TXNM Energy Inc (TXNM) 2003 Q3 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the PNM Resources third-quarter 2003 conference call. At this time I'd like to inform you that all participants are in a listen only mode. At the request of the Company, we will open up the conference for questions and answers after the presentation. I will now turn the conference over to Barbara Barsky. Please go ahead, ma'am.

Good morning. Welcome to the PNM Resources third quarter earnings teleconference call. With me today are PNM Chairman, President, and CEO JeffJeffrey Sterba, Chief Financial officer John Loyack and other members of the PNM management team. Before I turn the call over to Mr. Sterba, I need to remind you that some of the information we will be providing this morning should be considered to be forward-looking statements made pursuant to the Private Securities Litigation Reform Act of 1995. We caution you that all forward-looking statements are based upon current expectations and estimates and pNM resources assumes no obligation to update this information. For a detailed discussion of the factors affecting PNM results please see our current and future annual reports on form 10-K, quarterly reports on form 10-Q and our current and future reports on form 8-K, filed with the SEC. Now I'd like to introduce Mr. Sterba.

Good morning. Thanks for joining us today. As you all know, we did a web cast last week and also had a chance - either John or I or Terry Horn to visit with many of you in Florida. As a result of that, I think we will be able to keep this teleconference shorter than usual, particularly on the business update, since we have provided most of that information are ready. But let me just touch on a few quick points and you can reference the slide No. 3 on third-quarter earnings drivers.

One of the things as you know that we have focused on is building additional long-term power contracts. And we have added about 200 -- a little over 250 megawatts of additional wholesale load so far this year. And each of those contracts has a tenure to them - I think the average tenure is about 6 1/2 years on those contracts. And I think that will help see us through the markets over the next four years where there's a lot of uncertainty about what market clearing prices will actually be as well as providing some good sound basis for instability to our earnings string.

In the third-quarter this year we did experience warmer weather. Warmer than average and in fact our retail load grew higher than we anticipated but it's not something that we anticipate continuing.

I think on a weather-adjusted basis we saw about 4 percent growth through the summer. And that is about the forecast that we expect to see moving forward. But we do continue to see obviously retail low growth and I think we're projecting about 2 1/2 percent -- little under.

The wholesale marketplace has improved from what it was last year but I would remind us all that last year was really not a very good year in the wholesale market. And we have additional gas resources that are coming on throughout the West that I think will continue to provide a cap on prices, but I'm pleased to see the kind of improvement.

All of those things, I think. have added up to a relatively strong performance for the Company, I believe. Earnings are up 10 percent year-to-date. Again, that's off a fairly soft year from last year but I'm pleased with the progress we are continuing to make. So with that as just a quick overview let me turn it over to John to walk through the specifics of the numbers for the third Q.

Thanks, Jeff, and good morning. I'll start on slide 4 where I'll walk through our third-quarter and year-to-date EPS performance. For the quarter, as Jeff had mentioned, ongoing earnings are up 10.2 percent - 65 cents vs. 59 a year ago. On a year-to-date basis, ongoing earnings are up about 9.4 percent $1.63 vs. $1.49.

We have had some non-recurring items in the third-quarter of this year. We had a 24 cent charge for the early retirement of debt as we retired our 7.1 percent senior unsecured notes that would've matured in 2005 and replaced them with 300 million or 4.4 percent senior unsecured notes that will now mature in 2008.

Also as you remember in the first quarter, we had a 94 cent gain from the adoption of FASB 143 and a 26 cent charge for the write-off of regulatory assets associated with our global electric settlement.

In 2002, in the third quarter, we did have a 14 cent charge related to work force restructuring.

On slide 5, let me walk you through the key drivers of earnings improvement for the quarter. Margin was the real story, generating 21 cents of improvement. 12 cents sets coming from our long-term contract business, 7 percent on utility margin reflecting warmer weather and strong customer growth. And 2 cents on wholesale as the market pretty much met our expectations, we did see higher pricing and improved liquidity from a year ago which was a very difficult market. So we also saw that offset by a shift of resources from our short-term sales to service our long-term contracts and increase in retail load demand - both because of weather and growth.

On the cost side, we saw a 15 cent increase. As we had demonstrated in the first two quarters 5 cents of that coming from depreciation on new facilities. Those are our gas fired facilities that came online late in 2002. Five cents related to pension and benefits. Last year's asset performance in the pension plan was poor and we also have ongoing health-care cost inflation.

On slide 6, I just want to walk you through our reporting segments that we rolled out in the first quarter of this year. We're really focused on two critical business lines - the utility and our wholesale operations. In a $2 earnings range, the utilities expected to generate between 75 percent and 80 percent of our earnings.

These really come from three areas. Our New Mexico electric retail business, our transmission business and our New Mexico gas service territory. On the wholesale side, about 20 to 25 percent of the earnings in the $2 earnings range comes from our wholesale market. Three-quarters of those are covered by long-term contracts with an average age of about 6 1/2 years.

We've also started to provide margin within the wholesale business in three categories - long-term contracts, foreign sales, and short-term sales. And we will walk you through those in a minute.

On slide 7, let me review our earnings by segment. Electric utility 55 cents - up six cents or 12.2 percent. Again good customer growth, warm weather. Lower fuel cost on both the coal and nuclear side were more than enough to offset the first month of the electric rate reduction that went into effect in September of this year. In the gas utility business, we generated a 12 cent loss that was 2 cents more than a year ago. And there we really see return lag due to the need for rate recognition for our ongoing investment in the business.

Transmission improved a penny, largely due to the restructuring of our EIP transmission lease that happened earlier in the year.

But the real highlight was our wholesale business generating 16 cents of EPS - that's 12 cents more than a year ago, 300 percent improvement - refracting our long-term contract business as well as the introduction of our wind farm that came on early and ramped up through the quarter. In fact, we saw market prices range from $29 to $75 - which meant our wind farm was clearing the market through the entire quarter. We also added the first long-term contract on the wind farm with SRP and we announced that a few days ago.

[indiscernible] and other saw a decline of 11 cents and that reflects the pension in benefits that we got about earlier. Also the elimination of capitalized interest on the gas fired construction that ended at the end of 2002.

On slide 8, I'll walk you through the margins by platform. Our electric utility margin was up about 4 million. We saw customer growth of about 3.1 percent, cooling degree days jumped to 1200 from 975 a year ago showing the warm weather and that's about a 23 percent growth. Again, we saw lower fuel cost on coal and nuclear and all that was enough to offset the first month of the electric rate reduction.

Gas margins were up a bit - we saw a 2.4 percent customer growth. That was largely offset by the loss of the collection of a regulatory asset that became fully collected at the end of last year and transmission improved a bit as we had more sales to the jurisdiction due to weather and growth.

The wholesale electric operations - the real story there, again, our long-term contract business improved 7.5 million - 74 percent. That's our Navy deal, the ramp up of our TMP and other contracts as well as the addition of new long-term contracts. In the short-term and forward market we did see $1 million improvement. We saw prices up to 49 vs. 35 a year ago and velocity improved to 1.9 vs. 1.7 a year ago.

Remember. Velocity is our total sales versus what we actually generate.

Again, that bucket was offset by that shift in resources to our long-term contract business as well as service demand for the quarter in the jurisdiction.

Let me spend a minute on cash flow for the nine months. For the nine months, we generated $162 million cash flow - that's up 61 million or 60 percent for the nine-month period. That reflects our strong earnings and better working capital management. We've also generated about 25 million of free cash flow for the nine months and that's been used to retire short-term debt.

On slide 9, let me walk through 2003 earnings guidance. Again, today, I'd like to reaffirm our $1.80 to $2.05 range. Within that range we would expect the utility to generate $1.40 to $1.60 or about 78 percent of our earnings and our wholesale operations to generate 40 to 50 percent or about 22 percent of the balance.

On slide 10, I'll give you our guidance update. We see short-term wholesale prices at $41 for the full year. That's in line with what our second-quarter forecast was as well as a little better than what we started the year at. Velocity will improve slightly to 1.75 over the 150 (ph) that we had in our second-quarter guidance as well as the initial guidance for the year.

Spark spreads (ph) haven't been meaningful and we wouldn't expect that to change as we move into the fourth quarter. And electric retail growth on weather-adjusted basis is expected to be 2 percent for the year - that's in-line with our second-quarter and original guidance.

Now let me turn it back to Jeff for a wrap up.

Thanks, John. Just a couple of quick things to add before we take questions. John mentioned the sale of renewable energy credits - our first major wholesale sale. We also have had good response on our -- what we call Skyblue, which is our renewable energy program for our retail customers. I think we're running at about two times below the rate of subscription that we had anticipated.

So we're very pleased at how well that's been received by our customers. Mention that we had this year about 250 megawatts of more wholesale long-term contract load and, also, through the course of the year we signed 65 to 75 megawatts. We got one contract that can move 10 megawatts - that's why the range - of new contracts for this year plus the 50 megawatt sales to SRP that we announced last week.

I think, also, one of the other things I was very pleased with was the refinancing of the 300 million in debt. To see the level of subscription where we had over a 4 to 1 subscription rate for what we're issuing -- very, very pleased to see the reception within the market. Last thing I want to touch on is a gas rate settlement. As you know, we entered into an agreement with the staff and our industrial consumers. And we had one party opposed and a couple parties that took no position.

And that was certified to the Commission at the end of September by the hearing examiner with the recommendation to accept. Since that time, as we move closer and closer to the winter, there's obviously been a growing concern about the impact on customers of higher loads on higher demand for gas as you move into the winter, the increasing cost of natural gas that will be felt by those customers in the winter and then compounded with the rate increase. It is certainly something we knew about but there's only so much we can do with it.

What we have done and proposed to the commission is that we would defer all of the residential rate increase from going into effect in November to it would be deferred until April. We would then recover the deferred amount over the summer. So we would effectively shift revenues from the end of this year and the first quarter of next year into the summer of next year, but we would still collect the revenues. We anticipate that the decision will be made by the commission on Tuesday of next week.

I certainly don't -- can't tell you what the decision will be, because I'm not sure all the commissioners have resolved in their minds how they will vote. We hope that it will be approved with this amended approach but, clearly, we have elections of commissioners coming up next in the early summer for the primary and there certainly is a concern about gas price impact on customers moving into this year but I think we've made a very good case why this is an appropriate mitigation. And I certainly hope that the commission will see that and agree with it also.

So on Tuesday, we'll know the outcome of the gas rate settlement.

When that, I will turn it back over to Barbara and the moderator for us to take questions.

We're open for questions [indiscernible].

[Operator Instructions].

Teresa Ho (ph) from Solomon Asset management.

Just a question on the deferment of the gas rate increase. If you could perhaps quantify what the impact would be for within your 2003 guidance? If I calculate correctly it seems it would actually be less than a nickel and just wondering how that would impact 2004?

Good question and congratulation on your new appointment. I'm glad you asked it because I had in Florida given an indication and I didn't in the comments I just made. It's that 5 cents may be just a hair above but right about 5 cents. It will defer a total of about $11.5 million but some of that is in the first quarter of next year. So for this year, it's about 5 cents. We haven't changed our range of guidance for this year. The $1.80 to $2.05 - we think the 5 cents certainly keeps us within that range and again it would be effectively a deferral until next year.

So if I hear it correctly, we then take that nickel and add it in '04?

Yes.

Lee Anderson from Reliance Capital.

How much should weather help you in the quarter?

I can't give you a specific dollar number, maybe John has that. But if we look at our residential growth in the third quarter, our actual residential kilowatt - our sales growth was about 11 percent. And I would say I think our modelers would say about 70 percent of that was weather. I frankly think it's a little more than that, but you know we're splitting hairs. Do you have a number sense, John?

I think from a numbers perspective, all it really does is shift margin to the jurisdiction and other short-term bucket, because if you look at where average market prices were, it's also about our average generation rate. So net it really just causes a shift from one margin bucket to the next for the weather component.

And on this Skyblue initiative, could you give us what expected financial impact that will have?

I don't think it's going to be significant. Customers pay an additional $1.80 per 100 KWS for signing up for Skyblue and they can take up to 90 percent of their bill under the Skyblue program. It's -- we have not built in any significant -- what I would call measurable additional impact that will have on the retail revenue side. On the wholesale revenue side, renewable energy credits are selling for anywhere from $8 to $15 - is that fair, Eddie? (indiscernible) for megawatt hours. And one of the things that we are going to be working on and I already talked with our governor about this, Richardson is Chairman of the WGA, and one of the issues I think in the West is help make sure that we open up to renewable markets across states. And so that renewable energy credits can effectively be used in any state and there are a few states in the West that have taken the attitude is not renewable unless it is produced in that state which is a rather ridiculous kind of approach. And I think that will help us, but it is possible that the wind farm that endeavor could add 1 million or a couple of million dollars over time per year.

On the guidance for the year with the $1.80 to $2.05 I'm looking at the twelve month run rate and I'm already at 208s. I guess the things that are going to be sort of year-over-year in the fourth quarter [indiscernible] rate decrease and I guess the gas business seems to be a little worse than last year, is there -- are there other things that are helping or hurting you?

Well yeah, I am going to ask John to cover this in detail. The 208 you're looking at is the GAAP accounting that includes the onetime item because of implementing one of the FASes. So when we talk about $1.80 to $2.05 we're talking about ongoing earnings.

I thought that you adjusted that out here.

John?

If you look at.

Page 3 - presentation of the earnings report. (indiscernible)

If you look at slide 4, ongoing year-to-date earnings are $1.63. GAAP year-to-date is $2.06.

Sorry, I was looking at twelve months.

I think what you have to remember there on the twelve months rolling numbers is the rate reduction goes into effect for a full quarter in December or September through December as well. So when you look at - and we also have the extended Palo Verde outage that's going 75 days? In the fourth quarter so that unit will be out of service as well as the full outage at San Juan so year-over-year when you include last year's fourth quarter we wouldn't expect this year's fourth quarter to be at the same level.

Okay and the reasons are the rate reduction

And the plant maintenance.

Plant maintenance, right, and the Palo Verde outage is for ...

Normal outage runs about 35 days - this one will run 75 days.

This is a replacement of the [indiscernible] my apologies I thought you were asking about the (indiscernible) 206.

And you're going to get 30 megawatts out of that outbreak? Is that right?

No 12 megawatts.

Yeah, about 12 megawatts associated with because we're having to downrate it a little bit because of the plugging on the [indiscernible].

When we get through all three units that's when you're talking about 30 to 35 megawatt improvement.

Eric Bellman from Covia Capital.

Good morning. Congratulations on a good quarter. I was hoping to get clarity into the wholesale philosopher velocity and what the velocity would look like if you're only considering the long-term contracts. In other words how much is really at risk with the forward sales and short-term sales for what you have to go out and procure?

I want to make sure I understand that question because I'm not sure. That's certainly not the way we look at it because we look at the system in total and we dispatch the system to meet all the requirements so that the fact that we have these longer-term sales has the potential - potential - depending on the market of enabling us to increase velocity a little bit because we know we have those loads. And so when we can find sources to cover up those loads and lock in a margin then earlier in advance we can then do that and then resell the power that we freed up out of our generators. So I think having long-term sales has the potential and increasing our velocity versus what it would be if we didn't have those long-term sales. But I don't know how to ...

No, I understand. I was looking at from the other side but I understand what you are saying. Thank you.

John Hanson from Imperium (ph).

Follow-up on two items touched on so far - one just Eric did just a moment ago which is long-term contracts. Question I have is how're those contracts right now? They're long-term -- are they pretty much fixed-price kind of contracts or are the gas and power markets changed with those price (indiscernible) contracts change in the next year or two?

Good question -- Eddie, let me ask you -- Eddie Padilla who is Senior VP of Marketing will address that.

Yes, John, the bottom line is there's not a lot of variability in the price schedule. They are set schedules for the most part. There's such a difference between contract to contract that it's hard to describe them as all being set schedules because some of them have a minor index related to them. But for the most part, they're generally set schedules.

Great. Generally set so that if those prices -- market prices move up-and-down then they are not going to be that much affected? That's the general question I had on that?

That's correct.

Second thing - just an update on Palo Verde outage itself. Is that moving along on schedule, any surprises?

No surprises so far, it's moving along very well. I mean they're -- what? Maybe 30 days into it. Something like 30 days into it and I think the last thing I saw was they're 10 or 12 hours behind which in this schedule is nothing. That kind of flux is typical. So they basically are on schedule and on budget.

And you had to do the inspections from the special inspections that the NRC is requiring, right?

Yes.

And some of their folks have announced that they've had some questions come up with that. But you haven't had anything along those lines, correct?

There's nothing I'm aware of that's come up because they are being able to do an additional dome inspection as they go through this process and there is nothing that's come up that I'm aware of.

Brooke Van from Jefferies Co.

Can you walk us through what the Company's options would be if for some reason the Commission does not approve the amended stipulation?

Yes Pat -- I am going to ask Pat to walk through from a legal perspective.

Under New Mexico law, the suspension period is ending in a couple of weeks but the Commission does have the option to extend it for another three months. The options include going back and depending on what the Commission's concerns were with the addendum and the stipulation, looking to see if there's another way we can settle it to meet the Commission's concerns and still meet our objectives or we can go back to the litigation approach and go to hearing on the original filing for $37 million. The Commission may suggest some changes in the stipulation if it doesn't agree with the way it's formed. We have the option of accepting that or not.

Those are the basic options that we would have at this point. But under New Mexico law if the Commission does not approve it by the end -- approve or deny it by the end of that extended suspension period, we have a legal right of putting the original filing into place. But that's something we have to assess as to the wisdom of doing that at that point in time.

If you were to go under the litigated track could you just give a sense of the timing that you could actually complete that?

I would expect that the Commission would try to complete it within the next three months because of the existence of that suspension period.

[Operator Instructions]. Mirk Shervin from Ducane.

I guess my question is - looking into '04, I guess you haven't given guidance yet? You know when you're going to be giving guidance? And I understand that there's the gas rate case which we haven't got implemented yet. So --

We'd anticipate giving guidance either toward the end of the year or maybe early January but probably as we move into the last month of the year.

Okay and if I was going to look at '04. just trying to determine what the drivers might be, we have the gas settlement right now that if it gets implemented would be a positive. Are there any other things that stick out to you - any positives or any pressures or cost pressures exponentially that could be detractors from earnings that go into '04?

Sure there are. The rate reduction which went into effect in September will be in effect for the entire year next year and that's $21 million plus the compounding of growth. That is how much we -- the annualized rate reduction went into effect in September. We -- just like everybody we're certainly facing higher medical and retiree cost and I think our folks have done a pretty good job of managing that for this next year. But I think that's going to be an ongoing struggle for all of American business.

Certainly the wholesale market and the indicators that John laid out in the guidance sensitivities for this year will still be in effect for next year - relative to price, the velocity and as you probably know, we just don't count on SPARC (ph) spreads getting to a point that it would have any financial impact on our bottom line. We do use a gas generation at times but, frankly, we don't count on it in terms of clearing the market in any significant way.

I guess one other -- we do have one industrial customer that, in fact, is shutting down as -- well, in fact as of early October. Philips Semiconductor has closed their doors and their facility here. But as things occur, yesterday we announced the location of a new manufacturing facility that will not be quite the same size load but close and employ about the same number of people that just announced yesterday on the West side. So I think retail load growth has a sensitivity between 1 and 2 1/2 percent but John (indiscernible) anything (indiscernible)?

I think those are the critical factors.

Just one question on your wholesale and your contracting. You guys have been pretty aggressive in contracting out a lot of your supply. And I guess I am just curious as to - if you can discuss the dynamic between what you sell and how, if you contract more, does that increase the amount of megawatt hours that you can sell short-term or decrease the amount of megawatt hours and how that dynamic works?

Well, I guess my view is that having the long-term contracts really provides two things. No. 1, it provides a stability of a revenue stream because we know we got those transactions under our belt and since we're predominantly a non gas related generator, as long as our plants operate well and we have very high expectations for their performance, we're not affected too much on the gas side.

So that's first impact. Second impact then because we have those contracts in place, there is the potential that we can add velocity to our system to our wholesale system because we know we have those loads, we can go out and when market prices move down and we can buy power that locks in a margin on those longer-term contracts, we can then turn around and resell. Whereas if you're in a shorter term market term market, it's more difficult to get to the same level of velocity. Get with the risk management parameters that we impose. At the same time the velocity margins are not huge. So it doesn't add a lot but it does give us I think more opportunity to fine tune. Eddie, you add anything.

That covers it.

The other thing I would mention, too, is remember over the last two years either contractually or through part asset on the ground we've grown our generation portfolio about 10 percent a year. So new resources into the mix are the other component where I think we continue to be able to growth that business, add new long-term contracts, and continue to be able to meet that pipeline on a go forward basis.

Yes we've added over 500 watts or about 500 megawatts of resources over the last few years but they're really in four different grades. The wind facility, two different gas units and then two different long-term purchases. So I think one of our challenges in being able to continue the steady growth on the wholesale business will be new supply sourcing.

James Crawford with Zimmerman (ph) Partners. [Operator Instructions].

Teresa Ho from Solomon Asset Management.

I actually was just going through your [indiscernible] for the 550 megawatts of power and I know that you have some shelf capacity. And you're looking at opportunities to acquire capacity. But I was just wondering do you have the opportunity to build out assets and in terms of the acquisitions could you speak to what you're seeing in the market?

Yes we do have become the ability to build (indiscernible). We have not procured the water for the build out but it is sited in a way that it could be either taken to a two unit or a two on one. So -- and in fact we do have another [indiscernible] steam bucket that could be used but we haven't made any determination. It really depends on some ongoing low development opportunities down in the southern part of the state. Relative to resource acquisitions, I really don't have anything to add, I think, from what has generally been said by many others. We don't -- we still see too wide of a [indiscernible] spread - at least from our perspective for the kinds of assets particularly the gas assets that have been put out into the market and so we go to bed every night saying patience, patience, patience. We're not going to step in and over buy or overpay. And when will that change or will it change? My crystal ball is not any better than anybody else's, but I think we're going to have to see as we go through another next year 18 months whether folks get a little tighter in the back pocket and they or the banks have to do something. So we will wait and see on that. I think there's some other -- unless, unless we have a very specific transaction that requires a Greenfield site to be built, particularly natural gas, you won't see us building another Greenfield gas facility in the near term. We're going to either look for assets to purchase that come at a fair price or you'll see us do something on the renewable or even, potentially, on the coal side if we are going to be involved in a build out.

Mirk Shervin from Ducane.

I just wanted to follow-up on [indiscernible] question. When you look out into '04, '05, '06 timeframe and beyond, what are the -- what do you see as your primary driver and primary strategy for growth -- is it M&A or acquisition of assets. And where do we expect this growth to come from?

Real good question, Rick, and I think it's one of the challenges every one of us face. As we look at growth we see our retail loads being able to grow let's say 2 1/2 percent on average. So the question is okay, that's a good base but that's probably not satisfactory. And so our wholesale business, we believe, can continue to grow at least double that rate. But there's a point before too long where resource constraints will start to get imposed and it is going to be incumbent to find a resource or to acquire a resource to add to that. So we continue to plan on having the wholesale end of the business grow and add an additional kicker. In terms of M&A, we may -- I think we've demonstrated we have a willingness to look at opportunities if they add shareholder value, if they're long-term based and they are of a strategic nature, we don't feel any compulsion that we have to do something to get bigger just for the sake of getting bigger. But we will certainly look at opportunities as they come up.

You'll continue to find us sticking close to our knitting. We do have some small technology endeavors that are going off but we don't count on them to really add anything to the bottom line nor to hurt the bottom line because they're small dollar items that are well managed. So that's really the strategy is make sure that we can serve our 2 1/2 percent retail growth in as cost-effectively a way as possible. Try to double that rate of growth in our wholesale business and then be very eye opening or eyes opened, eyes wide open, about changes that occur - could occur within the landscape that may create a bigger opportunity for us.

One of the challenges that we will have going forward is we do believe in our merger (ph) utility strategy which says balance between wholesale and retail. We're not going to move to a position where our wholesale operation is 60, 70 percent of the Company. So as we continue to grow that wholesale operation, we have to do something to keep it balanced. So that will be one of the challenges that we face in the mid to longer-term.

[Operator Instructions]

If there are no further questions, I will turn the conference back over to Miss Barsky.

Thanks so much for joining us today. I hope you all have a safe and happy Halloween and weekend and thanks for joining us on the call.

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 308779. This concludes our conference for today. Thank you all for participating and have a nice day. All parties may disconnect.