TXNM Energy Inc (TXNM) 2003 Q1 法說會逐字稿

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Good morning and welcome, ladies and gentlemen, to the PNM Resources 2003 first quarter earnings teleconference. At this time I would like to inform you that this conference is being recorded and that all participants are in a listen-only mode. At the request of the company we will open the conference up for questions and answers after the presentation. I'll now turn the conference over to Barbara Barsky. Please go ahead

Good morning. I'm Barbara Barsky, investor relations officer for PNM. I'd like to thank you for joining this morning to review our first quarter 2003 results. Today's conference call can also be heard on the Internet through our web site at www.pnm.com. In the investor section of our web site you will also find the news release we issued yesterday afternoon, together with financial statements and the slides we will be referring to as we go through this presentation. With me here in Albuquerque PNM chairman president and CEO Jeff Sterba and John LOI yack and senior SR vice president and general counsel Pat or advertise and together with our vice president of market Eddie Padilla controller and chief accounting officer Robin alumnae. Remember some of the information we're PROILG today relative to earnings, regulatory issues investments and other issues should be considered forward-looking statements within the meaning of section 21 E of the security exchange act we caution you not to place undue reliance on these statements because the results will be affected by factors weather, local economy interest rates the performance of generating units and transmission systems. The electric and gas industries and various and legal and regulatory and legislative outcomes that the company is unable to predict at this time. For a detailed discussion of the important factors affecting PNM Resources, please see management's discussion and analysis of financial condition and results of operations in the company's form 10-K for the year-ended December 31st 2002 and 8-K filings with the SEC. I'll now turn the call over to Jeff Sterba.

Thanks, Barbara and thanks very much for joining us for all of you that are on the conference call. What we'd like to do this morning is I'll just give a very brief overview. You've seen the press release. Or probably have seen the press release. I'll just touch on a few highlights I'll turn it over to John LOI yack who will go into more details in terms of first quarter performance as well as fulfilling our commitment that we made to you last fall about starting to report our quarterly earnings starting this year in what we called the bucket format. We'll provide more transparency about the margins we make in each of our business areas and he'll also talk about our reaffirmation of our guidance for 2003 and then I'll come back and just touch on a few business issues. If you look at the first slide in the Internet package that you've got access to, you'll note that our earnings for the first quarter totaled $1.22, diluted share compared to 63 cents a share for the first quarter last year. But as you know, a big element of change for all of us in the utility industry is the adoption of FAS 143 and the catch up that's associated with that. So when you take into account the change with FAS 143, plus our previously announced one time item associated with the adoption of the stipulation in our electric settlement, our ongoing earnings, not including those one time items, were 53 cents a diluted share compared to the 63 cents last year. And there are a number of factors that I want to touch on that generally explain that difference. So the second slide shows a walk down of that comparison, showing the 63 cents we earned first quarter of last year. Let me go through the items that primarily drove the change. The first one has to do with the difference in weather patterns between those of you in the east and those of us in the southwest. You all experienced a fairly dramatic winter and we did not. It was warmer than normal and that affected both our gas business, particularly, as well as took some edge off our electric business and that coupled with just the general slow down in the economy cost us about seven cents per share compared to the first quarter of last year. The second item is net interest, the net interest effect was down about seven cents. And this is really driven by a couple of factors. The first one is we have deployed about 100 million dollars of cash that's all earning assets, all into earning investments. This year compared to next year. But the income has not yet been started to be realized. These include things like the buy back of the EIP lease, that's our transmission investment lease that we bought back in the first quarter. The 25 million dollar up front payment we made to secure the Navy contract in December of last year, and so we'll see the income effect from that over the next two and a half years. Also, as you know, gas prices were very high this year. And we have an arrangement in New Mexico where we obviously have to procure the gas to meet their needs. But then we don't -- we spread that higher gas cost over a series of months to our customers. And that amount each month that we have, that we've spent but we we.Haven't yet collected gets an intercom own NENT on it that's recovered later in rates. So, again, we have a delayed recognition of the income, whereas we've incurred the expense, if you will, by having spent the cash in the earlier period. That coupled with the fact that we completed the construction of a couple of generation projects last year where we had fairly significant amounts of interest during construction, which we don't have in the first quarter this year, causes the net interest impact to be a reduction. The third component is those new generating plants have depreciation associated with them which we didn't have last year. And this is one of the challenges of our marketing area is to ensure we recover the costs of those new investments. And so there's about a five cent per share impact on depreciation expense. And last pension and benefit expenses are up, I assume this is a common theme that you hear across all companies, not just utilities, but pension benefits and particularly health care, costs us about four cents a share this quarter compared to last quarter. Those are all partially offset by an improved wholesale market that added about 13 cents. But in our view, frankly, if we had had the same quarter in generator performance that we did last year, we would have probably seen earnings improve from the wholesale market instead of 13 cents up maybe 23 to 28 cents. And the reason is you may recall that in the first quarter of last year we had no scheduled outages of any of our major coal units. This year we had a significant scheduled outage associated with a rewind on one of the generator sets that took the unit down originally forecasted for about seven weeks and in reality the outage turned out to be nine weeks. Now, the cost of that two week slippage, the cost of the extended outage was incurred by our contractors, which was not a small cost. But it kept us from having available to us the low cost energy. So our purchase power expense went up about $5 million. When we know we're going to have a unit out, we will buy power forward if we need to ensure that we've got adequate resources to meet our loads. But it still costs us more than the cost of the coal generation. We also experienced forced outages on our coal units that are higher than typical. Last year our San Juan units performed in the top Q4 tile of coal units in terms of availability and forced outages rates. That's a track record they've had for some time. For a variety of reasons the first quarter of this year they didn't perform as well which was unfortunate because we had good strong wholesale markets. So far in the month of April we see improved performance with the significant outage that we had on one of the coal units. That unit will clearly be coming back in very good form. And then we have another unit that goes out there fall on a major scheduled out age and so we'll see its performance also pick up. So I think that this quarter was, we didn't have the performance that we would like to see out of the coal units. Part of it was driven by the scheduled outage, but I think we're already seeing improved performance overall out of the coal units so we'll see a return to more normal performance for us top quart tile performance as we go forward. So at this point then I guess I'd like to turn it over to John to go into more detail and talk about our bucket analysis.

Thanks, Jeff. And good morning. I'll start on slide six for those who are following along, which highlights our one time items. And let me provide a little bit more technique color on our one time items in the first quarter we adopted FAS 143 on asset retirement that generated a 95 cent gain. Historically torically PNM has provided for asset requirement through a green field standard but the new accounting standard requires us to do do it to a contractual level which is much lower. That resulted in recognizing the gain for the quarter. Also, Jeff mentioned the previously announced charge related to transition costs associated with open access. In the first quarter we had both our global settlement approved by the commission and open access was repealed during this legislative session. Those two events caused the trigger point for that recognition of the 26 cent charge. On slide seven I'd like to introduce our new business model. As we discussed last fall, we were developing a new business model to reflect the global settlement and to provide more granularity around our wholesale business, particularly at the margin level. The new model really focuses on two business segments. One the utility and two our wholesale operations. At the utility level, it's focused on our ability to joint dispatch both regulated and wholesale generation. Our ability to market jurisdictional excess power for the benefit of ratepayerors and allocates the revenue credit back that rate payors get for the use of that energy. Within the utility we have the electric retail component, transmission and gas. Electric retail is really the component that changes here, because we now have generation based on the new cost of service within that bucket. Both transmission and gas meet the same his torical standards for those segments as they have in the past. On the wholesale side, again we provide some new granularity with three major components to our margin detailed out for your review and analysis. The first is long-term contract bucket. These are transactions like our sales to Gallup TNP apatch CHEE and new Navy contract they average two to 17 years with an average life of about seven and a half P. On the forward sales, which is our next category, these are transactions one month to three years, but they average about a year. And it really focuses on three capabilities. One our advantage of favorable forward pricing in the market. Second our ability to take advantage of pricing opportunities between our three major transmission hubs with MOO*E Palo Verde and Four Corners and third it's the first opportunity where we create velocity when market volatility allows. The third component is short-term revenues. And these are sales less than 30 days in term. It reflects our spot market sales, power head sales, day ahead, week ahead. This is also the second opportunity for us to create velocity as we have the ability to move in and out of positions when prices are volatile. On slide eight, let me walk you through our wholesale margin performance for the quarter. On the long-term contract, or on an overall side our wholesale margins improved eight.1 million or 82 percent. The lion's share of that was driven by long-term contracts where our margins improved five million or 40 percent. That reflects our new Navy contract, increased sales to T and P and the fact that Kirk land which was a retail customer prior to the rate settlement now becomes a wholesale customer. On the forward side, we saw margin improvement as about a million. We saw better pricing, better velocity. In fact our velocity was at a ratio of 1.7, better than our assumed level of 1.5. But that was offset a bit by a 1.3 million dollar mark -to-market loss at the end quarter and plant availability issues that Jeff had mentioned earlier. On the short-term sales side we saw margins improve two million, and again higher prices and improved velocity helped drive that. There was a bit of an opportunity loss there as plant availability cut us short about 290,000 megawatt hours from what we would have planned to be able to sell. One thing that I think the new margin analysis helps us demonstrate is margin stability. Over 99 percent of our margin delivered in the quarter, both jurisdictional and wholesale, come from either jurisdictional rate payors or long-term stable contracts. Now let me move to slide nine and walk through each of the segments and give you a feel for what happened in each. At the electric utility, EPS was off about two cents to 34 cents. This was largely due to the transfer of the occur land business from retail to wholesale. Excluding those effects VO GRU [inaudible] Of a percent and volumes were flat as we continued to drive productivity that offsets inflation. Without curt land we would have seen about a penny improvement in the electric jurisdiction business. The gas business saw a four cent decline to 17 cents. Jeff mentioned the mild January that cut margins by about 1.8 million. The elimination of the rate rider we discussed back in January also cut margins about 1.3 million, while again costs remain steady. In our wholesale business we saw EPS improve eight cents to a base level of six. Margins improving 83 cents, eight million. Here we do see some higher operating costs as we added after ton and lords book both from OEM as the plants operate and the turbine storage that we mentioned back to you in the January time frame. At the corporate level EPS was lower 10 percent, again because of retire reand health care costs and short-term borrowings. Now let's move to looking forward on slide ten. We provided for you our key guidance assumptions and they look very much the same as they did when we presented them to you in January. The one changes we are a bit more optimistic on the short-term price horizon as we see prices through the January through April time frame. That assumption is enhanced for $34 to $41. On slide 11 we'll update earnings guidance. In January we provided guidance for the year 2003 of $one.80 to $2.05. Today based on quarter results and remainder of the year we're affirming our guidance. Let me also walk you through the segment guidance here as well with the new business model we're also providing earnings ranges for each of the segments. The electric utility range is a dollar 35 to $one.45 with weather and economy being the key critical factors that will drive that. Gas five to ten cents with the same factors. Transmission five to seven, with an overall utility earnings of $1.45 to $1.62. On our wholesale side we see earnings in the 34 to 40 cent range. Again market prices liquidity and plant availability will be critical. Getting us to our $1.80 to $2.05 range I'd point you the even in our wholesale operation although 70 percent of the ability to earn is driven by our long-term contract business. Now let me turn it back to Jeff for a wrap up.

Thanks, John. Just a couple things I wanted to touch on about other business elements going on in the first quarter. First, we had a 60 day session which was the first one for our new Governor. And legislatively I'd say the session was a success both for us as well as for the state. On PNM issues, as was previously mentioned, the Legislature adopted the legislation we needed to implement our electric settlement. We also received favorable legislation that will help us manage our costs about getting heavy vehicles out on the road during lowers when hours when we need them in the road because in the past there have been limitations about big and wide vehicles being out on state highways. There were proposals that would have tried to increase costs to the utility industry, the electric industry by requiring dry cooling or hybrid cooling on power plants. That never made it out of committee. So I think on our issues we had a very successful legislative session. And for the state, I think we had an equally successful legislative session. A new democratic Governor who comes in and gets a unanimous vote out of the senate to reduce income tax. I don't know that that's ever happened before, nor am I sure it will ever happen again anywhere in the country but it happened and we'll take it any way we can get it. I think that coupled with the very significant education reform initiatives that have been put in place through this legislative session bode well for economic development in the future and I think that's also coupled with we are only one of two states that I know of in the United States that are being able to operate in the black, given the economic downturn. So I think we're off to a good start in this administration and good terms for the issues that matter to us. As we've talked with you all about before, one of our major challenges for this year is the gas rate case. We expect to see the testimony to be filed by intervenors in about two weeks. The scheduled date is the 13th of May. That may slip a couple of days or a week. But only on the -- but at this stage it's still scheduled for the 13th and we'd go into hearings at the, toward the end of June with a recommended decision at the middle of September. We still feel that we have a very strong case. Obviously we don't expect to see the intervenors agree with us, but we have not heard anyone calling for a rate reduction, which is something that many of our, of other utilities have seen and we've seen in the past. So I think there's clearly a recognition that there needs to be a rate increase and the issue is how much and what's going to be appropriate and how is it implemented. So we certainly fully intend to pursue this case. We will obviously be willing to enter into settlement discussions. But if we don't think we can get an appropriate resolution, we'll carry the case to term. On renewable energy, the first set of wind machines are now up and running. They're not generating electricity into the grid yet but they're up and running. And at this stage we think that we will have the entire wind farm, about 200 megawatts, on line in advance early. We had talked about an in-service date for the project of August. I think we will make July. We may make early July. And I think if market prices stay the way they are, I think that we will see positive impacts from having this facility come on early. Remember that when we initially talked we anticipated that there would probably be some minor drag relative to the resource coming on line on earnings for a couple of years. I'm not sure that's going to happen at all at this stage. And we have a commitment out of our commission to move our green tariff within 100 days. So as we enter into the fall we should have that in place also. So again I think that that is continuing to move fairly well. That's I think all the business updates that I would have. So at this time I think if our operator is there, we will turn it over for questions.

The question and answer session will begin at this time. If you're using a speaker FOEVEN pick up the handset before pressing any numbers. Should you have a question press star 1 on your 14 on your push button telephone. Your questions will be taken in the order that it is received. Please stand by for your first question. The first question comes from Andre Feinstein of Angelo Gordon. Please state your question

Good morning. A couple quick questions on the wholesale business guidance. When I look back at the prior guidance you had given, you had indicated that a dollar CHAENG in prices was about five cents to earnings. And it looks like you've raised guidance for that, for wholesale price about seven bucks looks like the entire 35 cents of earnings that you guys are now expecting to earn from the wholesale business, I just want to confirm I'm looking at that correctly. And I also want to follow up, you had mentioned, I thought, Jeff, in your statements or somebody had mentioned that the wholesale market was a positive benefit for the quarter of 13 cents and it would have been 23 cents had you had the normal amount of generation on line. But when I look at the breakout looks like the wholesale business was eight cents incremental year-over-year for the quarter. Can you just explain the difference?

I'm going to ask John to take a first cut at that, both questions.

Sure. In the guidance for the quarter you have to remember that with the plant performance in the quarter we're a little behind. because of the purchase power. So not only will we have higher pricing, but it will help us to overcome that aspect of it. Let me flip back here to the wholesale margin. The wholesale margin

I'm sorry was it 13 cents margin and the eight cents is net income, is that the difference?

Yes

That's fine.

That's exactly right

I just want to understand your comment, your first comment there, because I might have missed it. I'm just trying to understand, because you never gave us this breakdown before of guidance, if in prior guidance you were assuming zero for wholesale because of the prior expectation of $34 pricing and now because you've increased pricing and you've shown pickups the sensitivity in the price that you see to pricing it seems as though mathematically the entire contribution that you're expecting now is 34 to 40 cents is about cash equivalent to the change in wholesale pricing assumptions. I'm just trying to understand, first of all, if that's correct, since we --

Yeah, if you look at our original guidance it had very low estimates in there for wholesale because of the $34 price and the way our revenue credit works back to customers, that allows us to about break even. You also have to remember in the first quarter we did purchase a little bit more power than we would have anticipated, because of plant availability. So those two components together with the change in price will get you to our range of estimate

And let me just chime in on that. Remember that my comment about the effective -- if in fact we had the same performance on units last year that we had this year we would have seen 10 to 15 cent improvement. Additional earnings. But remember that's something that we now have to work to make up. So think of it in the sense that we may be down a little bit because of plant performance in the first quarter.

You're not building that into the 34 to 40 cent number already, that --

That result is built in. So think of it being down and now we have, we're going to get up out of that and continue to move. So where the initial forecast may have been, was positive on the wholesale side, we didn't make as much on the wholesale side in the first quarter and so now we've got to make up for that and still get to the 35 to 40 cents that you mentioned

The wholesale contribution is now somewhat more back end loaded than you otherwise would have expected?

That's correct

Just to understand --

Again the pricing supports that

Understood. Just to understand as well, within the context of the guidance, though, if you are now expecting -- okay. Never mind, I think that just answered my question. Okay. That's it. Thanks guys.

Thank you.

Once again, ladies and gentlemen, if you would wish to ask a question please press star 1 or 14 on your telephone at this time. The next question comes from Theresa Ho from Banc of America Securities

I have three questions. First, for the buckets that you have, are you going to be able to provide these buckets for the other quarters in 2002?

We certainly will be providing that information as we roll out earnings results for each of the quarters

You're not going to give them out prior?

No, we're not really anticipating doing that.

Okay. And second, the assumptions that you have, I realize that you don't have an assumption for the [inaudible] Spread there. What kind of gas pricing -- actually not gas pricing, what kind of -- what should we read into the fact that there is no assumption for the Sparks spread?

Theresa, we are not estimating any significant amount of margin being generated on the basis of Sparks spread, Theresa. So effectively that will all be upside, if in fact it gets strong enough. Now we certainly expect that it will be positive during certain periods as we move into third quarter. But not in any significant way. If we're pleasantly surprised, there's some upside. If we're not, there's really little downside to the forecast.

Okay. And that's fair. And just finally, on the outage that you mentioned this fall, could you speak about which unit that would be and the planned timing for that.

Yeah. We have one of the major units, it's unit four, that is scheduled for a major outage this fall and that will probably be a six to seven-week outage. I can't remember specifically what it's scheduled for. It has not been down for about four years. So it is due for a major work. And a lot of it will be on the boil er side. The specific months, Eddie, I don't remember the exact schedule for it but it's going to be in the fall so it's probably October

Okay.

So it's going to be in October. And just remember on San Juan, units 1 and 2 are smaller units. Units 3 and 4 are larger units. They're 500 megawatt units. One and two are 100 megawatt units. So you can think of it paired that way.

And should we assume that you have already had the purchase power to make up for that loss?

Yeah, what we do when we know we are going to have major out ages because we have a Palo Verde unit going down for the steam generator replacement this fall. So we've got two major outages occurring. And we look at all of our sales profiles, we will then -- this will be done on an hourly basis. Wee take a look at what our anticipated resources are and what kind of a margin we think we want and if in fact we're short we'll go to the market and buy as we see the markets at the right price. Now, we also look at it on the basis of no gas generation. So if in fact market prices are below the cost of gas, then we will still go to the market and buy. If they're above the cost of gas, obviously we'll utilize our gas generation before we'll go to the market. Either buy forward or buy on the short-term side

Okay. Thank you.

The next question comes from Shawn hall with genesis, please state your question.

The guidance for plant availability for the rest of the quarters, what is that number for San Juan? I think you have 84 for Q1.

Shawn, we don't give guidance on specific performance of individual resources by quarter. So that --

I'm sorry. I didn't mean it by quarter. What is your plan for the entire year?

I couldn't tell you a specific number at this time, Shawn. And that's not something we typically would give. We have built into that, into the forecasts, the scheduled outages plus an anticipated level of what we call forced outages, which is when the unit may be taken off because you have a failed piece of equipment, a tube leak or whatever the case may be. And it's really the forced outages -- I'm sorry, my phone was going. It's really the forced outages that we take a look at and are careful about. So we don't give a specific forecast, but we anticipate that the units will return to more normal, which is top quarttile level performance. And that will have forced outage rates in the six and a half, six to six and a half percent range, something like that

Okay. And one other question, earlier in the comments related to the Navy contract, I wasn't sure if I heard you correctly. There was an up front payment.

Yes. Effectively -- this was a contract Shawn that we bought out from Enron. And the Navy really WAPA [phonetic] Who acted as their agent made the decision who was going to supply it. And part of it was making an up front payment to Enron, because the contract was a higher priced contract. So --

So it's unusual that there is an up front payment in long-term --

Yeah, I would call this a market transition. And so we effectively used cash and then we get the return on that cash over the two and a half years of the agreement

Okay. Thank you.

Once again, ladies and gentlemen, if you wish to ask a question at this time, please press star 1 or 1/4 on your push button telephone. If there are no further questions, I will turn the conference back to Barbara Barsky

I want to thank you for joining us this morning and I'll be available to talk if anyone wants additional information or conversation. Thanks a lot.

Ladies and gentlemen, if you wish to access the replay for this call you may do so by dialing 1-800-428-6051 or 973-709-2089 with an ID number of 288949. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.

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