PNM Resources Inc (PNM) 2013 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 with instructions to be given 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 for today, Ms. Jimmie Blotter, Investor Relations Manager.

Thank you Ben. And thank you everyone for joining us this morning for the PNM Resources third quarter 2013 earnings 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, and 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 are based upon current expectations and estimates, and that PNM Resources assumes 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 will turn the call over to Pat.

Thank you Jimmie, and thank you all for joining us on this beautiful fall morning to discuss the Company's performance during the third quarter. I hope you all had a safe Halloween, and got lots of treats in your candy bags.

We will start on slide four, The Company continued its consistent performance, and is on track to meet its financial goals for the year. As a result we have narrowed our guidance range to $1.35 to $1.41. TNMP continues to perform well, and is benefiting from the strong Texas economy. In New Mexico there continued to be indications that the local economy is stabilizing, and PNM saw a slight increase in residential load during the quarter. We are also pleased to say that the Company is on course with gaining the necessary approvals for the revised state implementation plan related to our coal-fired San Juan generating station.

Let's go to slide five now, and take a closer look at PNM and TNMP, and discuss market conditions in New Mexico and Texas. Starting with PNM in the third quarter we experienced a decrease in overall load with total retail energy sales down 1.2% from the same period last year. The decline was primarily driven by decreases in the commercial and industrial classes. Just a quick note about the industrial class, it makes up just 15% of our sales, and the decline was primarily driven by operational changes at a single large customer. We are encouraged that residential load increased 2% during the quarter, and overall appears to be stabilizing. The commercial and industrial classes are a bit more difficult to predict at this time.

Reports continue to suggest that Albuquerque which has stubbornly lagged behind the nation in its economic recovery is showing signs of stabilizing. The Greater Albuquerque Association of Realtors reported that in September single family detached home sales were up nearly 18% from the year before, the strongest September sales since 2006. Statewide the numbers were similar. When considered along with other economic indicators, such as increased employment, and gross receipts or basically sales tax collections, this is a positive sign. We will wait to see if it is reflected in our numbers going forward.

Taking a look now at TNMP, we are obviously very pleased by the continued strength of the Texas economy, which continues to have a positive impact on our results. If the Dallas Cowboys would win a few football games I might even convert to be a Cowboys fan, because Texas is doing so well. Both the residential and commercial classes in Texas showed strong load increases in the quarter,4.6% and 3.7% respectively. Average use per customer was also up by more than 3%. The Texas unemployment remains well under the national average, and job growth has been consistent. The forecast for Texas economy continues to be strong.

Now let's move to slide six for a snapshot of developments concerning our regulatory filings. I will just highlight a few of the high links on page six. In terms of the Delta-Person, in June the Commission unanimously approved our purchase of Delta-Person generating station. This adds $40 million to rate base on an annualized basis and is expected to contribute $0.02 a share. We expect this to close by the first quarter of 2014.

The next filing I want to talk about is the 2014 renewable plan. We filed our 2014 renewable energy plan with the New Mexico Commission on July 1. It includes the addition of 50,000 megawatts of wind-generated RECs, the construction of 23 megawatts of company-owned solar that we would put in rate base at a cost of $46.7 million, and a 20-year PPA for the output of an existing 100 megawatt wind energy center. We would also purchase some wind RECs in 2015. Our plan would increase our renewable energy rider effective January 1, 2014. We expect the Commission will rule on this plan some time in the fourth quarter.

On the FERC side of the house, as we noted last quarter PNM extended our agreement to provide both energy and power services to the city of Gallup, we extended that agreement through June 30, 2014. That extension included a rate adjustment that increased revenue by $3.1 million during the extension. The city of Gallup issued a request for proposal for long-term power supply in September. The RFPs are due by November 26th, and PNM is in the process of readying its response to that proposal.

Over at TNMP, actually the last day that we had our last earnings call, we filed with the Texas Public Utility Commission for a transmission cost of service increase. The Commission approved that request very quickly, and the new rates went into effect on September 17. This will increase revenues by $2.8 million annually.

Now let's go to slide seven to review developments with San Juan generating station and BART. We cleared a major hurdle with the revised state implementation plan or SIP on September 5th, when it was unanimously approved by the New Mexico Environmental Improvement Board. The plan is now in the hands of the EPA, and at this point we anticipate approval some time in the fourth quarter of 2014. We are moving forward with plans to begin installation of the SNCRs on Units One and Four of San Juan generating station, and we will be starting that in the first quarter of 2015. Units Two and Three would then be shut down on December 31, 2017. This is the overall time frame for the major steps in the process.

Let's move to slide eight for a timeline of the other steps that the Company will be taking to fully implement the plan. While the EPA is considering the revised SIP, the Company will be working with the New Mexico Commission on the other critical aspects of the plan. This slide shows the simplified timeline of the process. In December of this year, we will make a comprehensive filing with the Commission for three critical actions. The abandonment of San Juan Units Two and Three, and the recovery of the undepreciated value of the units. Certificates of convenience and necessity to add Company-owned capacity from Palo Verde into rate base, and the potential ownership changes in San Juan. These will replace a proportion of the capacity lost to unit retirement. We will file for the remaining replacement power sources in a time frame that will meet PNM's operational requirements.

The third component of that filing is a summary of the proposed rate making treatment for cost recovery. The PRC review of the December filings will take approximately one year. We would expect a final ruling some time in the fourth quarter of 2014 or the first quarter of 2015. As we have done in the past it is customary in these cases, the Company will participate in settlement discussions in an effort to reach a fair agreement that can be presented to the Commission, and it will provide maximum value to shareholders and also be fair to our customers.

Now I will turn it over to Chuck who will get into the details of our third quarter financial performance.

Thank you Pat, and good morning to everyone. We appreciate you taking the time today, and also look forward to seeing many of you at the EEI in the next week or so. Overall we are pleased with the third quarter results. We have been executing to our plans, and as a result we are able to narrow our guidance range for this year. While we have not seen an improvement in the load at PNM, we do believe that the local economy appears to be stabilizing, and we will continue to manage our business well, keeping our costs in line with revenues. PNM has also been affected by cooler weather this period. TNMP had another good quarter, and continues to reap the rewards of the strong Texas economy.

Let's review the financial results beginning on slide 10 of the presentation. Third quarter ongoing results were down $0.05 compared to the third quarter 2012. TNMP was up $0.02, while PNM was down $0.07. Corporate and Other was flat between the periods. The drivers on slide 11 beginning with PNM, higher PB3 pricing contributed $0.01 in Q3. As I mentioned last quarter we are fully hedged for 2013 at an average price of $34.

Looking forward to 2014, we are about 90% hedged at an average price of approximately $37. There are a few items offsetting the pickup. Versus the contribution that we made to the Navajo work force training initiative that is tied to the revised SIP. The training initiative is a $1 million program to offset the Navajo nation's economic impact from the shutdown of the two units at San Juan. This lowered earnings by a penny this quarter compared to Q3 2012. Transmission was also down $0.01 this year, this was driven by a number of small items including a transmission contract that expired, and another that reduced the volume earlier this year. The 1.2% decrease in PNM's load for the quarter represented a decrease of $0.02.

Weather was also down compared to last year. The EPS impact was $0.04, which was primarily driven by the above average temperatures in Q3 2012. Q3 2013 PNM's cooling degree days down 10% compared to the third quarter of 2012. Comparing this quarter to normal, we were only down 4%. Moving to TNMP we were up $0.02. Rate relief from TCOS filings added a $0.01, and higher demand charges from large commercial customers also contributed $0.01. Pat described the continued strength that we are seeing in the Texas economy. Load was up $0.01 as a result.

Turning to slide 12 we narrowed our guidance range to $1.35 to $1.41 for 2013, from $1.32 to $1.42. New Mexico load continues to be soft as we have seen since the beginning of the year, for 2013 we expect load to be down about 1% for the year. Although there are signs of the economy picking up locally, we are not seeing that translate to an increase in our load. Palo Verde 3 pricing has added $0.01 to each quarter so far this year, and we expect that trend to continue in Q4.

Palo Verde 3 is in an outage right now. When APS took the unit down for the planned refueling outage, they identified a valve leak which extended the outage by an additional two weeks. The majority of these incremental costs are capital. However as we have discussed, we are fully hedged at PB3's output this year. The exposure that we have on the hedge for the additional outage days is expected to cost us about $0.01 in Q4. Therefore the hedge price improvement will be offset by the effects from the outage. These items are captured in the new range.

We are successfully mitigating these challenges in various ways, including managing our costs. TNMP and Corporate and Other have also performed well, helping to offset the impacts of PNM. It is important to note some of the improvement at the corporate segment have been because of cost reallocation to PNM. We have updated the segment ranges for 2013 to reflect our current expectations. PNM is now at $1.15 to $1.18. TNMP is expected to be $0.33 to $0.35. And Corporate and Other a loss of $0.13 to $0.12.

Turning to slide 13. Although we are not providing 2014 guidance until December, I want to reiterate that we remain committed to achieving our total return objective. We define total return as EPS growth plus average dividend yield, and we are seeing top quartile amongst our peers as 10% to 13% over the five year period of 2012 to 2016. We expect to achieve the earnings growth using these three factors, the first of which is rate-based growth. This includes our core capital expenditures, and our continued use of the TCOS filings at TNMP to get timely recovery on that spend. CapEx related to the revised SIP which begins to ramp up in 2015, and the possibility of adding some of the Palo Verde Two leases to rate base in 2016.

As I have talked about on the last earnings call our notice is due in January, as to whether we will extend the Unit Two leases or exercise the purchase option. Since three of the four Unit Two leases have renewal options that only extend to 2018, we are seriously considering exercising the purchase options rather than renewing the leases. We will make the final determination on the notice by January.

Second is to continue to refine our business to maximize the earnings potential which we have discussed before. In 2015, we will have a couple of opportunities for that. The first involves the impact of the half price lease payments with Palo Verde 1 beginning January 15, 2015. This provides some timing flexibility to get us to the next general rate case at PNM. We are also anticipating the reduction of the holding company 9.25% debt, which matures May 15th, 2015. We have had opportunities to buy back some of this debt, and have been able to reduce the balance by about $23 million this year.

The third lever in achieving our total return goal is dividend growth. We are again expecting an above industry average increase when the Board reviews the dividend next month, which will be comparable to our last two increases. After that, we continue to expect above industry average increases, while staying within the target payout ratio of 50% to 60% of ongoing earnings during the period of high capital spending. While the three growth elements, rate based expansion, earnings improvement, and dividend growth, we are confident in our ability to provide the top quartile total return. Just as a reminder, we expect to see earnings growth annually, but the magnitude will vary from year to year. Once more, I want to say that we are very pleased with the strong foundation that we have established in our business. 2012 to 2014 are the years where we have increased our focus on earning our allowed returns.

Looking beyond 2014, we have catalysts for strong earnings growth. This growth will be back-end loaded and our total return time frame and will benefit from the drivers I talked about earlier, as well as rate case timing, which is the final topic to cover. We are considering a number of competing items as we think about filing the next general rate case at PNM. We will balance the timing of capital expenditures and the load situation in New Mexico against the ability to earn our allowed return. Our current thinking is that we would file by the end of 2014, with rates effective at the beginning of 2016.

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

Thanks Chuck. As we wrap up the presentation, I want to review our check list as we move into the fourth quarter of 2013. We have checked off the first two items for reasons that we discussed earlier, regarding Gallup and the TNMP TCOS rates. As we have discussed, we have made significant progress with the BART agreement for San Juan, and we will be very busy in the coming months as we bring that across the finish line. We continue to focus on maintaining our top quartile reliability, and to maximize our power plant availability. As a Company, we have been very effective at controlling O&M and capital costs, and that remains a top priority. We will continue executing our plan to achieve top quartile return by 2016. And finally I look forward to seeing many of you very soon at EEI, as Chuck mentioned earlier.

Operator, with that we will now start the question and answer period.

Thank you. (Operator Instructions). Our first question is from the line of Paul Fremont of Jefferies. Your line is open. Please go ahead.

Thank you very much. Can you update us on where things stand with the San Juan owner's agreement? Have you sort of reached an agreement with particularly the California players, in terms of what they plan on doing with their ownership shares?

We are still in the process of those negotiations, and with all negotiations they are confidential. We hope to resolve those soon, but right now we are still chatting with everybody.

And do you need I guess to resolve all of that before you actually file your case in December?

No.

Okay. And what would be the statutory time frame for a decision in the case that you are going to file in December?

12 months. They have a three month extension if they ask for it, but it would be 12 months.

So it could be as much as 15 months?

Yes, sir.

And if you were to exercise your option to buy the Palo Verde Unit 2 leases, what would be sort of the approximate timeframe for there to be a, I guess to go through the baseball arbitration in terms of what the value of the plant would be?

Yes, there is a procedure that is really tied to the terms of the existing lease agreement, and there is a six month window there which that negotiation process develops with market value on both parties, and negotiating to some agreement of price.

So it would be roughly the June, July of 2014 that there would be sort of a known price attached to the asset?

That is right, Paul.

Thank you.

Our next question comes from the line of Brian Russo. Your line is open. Please go ahead.

Good morning.

Good morning, Brian.

Hi Brian.

You mentioned residential load at PNM Electric was plus-2% in the third quarter of 2013 versus 2012. Do you have a weather normalized stat for the residential sales?

That is weather normalized.

Okay, great. And your next rate case timing, ifyou filed it in late 2014, what would the test year be?

Actually the rates would go in effect January 2016, and the period of time would be 2015 through 2016, one year.

It would be a 2016 test year or--?

2016-2017 would be the, 2016.

2016 test year?

Yes, Brian.

That is right.

Okay. And does your strategy of filing that, does that imply that you are going to begin to experience regulatory lag on your ROE from now until then?

Well, we are managing that with as we mentioned aligning revenue that we have with cost controls in place today, another circumstance we continue to work on. We will be managing that. You would begin to see some regulatory lag as you to begin to approach that time frame. We are managing to the point of if we decide to file at that point it will be for that reason. If we decide to file slightly earlier than that, then certainly we will make a decision in order to avoid any kind of material regulatory lag.

And maybe if you just could clarify the PV 1 and 2 leases versus your ownership in PV 3. It seems like the leases and the purchase options would that be part of a replacement power scenario tied to San Juan? Do you know what I am getting at, and then PV 3 could be rate-based in 2018?I want to make sure I understand the strategy behind those three units?

A couple of things. One is, first of all, the leases are completely separate, and that will be dealt with as just the normal course of adding the purchase option, or purchase of those leases into rates. It will have nothing to do with the replacement power, or anything to do with San Juan. The only element of the San Juan dealing with Palo Verde, again as you know, is the Palo Verde 3 the unregulated 135 megawatts that we have. The dynamics of this will make it interesting, because of the value points in filing that we do in December for BART. We intend to put a valuation on Palo Verde 3. It will be part of that filing. There are a lot of moving pieces, and discussing what the components are relative to the BART and replacement power. But certainlyPalo Verde 3 and the valuation will be included in that, and then also in January given the notice that we have processed that required us, as I mentioned earlier to go through a fair market analysis for those leases that we would begin to purchase. There are two separate reasons for what we are pursuing, but the valuations will make it even more of an interesting dynamic.

And what is the rate making treatment if you buy out the PV 1 and 2 leases?Does that have to be the context of a rate case, or can you make filings like you did with Delta, et cetera?

It depends. We have done it, certainly done it as we have done it with Delta in the past. If circumstances given all of the moving pieces that are occurring now, could very well work its way into the January 16 rate decision. But we haven't come to that point of exactly where we will come out with that. Either one is certainly a path for us to consider.

Great, thank you.

Thank you. Our next question goes to the line of Ali Agha of SunTrust. Your line is open. Please go ahead.

Thank you, good morning.

Good morning,.

Hey Ali.

First on the load growth, just to be clear you talked about some restructuring on one of our industrial customers. I know it is a small part of the load, but was the implication of that a temporary hit, or Chuck to update your comments , and say look, you are not seeing the pickup in load growth and that is the facts?

On the industrial side it is not a big piece but the industrial customer did some restructuring, they did kind of hit to use the overworked term, a new normal. That does not look like it is coming back anywhere in the near future on that industrial piece.

Okay. And as we look into next year, can you just remind us on a normalized basis, what kind of generally load growth do you guys assume for planning purposes?

At this point we are going to hold off until guidance, so we can get through the fourth quarter and get a better sense of whether or not the residential continues to be a trend moving to some improvement. We also mentioned commercial not showing some improvement, and really staying relatively flat, slight declining. So at this point, we are not overly optimistic towards thinking about 2014 to have any significant improvements. We are just seeing some slight indications of some movement in the right direction, but we will be somewhat conservative in our outlook in 2014, and how we think about load growth, until we get more data and some more quarters behind us.

Chuck, I mean as you think about the next rate case filing as you said the current preference is late 2014 for rates in effect in 2016. What would cause you to accelerate that? I am assuming load growth is a key component of that. But are you willing to live with lag next year just to keep your timing right, or what is your thinking in terms of what triggers that to happen sooner?

Certainly load would be a consideration, but it is really just the nature of all of the different moving pieces that we have in the business right now, dealing the San Juan replacement power, other components that we are thinking about relative to the regulatory filings that we have for it. So if we did move earlier, it wouldn't be probably more than six months, just to give you some sense, it is not a critical deflection on a significant difference in the timing of that decision, but maybe a six month earlier filing if we felt like we needed to, and also the timing of the capital was certainly the other component of that.

And also just to be clear on the PV 2 decision process, so if you decide in January that you are going to buy those leases, I mean do you need approval from the Commission beforehand? I know to put those into rate base you obviously would need some kind of a rate case mechanism. Is there any risk or concern that the Commission doesn't agree, or are they already supportive of this? Can you give us a sense of what comes first, in terms of the thinking there?

There is no required approval at all from the Commission. I will say there were some discussions and updates that we had testimony with the Commission yesterday, and in those discussions it was discussed about the Palo Verde leases, and the circumstances around the terms and conditions, and I can say that the feedback was encouraging and positive, and clearly understanding that we are considering the purchase option on those Unit Two leases, and our view would be that the response was positive in our thinking of what we are contemplating as we think about this decision.

We live in a state where nuclear power is perceived positively in terms of PV 3 and the leases so.

Okay. So Pat, you don't need anything to write off or anything in writing from the Commission before you take this decision?

No.

No.

Thank you.

Thank you. Our next question comes from the line of Kit Konolige of BGC. Your line is open. Please go ahead.

Good morning.

Good morning Kit.

Hey, Kit.

Chuck, you mentioned that in your discussion of total return that if I heard you correctly, that the total return could be a little below your target, in say the near term, near years, and then it is back-end loaded over a five year period, is that correct?

Yes. If you kind of think of it, in terms of if the industry is 5% we are certainly on the solid end of that range in the earlier part of the 5-year period. And then as we begin to see the timing of the capital replacement power, Palo Verde, et cetera, that we have opportunities to put in rates, we would see above industry average in our growth, so that it would allow us to achieve that 10% to 13% total return.

So what is the industry average growth that you are using?

Well, you hear different views of 3% to 5%, 5% to 7%. I don't know exactly where folks would come out. But if you use 3% to 5%, I said we would be on the top end of that range for the earlier period of time, then we would significantly increase it going forward for the latter period.

Okay. Fair enough. And that assumes the capital spend and this kind of growth outlook assumes the BART treatment that you proposed?

That is correct.

Okay. Fair enough. What can you tell us anything more about the settlement discussions that you mentioned other than that have occurred in the past, and I guess you are saying you hope to have them in the future?

That is a wonderful summary, Kit.

I wrote that out beforehand here so.

Thank you.

Okay. I think that does it for my questions. Look forward to seeing you in Orlando.

Okay, good.

Same here, Kit.

Thank you. Our next question comes from the line of [Eli Craser] of Millennium Partners. Your line is open. Please go ahead.

It is Chris Shelton. Good morning.

Good morning Chris.

Chris.

Had a quick question on, it looks like there were a couple of minor shifts on the CapEx logs in the Appendix, and I just wanted to see what, get a little more granularity on what was driving some of those?

There was a slight increase I think on the renewable assumption around the peaking for replacement power.

Okay.

I think that was probably, obviously increased from I think it was like 280-something to 299. So that is essentially the only change that I am aware of that would be of any significance.

Got it. Okay. And then I guess I am not sure if it was the convention of more certainty on some of the projects, but it looks like the rate based CAGR was a little different, too. Is that just a product of BART agreement having been moved forward, or can you talk about that?

No, it just is a slight adjustment relative to the BART timing and capital timing.

Okay. Got it. And then quickly on the just to circle back on the PV2 potential. I know obviously everything is going depend on what is the purchase value is, et cetera. But can you talk a little bit about the rate impact I guess? I mean there is the leases I guess the lease expense would roll off, and how it would look for rates? In general?

Well, it is not significant relative to 64 megawatts, depending on the valuation point, but from a rate standpoint it wouldn't be material at all. It wouldn't being is to be concerned about. As we have seen in the past, our biggest challenge is the fact that we have got all of these opportunities and variables to work a nice clean strategy, to get them through the regulatory process, but these are not contentious types of decisions that will be made. Just more of the timing of things. But the BART as you know is well under the original expectations of cost and customer impacts. So we are working with some good positive momentum, and how we would think about all of these different variables coming together, and ultimately trying to work our way into rate increases. Again, when I say that to put it in context, we are still in the single-digits as far as any kind of combination of these different options and how we think about rate increases.

Single digit rate increases encompassing kind of all of these different Palo Verde leases, BART, all of that stuff?

That is right, exactly.

That doesn't include the BART piece. The BART we said could be up to 15% but that is not until 2018.

And that would include the replacement power et cetera, I guess?

That is right.

Correct.

Understood. Thanks for the clarifications.

Thanks, Chris.

Thank you. Our next question is a follow-up from the line of Ali Agha of SunTrust.

Thanks. Pat, just being clear, the solar project the 23 megawatts, $47 million or so that you alluded to in your latest renewable plan, is that spending in 2014? Are you going to buy a solar plant? You put that in rate base for 2014?

We would build it and we are actually in the process of building that now.

Okay. So you will just get the rate treatment for it in 2014?

Yes, it goes in the rate rider, yes.

I see, okay. Secondly also in the order of total return, you look at the 2012 through 2017 period, when you talk about those numbers as you alluded to the fact PV3 and BART, that doesn't kick in until 2018?

That is right.

Are you factoring that in or not even factoring that in right now?

No, it is not factored in.

I see so this is still 2012 through 2017?

That is correct. It is really, 2016 is the end period which we targeted. 2012 through 2016 is the total return period. There are opportunities beyond 2016 that you are referring to, that provide some additional growth in the business.

Sorry. So this is still end of 2016?

That is correct, yes.

Thank you.

Thank you and with no further questions in queue, I would like to turn the conference back over to Ms. Pat Vincent-Collawn for any closing remarks.

Thank you. And again thank all of you for joining us. We look forward to seeing many of you at EEI in the next couple of weeks. Have a wonderful weekend, and travel safely. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of your day.