PNM Resources Inc (PNM) 2015 Q4 法說會逐字稿

Hello, and welcome to the PNM Resources fourth-quarter 2015 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Jimmie Blotter, Director of Investor Relations. Please go ahead.

Thank you, Carey, and thank you everyone for joining us this morning for the PNM Resources fourth quarter 2015 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 Executive Vice President and Chief Financial Officer; 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 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 report on Form 10-K, quarterly reports on Form 10-Q, as well as other reports on Form 8-K filed with the SEC. And with that, I will turn the call over to Pat.

Thank you, Jimmie. Good morning everyone, and thank you for joining us as we close out our discussion on 2015, which was a very productive year for the Company. We will begin the presentation today on slide 4, with a look at regulatory and operational achievements over the year.

2015 was -- to say the least, an interesting year. I'm very proud we were able to successfully overcome several challenges and finish the year on a strong note.

Our most significant accomplishment was PNM obtaining final approval for the San Juan Generation Station BART plan. We received that approval two years from when we filed with the Commission. Many things were dependent upon a positive decision, and we're now able to move forward with our comprehensive plan.

It is the most cost-effective path forward, and the best option for our customers, who are already seeing lower bills as result of the new coal supply agreement. It will also benefit the entire state by minimizing economic impacts and providing significant environmental improvements. Ultimately, the position that we and other utilities had regarding the definition of what constitutes a "future test year" was upheld. The Commission revised its definition in away that agrees with our understanding, and the New Mexico Supreme Court has dismissed the appeal.

We're also pleased that we were able to settle our FERC Transmission formula rate case. The settlement is awaiting final approval from FERC. In Texas, TNMP successfully implemented two TCOS increases, totaling $5.8 million annually. In addition, on January 8 of this year, the staff of the Public Utility Commission of Texas recommended that the Commission approve, without changes, TNMP's filing for reconciliation regarding its AMS deployment. We anticipate the Commission to rule at its open meeting on March 24.

We turn to our operational highlights. You always hear me talk about reliability being our customers' number one priority. I'm proud to say that in 2015, PNM delivered strong reliability and was recognized with the ReliabilityOne award for Outstanding Midsize Utility. TNMP also continued to deliver excellent reliability, despite extreme weather throughout the year in Texas.

As result of PNM's excellent reliability and focus on customers, in 2015, we continued to improve our JD Power Customer Service ratings. In July and August, PNM achieved its highest scores ever. At the same time, the number of merited complaints with that New Mexico Commission remain at the lowest level in the past five years. That's especially significant during a rate case year.

In 2015, PNM stayed on track with plans to increase generation capacity. We added four new solar facilities, totaling 40 megawatts, and the new La Luz 40 megawatt gas peaker is also now on line.

We are also proud of the fact that once again, TNMP received EnergyStar's Market Leader Award for its energy-efficient programs. That's the 11th consecutive year that TNMP has earned that honor. We continue to move forward with the AMS rollout at TNMP. We are now at 91% completion.

In conjunction with the AMS deployment, we have implemented a new outage management system. This will be an important tool in improving response time, reducing outage time, and increasing both reliability, and customer satisfaction.

Let's now go to slide 5, for a snapshot of fourth-quarter and year-end results. As you can see, there is a significant difference between our GAAP and ongoing earnings, which is primarily due to a GAAP write-off related to the shutdown of Units 2 and 3 at the San Juan Generating Station. Our GAAP EPS for fourth-quarter 2015 was a loss of $1.15, compared to earnings of $0.24 in the fourth quarter of last year.

For the year, GAAP earnings per share were $0.20, compared to $1.45 in 2014. For the fourth quarter, ongoing earnings per share were $0.23 compared to $0.24 from the fourth quarter last year. For the year, ongoing earnings totaled $1.64, up from $0.15 from 2014. We are also affirming our 2016 guidance range of $1.55 to $1.76.

A couple of quick regulatory updates. We are moving forward with the implementation of our BART plan at San Juan. The SNCR and Balance Draft equipment are now in full operation on Units 1 and 4, and savings from the new coal supply and restructuring agreements are now flowing to our customers, and the 40 megawatts of solar that was in our replacement plan is now online.

We are also on track with the rate case we filed last August. PNM and the intervenors filed rebuttal testimony this past Monday, and the hearing is currently scheduled to run from March 14 to March 25.

On January 29, TNMP made its latest TCOS filing, requesting an annual increase of 4.3 million. We expect that these rates will go into effect in March. This reflects a $25.8 million increase in transmission rate base over our last filing.

I will now turn it over to our Chief Financial Officer, Chuck Eldred, for a more comprehensive look at the numbers.

Thank you, Pat, and good morning everyone. We continue to make progress towards achieving our goals. The Westmoreland coal contract became effective February 1, bringing substantial savings to customers. We received approval on the BART and resolution of the "future test year" definition from the New Mexico Commission in December. We also ended 2015 with an improvement in earnings, compared to our revised guidance range.

So -- beginning on slide 7. Let's start by reviewing load at both PNM and TNMP. Both were within the guidance ranges that we had for the year. At PNM, 2015 was down 1.4%, compared to 2014. I want to point out the residential load was flat, both for the fourth quarter and for the entire year.

Customer growth came in higher than expectations at 0.8% for fourth quarter and 0.7% for the year. The economy in New Mexico continues to have mixed indicators. The employment growth recently in the Albuquerque metro area has been strong, and you can see that even on a 12 month rolling average, it's moving up, with the strongest numbers we have seen in three years.

The state, overall, is not faring as well, though. That softness is driven primarily by the low oil and natural gas prices. While we do not serve the regions of the state that produce oil and gas, we do expect that impacts of layoffs and the decrease in state royalty revenues will somewhat soften the economies in our service territory, particularly in the Albuquerque metro area and Santa Fe, as the state deals with budget shortfalls. We continue to expect 2016 load to be flat to down 2% for the year.

Moving to TNMP, load for 2015 was up 2.6%, compared to 2014. Customer growth was higher than forecast at 1.5% for Q4 and for the year.

The Texas economy continues to be strong, but the Houston area, in particular, is feeling the impact of low oil and natural gas prices. While use in proper is suffering, we are not seeing the economy in our service area soften. This is because of a couple of factors.

We serve many refiners and petrochemical manufacturers who continue to have strong production. Additionally, we see some production movements into the smaller communities outside the Houston metro area-- population movements into the smaller communities outside the Houston area. TNMP serves some of those areas, and therefore we're actually seeing customer increases rather than decreases. For 2016, we continue to expect load to be up 2% to 3%, as refiners and petrochemical manufacturers continue strong production and our service territory that is near Dallas and Fort Worth continues to have a strong economy.

On slide 8. As I said before, we ended the year exceeding the upper end of our 2015 guidance range, with $1.64 of consolidated ongoing earnings. All of our segments performed well during the year. PNM came in $0.02 higher than guidance. TNMP at the upper end of the guidance range, in corporate and other, was also $0.01 better than guidance.

Moving to slide 9, ongoing earnings came in at $0.23 for the fourth quarter, compared to $0.24 in the fourth quarter 2014. PNM was down $0.03, and TNMP was flat. Corporate and other came in $0.02 better than last year driven by improvements in interest expense related to the repayment of a $119 million of 9.25% debt in May of 2015.

On slide 10, let's look at the drivers for PNM and TNMP. Beginning with PNM, APDC improved $0.03, compared to the fourth quarter of 2014. This was caused by higher capital spending and higher equipment balances, including the SNCR and Balance Draft Equipment at San Juan, and the construction of the 40 Megawatt La Luz Gas Peaker and 40 Megawatts of solar. As we have seen through 2015, the half-priced Palo Verde Unit 1 leases contributed $0.03.

Weather was an improvement of $0.02 between the quarters, as weather reduced to fourth-quarter 2014 earnings by $0.01, and improved fourth-quarter 2015 by $0.01. The heating degree days for fourth-quarter 2015 were not the driver for weather, as they were only 8% higher than last year, but 2% below normal. Instead, it was our cooling season that extended into October, with temperatures that were warmer than normal and warmer than 2014.

We had been migrating the Palo Verde Unit 3 nuclear decommissioning trust from a shareholder asset to a regulated asset. This involves rebalancing the portfolio to reduce the percentages held in equity investments to better match the regulated assets. As we do this, we have opportunistically captured gains.

In addition to that, we changed some of our managers, which resulted in further rebalancing of the investment portfolios. Together, these actions resulted in higher gains of $0.02, compared to fourth-quarter 2014.

Renewables also improved results by $0.01. We had higher O&M expenses of $0.03 in the quarter which brings our year-to-date expenses in line with our guidance range. Outage costs were $0.02 higher, this was caused largely by the San Juan Unit 4 outage and install of SNCR Balance Draft equipment.

We took $0.02 write-off in the fourth quarter of 2015 for items on our balance sheet related to the exploration of alternative fuel supply contracts for San Juan. With the completion of the Westmoreland contract, we determined it was appropriate to write off these assets. Interest expense was $0.02 higher, related to the additional debt that PNM entered into August, 2015.

Load was down $0.01; transmission margins were down $0.01, compared to fourth-quarter 2014. We had two long-term, point-to-point contracts expire during the year, which is the primary cause of this change. We also had higher depreciation and property tax expense of $0.01.

Finally, we capitalized ANG load on capital projects-- is lower than it was last year. This is primarily related to the timing of capital projects. At TNMP, rate relief from TCOS filings was up for $0.01 compared to fourth-quarter 2014.

Weather was down $0.01. Heating degree days were 28% lower than fourth-quarter 2014, and 27% lower than normal. Depreciation of property taxes were also higher by $0.01.

Turning to slide 11, before we review the 2016 forecast, I want to mention how the five-year bonus depreciation extension affects us. As you are aware, we have a NOL at PNM for income tax purposes that had been expected to be fully utilized in 2018. The extension of bonus depreciation will cause the NOL to last for a longer period of time, now carrying us into 2019.

While the additional deferred tax from bonus depreciation decreases rate base, the NOL increases rate base. As result, we did not expect to see significant change in our rate base. Looking at 2016, bonus depreciation does not impact our ongoing earnings guidance.

We have included our rate base projection on this slide for the expected impact of bonus depreciation and the extension of the NOL. The impact of bonus depreciation does not change our 2016 rate case numbers, except at TNMP, which does not have an NOL. However, regardless of rate base change, our EPS expectations for 2016 are unaffected. As a reminder, we expect to update guidance in the middle of this year, after we resolve the ongoing rate case at PNM.

In the Appendix to today's presentation, you'll find the 2017-2019 potential earnings power slide. This has also been updated for bonus depreciation. As for 2016, PNM does not have a significant change, and TNMP's rate base is reduced from our prior presentation by approximately $50 million in each period. Overall, the changes are not a significant earnings driver for the Company.

Since the NOL is expected to be utilized in 2019, bonus depreciation will have an impact in our 2020 rate case. We are currently reviewing the capital protections and identifying which projects should be funded. We'll provide those updates later this year.

Finally, on slide 12, we are focused on achieving our strategic goals. We expect to continue delivering above-industry average earnings in dividend growth, which is displayed in the potential earnings power in the business and supports our 7%-9% growth rate.

As I wrap up today, I wanted to express that 2015 ended with good results. We are optimistic about 2016, and we recognize the importance of PNM's rate case on this year's financial results, and the need to bring it to a good resolution.

We also expect to file our 2018 rate case in December of this year. That filing will include the major elements of the BART case. The abandonment of San Juan Units 2 and 3, the additional megawatts in San Juan Unit 4, and the inclusion of Palo Verde Unit 3 at rates. The rate base valuations for each of these items have already been set through the BART process.

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

Thanks, Chuck. As Chuck said, we are very proud of what we accomplished in 2015. We reached positive conclusions on key regulatory filings. The Company delivered another solid financial performance, and most importantly, we continue to focus on serving our customers with reliable, affordable, and environmentally responsible electricity. Given the challenges and oppositions we face through this year, and continue to face, these achievements confirm that our strategy is sound and our hard work has created positive results.

Going forward, we plan to stay the course and continue to work in the best interest of our customers, the communities we serve, our employees, and our shareholders. One more note about our rate case: no one likes rate increases, and we understand that. We take it very seriously.

This request is driven primarily by capital improvements to our system, designed to ensure continued reliability for our customers. As filed, the rate case would increase rates by about 14%. But when you consider the customer benefits from the Westmoreland coal contract and other items, the total increase is about 5%. That's an average of about 1% a year since our last increase.

I wanted to emphasize that it is of great importance that we achieve timely rate recovery in this proceeding. And we're confident that we have strong justification for the revenue requirement. As we have been saying all along, given the number of intervenors in this case, it's likely that the best way to achieve this will be through litigation.

And in closing, I cannot say enough about the tremendous effort of our employees. They are responsible for our ongoing success and progress, and they make us proud every day.

Operator, let's now open it up for questions.

We will now begin the question-and-answer session.

(Operator Instructions)

Our first question comes from Anthony Crowdell from Jefferies.

Good morning.

Good morning, Anthony.

I have a couple of questions. One, I want to know, what's left on your Palo Verde leases after you file for the rate case at the end of this year for new rates in 2018?

There is-- the lease is about 114 megawatts that still remain, that actually extend on half-price, as they pass through to O&M through 2022, 2023.

Okay, great. Since the BART filing in December, or maybe even the third quarter call, given this, I don't want to use the word guidance, but maybe a rough estimate of the potential loss, the unregulated portion in the San Juan plant would be. Power prices have maybe said taken another downturn. Could you give us an update on what your estimate would be for the unregulated portion of power of-- of San Juan?

Anthony, as you know, the 65 megawatts doesn't actually affect us until the BART implementation in 2018, when we take on the 65 megawatts. As you recall in our projections, we use spot prices, real-time prices of the market. So you're right, prices have decreased considerably since we've last talked about it. I think we are around $0.03 losses, and with the additional lower prices, which are close to a little less than $30 per megawatt hour, and to break even in the mid $40 a megawatt hour, and for San Juan $65 a megawatt, we are probably additionally $0.03-$0.04 loss.

Let me also comment, as you are aware, with the Westmoreland contract, the financing that we had done through Westmoreland to support the closing of the purchase of the mine, that there are some additional earnings that begin to reflect as result of the financing and the basis spreads between what we were able to finance at it PNM, versus PNM Resources, versus what Westmoreland was charged to reflect more of their credit. That benefit, if you will, is roughly around $0.04, so it offsets the losses that we would have at the 65 megawatts I just referred to. So we remind kind of neutral that, overall, we're on the course we said we would be on, and we are not really receiving an impact, even with the lower prices at the 65.

Okay, and just lastly, Pat, I know you had said the best way of achieving what you've requested in the rate proceeding, given the large number of intervenors, and it looks like everyone's dug in their positions, was to litigate a decision. Would you comment at all if there's even a potential for a settlement, or it just seems like it's really not going to happen here?

You know there's always a potential, but I think in this case is litigation is probably the best path forward, because it's the most expeditious and the quickest path forward.

Great. Thanks for taking my questions.

Thank you-- thanks, Anthony.

Our next question comes from Brian Russo of Ladenburg.

Hi, good morning.

Good morning, Brian.

You mentioned that when the NOLs run off at the end of 2019, there will be an impact to your rate base from bonus depreciation in 2020, can you quantify that?

Yes, we haven't actually put out the 2020 rate base at this point. So we'll -- but it does, it pretty much keeps the rate base slightly lower than what we have through 2019, but we haven't quantified it at this point, Brian. So I'd rather wait until we run through the numbers and look to see if there some additional capital funding that we can benefit from, from the bonus depreciation and additional cash flow, and then we will provide them to you.

Well maybe I will ask it a different way. Your 2016 rate base, hypothetically, if you didn't have the NOL what would the impact to your rate base be?

For 2016?

Or 2015?

I don't have 2015. Let me get -- we will have to get back with you on that. I have the numbers at 2016, I don't have 2015.

So could you share with us the 2016?

Yes, 2016, if you would roughly-- with the effects-- without NOL, the net effect of that looks like it would be about $2.6-$2.4, about $200 million, net.

Okay, thank you very much.

Thanks, Brian.

(Operator Instructions)

Our next question comes from John Alli at Castleton. Please go ahead.

Good morning.

Good morning, John.

Just two quick questions. You said litigation is the quickest route, what is the timeline you are thinking for that? And then secondly, do you have any thoughts on the formation of a REIT for your Texas assets?

I'll take the first one, I'll let Chuck take the second one. The hearings, John, start on the 14th of March and go through the 25th of March. We would hope that the effective date would be close to the beginning of Q3.

I think you all know that Q3 is our largest quarter, so therefore, having the rates in place early in the quarter makes a big impact, which is why we want a timely rate increase. So that is probably the schedule we are looking at.

Great.

Yes, John, in regards to the REIT-- we're watching, as everyone is, to see what the Commission ultimately does with the Hunt proposal and the actions relative to how they pursue that going forward, and whether they actually allow that to be approved, and the REIT gets formed with Oncor. We'll monitor that, and if we feel but that decision is made, as I'm sure all the T&D companies in Texas will do the rigor and analysis necessary to make sure if it makes any sense for our structures to consider that as well. So at this point, we are just on the sidelines, keeping a close eye on it.

Great. Thank you.

Thanks, John.

And this concludes our question-and-answer session. I would now like to turn the conference back over to Pat Vincent-Collawn for any closing remarks.

Thank you, and again, thank you all for joining us this morning. We appreciate you joining us on this call to hear about our very successful 2015 and our plans for going forward, and we look forward to speaking with you and seeing you all throughout the year. Have a great weekend.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day. [