?
Or is there something else we should be thinking about here?
Jeffry E. Sterba
Well, let me take that and I’ll ask Chuck to add a few points if he wants to on the second part of your question. First in terms of the customers going down, part of this is conscious.
What we found is a lot of our what we call passive enrollments is the customers that move on to our system, they come in and buy from us but we haven’t actively solicited them to become a customer. A lot of them are at risk apartments.
They’re not very good credit customers. But they might be just above the threshold.
They have a tendency to move quickly because they may not be in the apartment very long. What we’ve consciously done is moved away from trying to serve those customers.
So we are willing to lose a lot of those as customers and focus on our term products. So we expected to see – and by expected I mean since the early summer, we expected to see some customer degradation in terms of numbers of customers as we altered consciously the marketing strategy of First Choice Power.
Now I would tell you that it’s turning. This last month we’ve seen a net increase to numbers of customers.
But it’s more focused on the customers that I think we will want for the longer term. Relative to the fourth quarter, certainly a piece of it is bad debt.
But the fourth quarter is never a strong performance quarter for that retail marketplace. It hasn’t been in any of the years.
Second and third quarters are the stronger performance years. But remember that a lot of the bad debt that is really created in August, September becomes 90 days past due in the fourth quarter.
So yes bad debt will be a piece of it – a significant piece of it. Chuck, anything you want to add on that?
Charles N. Eldred
No, I just think it just as Jeff said, as we go forward and we’re in the process of executing more aggressive plans to lower the churn rates through renewal programs. In addition to that we’re looking to try to extend as Jeff talked about earlier terms of customers as far as changing from month-to-month to longer periods of time.
And it just takes time to execute those plans and address our exiting given the challenges we’ve had earlier this year and the summer months of high commodity prices. Trying to work through getting those plans implemented to stabilize that business, but although we’ll see some improvements in fourth quarter we won’t be out of the woods in the fourth quarter.
And we’ll begin to see those improvements more significantly in 2009 as we re-stabilize that business.
Paul Patterson – Glenrock Associates
Now you mentioned that the First Choice, that there was an issue with bad debt customers simply going and switching supplier and I guess effectively just leaving you guys the bad debt. Generally speaking in most commercial marketplaces, people deal with that in terms of credit ratings or something of the sort.
There’s some predictable way of dealing with it. There’s not usually some mechanism I guess to go to the Commission to ask them to somehow take care of it.
Could you just elaborate a little bit more on that?
Jeffry E. Sterba
Well you know you’re absolutely right. And a lot of it’s done through the credit side.
What we’re working on and I’m not going to go into a lot of detail on it, but is a much more focused set of credit metrics. Because typically you’ll end up with people that they use just basic FICO scores and what we’re finding is that that’s not necessarily as good a predictive of bill payment behavior as others.
But what happens is someone says, “Okay, I’ve got $300. I’m not going to pay the electric bill.
I’m going to pay the deposit to go someplace else.” And so you end up with this churn that causes a friction across the business.
The – so credit scores are clearly one of the tools and the development of deposit payments to be made are one of the key tools. Let me give you an example, though, of where we find credit scores not necessarily being predictive of behavior.
We have established a pretty strong position within the Hispanic market. And if we look at raw credit scores, frankly, they are not at the same level as we see in other parts of the marketplace.
Yet their payment behavior to First Choice Power is much better than other market segments. So that’s where we are working on tools that will be more predictive of payment behavior for electricity.
Because traditional FICO scores we just don’t think are –
Paul Patterson – Glenrock Associates
So really briefly, the PMP ROE for the last 12 months, what was it? And I looked at the appendix or just missed it.
What is the equity ratio in the capital structure that you guys are proposing you make it?
Jeffry E. Sterba
Pat, do you want to take that?
Pat Vincent-Collawn
Yes. If you turn to PNMP, Page 10 and the last allowed we at PNMP Texas with 10.25 and the debt equity ratio was 60/40.
Paul Patterson – Glenrock Associates
60% equity?
Jeffry E. Sterba
No.
Pat Vincent-Collawn
The debt.
Paul Patterson – Glenrock Associates
The debt is 60%?
Pat Vincent-Collawn
Yes.
Paul Patterson – Glenrock Associates
And what is the last 12 month ROE? I mean, in other words what are you currently earning on this at TMP right now if we take the last – whatever the last numbers you have available?
Pat Vincent-Collawn
We haven’t calculated that for you but we can get that to you.
Operator
Your next question comes from Paul Fremont – Jefferies & Co.
Paul Fremont – Jefferies & Co.
If I look at your Slide 20, I’m just trying to figure out if that last checkmark implies that you may need to file another rate case. And I guess my question would be your past year probably goes through March of this year.
To what extent do you have the ability to update known and measurable changes in cost into your current filing? Or would you have to wait until a new filing to sort of catch up?
Jeffry E. Sterba
Pat.
Pat Vincent-Collawn
In New Mexico we have 150 day known and measurable adjustment. So we’ve made all those known and measurable adjustments.
We have also in this case asked for some more of the San Juan environmental upgrades that are outside of that 150 day drew up because they are not revenue producing. So we have done known and measurables all the way up until August plus the San Juan.
Paul Fremont – Jefferies & Co.
So does that imply – am I reading that correctly that there are expense increases that you’re now anticipating post-August that will put pressure on the expense side of your income statement next year which you would have – which would then potentially cause you to file another rate case after you get the result of this rate case?
Pat Vincent-Collawn
We filed for a fuel clause – the extension of the fuel clause in this case and that fuel clause is a prospective looking clause and the calculation in there is the 12 months forward looking from March of this year. You’re always going to have PMB capital investments that are outside that 150 days because if we get new rates, they would go into effect late summer of next year.
So you’re always going to have some regulatory lag. But by taking forward the 150 days plus the San Juan and the fuel clause, we’re going to start to minimize that.
Obviously the decision to file another rate case also depends upon the outcome of what you actually get in that rate case.
Paul Fremont – Jefferies & Co.
And then my other question is back in February you identified PNM Electric rate base as $1.8 billion expected, I guess, for 2009. Can you update that number for the stipulation or give us a sense of what you would expect rate base to be in 2009?
Gina Jacobi
Paul, this is Gina. Just to clarify, you’re talking about the earnings power slide that we presented?
Paul Fremont – Jefferies & Co.
Slide 36 of the February presentation.
Gina Jacobi
That would be the earnings power slide.
Paul Fremont – Jefferies & Co.
Right, but I think it gives an estimated rate base number for PNM Electric.
Gina Jacobi
Yes, that’s correct. That was the $1.6 –
Pat Vincent-Collawn
We filed it this last rate case as $1.6 is our rate base.
Jeffry E. Sterba
We’re going to update that when we do guidance for ’09. We’ll go back and we’ll update that slide because I think we just want to make sure we have the most current information and let the budget process and some things settle for this year.
Then we’ll provide that information.
Charles N. Eldred
Paul, the earning – just to keep in mind that $1.8 billion which I do recall on that slide, that’s the year end ’09 and it was based largely on the old capital budget which we just talked about that we’re cutting fairly substantively. So it will be updated.
Paul Fremont – Jefferies & Co.
And I guess the $1.6 – do I need to add the $78 million for Luna and Lordsburg?
Pat Vincent-Collawn
No. That’s in that $1.6.
Paul Fremont – Jefferies & Co.
That’s included in the $1.6. So there are no adjustments?
Because also the repurchased lease hold interests in Palo Verde is in the $1.6?
Pat Vincent-Collawn
That’s correct.
Paul Fremont – Jefferies & Co.
So that number is still a good number as of what? March of this year?
Pat Vincent-Collawn
March plus the five months so August of this year, plus in San Juan – that San Juan environmental upgrade that we put in there. So it’s basically August of this year plus San Juan.
It doesn’t have any T&D and other generation numbers past August.
Jeffry E. Sterba
The earlier question regarding 2007 ROE results, if you just reference in the appendix Slide 30 it shows what the ’07 results are for rate days for each of the regulated utilities. And if you access our website you’ll get the details as to the methodology and the calculations.
So just wanted to add that information.
Charles N. Eldred
We haven’t calculated them at the third quarter this year but those are year end.
Operator
Your next question comes from Chris Taylor – Evergreen Investments.
Chris Taylor – Evergreen Investments
First of all a request, I didn’t see a balance sheet or a cash flow statement in your release and if liquidity is a key concern I think that would be something relevant to include going forward. That would be very helpful.
On your refinancing and you basically have $460 million at TNMP early next year
Charles N. Eldred
$317 million.
Chris Taylor – Evergreen Investments
Well the bridge is $150 and the two notes are $300 million. But basically you’re
Charles N. Eldred
The bridge is supporting part of that $317 until we go to the market and able to issue the permanent debt. So the total amount of debt is just slightly over that $300 million.
And also just to add, too, we issued the 10-Q this morning so you can get the details.
Chris Taylor – Evergreen Investments
If I’m looking at TNMP, you’ve got rate base of roughly $400 million. You earned 6% on it, yet now you need to refinance $300 million which is given the markets going to be well over 6%.
How confident are you on the refinancing there?
Jeffry E. Sterba
You know, we’re confident. Your point is certainly clear is that we’re confident in access in the market but under today’s conditions the rate level is the concern.
And so frankly that’s the reason why we put these bridge facilities in place to give ourselves ample flexibility as to when we time execution to refinance the securities in the market. So we’re going to let things stand on the sideline for the next few months and just kind of let the markets settle down.
But certainly the interest costs will be well above the 6% level. And at this point if we were to go out into the market then we’re probably looking for levels that wouldn’t be attractive to us and therefore that’s why we want to sit back and wait for a better opportunity.
And let things settle down, liquidity in the capital markets.
Chris Taylor – Evergreen Investments
But you’ll have to refinance it using at the parent level?
Jeffry E. Sterba
Actually we have adequate liquidity at the parent level and then no plans at all to refinance. And just to further substantiate that as I talked that we will go to the market with the $100 million equity linked securities this Friday but given the fact that we previously financed an extra $100 million back in May of this year at 9.25, we really don’t anticipate that that additional $100 million is absolutely essential.
But we’ll go to the market, see what the rates are and we’ll make a determination as to if any how much we’d allocate back to the company.
Chris Taylor – Evergreen Investments
In terms of the gas sale and there’s no financing out for the buyer but I mean if they can’t get financing do they have any other resources that you would have recourse to? Or are you confident that you can force a sale through?
Jeffry E. Sterba
We’re comfortable that the commitments in place by Lindsay Goldberg and we’ve had recent conversations and frankly know the lead banks and the bank syndicates that are involved in the financing. And those facilities are committed and in place and don’t see any issues with that.
Chris Taylor – Evergreen Investments
So this is a – I guess do you have recourse to the fund itself? Or is this just a shell company?
In other words, just in a worse case scenario that they can’t get financing who are you – what legal entity are you dealing with? Is it the shell company that’s doing the buying or is it the fund itself that –
Jeffry E. Sterba
The company is Continental Energy Systems which is the holding entity of not only the New Mexico Gas business but also the other gas businesses that are owned through that holding entity, located both in Michigan and Alaska.
Chris Taylor – Evergreen Investments
I mean, I know those companies. They really don’t have the resources to come up with this kind of money without the parent support, without the funds support.
So I mean you can say well, there’s no financing out but –
Jeffry E. Sterba
That’s not an out for Lindsay Goldberg to use as a reason to not execute the transaction. So we have both debt and equity commitment letters in place.
And recent discussions with both Lindsay Goldberg and the lead bank that has put that debt commitment letter in place has confirmed that they’re ready to do the financing at the time we have approval to proceed with the closing. At the same time we will plan activities around any situation that could occur from the liquidity standpoint, but we’re confident that at this point we’ve affirmed Lindsay Goldberg’s ability and we’re comfortable that financing will take place.
Chris Taylor – Evergreen Investments
Please correct me if I’m wrong, but I think you were feeling confident that you could get this deal done by year end. What would account for the delay?
And what’s the absolute final date that they have to execute this?
Pat Vincent-Collawn
The hearing examiner in New Mexico has a couple other cases. She has the [FPS] rate case.
She now has our electric rate case. So – and she had some personal time come in there.
So it’s just a matter of a regulatory delay, nothing in particular other than the hearing examiner’s schedule.
Chris Taylor – Evergreen Investments
And what’s the timeframe here for closing? Is it – I remember in the Alaska end, Michigan transactions that your counterpart did it was 30 days after the regulators made their decision.
Is it something similar here?
Frederick Bermudez
Chris, this is Frederick. If you call Gina or me later today we’ll give you the background on the transaction because we’re out of time.
Jeffry E. Sterba
I think the 30 day timeframe is very reasonable and what would be our expectation.
Chris Taylor – Evergreen Investments
So it all depends on the regulator.
Jeffry E. Sterba
Yes, that’s exactly right. Yes.
Operator
That does conclude our question and answer session. At this time I’d like to turn the conference back to our presenters for any additional or closing remarks.
Jeffry E. Sterba
Well again thank you for your time this morning. Chuck and Pat will be out in Phoenix.
I’ll be there for part of the time but will not be able to be there the entire time. So if you have any follow ups you can certainly run into any of us in Phoenix next week.
And I don’t know how many of you all stayed up last night watching the election results so you may want to go take a nap. We’ve got a lot of change ahead of us in this industry and which I think makes it even more exciting.
Thank you all very much.
Operator
That does conclude our conference call. You may disconnect at this time.