TXNM Energy Inc (TXNM) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PNM Resources conference call. (Operator Instructions). As a reminder, this conference call is being record.

I would now like to introduce your host for today's conference, Ms. Gina Jacobi, Director of Investor Relations. Ma'am, you may begin.

Thank you.

Thank you, everyone, for for joining us this morning for a discussion of the Company's first quarter 2010 earnings. Please note that the presentation and accompanying materials for this conference call and supporting documents are available on the PNM Resources website at www.pnmresources.com. Joining me today are PNM Resources CEO, Pat Collawn, and Chuck Eldred, our Chief Financial Officer, as well as several 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 thePrivate 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 the information. For a detailed discussion of factors affecting PNM Resources' results, please refer to our current and future annual reports on Form 10-K, and the quarterly reports on Form 10-Q, as well as other current and future reports on Form 8-K, filed with the SEC.

And with that, I will turn the call over to Pat.

Thank you, Gina, and good morning, everyone, on this Friday morning, where I hope the market doesn't provide us with as much, ahem, interest as it did yesterday.

I am going to start on Slide Four this morning. And as you see, earlier this morning, we reported our first quarter results and our ongoing earnings of $0.06 per diluted share, compared with $0.10 a year-ago. However, if you adjust last year's earnings to exclude the $0.08 contribution of the PNM Gas operations, we had an improvement in 2010, to $0.06 versus $0.02 without Gas in 2009. Our GAAP earnings are down, reflecting an unrealized mark-to-market loss on economic hedges of $17.9 million at First Choice Power. Last year's GAAP results also reflect a one-time gain of the sale of the gas operations.

As stated in our news release, our first quarter results were driven primarily by the performance of First Choice Power, which contributed $0.11 to ongoing earnings. First Choice's improvement primarily is a result of significantly reduced bad debt expense. I will go into more detail about First Choice in a moment. Weather also contributed to our earnings this quarter at PNM, TMNP and First Choice Power, all of which benefited significantly from colder weather this year compared with 2009.

Let me highlight the first quarter. We're starting to see some signals of modest improvement in our economies in Texas and New Mexico. We did see a sign that customers are at least willing to spend a little more than they have in the past. Heating degree days in Texas and New Mexico were up substantially and customers responded by turning up their thermostats. On the regulatory front, we continue to make progress in both New Mexico and in Texas. And we saw strong performance from First Choice Power, and their results more than offset the weak market prices we continue to see in ERCOT, which negatively affected Optim Energy.

We turn to Slide Five and provide a bit more detail on the economy. For the first time since we began showing you these datapoints some time ago, New Mexico's unemployment rate is higher than the Texas unemployment rate, although both are still below the nation's average, which this morning was announced as 9.9, as opposed to the 9.7 on the chart. As I have mentioned, both for better and for worse, New Mexico's economy traditionally lags behind the rest of the country in terms of showing results. Unemployment appears to be one of those economic indicators in which New Mexico lags behind. Despite that indicator, we are seeing some signs that the recession's grip is loosening in our service territories. Customer growth, albeit modest, is occurring. We saw a little more than 0.5% in PNM and 0.2% in TNMP.

There is a little more information on load on Slide Six. Energy sales are picking up in both of our regulated territories, compared with 2009. Now keep in mind, though, 2009 was a very down year. So while we are seeing improvement, we're closer to the levels that we saw way back in 2006. Weather normalized load grew 1.6% for PNM compared to the first quarter of 2009. For TNMP, the story is a little better. TNMP saw 2.3% load growth this quarter.

There are a couple things to take in mind when looking at this chart. First in PNM, you see strength in both the residential and the commercial market place, while the industrial wide is down. However, industrial margins at PNM represent only about 7% of our retail margins. So that load decrease was only 0.2% of PNM's load. At TNMP we're not seeing residential uptick yet, but you're seeing a very strong increase of 5.5% in commercial, again,showing some signs that the recession is starting to loosen its grip.

Turn to Slide Seven, and give you an update on the significant amount of regulatory activities we have in both of our service territories. As you know, one of our goals is to have successful outcomes in all our upcoming regulatory cases. We are aiming for a June 1 filing, and are on track for a June 1 filing, with the PNM rate case, which will be a future test period. This is likely going to be one of the most complex cases PNM has ever filed. When we file it, we will summarize the key points when we issue the news release announcing the filing, and Gina and her team will post the supporting data and testimony on our website.

On the energy efficiency front, the public regulatory commission recently adopted a rule that allows utilities to recover lost revenue associated with fixed costs. We filed our tariffs that reflect this and we're awaiting their approval. As you though this energy efficiency tariff would eliminate the inherent disincentive all utilities face when implementing energy efficiency programs. We're very encouraged that the PRC recognizes the importance of saving energy in a way that does not penalize utilities.

In just ten days, on May 17, the public hearing regarding our renewable energy plan begins before a PRC hearing examiner. You will remember that we initially filed a plan that included a mixture of wind and solar power. That plan was criticized for not supporting more solar technology. We since filed another plan that is 100% solar, and that is the plan that is being considered. Now this plan has drawn criticism from the PRC staff, the AG's office and others for not being the most cost-effective way to deliver renewables. From our perspective, we're technology agnostic. We believe we are required to meet state mandated portfolio standards in 2011 and beyond, and we remain steadfast in our position that we will not invest in any renewable project without a clear and certain avenue for cost recovery. And as we mentioned in the February call, we expect to file a [firt] transmission case for PNM toward the end of this year. Our last filing to increase wholesale transmission rates incurred in March of 2005.

If you move on to Texas, on March 2, we filed for a $5.5 million increase to TNMP's transmission cost of service rates. And in April, the commission staff filed their recommendation for approval, and the ALJ approved it and filed an order. It will be decided upon on the open meeting scheduled for May 14, in Texas. Later this quarter, pending our Board's approval, we anticipate filing for advanced meters for all of TNMP's customers. This would be a capital investment of about $70 million. Texas regulatory environment provides for an accelerated review, and approval, of these automatic meter-reading projects, and we could be adding a rider to bills as early as November on this. More to come on this project after Board approval, but those of you that follow Texas know that Texas is very good in terms of these projects, and they provide a very attractive return for the utilities implementing those. And we remain on track to file a general rate case for TNMP sometime during the third quarter and, again, we will keep you updated on this filing.

We turn to Slide Eight. We will talk for a minute about the competitive businesses. The past 18 months or so at ERCOT have been unpredictable, to say the least. We have seen market prices peak to all-time highs and then plummet to near record lows. Throughout this turmoil, our competitive retail operations in First choice and our generation company, of which we own 50%, Optim Energy, have provided PNM Resources with a kind of a natural earnings balance. With First Choice, ongoing quarterly earnings are above last year's results, as I said, largely due to a significant reduction in bad debt expense. As you see from the slide, quarterly bad debt expense was $5.8 million, or about 5.1% of revenue, compared with $14.3 million, or 11.7% of revenue, in 2009. During the quarter, First Choice had fewer customer departures and lower average final bills. Despite the fact that we're at 5.1%, we still believe bad debt will finish the year at about 7% of revenue. Bad debt expense traditionally increases during the higher use months that are still to come.

We look at Optim Energy. Operationally, Optim is solid and continues to perform well. Their power plants had excellent availability. Those are in the appendix, on Slide A5, for to you look at. Optim will remain poised to maximize its fleet and respond quickly to market opportunities. They remain focused on cash conservation, a strategy which we announced to you last year. Overall with Optim, the story remains the same as it did for much of 2009. Low natural gas prices continue to dampen power prices throughout ERCOT, and have limited Optim energy's performance.

With that, I'm going to turn the call over to Chuck for the financial overview.

Thanks, Pat, and good morning.

As we mentioned in this morning's news release, we earned $0.06. We were down $0.04 from last year. But that includes the $0.08 of the earnings from our Gas operation which we sold early last year. If you exclude that $0.08, our first quarter earnings were actually up $0.04 from last year, and that's largely due to colder weather, reduced bad debt expense at First Choice Power, and the slight load growth in both New Mexico and Texas.

Turning to the individual business units on Slide 11. This lists the major drivers of our quarter-over-quarter improvement in our regulated businesses. Let's start with PNM. This year the New Mexico utility reported ongoing earnings of $0.02 per share, while last year the utility essentially broke even. Implementation of our first phase of rate relief, which went into effect on July 1 of last year, added $0.03 to the utility's earnings. Colder weather contributed another $0.02, as heating degree days in New Mexico were up 22% from last year. And lastly, normalized load growth of 1.6% added another $0.01 of earnings.

Now partially offsetting the favorable drivers were $0.04 of increased outage and maintenance costs at Four Corners in San Juan, and $0.01 of higher pension and retiree medical costs. At TNMP, earnings were flat quarter-over-quarter. The implementation of new rates on September 1 of last year, added $0.01 to earnings. Additionally, normalized load growth and colder weather, each contributed $0.01. This past quarter, Texas weather ranked as the ninth coldest in over 100 years.

Offsetting the favorable drivers were high interest costs which reduced earnings by $0.02. The increase in TNMP's interest expense is fully recovered in rates. However, it should be noted that a recovery is usage based, so we will see this as at a variance, so we will under-recover in the shoulder months, when usage is lower, and over-recover in the summer, when usage is highest.

Now, moving to our unregulated businesses on Page 12. While the sustained low price environment limited Optim's financial performance in the first quarter, First Choice Power continued to deliver strong results, proving that the two companies combined provide a natural earnings balance. First Choice Power generated ongoing EBITDA of $16.7 million in the quarter, up $4.7 million from last year. And as Pat mentioned earlier, the improvement was primarily driven by lower bad debt expense, which declined from a little over $14 million to about $6 million, or 5% of revenue. Clearly, initiatives to reduce bad debt that First Choice has been implementing were paying off. However, despite the strong performance this quarter, we still anticipate bad debt for the year to come in at about 7% of revenue. Traditionally, bad debt tends to increase in the higher usage months, as electric bills increase and customers switch in an effort to avoid paying their final bills.

As expected First Choice Power's gross margin was down quarter over quarter, as unit margins continued to contract. However, unusually cold weather helped offset some of the impact that was negative. Although customer accounts were down about 10% quarter over quarter, sales volumes increased 4.5%, reflecting the higher customer usage due to the colder weather.

Now turning to Optim Energy. Optim generated EBITDA of $9.8 million, which is up $8.5 million(Sic-see presentation slide) from last year. Although power prices remain low in ERCOT, continued optimization of plant and commercial activities, coupled with cost reductions implemented last year, contributed to Optim's bottom line. One negative driver was the absence of emission sales. This year, given the current weak market for allowances, Optim did not sell any of its excess emissions. However, the Company continues to monitor the emissions market, and will sell its excess allowances when appropriate.

Moving on to guidance for the year. Despite slightly higher than anticipated outage costs and continued lower prices affecting Optim, we remain confident in our ability to deliver earnings within our original guidance range. We are affirming our earnings, unregulated EBITDA, and cash earnings guidance. We still anticipate consolidated earnings to range between $0.60 and $0.72 per share, with our regulated earnings coming in between $0.66 and $0.72, and our unregulated businesses contributing between $0.05 and $0.17. You can find the segment detail in the appendix on Page 8-2. Our unregulated EBITDA guidance ranges are also unchanged from last quarter. Although we do expect First ChoicePower to come in on the high end of its range, while Optim expects to be on the lower end of its range. And lastly, we still anticipate cash earnings to range between $290 million and $315 million.

And with that, I will turn this back over to Pat for her concluding remarks.

Thanks, Chuck.

If you look at Slide 14, this is the list of 2010 objectives we presented to you at the February call. I'm pleased to say the first quarter resulted in progress on two significant fronts and they are noted in the green print on the slide. First, as I mentioned, we filed the transmission cost of service proposal for TNMP and received staff and ALJ approval. This rate proposal is on the May 14 PUCT agenda for consideration. Second, on March 9, Moody's revised its outlook on the Company to stable from negative. This followed a similar move by S&P in December. Today all three rating agencies have stable outlooks recorded for the Company. We will go through the slide every quarter, and I look forward to reporting continued progress on our checklist.

This concludes the presentation portion of the call. Operator, we can start the Q&A session, if there are any questions.

Yes, ma'am. (Operator Instructions).

Our first question comes from Brian Russo of Ladenburg Thalmann.

Hello. Good morning.

Good morning, Brian.

I think previously your guidance assumed flat growth or lower growth at the utilities, but it looks like growth is slightly exceeding your expectations, but you maintained your guidance. So I'm wondering, are there some offsets elsewhere that we should be aware of?

A couple things, Brian. Our guidance had anticipated some growth in Q1, even though it was flat for the entire year. Given that the first quarter in 2009 was the quarter that was extremely anemic. So, that's one thing.

We also expect a little more demand response, associated with the fact that the second phase of our rate increase went into effect in April. So there is a price increase there. And we true up our fuel clause in July, so if we're under-recovered at all, you could see a bump in prices. We also have several industrial customers that have said they are going to shut down some of their operations in New Mexico, and while that is only a small piece of our load, that will be happening later in the year. So --

Okay.

It is just a little too early to also tell, I think, if that growth in usage is sustainable.

Okay, so we should just continue to assume kind of flat year-over-year growth, for the rest of the year?

Yes, Brian.

Okay. And then, just elaborate on your comment earlier that this upcoming PNM electric rate case is the most complex case in your history.

A couple things. It is going to be switching from a historic test year to a future test year. And that has not been done in New Mexico, so that alone makes it very complicated. The last -- our prices are currently set, on a rate base, in March of 2008. So obviously, there is a lot of regulatory lag, plus going into the future. And we also need to propose a solution to energy efficiency, and the lost margins on that. I mentioned that solution we have in place right now is, the Commission will allow us to earn $0.01 on lost margin, and we filed our tariffs for that. But in this case, we need to propose what is called a permanent solution for that issue, so you will see that in there. So we're dealing with that at the same time.

Okay, and I don't want to jump the gun on the rate case filing, but it seems like you're going to have a rather impressive accumulating rate base from March of 2008, and would basically lead to a high double-digit rate increase request? And I'm just wondering if you had any thoughts on that, and maybe the reaction from consumers and interveners.

Well obviously, we make our filing on June 1, and so I I don't wanted to jump the gun talking about it. But I will say that we are well aware of other rate cases being filed, and filing strategies and reactions, and we're going to take that into account when we do our filing.

Okay could you remind me that the 100% solar renewable plan, how much is that total cost?

The 100% solar renewable plan, that we filed -- $270 million, yes. I was going to give you $285 million. It is $270 million.

Okay. And how much were your emission sales in 2009 for the full year?

At Optim? Let us look that up. I don't know off the top of my head.

And then, just real quickly on Optim, are you completely unhedged in 2011?

We haven't disclosed for 2011 yet.

We, Brian, we still continue to take long positions, but we're about 60% hedged for 2010. And 2011, we're still working through hedging strategies, particularly withTwin Oaks, which we haven't begun to disclose our positions there, but we're not completely unhedged, but we're not fully hedged by any means. And part of that is because we continue to remain in a long position, anticipating the gas prices to be a little bit higher than where they are today.

Got you. Thank you.

Brian, we don't have the emission sales right in front us. So we will get Gina, or Frederick, will call you back with that number.

Okay. Thank you.

Thank you. (Operator Instructions).

Our next question comes from Edward Heyn of Catapult.

Can you guys hear me?

Yes. Good morning, Ted.

Hello,Ted.

Just actually had a quick question on Optim. You highlighted that -- what was it called? Commercial optimization was up. Can you just give a little more color on what exactly that is?

You know, we tried to kind of point out the way you dispatch the power in the markets, and dealing with ancillary services, and also some down-balancing of Twin Oaks, where we can take that plant down and actually buy power in the market and sell that power. There are some things that we're able to do to optimize those assets. But it really is -- it has allowed for us to beat the balancing market and do better than what the marketing prices would normally reflect.

Okay. All right. And then do you guys have a numberof what -- on a per mega-watt hour basis, your margins were for First Choice in the first quarter?

We haven't provided that --

We haven't disclosed that.

Okay. Is it safe to say they were above what, I think you're assuming in your guidance, that they go back to long term rates.

When you get the 10-Q you will see the details in there. If you back out the economic hedges you will get a pretty good idea, but it is safe to say they were higher than what was anticipated. But we still continue to see this downward trend we saw and talked about last year, about a 20% decrease. We still anticipate the competitiveness in that market to support that kind of trend, but certainly, we are seeing margins to be slightly higher the first quarter.

Okay but the really -- for bad debt and for margin, the rubber kind of hits the road, as you get into the more meaty summer season?

Yes, that's why we're being hesitant to say much more, other than we're certainly doing well for the first quarter, but we have the summer months, anticipating to see what happens.

I think you're starting to see people be -- the competitors be a little more aggressive on their pricing, which will continue to put pressure on those margins.

Got you. Okay, thanks a lot. Congrats on the good quarter.

Thank you.

(Operator Instructions).

I am showing no further questions at this time.

Okay. Thank you. I think everyone is probably focused on the broader market today, and our upcoming rate case. So thank you, all, for taking the time to join us this morning. As we said, we're on track for a June 1 rate filing at PNM, and Gina and her team will get that out in a news release and post it on the web, and be prepared to answer any questions. Thank you all, and have a good weekend.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Thank you and have a nice day