PNM Resources Inc (PNM) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PNM Resources third 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 follow at that time. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Lisa Eden, Director of Investor Relations. Please go ahead.

Thank you, everyone, for joining us this morning for a discussion of the Company's third quarter 2011 earnings. Please note that the presentation and the 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 CFO, as well as several members of our executive management team.

Before I turn over the call to Pat, I need to remind you that some of the information provided this morning should be considered forward-looking statements pursuant to the Private Securities Litigation Reform Act of 1995. We caution you that all of the forward-looking statements are based upon current expectations and estimates, and that PNM Resources assumes no obligation to update the information. For a detailed discussion of factors affecting PNM Resources' results, please refer to our current and future annual reports on Form 10-K and the quarterly 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 will turn over the call to Pat.

Thank you, Lisa, and good morning everyone. Earlier today we issued our financial news release, reporting quarterly ongoing earnings of $0.61 per diluted share compared with $0.63 during the same period in 2010.

While our quarterly results are slightly lower this year compared with 2010, this year's third quarter performance was driven by our utilities, PNM and TNMP, which accounted for more than 90% of our ongoing earnings. Chuck will go into detail on the quarter in his portion of the presentation.

Just want to recap the news from earlier this week. As you know, PNM Resources completed its sale of First Choice Power to Direct Energy, and we are now at the beginning of a new business direction in which PNM Resources will be solely operating regulated utilities.

I'd just like to take a minute and say that, since 2005, First Choice Power has been a valuable part of our business. Brian Hayduk and his team have done a great job in positioning First Choice Power to produce solid and sustainable results, and I speak on behalf of the entire Company in wishing all of the First Choice Power employees the very best.

We remain steadfast in controlling utility costs at both PNM and TNMP, and are making significant strides in improving their earnings and narrowing the gaps between earnings and allowed returns.

TNMP remains on track to achieve its allowed return of 10.125% in 2011. For PNM, initiatives are underway to reduce costs so that expenses are synched with the increased revenues recently approved by state regulators. With our efforts to further streamline our operations, we expect PNM to earn its allowed retail rate base return of 10% by the end of 2012. We have also tightened our 2011 guidance range to $1.00 to $1.05, and we have decided to provide 2012 guidance in early December. Chuck will provide more detail on both of these items later in the call.

We turn to slide 5. I'll take a minute to talk about our load growth. Both utilities experienced load growth for the quarter, although it was modest; but for the year, PNM and TNMP are seeing relatively good growth at 1.2% and 1.3% respectively. For PNM, this is the eighth consecutive quarter of load growth that followed six consecutive quarters of load decline. But we didn't put unemployment on the slide here, because it's steady. New Mexico is still below the national average at 6.6%, and Texas weighs in at 8.5%.

We turn to slide 6. Since the second quarter earnings call, there have been several developments regarding the Best Available Retrofit Technology, or BART, determination at San Juan. The EPA issued a final determination regarding BART at San Juan, calling for the installation of SCR technology on the four units at San Juan in a five-year timeframe.

While this was a change from the EPA's first draft decision -- it called for installation in a three-year timeframe; this calls for it in a five-year timeframe -- they still selected the SCR technology. This installation is estimated to cost at least $750 million, with PNM's share at least $345 million. This BART determination at San Juan marks the first final federal implementation plan for a coal plant in the United States, so many eyes are watching this issue to see how it resolves.

Since that final plan from the EPA, PNM has gone back to the EPA and asked them to reconsider its mandate, to stay its decision, and to fully consider the New Mexico state implementation plan, which called for less expensive SNCR technology. We believe the EPA did not properly consider the state's plan to address regional haze, as required by federal law and regulation. Modeling by an expert engineering firm shows the two plans would achieve similar visibility improvement as perceived by human eye.

PNM has also filed an appeal in the Tenth Circuit Court, challenging EPA's final determination. And we are very pleased that on October 21st, New Mexico Governor Susana Martinez and the New Mexico Environment Department challenged EPA's decision in federal appeals court and petitioned EPA for reconsideration of the state plan.

Because New Mexico consumers have so much at stake here, and ultimately they will pay a higher electric cost as a result, we're very pleased that the Governor and [MNED] took these actions to protect the state's legal authority to determine what is best for New Mexico. It's worth noting that that state plan is significantly less, with total plant costs of about $77 million.

However, given the short timeframe for compliance, PNM must move forward under the FIP framework, and we expect to issue a request for proposals for the SCR installation by late this year or early next year. We fully expect that any dollars we spend on installing emission reduction technology will be recovered in rates.

On this slide we have some estimated costs for early design and construction in the first year, and then those costs rise exponentially when we enter into year two, following the EPA mandate. When we get feedback from the EPA or the courts regarding our appeal and request for a stay, we will communicate those developments to you.

Before I ask Chuck to discuss the details of our financial performance, I wanted to give you a brief update on New Mexico Public Regulation Commission. District 3 Commissioner Jerome Block Jr has resigned, and his seat on the PRC remains vacant. Governor Martinez will appoint a new Commissioner. She has narrowed the field down from the 87 who applied, to five candidates -- three Democrats, one Independent, and one Republican. All of these finalists are eminently qualified to be a PRC commissioner. There is not a timeframe for the Governor to name the new Commissioner, and she has said she will take due time in order to make a good decision for New Mexico.

Also on the regulatory reform front, Think New Mexico, which is a statewide think tank with a focus on improving the quality of life in New Mexico, has launched a policy initiative to reform the PRC. Think New Mexico recommends two fundamental reforms to the Public Regulation Commission. One, refocus and narrow the scope of the PRC's duties; and second, increase the qualifications of PRC Commissioners by requiring candidates to either have a four-year degree or five years of relevant professional experience. We are watching this process closely and will update you as developments arise.

Now I'll turn the call over to Chuck.

Thank you, Pat, and good morning to everyone. As Pat reported, ongoing earnings were $0.61 per share for the third quarter, down $0.02 from last year. However, a breakdown of EPS by segment shows earnings at PNM increasing by $0.03 and TNMP up $0.02. Total earnings of the competitive businesses, which include a full quarter of First Choice and two months of Optim, were down $0.08 from last year.

As you are aware, our exit from Optim was completed in September, and shortly I'll give you the details on the First Choice sale, which closed on November 1st.

The individual business segments are on slide 9. In the third quarter, PNM's ongoing earnings were up $0.03 from last year. The primary driver increasing PNM's performance was a $72.1 million annual rate relief implemented on August 21st. This accounted for $0.07.

Weather was another factor in New Mexico, with cooling degree days up 10% compared to last year. This contributed $0.03 towards earnings.

Outage costs were less than last year, reflecting a reduction in the number of plant outage days, impacting EPS positively by $0.01.

Negative factors affecting PNM's performance this quarter included the expiration of the Palo Verde toll 3 on December 31st of last year. For the quarter, the toll's expiration reduced earnings by $0.07. At TNMP earnings were up $0.02. The implementation of new transmission rates last year along with the new general rates that were put into place in February of this year, added $0.01.

As I mentioned earlier, extreme heat in Texas was a contributor to the quarter results. At TNMP, the weather also accounted for an increase of $0.01 to earnings as cooling degree days in TNMP's territory were up more than 14% compared to last year.

Now moving on to slide 10, the sale of First Choice Power to Direct Energy closed successfully on November 1st for a total of $329 million in cash. This made up for the $270 million purchase price plus working capital of $59 million. We are very pleased with the value received for the business, especially when you compare it to other transactions in this space. As you are aware, we plan to use the proceeds from the sale to recapitalize our business. On October 5th the purchase of the Series A Convertible Preferred Stock for $73.5 million was finalized.

Last week, PNM Resources announced the buyback of $50 million of its 9.25% senior unsecured notes, which is anticipated to close later this month. With the premiums, the total is expected to be $60 million.

We are currently considering various alternatives for additional repurchases of our common stock. Market conditions will obviously be a major factor in the decisions that will be made, and we'll announce these plans as we are able to. Any remaining proceeds from the First Choice Power sale would be used for general corporate purposes.

Now, turning to slide 11. With the recent rate relief we have received in the First Choice and Optim transactions, both Standard & Poor's and Moody's have issued credit rating upgrades. In late September S&P raised all of PNM Resources and its utility ratings one notch, and improved their outlooks to positive from stable. Moody's upgraded its ratings for TNMP and PNM Resources one notch on Tuesday of this week. We are pleased with this progress, and are encouraged that our efforts have been reflected in recent upgrades. Both of our utilities are now at investment grade ratings.

Now turning to slide 12, we have entered into a number of financing transactions recently. The improved credit ratings have enabled us to receive more favorable pricing of our debt than we would have been otherwise able to achieve. TNMP refinanced $50 million term loan in September, reducing the interest rate by approximately 150 basis points to about 3.5%. PNM issued $160 million of 10-year notes in October at 5.35%.

In addition, we received our credit facilities -- we renewed our credit facilities for five years both for PNM and PNM Resources, for a total capacity of $700 million. These actions have strengthened the Company's liquidity, and we're all well positioned to address our future capital expenditures, including environmental and renewable mandates.

Now turning to slide 13, as Pat mentioned earlier, we are tightening our 2011 guidance, which was issued on September 23rd. Consolidated ongoing earnings are now expected to be between the $1.00 and $1.05 range, with the regulated earnings coming in between $1.00 and $1.05, and the unregulated businesses contributing between $0.16 and $0.18. PNM is expected to contribute between $0.72 and $0.75 to ongoing earnings.

This guidance includes the rate increase that was effective on August 21st. Updates for the warmer weather experienced in the third quarter, and the cost control efforts that Pat discussed earlier. At PNM our cost control efforts are focused largely on closing the $13 revenue gap between the stipulated and approved amounts. These savings will be realized across both 2011 and 2012.

TNMP is expected to account for $0.28 to $0.30 of our ongoing earnings. The primary driver at TNMP is the warmer weather in Texas during third quarter. We expect that PNM and TNMP to earn a combined $0.18 to $0.23 for the fourth quarter, which includes the share buyback.

As Pat discussed earlier, we intend to give our 2012 guidance in December, and we're targeting December 9th, but will confirm the date with a press release as we get closer to that timeframe.

On the guidance call, we are planning to address a number of drivers for 2012 earnings. Load growth expectations will be covered, as will the impact that normalizing weather will have when comparing 2012 estimates to 2011. We'll give some additional color on the cost savings initiatives that we have been undertaking.

As I mentioned earlier, we are on track to close the $13 million gap between the stipulated and approved rates at PNM. We'll be discussing how much of that will be incremental for 2012, versus amounts that have already been saved in 2011. We'll also be discussing the assumptions we have around our pensions in 2012; but keep in mind that our plans are frozen, so there are no new participants.

Projected rate base growth in the capital allocation between PNM and TNMP will be reviewed based on our five-year plan. We'll also provide some additional detail on the expected rate base returns for PNM retail, FERC, and TNMP, as well as the EPS impact of unregulated generation from Palo Verde 3.

And with that, now I'd like to turn the call back over to Pat for concluding remarks.

Thank you, Chuck. As we always do, we'll finish the presentation portion of the call with a review of PNM Resources' key strategic goals and checklist, and our progress on those.

Our main focus is operating regulated utilities and earning our allowed returns, and we have made significant strides in accomplishing that goal. We'll continue to make progress by aligning costs with revenues, i.e., controlling our expenses and continuing to seek appropriate regulatory recovery.

As I said earlier, TNMP is on its way to earning its return this year, and we expect to finish 2012 with PNM earning its allowed return on its retail rate base. And you'll remember that not that long ago, PNM's regulated return was in the low single digits.

The exit from the competitive businesses in Texas is now complete, and we have unlocked the maximum value from those businesses for our shareholders.

On our third goal, as Chuck mentioned, we've seen progress here also.

The journey to returning to a solid investment grade has been a long one. Our hard work over the years has resulted in PNM Resources being a financially healthier Company and a good investment for our shareholders. We believe we are very well positioned for providing solid, predictable, and sustainable financial results with our two utilities. We have ample opportunity to grow our utilities with investment in their infrastructure, while securing appropriate recovery.

With the exit from our competitive businesses, we have a stronger and more stable platform, which leaves us well positioned as we consider our dividend path going forward. The board takes a long-term strategic view of the dividend, and strives to manage the dividend in order to ensure a competitive total return position comparable to our peers. As you know, the board addresses the dividend every February, so we won't have definitive guidance and until then, but we expect to grow our dividend over time to reflect our earnings growth.

Operator, we are now ready for the Q&A portion of the call.

(Operator Instructions). Paul Fremont, Jefferies.

Just a point of clarification on the -- on your statement that [PSNM] will earn its authorized return on retail. That excludes -- that's exclusive of the contribution from Palo Verde 3, right?

Yes. Good morning, Paul. Yes, that is.

And can -- and of the $0.72 to $0.75 that PNM's going to earn this year, can you give us a sense of what the level of contribution is from Palo Verde 3 in that number?

Yes. Paul, it -- we're going to provide more color around the forward-looking view of Palo Verde 3, but this year it's more of a breakeven, so it's easily -- at this point, given where market prices are, it could be anywhere from a breakeven to maybe a few cents' drag on earnings, but we've got that factored into the $0.72 and $0.75. But I'm going to break that out and give you more color on that in December when we talk about guidance.

Right. And then, real quickly, when I look at the remaining holding Company debt, should we expect that the Company will try and retire the additional debt that's outstanding, particularly the 9.25% debt? And over what time period would we expect that to happen?

Yes, and if you -- as you -- as we said, we've got the open market tender going on at this point for $50 million, and that brings the balance down to roughly about $150 million, thereabouts. And then we would look for that debt to be retired in 2015 when it matures.

So, in 2015?

Yes. When the maturity date -- yes.

Okay. And then the last question is, on San Juan would you contemplate any regulatory filing before, I guess, July of next year, when you're at least eligible to file a general rate case?

Paul, we might. We are discussing whether or not we want to file a CCN for that project, and if we did that we would make the filing for that, and we'll just wait to see from there. But we may make a regulatory filing. We just haven't decided yet.

Great. Thank you very much.

Ali Agha, SunTrust.

One near-term question. The third quarter results, particularly of the utilities -- were they pretty much in line with your expectations? You know, particularly, I thought that the weather impact in Texas looked a little light versus -- given the weather. So, overall, did the third quarter pretty much come in line on the utility front as you would have expected?

I think a couple of things, Ali. The rates didn't go into effect, remember, in New Mexico, until August 21st. So, that was in line. And then the rate design now is different. So, we would -- we expected less in the third quarter, because the upper blocks took the bigger portion of the rate increase here in New Mexico. They tend to use more year-round. So, you didn't see a big as impact in the third quarter, because you'll see them contributing more through the other quarters.

Okay.

So -- (inaudible), yes. And it's at the [pass point]. I mean, given that, we're well within our expectations of what we expected for third quarter.

Okay.

And those were the two things that really drove the third quarter expectations with PNM, was the rate design, and when rates went into effect.

I see. Because, yes, relative to the numbers out there, I mean, the quarter was light. But I guess it was a timing issue, is what you're saying.

Yes.

(Inaudible) third and fourth quarter, if you go back and look at those that do break it down by quarter, it looks to be more of a timing factor than anything.

Right. Because the rate design will really show more into the fourth quarter.

Understood. And in your '011 guidance for PNM electric, what is the implied retail ROE for this year?

For PNM?

For PNM?

Yes.

8%, and -- is what we expect this year for rate base return.

Okay. And you said that TNMP should earn its authorized -- was it --

10.125%, yes.

10.125% this year. Okay.

Yes.

Okay. And then separate question on the share buyback. I guess, if I recall -- so, $230 million was authorized and $73.5 million was used up for the preferred retirement, so about $158 million or so is left. I mean, are you thinking of an accelerated program? I mean, how -- what are the various options you are looking at? When do you think that program gets completed?

Yes. We'll announce our plans just as soon as we have made decisions, but we -- I guess it's $156 million to work with, that we have authority to buy back additional shares. And so, looking at accelerated share repurchase programs, tenders, other arrangements that can be made in order to accelerate that, to try to execute it as quickly as we possibly can. But at this point, until we have the details firmed up and our plans, I refrain from any announcement beyond that.

Okay. And that is something you'd have firmed up as part of the December 9th or so meeting?

We -- hopefully we'll be able to provide some additional insight on that.

Okay. And then lastly, on the dividend -- going back to just clarifying your remarks. As you said, you'd grow it over with earnings going forward; but to get you to your benchmark -- relevant benchmark as a regulated utility, what would you consider to be your peer group payout ratio right now?

Well, you know, as you look at -- I know you see the regulated businesses tend to be up to -- up at 75% payout ratios. We're still within the 50% to 60%. We're looking at, as Pat mentioned, total return, a way to complement the dividend along with our earnings growth, and we'll discuss that with the board in September -- excuse me, in February next year, to determine what that next step would be, and how we can go about executing a strategy around consistency, and that's comparable to our peers over time. So, that's our goal.

Comparable to peers would mean ultimately getting to that 70% plus range?

You know, at this point it's a long-term view, and so we want to be comparable to our peers of other regulated businesses; but we see that as several steps in order for the Company really to address that, and the board's comfort with the long-term view of the business. So, at this point I think that's probably enough that we can talk about.

Yes. Thank you.

(Operator Instructions). Chris Shelton, Millennium.

Hi, it's actually Jeff Gildersleeve. Just -- most of the questions were asked, but on the buyback you said market conditions. What exactly did you mean by that?

Well, I think that's probably a good parameter to think about trying to determine the balance of proceeds we have and what to expect in the way of using those proceeds to buy back additional shares. So, market's probably a good parameter to work with. Certainly if we can find ways to execute in a more favorable manner, we'll do that. But at this point I don't really have any details to talk about.

Okay. And we'll hear more about that in December as well.

Right.

Absolutely.

Okay. And then on Palo Verde, when we think of '12 and then into '13, does that -- that should improve? I guess it's improving with other owners.

You know, Jeff, the way -- yes. The way to look at that is -- you're talking about Palo Verde 3, the unregulated -- it's 135 megawatts. So, you need to think of it in terms of, we -- when we got out of the toll, we're really working with kind of a rolling 12 months of how we look at the pricing of that generation.

Given where prices are relative to the market being exceptionally low, we're not wanting to lock down that asset for any longer period of time. So, I would just look at it as the forward curve relative to a rolling 12 months, and how we'll eventually work that into our ability to maximize its value over time.

And on the costs in the operational front, Pinnacle West is doing a very nice job managing the costs at Palo Verde in a downward slope, and also keeping the production of that plant up.

Right. Yes. I'm sorry I wasn't clear. I was referring to the cost -- that, improving over time.

Yes. We see -- we haven't gotten the finals from Pinnacle yet, but we see the trends going in the right direction on the costs at Palo Verde.

Okay. Great. And then the comment about earning the allowed return by the end of 2012. So, that'll be a process through '12 that, by the -- so, in other words, by the end of '12 you would be at that level of earned return -- allowed return.

Yes, Jeff.

That's right, Jeff.

That's correct.

And when we -- [come] December, we'll have more details about how we get there, in terms of cost cuts and other things.

Great. Nice job. Thank you very much.

Ashar Khan, Visium Asset Management.

My questions have been answered, thank you.

Tim Winter, Gabelli.

Good morning, guys, and congratulations on the quarter and recent actions. I was wondering if you could give us an update on how the rule-making procedures are going, with trying to get in place a process for a forward-looking test year in New Mexico?

They haven't gotten started yet, Tim.

Okay. What's hindering that process? Is it the turnover in the Commission, or --?

Yes. The Commission really needs to get fully staffed up, and unfortunately around the resignation of Jerome Block there was allegations of credit card misuse that may have spread, you know, some of the Commission staff. So, they've just been a little distracted. But I think as soon as the Governor gets a new Commissioner on board, they'll get going.

Okay. And is there any -- can you talk about any ways that you could address the San Juan expenditures, should they end up at the higher amount? Would you just have to wait till they were spent -- till it was spent, and then file, or --?

No. We, in the rate case, made sure that there was an opening that we could file for any environmental expenditures that came from regulations. There's multiple ways we could do it. We could file for, you know, CWIP. We could file yearly rate cases. We could file an environmental tracker. We're exploring all those kinds of things with our internal folks and with our legislature, in case we decide we need any legislation for that.

Okay. Fantastic. Thanks.

You're welcome.

Maury May, Power Insights.

Just a couple of quick questions. I want to get 2012 straight. You are going to be earning your allowed ROE at PNM in 2012, or are you going to be at -- earning at that rate by the end of 2012, implying that you earn it in 2013?

No --

By the -- go ahead, Chuck.

We'll be earning our allowed return in 2012. And it -- there's -- as we talk about it in the guidance in December, we'll give you more clarity around the expectations and how we're looking at earning that return, but it is tied to some cost reductions that Pat mentioned earlier as well.

And Maury, remember, it's on the retail piece, so you've got to -- so, Palo Verde, and don't forget there's FERC in there too.

Right. Okay. And then on your cash position right now, where are you? You know, following the close --

Well, we actually (inaudible) on cash. We've got about $166 million of surplus in cash right now, so (inaudible).

The $329 million that walked in the door the other day was very helpful.

So you have $166 million. So, you can sleep well at night, Chuck?

I sleep very well at night.

Yes.

Great. Okay.

In fact there is a -- in the appendix, if you look at the [slide] A-10 there's detail.

Okay, great. Thank you, folks.

Mike Bolte, Wells Fargo.

I guess I just have a follow-up question on the -- PNM earning the allowed ROE by the end of 2012. Would that be on, like, the authorized $1.8 billion of rate base, or would it be kind of on an average for the year? Like, in other words, did you pick up any kind of incremental rate base between, I guess, the end of the test period, which was, I think, mid 2010, in that number?

Yes. It would really be more of an average rate base and our earnings projection for '12 will be based on that calculation. So, we'll give you more details of that when we talk about it in December, but that's the way to look at it.

Okay. Thank you.

You're welcome.

And I'm showing no further questions at this time. I would like to turn the call back over to management for closing remarks.

Well, everyone, thank you for joining us on what in New Mexico is a beautiful fall morning, and we look forward to seeing many of you next week at the EEI Financial Conference.

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