PNM Resources Inc (PNM) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PNM Resources first quarter conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Gina Jacobi. You may begin.

Thank you, everyone, for joining us this morning for a discussion of the Company's first quarter 2010 earnings. Please note that the presentation and accompanying materials for this conference call and supporting documents are available on the PNM Resources' website at 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 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 report on the Form 10-K and the quarterly report on Form 10-Q as well as other current and future reports on Form 8-K filed with the SEC. And with that I'll turn the call over to Pat.

Thank you, Gina, and good morning, everyone. This morning we released our first quarter results and reported ongoing earnings of $0.04 per diluted share, which is below our 2010 performance of $0.06. As we noted in our news release, quarterly results were driven by performance from TNMP and First Choice Power.

While we expected First Choice Power to be down compared with last year we are very pleased with their performance as they continue to demonstrate good results. As Chuck will discuss in more detail, TNMP had strong performance, up $0.03 quarter over quarter primarily as a result of rate relief.

TNMP implemented new transmission cost of service rates last May and also benefited from new retail rates that went into effect on February 1. As expected, First Choice Power was down this quarter compared with the same period last year as we continue to see margins compress due to lower consumer pricing.

For PNM we remain focused on strengthening the regulatory framework for PNM with the ultimate goal of improving credit metrics and shareholder returns. If you turn to slide 5, I will go into some detail on our ongoing regulatory matters. As I'm sure you are all aware, the hearing on PNMs stipulation begins this coming Monday in Santa Fe. The hearing is scheduled for 8 days of testimony.

Opposition testimony has been filed and PNM has also filed its rebuttal testimony. We believe the hearing examiner will issue her recommended decision in June and the commission has indicated they could render a final order in July. PNMs FERC case is still moving forward and we plan to implement new transmission rates on June 1 subject to refund.

As a reminder, the new FERC rates would increase annual revenues by $11.1 million and the filing of space on a return of equity on equity of 12.25%. Another open docket is the case involving the advance metering system rider for TNMP. There is a hearing set for this case for May 18 through 20 and we could see resolution of that case by the end of July.

If you turn to slide 6, we'll have a brief discussion of economic conditions and load in the regulated businesses. When we first provided 2011 guidance in February, we said that we anticipated the Texas economy would rebound quicker than New Mexico's.

Initial unemployment figures, however, paint a little bit of a different picture and have New Mexico keeping pace with Texas. And I say initial results because when you look at the March New Mexico unemployment rate of 8.1%, that is a significant drop from the reported 8.7% unemployment rate in February.

When the US Labor Department announced that 8.1% rate, there was some immediate skepticism by our local economists. If that 8.1% holds up, that would say New Mexico's unemployment rate improved faster than any other state's rate between February and March. We could see that 8.1% figure change and tick upward in the coming months, but for now that's our official figure in New Mexico.

Texas' unemployment rate seems to be in line with what we have seen recently and continues to make modest improvement. In addition, the Texas leading indicator's index continues to grow and it's currently at its highest point since August of 2008. Overall unemployment figures there have shown positive growth for more than a year now.

If you look at regulated load growth, both PNM and TNMP had good growth for the quarter. PNMs load growth was 2.2% and TNMPs was 2% and these are both weather adjusted. While customer growth remains modest we are seeing higher use per customer in both Texas and New Mexico. PNM residential use per customer was up 1.6% and in Texas the commercial use per customer was up 1.8%.

I want to turn to slide 7 for a minute and discuss the proposed impacts of some environmental regulations. Many of you have asked us about the financial impact of pending environmental regulation. We've put this slide together to help you assess that impact. As you can see, the EPAs pending determination regarding BART at San Juan is the largest impact.

If we are required to implement the federal implementation plan to address regional haze that the feds have already adopted then PNM would be required to install selected catalytic reduction technology that would cost PNM rate payers up to $460 million. Plant wide that's almost a $1 billion.

If the state implementation plan is adopted, however, which recommends SNCR, those costs for PNM customers are estimated at about $36 million. PNM supports the New Mexico environment department proposal which was filed on April 4, for that SNCR technology at San Juan that addresses regional haze and we think minimizes cost for customers. We'll know by August 5, when the EPA issues its final determination.

The original plan was for the EPA to rule in June, but the state received an extension and the EPA will use that time to review the state plan. Regarding the Mercury Rules, our plants are well positioned and will require minimal capital spending. Specifically San Juan will not need new additional equipment. They are already capturing mercury removal in excess of 90%.

Four Corners may need some additional equipment and you know we own about 13% of Units 4 and 5 which are currently equipped with fabric filters and dry line scrubbers and can also achieve 90% plus mercury control efficiency. In Texas, Twin Oaks likely will be slightly impacted by the new Mercury Rule and we expect upgrades to cost between $1 million to $2 million.

We turn to slide 8, we'll talk briefly about the competitive businesses. Starting with First Choice Power, at the beginning of the year we stated that one of First Choice's goals was to continue to grow its commercial customer sales and boy, have they grown commercial customer sales. For the first quarter commercial sales were up 32% compared with Q1 of 2010.

That's a significant jump and commercial sales during the first quarter accounted for about 40% of First Choice Power volumes. In addition, First Choice continues to build upon its sales and distribution channels and is developing stronger relationships and partners to strategically expand its customer portfolio. First Choice is also seeing strong and positive customer satisfaction trends as they continue to deliver on their You First brand proposition.

Loyalty scores are strong and their Q1 customer satisfaction score was above 80% for the second consecutive quarter. In this very, very competitive arena satisfaction scores are key in order to maintain and attract customers.

We look at Optim. As we discussed in the news release, we saw the natural hedge between First Choice Power and Optim Energy demonstrate its value during that cold snap in February. As we've said many times, Optim is in cost control mode as we await an improved power market in Texas. This concludes my update and I will turn it over to Chuck for a more detailed discussion of our financial results.

Thanks, Pat, and good morning. As Pat reported, we earned $0.04, down $0.02 from last year. A breakdown of our earnings by segment shows that earnings at our regulated businesses are beginning to improve, particularly in Texas. In total regulated earnings were up $0.02 from last year reflecting improved low growth in Texas and New Mexico, as well as our continued focus to earn our allowed return.

On the other hand, you'll see our competitive businesses show a decline in earnings. This trend has been fully expected given the low power price in Texas and the expiration of the Twin Oaks contract, both of which have been factored into the guidance we issued earlier this year.

Turning to the individual business units on slide 11, that provides a breakdown of the major earnings drivers for our regulated businesses PNM Electric and TNMP. Let's start with PNM. This year the New Mexico utilities ongoing earnings were down $0.01 from last year. The decline reflects the expiration of the Palo Verde 3 toll agreement which had been expected and reduced earnings by $0.06.

Lower outage cost, improving load growth and some rate relief helped to offset the impact of the toll's expiration. Outage costs were down $0.04 from last year reflecting a reduction in the number of planned plant outages. Last year 2 units at San Juan and 1 unit at Four Corners were down for maintenance while this year only 1 unit at San Juan was down for plant maintenance.

Weather normalized load growth at 2.2% added $0.02 of earnings. An implementation of the second phase of 2008's rate increase added another $0.02 to PNMs earnings. If you recall the second phase went into effect April 1 of 2010.

Other negative factors affecting PNMs performance this year included milder weather which reduced earnings by about $0.015 and increased depreciation which roughly cost utility another $0.01. At TNMP earnings were up $0.03. The implementation of new transmission rates last year along with new retail rates that were put in place in February of this year added $0.03 to earnings.

Weather normalized low growth of 2% contributed an additional $0.01 to earnings. Today we're very pleased with TNMP performance and still expect to earn close to our allowed return this year at our Texas utility. And I say close because implementation of the new rates went into effect on February the 1, not at the beginning of the year.

Now turning to the competitive businesses, as I mentioned earlier, earnings at our competitive businesses were lower than last year, but the decline had been fully expected. Starting with First Choice Power, although First Choice EBITDA was down quarter over quarter we are nevertheless pleased with their performance. The Company's sales trends particularly, on the commercial side is moving in the right direction.

Bad debt continues to decline as a percent of sales and their marketing efforts are paying off. The Company earned about $12 million of EBITDA, down almost $5 million from last year, and, as expected, a reduction in margins accounted for most of the decline. As we had mentioned during our last call, unit margins declined about 10% in 2010 and we project a similar decline in 2011. During the first quarter total unit margins for the quarter ended up 18% below last year. However, the decline was skewed by the impact of extreme weather and rolling outages that hit Texas in early February.

While First Choice Power was adversely impacted by the extreme weather, the Company's portfolio and risk management approaches helped mitigate some of the exposure. Additionally, the negative impact associated with the weather event was almost completely offset by a corresponding increase in margins in Optim Energy reflecting the natural hedge between these two businesses.

A 32% increase in commercial sales volume also helped First Choice Power offset the negative impact of lower unit margins. This growth rate, however, had been anticipated and had been factored into First Choice's commercial sales guidance assumptions.

The Company still expects its annual commercial sales to increase 15% to 20% over last year. Bad debt at First Choice was also down reflecting a 15% drop in customer departures and lower average final bills. For the year First Choice still anticipates bad debt to come in between 4% to 5% of revenue for the year.

Now moving on to Optim Energy, Optim generated about $7 million of EBITDA in the first quarter which was down $3 million from last year and as I mentioned before, we had been expecting a decline in earnings due to the expiration of the power sales contract at Twin Oaks. In the quarter the roll-off of the contract reduced Optim's earnings by about $14 million.

However, the Company was able to partially offset the impact of the contract's expiration by continuing to focus on cost control and selling excess emission credits of about $4 million. Another favorable earnings driver was associated with the cold snap that had adversely impacted First Choice Power.

While the extreme weather and volatile prices reduced First Choice's EBITDA by $3 million, we estimate that the cold snap added about $5.4 million to Optim's EBITDA. So, clearly the natural hedge between First Choice and Optim Energy demonstrated its value to the first quarter and helped mitigate our competitive earnings volatility.

And now moving on to guidance, despite the delay in expected rate relief at PNM, we remain confident in our ability to deliver earnings within our original guidance range and are affirming our earnings of the unregulated EBITDA and cash earnings guidance. One caveat, though. This assumes new rates are implemented by August 1. There's more information on the financial impact of this delay if you look at the Appendix slide A-7.

We still expect consolidated earnings, to range between $0.80 to $0.92 per share with our regulated earnings coming in between $0.89 to $0.96 and our unregulated businesses contributing between $0.06 to $0.16. Despite the delay of the rate case PNMs Electric guidance range of $0.62 to $0.67 is unchanged from our original guidance as we continue to focus on managing our costs. I do want to caution you, however, that the utility could come at the low end of our range depending on the rate case outcome.

Our unregulated EBITDA guidance ranges are also unchanged from last quarter, as is our outlook for cash earnings. And with that I'll turn it back over to Pat for concluding remarks.

Thank you, Chuck. We will finish today's presentation with our checklist. This is a brief reminder of the strategic goals we continue to work on in our efforts to ultimately return our subsidiaries and PNM Resources back to investment grade status. This was an unusual quarter in that we do not have any milestones since our previous earnings call. Although we do have a lot in progress.

By the time we talk to you again to report our second quarter results on August 5, we should have significant updates for you. By then we'll have a clearer picture on the PNM rate case and the TNMP/AMS docket and we'll have an idea of how that Texas power market fared during this summer. With that I will turn the call back over to our operator to start the question-and-answer portion.

(Operator Instructions) Paul Fremont, Jefferies.

I guess my first question relates to First Choice. With the growing level of C&I contribution there, is the margin on C&I different than the margin on residential, and can you give us numbers that we should think about in terms of a range?

Good morning, Paul. It's Pat, and Brian Hayduk, who is the head of First Choice Power is here with us this morning, and I'm going to ask him to give you some color on that.

Sure. Hello, Paul, it's Brian. You know what? Certainly the commercial margins are lower than residential, and I don't think I'll give specific guidance on that, but I will say, as Chuck mentioned, we were down in the neighborhood of 10% for the year on margin last year. We expect to be in a similar trend this year, and that is inclusive of what we are forecasting from a commercial standpoint. So we're not at this point really looking to have the commercial growth dramatically impact our forecast to margin.

So is it fair, then, to think about the 10% decline in 2011 as being primarily driven by the change in mix in your customer base?

No, I think it's a combination. It's a combination of compression certainly on the residential side. I think most suppliers have mentioned the compression in margin and the competitive nature of Texas. I think you have that as well as the change in mix, and in our case it's probably more the compression on the residential side than a dramatic material change in mix at this point.

And Paul, I think the other thing to think about, when we talk about commercial customers, Brian is not talking about the real large folks that you tend to have really, really small margins in. These are more what we would consider smaller- and medium-sized commercial customers.

And then my other question is for Chuck. He mentioned that you might be at the low end of the guidance range on the New Mexico utility depending on the rate case outcome. Can you clarify what that means? Are you assuming that the settlement is approved as submitted, or is there something that I'm missing?

No, I think the key point, Paul, is we're making the assumption that rates would be implemented by August 1, which means that we would anticipate a decision out of the Commission sometime in July. And so given that, obviously if you go back and look at the full implementation of the stipulation, we would have gotten $0.23 this year. That drops it down to $0.16.

And then the way in which we're managing that, and why I say the lower end is because it's really trying to match up ways in which we can adjust O&M cost, and also we're assuming in our guidance range the upper end of the load growth, which is 1% to 2%. So the combination of those factors allow us to remain within the PNM guidance range, but I just want to caution that based on what the ultimate outcome is and given what that answer might be, then we would have to reevaluate based on what the decision is out of the Commission, but the key is the assumption that we're using now is August 1 with no change in the stipulation.

And remember, Paul, we said that it was a $0.02 to $0.03 a month impact to earnings if the stip was delayed, and because remember, these tend to be your hot summer months, so if you end up moving to August 1 you lose some of the hot summer months.

Brian Russo, Ladenburg Thalmann.

Could you just talk a little bit more about kind of the Optim and First Choice Power dynamic, and correct me if I'm wrong, but First Choice Power's load is significantly more than the capacity output of Optim. So I'm just trying to get a sense -- it's not kind of a perfect hedge because you're not selling from one to the other in purchase power, right?

Well, first of all, hi, Brian, the load compared to Optim is 50%. So actually your long energy when you take Optim's supply versus what the load is on First Choice, and there is a pretty good match relative to the location of the generation assets and where that load is in First Choice. It's not perfect, but certainly not a bad match, but there is no benefit from the integration of that. It's really how the 2 businesses performed during that cold snap, and that's our point is that, as you would expect with the extreme increase in power prices in February because of that cold period, Optim and the plants performed well during that period were able to sell excess power and make money.

On the other hand, Brian was in a situation where he had to deal with the swings in the usage and the impact through the cold snap, had to buy power, it was more costly, but net-net the 2 businesses when you look at it in total really did come out as a net positive. And that's our point there is the fact that the natural offset, how the businesses performed independently resulted in a net positive for the period of time that occurred in February.

Right. Thanks. And I haven't had a chance to look at the PNM Electric subsidiary income statement, but I'm just wondering if you can discuss the trends you're seeing in O&M maybe first-quarter 2010 actual, and then what you're seeing for the rest of the year because I think that's kind of a big, supporting factor in earning your allowed ROE over the next couple of years.

Yes, and we really haven't given direct information on non-fuel O&M costs, but you can see the trends, but I think that the main message is that we continue to find ways to align the revenues and the cost, certainly to reflect a more manageable outcome for the business to work towards earning its allowed returns. So we have internally, Pat has programs and management does of ongoing process improvements and ways to tighten our belts to ensure that we create as much efficiency as we can, and so I think you will see over time that we'll continue. It's just the nature of how we think of the business is to find ways to control O&M costs, and hopefully reduce and continue to reduce O&M costs.

Brian, if you look at the first quarter, for example, we did $0.04 better because of lower outage costs. As Chuck mentioned, we had significantly fewer outages, so we have some natural things in there that benefit us, but we have plans in place to basically match our costs with our revenue.

Okay, great. My last question has to do with load growth. I think weather-normalized load growth at PNM Electric was 2% in the first-quarter 2011 versus first-quarter 2010?

Yes, 2.2%, yes.

2.2%. That seems quite high relative to what we're seeing in other parts of the country. I'm wondering if you could just maybe explain the demographics or the dynamic that's supporting that, and is that sustainable or is it just a function of the low sales base from a year ago?

No, I think it's sustainable because the sales base of last year in 2010 was not that bad. 2009 was the real low sales year. And anecdotally what we are seeing and hearing is people that have their jobs are much more comfortable with their jobs. So they are either keeping the house a little cooler in the summer maybe, or a little warmer in the winter, and we're all buying all these gadgets that just really kind of take a lot of energy. And so I think it's just more a psychological function of the fact that people are more comfortable using energy.

And remember, only 13% of our sales come from the industrial segment, which was the one that I think experienced a large downturn, and our largest industrial customer happens to be Intel and they're pretty steady. So we're just more of a steady commercial residential customer mix.

(Operator Instructions) Ali Agha, SunTrust.

Chuck, could you remind us, embedded in your 2011 guidance currently for PNM Electric, what is the implied ROE in there? And then assuming the stipulation of the settlement is approved as planned, what should we be thinking about the ROE in 2012? Is it pretty much -- has it pretty much overcome the lag?

No, 2011 we've talked about 7% to 7.5% for the rate-based return for PNM. In 2012, we haven't really given out any guidance and information. I think the clear message is, based on the stipulation and the assumptions around the stipulation, it gives us a clear path towards earning our allowed return up through 2013. So I think at this point until we have more definite information of the results of that stipulation, we should probably just leave it at that. But definitely if you look to 2010, or 2009, 2010, and 2011, clearly you see us beginning to make significant improvements in our return on rate base, and we just need a clear decision so we can begin to manage to earn that allowed return.

Okay. Chuck, just to probe that a little further, should we not assume that you're earning allowed return in 2012 yet, or assuming the stipulation goes through, or did I not hear that correctly?

I think if you take a look at the stipulation, it's in 3 pieces. It's this year, next year, and then 2013 where you get that capital additions rider in, and that capital additions rider basically applies to any additions made to capital from June 30, 2010, which is the end of this case, to December 31, 2012. So if you think about it, you really need to take another step until you get caught up on your capital.

Okay. Understood. And then if you take -- and assuming that plays out as planned, and you lay out your 5-year CapEx numbers across the utilities, if you look at your growth rate and rate base off that, which I believe is about 6% a year if my math is right, should we assume pretty much underlying EPS growth follows that pattern? Or are there other pluses or minuses to think about, assuming that 6% number sounds right to you?

I think there's 2 things to think about that are not in that capital that could happen. One is, as we discussed earlier, if the federal implementation plan for San Juan is implemented, that's about $460 million of capital that isn't in there. We would apply for rate recovery of that, and we have an out in stipulation to apply for rate recovery of that.

On the other question, if there would be any renewables above and beyond what currently is in the plan right now, but the rest of the capital that we have in here is really base O&M capital.

Okay.

Or is base capital that would be covered in the additions rider.

Okay. And last question, going back to Optim and First Energy. In the past, Pat, you guys have talked about your goal obviously to run them in somewhat of an integrated fashion, as you said, the location makes a lot of sense, et cetera. Any success there? And linked to that, you've also said if that doesn't play out at some point you've got to make a strategic decision, does it make sense to run them separately or to even own them? Can you just give us an update on your current thoughts on those [non-rate] businesses?

I think you just answered the question for us. You've well stated our position and our view. We think the longer-term strategic direction would be a full integration of the business, and certainly alternatives to achieve that are certainly things that we continue to review and think through. Meanwhile, our focus has been on stabilizing First Choice, and having consistent and stable results on that, which we've proven out the last 2 years and continue to have a good feeling about that business this year. And Optim itself being able to manage through a very difficult environment in Texas with low energy prices. So the businesses work well as they are, but they're not fully benefiting from any synergies, and so we would continue to think through ways in which we would integrate it or make other decisions if we don't think that's achievable.

Chuck, is that a 2011 decision point, or is that more a 2012 decision point?

I wouldn't absolutely put a timetable on it at this point, Ali. I think we just leave it like it is.

Okay.

We'll let you know as soon as we have some better information.

John Ali, Decade Capital.

I may just be putting the cart before the horse, but follow-up to Ali's question, if you were to drop First Choice into Optim, assuming they would pay out the cash for their portion of the equity -- or not into Optim, into the JV, what are some potential uses for that cash?

You're saying if we pull cash out?

Right. You dropped in First Choice -- .

Well, there's all sorts of ways in which you could look at handling cash, if you were to pull cash out of the business or use it to capitalize the new business model if you put it together. So whether you look at reducing debt at the holding company, buy back stock, whatever typical things you might think about on use of cash, we would think through those alternatives as well.

Any preferences?

No comment.

I'm showing no further questions at this time. I would like to turn the call back to CEO, Pat Collawn.

Thank you, operator. With that, I think we'll end the call today. We appreciate everyone taking the time to participate in this call this morning. We look forward to talking with you all on the second quarter call, if we don't see you beforehand. Again, thank you all very much. Have a wonderful weekend.

Ladies and gentlemen, that does conclude today's conference. You may all disconnect, and have a wonderful day.