PNM Resources Inc (PNM) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PNM Resources second quarter conference call. (Operator Instructions). I would like to introduce your host for today's conference, Jimmie Blotter, IR Manager. Ma'am, you may begin.

Thank you for joining us for the PNM Resources second quarter 2013 conference call. Please note that the presentation for this conference call and other supporting documents are available on our website at PNMresources.com. Joining me today are PNM Resources Chairman, President and CEO, Pat Vincent-Collawn, and Chuck Eldred, our CFO, as well as several other 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 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 assume no obligation to update this information. For a detailed discussion of factors affecting PNM Resources' results, please refer to our current and future annual reports on form 10-K, quarterly reports on form 10-Q, as well as reports on form 8-K filed with the SEC. With that, I'll turn the call over to Pat.

Thank you, Jimmie. Good morning, everyone, it's great to be with you all on this beautiful sunny New Mexico morning. Today I'll offer a quick snap shot of the Company's second quarter performance, a scan of the economic and regulatory outlook in New Mexico and Texas, the latest update on San Juan generation station in BART and a brief look ahead. I always like to share good news with you and I believe our second quarter results qualify. I'm pleased to report that the Company continued its strong performance and delivered solid earnings results. As we look at the numbers on slide four, I'll discuss what is behind them.

First, the Company continues to realize benefits from the focus on our core business as a regulated utility. We are effectively managing costs while maintaining reliability and good customer service. We have also worked hard to build and maintain relationships with regulatory stakeholders and we continue to see progress in obtaining constructive regulatory outcomes.

The analysts at Moody's specifically mentioned that fact in June when they upgraded the credit outlook for PNM Resources, PNM, and TNMP to positive. This followed S&P April upgrades of all of our entities which included moving PNM Resources credit rating to investment grade.

Today, we affirmed our financial outlook for the year. We expect the 2013 consolidated ongoing earnings to be solid in the middle of the guidance range of $1.32 to $1.42 per diluted share.

Now let's go to slide five and take a closer at PNM and TNMP and the economic forces at work in both states. Starting with PNM, in the second quarter, we saw a small decrease in weather normalized loads with total retail energy sales down .6 from the same period last year.

Just as in Q1, some of the decrease in loads can be attributed to the Company's energy efficiency programs. I want to point out that the decrease in Q2 was less than the decline in the first quarter. On a positive note, sales were up 2% in our commercial customer class.

Year-to-date, PNM is averaging .5% customer growth. The economy here continues to be a bit soft as New Mexico lags behind the rest of the nation in post recession recovery, especially in the Albuquerque metro area.

However, numbers reported this week show year-to-date public and private sector job growth in the metro and statewide unemployment remains below the national average. Gross receipts tax collections in the city of Albuquerque, which is considered a credible indicator of economic activity, were up in May, now for the third consecutive month.

And the director of the bureau of business and economic research was quoted this week saying that an overall recovery is finally happening in Albuquerque. While we're not yet seeing that in our load numbers, we have experienced periods of increased peak demand, and in fact, on June 27th, we set an all-time record peak.

Turning to TNMP, energy sales were basically flat for the quarter. While we did see some load decline, the trend for TNMP is still positive. The rolling 12-month average for TNMP shows an overall retail sales increase of over 2%.

We know the Texas economy is still strong and growing. The state's unemployment numbers are well under the national average and job growth has been consistent.

There's every indication that will continue in Texas. Now let's move to slide six for a regulatory update. As I mentioned at the top of the call, we are pleased with several recent constructive regulatory outcomes that have provided rate relief and allowed the Company to move forward with important projects.

On June 26th, the New Mexico public regulation commission unanimously approved PNM's purchase of the Delta-Person Generating Station. This plant is 132MW gas fired peaking facility in Southwest Albuquerque and it has provided power to PNM under a purchase power agreement since 2000. The plant will add 40 million to rate base and on an annualized basis, is expected to contribute $0.02 per share to earnings.

We expect to close in early fourth quarter. On May 17th, PNM filed with the New Mexico commission for approval to build and operate the new 40MW (inaudible) gas fired peaking plant South of Albuquerque. Construction will cost an estimated $63 million.

We anticipate the New Mexico public regulation commission to act on the filing sometime to mid in mid to late 2014 and expect the facility will go online in the first quarter of 2016. We also filed our renewables plan with the New Mexico commission on July 1st. This 2014 plan calls for the construction of an additional 23MW of utility owned solar capacity.

The estimated cost of this is $47 million, and our plan also lays out how PNM expects to meet the state's renewable portfolio standards. We look at TNMP, we filed our latest (inaudible) increase yesterday, which will add $2.8 million in revenue.

Barring an unforeseen challenge, we should begin collecting on the new rates at the end of September. The consolidating tax saving adjustment bill was signed into law by Texas Governor Rick Perry in June. This eliminates the provision that previously allowed the PUC to artificially lower a utilities rate request by applying tax losses of the utilities affiliates.

We move to the FERC filings, in June, FERC approved an amended agreement creating a 1-year contract extension for PNM to continue providing power to the city of Gallop.

That agreement went into effect July 1 and contains rate relief that will increase revenue by $3.1 million during the contract extension period. There are few developments with the FERC transmission formula rate case that PNM filed December 31st of last year.

The Company is currently engaged in settlement talks with FERC and the parties to the case with the next settlement conference scheduled for October. We have updated our filing to reflect FERC's directed ROE of 8.67%. The $1.3 million rate increase, which is subject to refund, went into effect today.

Now let's go to slide seven to review developments with the San Juan Generating Station and BART. We are making progress with the revised state plan to put SMCRs on units one and four and shut down units two and three. The revised plan is now under consideration by the New Mexico environmental improvement board.

They're scheduled to hold hearings on September 5th and 6th and we anticipate that the board will vote on the plan in September. The state, through the New Mexico environment department, proposed the revised plan and the governor has publicly supported it.

In addition, a broad range of key stakeholders, including the Navaho nation and a number of legislative and business leaders, support the plan. Gene McCarthy, the new EPA administrator, has called the plan a model for how the EPA, state, and utilities should work together.

We're optimistic that the agreement will be approved. After the EIV approval, the governor has 30 days to submit the revised plan to the EPA. The EPA approval process is expected to take about a year.

We will be making the appropriate filings with the New Mexico commission at the end of the year for the retirements of units two and three at San Juan, and for the identified replacement power. We are still on track to begin installation of the SNCRs on units one and four in the first quarter of 2015.

The process will take about a year to complete. According to the revised plan, units two and three will then be shut down by December 31, 2017.

We will be working with our stakeholders over the coming months to identify the appropriate replacement power. As we have previously discussed, we have been asked to consider adding our interest in unit three as part of our replacement power and that continues to be a potential option for us.

It's important to note that with this agreement, the Company would be in a position to meet or exceed the (inaudible) greenhouse gas reductions outlined by President Obama, 17% below 2005 levels by 2020. With that, I'll turn it over to Chuck who will go into details of our second quarter financial performance.

Thank you, Pat, and good morning to everyone. At the beginning of the call, Pat mentioned that Moody's moved to a positive outlook for us. The recognition for Moody's and a few months ago from S&P is proof that we continue to deliver on our commitments. This carries forward to our quarterly results. We had a strong second quarter. In spite of a sluggish local economy, we continue to manage our business well.

Let's review our financial results beginning on slide nine of the presentation. First quarter ongoing results were up $0.05, compared to the second quarter 2012. PNM was up $0.03 and Corporate and Other up $0.02. TNMP was flat between the periods.

The drivers on slide ten. Beginning with PNM, we talked last quarter about leveraging cost control to help make up shortfalls from load. We're able to effectively mitigate the load impact at PNM this quarter with these efforts. Going forward we will continue to manage our business well, including keeping our costs in line with our revenue.

Our objective for the Palo Verde nuclear decommissioning trust is to maintain a balanced and diversified portfolio. We had our manager to increase the diversification which resulted in a $0.02 realize gain. Rate relief provided $0.01. This is from the renewable energy rider that was implemented in August of 2012.

Higher PV3 pricing also contributed $0.01. We are fully hedged for 2013 at an average price of about $34. Last quarter, we talked about load coming in lower than we expected and Pat has all ready talked about this quarter's results.

Combined load and weather, we're down $0.01 compared to last year. Each contributed about $0.005 for reduction for PNM. Cooling degree days of PNM were down 9% compared to the second quarter of 2012, but were up 22% compared to normal.

As we discussed in the first quarter, higher depreciation expense from increased plant additions during 2012 lowered earnings by a penny. The outage costs were also negative compared to the second quarter of last year. This was primarily because timing of a planned maintenance at San Juan.

Moving to TNMP, while we were flat on an EPS basis, there are a few offsetting driver's. Rate relief from (inaudible) filings added $0.01 and a higher demand charges from large commercial customers also contributed $0.01.

As Pat indicated, we filed our second (inaudible) for the year yesterday and we expect that the $2.8 million rate increase will be effective in September. Weather was down $.01, cooling degree days were 19% lower than last year and 10% than normal.

Depreciation and property taxes due to increased plan additions reduced earnings by $0.01. Although this is not on the slide, I will also give an explanation for the change in corporate and other. This segment is up $0.02 compared to last year. The primary driver is a combination of the timing and allocation to the utilities of certain expenses including depreciation, that were formerly held at corporate. Neither of these items were a net benefit to the consolidated entity on an annualized basis.

We did see a slight pick up for lower interest. We received the $96 million tax refund that we talked about, and used those funds primarily to pay down our revolvers. The April upgrade from S&P ratcheted down the interest expense of the revolvers and we had the opportunity to repurchase about 8 million of the 9.25% holding Company debt during the quarter.

Turning to slide 11. We are reaffirming our 2013 ongoing guidance range of $1.32 to $1.42. With half of the year behind us, we are confident that we'll end up the year solidly in the middle of our guidance range.

As Pat described, we're continuing to monitor load. We're all ready through July, the first month of our largest quarter, and the load has not changed our view for the year.

We still expect 2013 to be down as much as 1% compared to 2012. As I mentioned earlier, we have (inaudible) fully hedged for 2013, we're also about 50% hedged for 2014 at an average price of approximately $37.

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

Thanks, Chuck. As we wrap up the presentation, I want to review our checklist as we move into the second half of 2013. We have checked off the improving first earnings goal because of the rate increases associated with the Gallop contract and the FERC transmission formula rates. We continue to optimize our Texas T-cot filings.

As I mentioned yesterday we made our second filing for the year and should be collecting the new rates in September. We will keep working to obtain final approval of the revised San Juan BART agreement.

We work diligently to maintain our top reliability and to maximize power plant availability. I want to take a minute to mention the unprecedented storm system that hit the Albuquerque metro last Friday, including wind gusts up to 89 miles per hour which is Hurricane force and the strongest ever officially recorded in Albuquerque. It caused a lot of damage and our systems were impacted as well.

I'm very proud of our employees who rose to the challenge and worked tirelessly to restore power to all of our customers. It was also the first time that we have ever asked for help from neighboring utilities. Several were eager to assist and I would really like to call out Tucson Electric and El Paso Electric. We're grateful to them for sending their crews.

On the financial side, most of the cost of repairs will be capitalize and we do not expect this to impact earnings. Moving on, we'll continue to effectively control OEM and capital costs. And finally, we continue to execute our plan to achieve top core tile returns by 2016. With that, operator we can now start the question and answer period.

(Operator Instructions). Our first question comes from the line of Ali Agha with SunTrust. Your line is open.

Good morning.

Good morning, Ali.

Good morning. Couple of questions. On the earnings contribution from the nuclear decommissioning trust. Can you remind us what had you budgeted for that for the year and should we expect more of that as the year progresses?

Yes, Ali, we don't budget for any realized gains on any Nuclear Decommissioning Trusts. As we continue to focus on providing diversification in that portfolio. At times you'll see where the market is doing so well on the equity side that we have to rebalance that to adjust the portfolio to about a 50/50% split. Because at amount of the fund has grown significantly, we've had to add some additional fixed income managers and we happen this time to add one that resulted in picking up the realized gains before interest rates changed in the market. We don't budget for it, so it's more of how we manage that corporate asset and how we think about maintaining the objective of diversification and that portfolio.

Okay. Secondly, given your comments on load trends and the comments that you're very comfortable with the middle of your guidance range for the year, what are your latest thoughts on the timing of the next rate case? Are you still thinking you can push it off into 2015 with San Juan or any changes on the thoughts? Can you just update us?

A few things. One, we haven't made a decision on a future rate case and we continue to evaluate that. Obviously, the trend and the load has create some additional challenges, but we've been able to mitigate that this year with managing costs and aligning with the revenues. As we think about it going forward, we're continuing to analyze the load projections and think of ways in which we can offset and mitigate the impact of that as we assume the economy is slow in recovery. Ithink we've shown examples where we have a Delta-Person Station which was not originally expected, but we picked up about $0.02 for next year.

We continue to look at opportunities within the business that would continue to help mitigate the impact of the load decline, and I think that at this point, it's too early to really talk about those things, but certainly we'll talk about it during guidance during 2014, and if we feel this load scenario plays out to be much slower and the economy doesn't turn around any time soon, then we would have to consider possibly filing early on the rate case, but we're not prepared to make that decision. We'll continue to manage the costs on the business and look at other opportunities to begin to offset the sluggish recovery of the economy.

Just remind me. Right now, as it stands, the plan for the next rate case is when?

We haven't announced that at this point.

Okay. Last question. Assuming there's no rate case filing or no rate increases in 2014 and I know you'll give us 2014 guidance at the end of the year, at a high level, where do you see the drivers for 2014 other than load growth and cost reductions right now?

I think it's better to wait until we give guidance, Ali, but as I mentioned, we're continuing to look at ways on how to offset the minimum of the load implications. We have options that we're looking at and opportunities that might certainly help with mitigating that impact. It's just too early to talk about that. We're also looking at weather normalization and how the cooling degree day applies to the energy sale.

And frankly, we are seeing if you begin to shorten the periods of which we normalize weather on a 10-year basis, we think about looking at some of the statistical trends we've looked at over the last four years, we've seen an improvement in cooling degree days so we're reevaluating on what the normalization impact has had on our load and energy sales and it's too early at this point to talk about whether or not we've drawn a conclusion, but we may not see energy sales as impacted in what we currently use. As everyone knows, it's really more of an art of how you apply that and we're taking a hard look at that, and if we think we're going make changes, we'll talk about that in the December guidance.

Thank you.

Our next question comes from the line of Kit Connaledge, with BTC. Your line is open.

Good morning. Chuck, maybe can you go into a little bit more detail on what kind of cost offsets you were able to find to help mitigate the load and maybe discuss in a little more detail how much carry-through there might be on cost reduction efforts?

Yes, Kit, these are a lot of small items within the business that we look at in the operational side, dealing with some of the planned expenses that we can pull back levers and delay, and rethink about priorities of how we spend O&M dollars in the business. Don't necessarily look at these things as permanent to carry forward for years, but certainly gives us some flexibility and some options on how we prioritize the allocation of O&M across the business and find ways to reduce the costs. I don't have a number for you to say to carry-forward, but certainly we have opportunities to continue to align those costs up with the revenue declines that we've seen given the impacts on load, and we'll just continue to manage that.

And if you were to conclude that load growth was going to be weak or negative over an extended period of years, would you then be in the market to be doing some more kind of larger scale, more permanent O&M reduction approaches?

We would look at combination of things, one being certainly how we think about the long-term implications of the declining load, but it really would get more probably into Ali's comment about the timing of the next rate case and that is the next step we would take, is to begin to line up the expectations try to address the implications and load on the next rate case and file sooner than what would likely be another scenario.

Great. And finally then, do you have any quantification at this point or beginning of an estimate of how much impact energy efficiency has on load?

We're seeing on average roughly around 1% to 1.5% when you factor in distributed generation. Energy efficiency seems to and be around that 1% area and distributed generation maybe slightly less than .05% so it's in that range is what we see is the impact.

Okay, great, thanks. Very helpful.

Okay, Kit, thank you.

Our next question comes from the line of Paul Freemont, with Jeffries. Your line is open.

Thank you very much. I guess my first question is you've got a lease option coming up in January. Is it likely that you would go the same way on Palo Verde on unit two that you went on Palo Verde unit one, which is an extension?

Hi, Paul. We're looking at G&L, we have that option and we don't have to make a decision until January to your point as far as giving the notices as to whether we want to extend the lease or purchase. We're going take a very careful look at that. We certainly have the benefit with the unit one leases because they extended out as far as 2023 to continue to have the option to purchase the leases, but have the benefit of extending for a longer period of time.

If you look at the leases that we have outstanding now on unit two, three of those leases really get extended only to 2018, so that might create some thinking around the idea that we would consider a purchase option and using that as the notice, but we haven't concluded that, but given the fact that it's a shorter period to extend the leases might result in us thinking about noticing differently on the unit two leases than we did on unit one.

Great. The integrated resource planning process in New Mexico I guess just kicked off. When should we expect that you file your action plan in terms of resources that you see in the following 3-5 years?

Paul, it's about a year-long process, so you would expect to see the filing next year. Remember, in New Mexico, the integrated resource plan doesn't formally get accepted. Other states it formally gets accepted and that's where you file your long-term plans, but the timing on this is perfect as we move into talks with stakeholders about replacement power for San Juan. We'll be running the numbers through the IRP process, so it will dovetail nicely on those two processes.

The Company sort of indicated an interest to potentially purchase another 78MW of San Juan from other parties. Who would you be purchasing that 78MW from?

Paul, what we're talking about now because the owners are still in discussion, is rebalancing so it could come from a variety of different owners, and it's just rebalancing what's in there in that unit, but the talks about who gets what are still confidential, but we're still retiring the 340MW. If you remember the units that are closing are different than the ones in the original plan, so that's why we pick up the 78. It's just for the portfolio rebalancing piece.

Okay. Thank you very much.

Thanks, Paul.

Our next question comes from the line of Justin McCann, with S&P Capital IQ. Your line is open.

Chuck, you pretty much answered most of the questions that I have regarding load. I would just like to maybe fine tune. Like in Texas, where the economy is strong, how much of it over the next few years is going to be energy efficiency that's keeping load down? And two even in New Mexico, even if there's an improvement in the economy, that energy efficiencies will limit the load growth?

In Texas, we're not getting that much of an impact on the energy efficiency, so it's really not driving any real change in our outlook towards energy sales growth in that market in fact, with the number of customer growth and the fact that the economy is strong, we continue to frankly exceed some of the expectations in how we project the load within Texas, so we're very optimistic on our view towards that particular region and part of our business.

And in New Mexico? Assuming that the economy does improve, would energy efficiency limit the load growth potential?

Right now you might draw a conclusion that even with a small customer growth that we've had, which is about .05% that it's pretty much getting washed out with the energy efficiency that we're seeing, so we need to see more customer growth in the economy coming back in a much stronger way for us to really begin to see a net real positive turnaround, but we do see early some indications that the economy, as Pat pointed out, is showing some improvement. We're we've just not seen it in the load. On the other hand, as Pat talked about in her comments, we hit a new peaking record this summer. It's still a strong business model, but just more impacted by a sluggish economy and how we think about the timing of when that actually begins to be reflected in our increased energy sales.

One question for Pat. What impact do you see the tax reform package which lowered the corporate income rate having, or has it had any impact so far?

Ultimately the governor passed the tax reform. ultimately those will all go back to customers, so it doesn't have a big impact on us at all. Hopefully it helps in the economic development in the state and I know that the economic development secretary will tell us he's getting more inquiries for customers thinking about moving into New Mexico, but we end up giving all of that back to customers.

I didn't maybe state it correctly, what impact it would have in terms of more corporations moving into New Mexico?

We see it as very much a positive and while no one has announced that they're coming here, our economic development folks at PNM along with the city and the state are a lot busier than they were before, so we think it's going to have a positive impact.

Okay, thank you.

Our next question comes from the line of Brian Russo, with Ladenburg Thalmann. Your line is open.

Good morning.

Good morning, Brian.

The filings that you guys make every year, TNMP, is that $2.8 million a good run rate to use on an annual basis going forward?

Yes, it's kind of hard to tell, but that's in line with the growth that we tend to see over there.

Okay. And when is the next D-cost filing?

Well, the D-Cost filing we haven't stated if we would use it. Remember, the D-Cost filing has an earnings test in it and so if you're earning your allowed return, you can't take advantage of that filing so we have not been able to take advantage of that filing.

Okay. I guess to interpret your comments earlier about offsetting the weak load growth of cost cutting. You guys are able to earn, you're allowed ROEs at both subs this year?

Yes, definitely, without a doubt.

And then also, the Delta purchase and the (inaudible) peaking capacity. Is that in your CapEx?

You know, at this point we didn't have it in guidance for this year. In the CapEx going forward --

Brian, this is Jimmie. Delta is a PPA that we were all ready receiving the energy from, so it was not part of capital.

On the acquisition piece of it, we've incorporated into our current projections, but it's an acquisition of a PPA, that's why it's a little different.

Okay. Are there any rules or regulations in New Mexico that allow for you to ask for a recovery of lost revenues related to energy efficiency?

It's somewhat unclear. The way that the statute states, is that PNM should recover its energy efficiency costs and earn a return greater than supply on its energy efficiency. In practice, it hasn't quite turned out that way. We are able to earn and a small incentive on that. We do not have a Loss Revenue Adjustment Mechanism, or an LRAM, we do not have that here. We looked at decoupling our last rate case and that got too complex so we ended up withdrawing that. Like everybody else, we're looking at what surrounding states are doing to see if there's a mechanism that makes sense going forward if energy efficiency gets to be a lot bigger.

Lastly, is the base case still to finance your base CapEx our your core CapEx plus the San Juan spend without any meaningful external equity?

That's correct, Brian. What you see in the capital slide and the presentation does not need any equity to fund the business.

All right, thank you.

Infrastructure (Operator Instructions). our next question comes from the line of Leon DuBose, with Luminous Management. Your line is open.

Good morning.

Good morning, Leon.

Not to continue to coming back to the sales growth numbers. I'm curious, in Texas, we saw pretty significant decline from Q1 to Q2 in the growth. Can you just give a little more on what's the main factor that's causing that?

Last year, there was an anomaly in Texas. If you remember last year in this quarter where sales were very high, and so this year they drop down. I don't take this than anything other than a change from last year's anomaly. We don't see anything in Texasthat shows us that load is slowing down or customer growth is slowing down. I think it's a hiccup in the numbers from last year.

Okay. That's why you haven't really changed the projection?

There's no indication at this point, and again, as I mentioned, we're looking at weather normalization and how we apply that so there could be some methodologies that we talk about during guidance in December that could be a factor in how we think about it. So weather normalising would show a slight decrease in pressure on energy sales, but over a shorter period of time we're not seeing that same impact. In other words, 10 years versus a shorter period of time, we're don't see the same impact.

Thank you very much.

I'm not showing any further questions in queue. I would now like to turn the call back over to Pat Vincent-Collawn.

Thank you for joining us. We hope you have a wonderful weekend. Thank you.