TXNM Energy Inc (TXNM) 2002 Q1 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the PNM Resources First Quarter 2002 Earnings call. At this time, I would like to inform you that this conference is being recorded for rebroadcast, and that all participants are in a listen only mode. At the request of the company, we'll open the conference up for questions and answers after the presentation. I will now turn the conference over to Barbara Barski. Please go ahead, ma'am. barski: Good morning. I'm Barbara Barski, Investor Relations Officer for PNM Resources. So I thank you for joining us this morning to review our first quarter 2002 results. Today's conference call can also be heard on the internet through our web site, pnm.com. With me here in Albuquerque are PNM Resources Chairman, President and CEO, Jeff Sterba, Max Maerki, our CFO, General Counsel Pat , Eddie , Senior Vice President of and our Corporate Controller, John .

Yesterday, PNM Resources reported earnings for the first quarter. Together, with earnings guidance for the full year of 2002. The news release we issued yesterday afternoon included summary financial and operational information for the quarter and comparative information for the first quarter of 2001. If you have not received this release, a copy can be found on our web page, pnm.com. Together, with the accompanying charts and financial statements.

Remember that some of the information we will provide today relative to revenues, earnings, regulatory issues, investments and other issues, should be considered forward looking statements, within the meaning of section 21E of the Securities And Exchange Act. Actual results for the remainder of 2001 will be affected by a number of factors, including but not limited to weather, the local and national economies, the competitive environment in the electric and natural gas industries, various legal, regulatory and legislative outcomes that the company is unable to predict at this time.

For more information about these uncertainties and risk factors, please consult PNM 10K AND 8K filings with the SEC for 2001. I'd like to now turn the conference over to Jeff Sterba, who will take about 15 minutes to discuss PNM's financial results and other recent news. Immediately following his remarks, we will open the conference to questions. Jeff?

Good morning, and, and let me add my thanks to you all for joining us this morning. It was good to see many of you in New York two weeks ago also. This morning, let me first briefly review our first quarter results, and then go on to share a perspective on the current state of the wholesale power market and our outlook for activity in that market in the coming months.

Then I want to follow up on the earnings warning release that we issued April 4th, and provide you with the revised earnings guidance as promised for the remainder of 2002. And last, I'd like to bring you up to date on our generation growth strategy, and discuss a couple of factors that are likely to impact our success in years beyond 2002. As expected, the first three months of '02 reflected a considerable slowdown from the record setting pace of last year. Earnings for the latest quarter were about $25 million, or 63 cents per diluted share.

Compared to earnings of more than $63 million, or a dollar sixty a share for the first quarter of 2001. We have indicated in January that Q1 results should look really more like Q1 of 2000, when we were at 55 cents, and as our results show, we were able to improve a bit on that performance. Earnings and revenues were lower, primarily due to the slowdown in the wholesale electric market, where both prices and trading activity continued to run at considerably lower levels than at this time last year.

The lower price levels prevailing so far this year are reflected in our wholesale revenues, which averaged about $24 a megawatt hour for the quarter, compared to $135 a megawatt hour for the first three months of '01. The decline in trading activity is reflected in our wholesale, wholesale volume for the quarter, which declined by just over 25% compared to the same period last year. So to sum up, the combination of lower prices and price volatility, and less trading activity, translated into reduced returns from our wholesale business.

On the plus side, our electric and gas utility turned in a very solid quarter, despite slightly warmer than normal winter temperatures, and a slowing, growing economy in our home service territory. Now let me spend a moment on what we see as the near term prospects for the wholesale market. As you know, our marketing and trading business has grown significantly over recent years. And fluctuations in that market represent the single largest variable in our results going forward.

Obviously, commodity markets are never in perfect balance. By their very nature, they swing above and below a price mean and a volume mean. We are all familiar with the factors that drive those swings in the power market. Temperatures, economic activity, the availability of generation resources, natural gas costs, spark spread, market liquidity. And as we've seen in the west over the last year, regulatory policy and politics can also play a crucial role in determining price direction and levels.

But while it's important to be tactically flexible, and adjust appropriately to changing conditions in the market, the only sure road to long term success is to remain true to your strategic imperatives. And that's what we have done, and will continue to do. We're remaining true to the strategic plan that has succeeded well for us over the past several years. We're not willing to accept additional risk by loosening our conservative credit policies, or deviating from our existing risk management guidelines.

We continue to limit our exposure to adverse market moves by back stopping our trading activity with our own generation resources. And we're investing in new plants to position the profit from the next stage of the supply demand cycle in the market. We're committed to insuring that at least 50% of all new generation, and 70% of our total portfolio, is secure and under long term commitments for purchase. In evaluating our first quarter performance, and look forward, looking forward to the remainder of the year, as we have said before, 2001 was an anomaly.

For making comparisons, it's more valuable to look back to 1999 or the first half of 2000, before the price spiked in the wholesale market. On that basis, PNM earnings are up 15% over the first quarter of 2000. Now April and June are typically very mild weather months, and historically, the second quarter has been the weakest for PNM. If you look at the historical ongoing earnings, which I believe is table 2 that's posted on the web site as part of this presentation, you'll see the second quarter in both '99 and 2000 lagged first quarter results.

We expect second quarter 2002 earnings to be more in line with our experience in 1999 and 2000, but will demonstrate continued growth above those levels, as we did in the first quarter. For the full year, our review of operations and markets leads us to believe the most likely range of earnings is between 260 and 285 per share. In table three, titled market assumptions, we list the primary factors that underlie that guidance. And let me make a few comments on some of the most significant elements.

First, obviously, wholesale prices. Our average wholesale power price during the first quarter was $24 per megawatt hour. The average of the current forward contract prices for the balance of the year is approximately $37. And our new earnings guidance is premised upon a variation in average prices between $32 a megawatt hour and $41 a megawatt hour. While this price to earnings sensitivity can be analytically forecasted, again, let me remind you that the complexity and interdependence of numerous variables that affect the actual wholesale revenue performance doesn't allow for a linear relationship.

Second, market liquidity. This factor affects our current wholesale revenue forecast in a significant way in the post-Enron era. While we see some signs of a more liquid market, we have revised downward our expectations for recovery. The lower liquidity affects our marketing velocity expectations, which, as you will recall, is our measure of the ratio of total sales to total generation. We target about a two to one ratio, but in the first quarter, we were only able to accomplish a one point six to one.

Consequently, we are now revising our target ratio downward such that the low end of our guidance correlates to a 1.75 performance expectation for the balance of the year. I would note that if you look at the quarter by quarter analysis of velocity, the first quarter is always lower than the balance of the year. Third, a third factor to touch on is spark spreads.

Because our current gas generation assets are essentially peaking resources, earnings contributions from these resources occurs only when spark spreads exceed roughly $15 a megawatt hour. Our previous forecast projected spark spread in the mid teen range during the third quarter. And certainly there would be days in which spark spreads would be much higher than that. But it was premised on a gas forecast that was lower than current forward gas contracts.

The forward gas contracts today indicate a spark spread in the six to seven dollar range. On that basis, we're now assuming a spark spread to remain below the level necessary to justify use of our gas generation. Consequently, our revised earnings guidance presumes that there are no significant earnings contributions from our gas peaking resources. Finally, in the market assumptions table, we also list the primary sensitivities that could move results outside of our current range of estimates.

Obviously, it will take fairly significant changes in these items, like relatively extreme weather, or a significant change in the amount of hydropower that's expected to be available this summer. And also the issue of whether the acts to extend the price caps in place in the western marketplace beyond their sunset this fall. These are items that could affect our earnings and move us either higher or lower outside of the range of the 260 to 285. While we manage the short term impacts of the current wholesale market, we remain committed to the implementation of our strategic plan.

We're proceeding with the construction of two new generating plants in southern New Mexico. Because transmission constraints make it difficult to import power into that area, we are these new plants are a sound, long term investment. We are looking beyond New Mexico for additional resources, and now have shifted our focus in looking to buy assets rather than building, because the current down turn in power prices has made assets available at more attractive prices, and with us not having to take on the risk of citing generation and environmental issues in that citing process.

Whether we buy or build, however, we will not overextend. We are pursuing an incremental growth strategy that allows us to expand our wholesale marketing business without departing from the asset backed marketing strategy that helps us control downside risk. Our financial strategy remains equally conservative. As you can see in the table on credit ratios, all PNM coverage ratios are in excess of current S&P standards for our credit rating. And I'm not favoring S&P over anybody else, it's just that they're the only ones that publish those standards.

And we continue to improve on all of these ratios. We have ample liquidity and access to capital to fund our growth plan without endangering our utilities investment grade rating. Now, before we open the call to questions, I want to touch on another issue that I think is a bit of interest to investors. If you've been following PNM, you probably know that Arthur Anderson has been our auditor for the last ten years. It is our longstanding policy to review our auditing needs every five years.

And earlier this year, the board decided to initiate an RFP process to select an auditor for 2003. Although we ask shareholders to approve Anderson as our 2002 auditor, the company expanded that RFP process to identify alternatives, should the board determine it was in the best interests of the company. Since the completion and mailing of the proxy statement, there have been additional significant developments, as you know, regarding Anderson.

Because of these, it's become much more probable that we will replace Anderson as our independent auditors during 2002. The decision has not yet been made, nor has a decision been made as to who would replace Arthur Anderson if they are replaced. The competitive bid process we're going through will, in the end result, provide greater value for us. So due this, to this unusual situation, we've removed the approval of the independent accounting firm from the agenda for our annual meeting in May.

Finally, let me briefly mention one of the issues that can affect our results beyond '02. As you probably know, we now have a rate freeze in place here in New Mexico, and that freeze is due to end at the end of this year. After that, rates will remain where they are, until new rates are approved by the commission as the result for the rate proceeding. If it turned out that there was a litigated rate case, the earliest that we believe such rates could be adjudicated and placed into service would be the summer of 2003.

However, we're in negotiations with all of the intervenors today, to not only address future rates, but also two other pressing issues within our state. One is, the delay to 2007 of restructuring and open access. There is a growing interest in wanting to resolve that issue before waiting until 2007. A second issue is how planned additions to our merchant plant portfolio will be treated. So these negotiations are comprehensive.

Embracing all three of those major issues. And they continue in a constructive manner. But as complex negotiations, we can't tell you what we believe the outcome will be. But I can tell you that they're proceeding constructively, and I think that there is always benefit in looking at global settlements in an, in an environment like this. In closing, I want to note to you that our experience so far this year, I believe, demonstrates once again the value of our merchant utilities strategy.

While our wholesale business continues to offer long term superior growth opportunities, the utilities, steady cash flow, and predictable revenue stream, provides stability to counter balance the volatility of the wholesale marketing business. Now we'd be glad to take any questions you may have.

Thank you. The question and answer session will begin now. If you are using a speaker phone, please pick up a handset before pressing any numbers. Should you have a question, please press one four on your push button phone. If you would like to withdraw your question, press one three. Your question will be taken in the order it is received. Please stand by for your first question. Our first question comes from Sam . Please state your affiliation followed by your question.

Hi, yes. Good morning, Jeff.

Morning, Sam.

A quick question. You spoke of the price caps as one of the factors. What assumption did you make? Are you assuming that those go away this fall?

We are assuming that they go away. And it certainly is my belief that that will be the outcome. I think the has given many indications that they put these in place because of the situation that existed, but they do not intend to keep them on. Now, that doesn't mean that they may not look at doing something else, and that's why it's very difficult to say what will happen. And the, one of the reasons why at this time it doesn't make much sense, I think, for us to try to give guidance for '03. But our fundamental assumption is that they are lifted.

Can you quantify at all what the impact would be to you guys if they were not lifted?

Well, for '02, frankly, I doubt if it would have much impact. It could have a little bit, because largely the era, when you expect to see price spikes that would go above the $94 level, which is the cap, this is usually in Q3. There are certainly instances in which in Q4 it could go above that level. And so it may clip some of the peaks. I don't think the impact would be nearly as significant as it would be if it extends through the third quarter of any year.

Okay. Thanks a lot.

Thank you. As a reminder, should you have a question, please press one four on your push button phone. At this time, I'm showing no further questions. I'll now turn the conference back to Miss Barski to conclude.

Thanks very much for joining us. Have a good day.

Ladies and gentlemen, if you would like to access a rebroadcast of this conference, you may do so by dialing 1 (800) 428-6051 for domestic callers, and (973) 709-2089 for international callers. Use the pass code ID of 238113. This rebroadcast will be available starting today at 11:00 AM Eastern Time, through May 1st, 2002, ending at 11:59 PM Eastern Time. Thank you for participating, and have a nice day. All parties may now disconnect.