TXNM Energy Inc (TXNM) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to your PNM Resources third quarter conference call.

(Operator Instructions)

At this time, I would like to turn the conference over to our host, the Director of Investor Relations, Miss. Gina Jacobi. You may begin.

Thank you everyone for joining us this morning for a discussion of the Company's third 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.PNM Resources.com.

Joining me 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 concerned forward-looking statements pursuant to Private Securities Litigation Reform Act of 1995. We caution you that all the forward-looking statements are based upon current expectations and estimates, and PNM 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'll turn the call over to Pat.

Thank you Gina, and good morning, everyone. This morning we released our third quarter results of $0.63 per diluted share, which equaled quarterly results from 2009. Year-to-date, our ongoing earnings are $0.90 compare with $0.94 this time last year. You may remember, however, that last year's results included $0.08 from our gas business, which we have since sold.

I know our quarterly and year-to-date results are above some street estimates, and Chuck will walk you through the drivers that positively impacted our performance so far this year.

As we stated in our news release, quarterly results were driven primarily by improvement from our utilities, PNM and TNMP, both of which benefited from weather normalized load growth, increased demand as a result of warmer weather, and rate increases that were in effect for the full quarter.

As expected, we are seeing a downward trend in First Choice Power's earnings. Average retail margins continue to compress, albeit not as tightly as we had expected. And First Choice continues to do a good job of reducing its bad debt expense, which I will discuss shortly in more detail.

Optim Energy, along with all the other Texas generators, continues to manage through a challenging market in ERCOT. We are still seeing very low market prices, but strong operational performance at Optim's three power plans and an increase in ancillary services, have helped to mitigate the impact of low-price market for Optim.

Finally, because of that warmer weather and better-than-expected performance by First Choice Power, we have increased our ongoing earnings guidance for 2010. These are the highlights for the quarter, so if you turn to slide 5, I'll provide an update to you on our regulatory activities.

We now have two rate cases ongoing for PNM. Regarding the current retail case, which is our forward test period case, the procedural schedule was reset and we now have a hearing date starting on January 31. On Wednesday, we filed a PNM FERC transmission case, we've asked for an $11.1 million increase in revenue, a 12.25% return on equity, and for rates to be implemented on January 1, 2011. As this case's schedule becomes more firm, we'll provide you with key dates of that proceeding.

At PNMP, on August 26, we filed a general rate case asking for $20.1 million and ROE of 11.5%. This docket is on 185-day timeline. The public utilities commission of Texas is focused on getting through cases within their established 185-day window, and we are more than happy to comply with that. So we expect this case to be resolved and effective by February 28, 2011. If you turn to slide six, I want to quickly recap the recent decision by the New Mexico PRC regarding PNM's renewable energy plan. A scaled-down version of our original plan was unanimously approved on August 30. This plan calls for the construction of a total of 22 megawatt of utility scale solar at five sites. The recovery is capped at $101.7 million, which are the estimated costs of this project.

The Commission also approved a 500-kilowatt battery storage project with solar, which is partially funded by a grant from the US Department of Energy. They also modified our residential and business solar incentive programs, and expanded those programs to include solar electric thermal systems. Cost of these solar programs will be recovered through a rider, that will begin in 2012. And as we stated previously, we expect the increase to rate base to add $0.03 to $0.05 to our 2012 earnings per share.

If we move to slide seven, well talk about our retail load. Today we reported that the quarterly weather normalized retail load growth for PNM was 2.1% and for PNMP, 0.7%. On a year-to-date basis, PNM is at 2.1% load growth while PNMP is a bit lower, at 1.7%. While we are seeing some growth for PNM, keep in mind that PNM is still well below the yearly retail growth rates we saw prior to 2007.

Customer growth, which is that last line on the chart, remains positive but modest. PNM continues to experience about 0.5% customer growth, while TNMP is even less at 0.3%. Unfortunately, it seems that here in New Mexico we are still muddling through the recession and, as we've said many times, New Mexico's economy lags, for better or for worse, the United States. Earlier this month, Moody's Analytics and MSNBC.com identified New Mexico as one of the seven states that still remains in recession that ended nationally in June, 2009. The Department of Workforce Solutions expects that we should report a net job gain by the end of next year.

If we turn to the next slide, I'll briefly discuss our competitive businesses, First Choice Power and Optim Energy. Starting with First Choice, bad debt expense is below 5% of total revenue for this quarter. And since we have projected finishing the year at 6.5%, this is certainly good news. We are also seeing the payoff of First Choice Power's efforts to reduce customer risk through its offering pre-paid products, tightening its credit threshold, and upgrading its system.

First Choice continues to develop a deeper commercial customer base. Generally speaking, commercial customers have higher retention rates, lower bad debt, and can provide First Choice with better earnings predictability. And, finally, First Choice has opened customer service offices. The competitive market is maturing, and customer service is beginning to be a key point for customers, who are looking for more than just the lowest price.

Regarding Optim -- operationally Optim Energy continues to excel. As a fleet, Optim's power plants had near 100% commercial availability last quarter. Specifically Glen Oaks had its best performance during three consecutive months with in its history, with an EAF of 99.6%. Altura Cogen had 99.7% availability for the quarter, while Cedar Bayou Four finished the quarter at 94.3%, very impressive for those plants as well.

This strong operational performance led to higher ancillary revenues, which helped to offset the ongoing low energy price market ERCOT. In addition, the burning of alternative fuels at Twin Oaks resulted in fuel savings of about $100,000 per month.

As the down market continues, Optim will continue to focus on cost control, getting the most out of its operations, and conserving its cash. I'll now turn the call over to Chuck Eldred, our Executive Vice President and Chief Financial Officer, to go through the financials.

Thank you, Pat, and good day, everyone. As Pat mentioned, on an ongoing basis, we earned $0.63 in the third quarter, the same as last year. Even though earnings were flat, we were nevertheless pleased with our results as they exceeded internal expectations. Weather certainly was the key driver this quarter, but lower bad debt of First Choice also helped us beat our expectations.

Year-to date cash earnings of $285 million also came in above our original projections, reflecting our better-than-expected financial results. This increase in cash will be used to fund our capital spending plans, reduce our short-term debt, and support one of our key goals, the recovery of our investment-grade rating.

If you turn to page ten, you will see our standard walk-across graph. Rate relief, weather, and some modest load growth, were all positive drivers. However, these gains were offset by lower margins at First Choice Power and reduced earnings from Optim Energy, both of which had been expected.

Starting from left to right, the $0.09 gain associated with the rate relief reflects the implementation of new rates at both TNMP and PNM. At TNMP new base rates went into effect in September of last year, and new transmission rates became effective in May of this year. At PNM, we benefited from the implementation of the second phase of our 2009 rate increase, which went into effect April 1 of this year.

Weather in both Texas and New Mexico also contributed to this year's earnings. Compared with last year, cooling degree days were up an average of 5% in TNMP's service territory, and 9% in New Mexico. While weather in New Mexico during July and August was essentially normal, September was unusually hot. In fact, the month was the second-warmest September we've experienced in over 60 years. We also saw modest growth -- low growth -- in both PNM and TNMP service territories. In total, the increase in load added another $0.02 to the third quarter earnings.

Offsetting the positive income drivers were lower margins at First Choice Power, which reduced earnings by $0.08, and a decline in our share of Optim Energy's earnings. Both of these trends have been expected, given the current price environment in ERCOT. Other negative drivers also included higher pension and retiree medical costs, as well as increased property taxes, interest expense, and depreciation.

Since I basically just covered the key drivers of our regulated business performance, I'm going to skip to the next page and move on to page 12 to address unregulated business results. For those of you who want more detailed quarter-over-quarter drivers for PNM and TNMP, you will find them on page 11. First Choice Power's EBITDA came in at $20.8 million and almost $9 million below last year. As I mentioned earlier, the decline was expected as unit margins continued to compress in ERCOT. However, despite lower unit margins, First Choice Power beat its internal expectations because of warmer weather, decreased bad debt expense, and continued growth in their commercial sale.

In the third quarter, First Choice's commercial sales were up almost 20% from last year, primarily reflecting an increase in the size of the Company's average commercial customer. The business also benefited from improved products and market focus on these commercial customers. Third quarter bad debt was down about $2 million from last year, and was also considerably better than expected. First Choice had projected third quarter bad debt to come in at 8.5% of revenue. However, actual bad debt ended up a little under 5% of revenue, as Pat mentioned, due to reduced customer departures and lower final bills. We now project bad debt to average about 5.5% of revenue for the year, which is down a whole percentage point from our previous estimate.

Now, turning to Optim Energy -- Optim generated EBITDA of $25.4 million in the third quarter. This is down about $3 million from last year. The positive drivers included a $3 million increase in the sales on ancillary services, associated with a favorable forward sale in lower O&M, as Optim continues to focus on cost control and enhancing free cash flow.

Offsetting these positive drivers were higher fuel prices, both gas and lignite, and lower realized power prices due to rolloff of favorable hedges.

Now, move to the guidance for the year -- Given First Choice's better-than-expected performance in the third quarter, we are raising our consolidated earnings guidance range for the year from $0.65 to $0.75, to a range of $0.83 to $0.90. Our regulated earnings guidance remains unchanged from last quarter. However, we do expect to come in on the high end of the range due to favorable weather and modest low growth. We could even exceed the range if our load growth continues at the rate we saw in third quarter.

We are raising our earnings guidance for First Choice from $0.27-$0.33 to $0.40-$0.43, to reflect their better-than-expected performance in the third quarter. And we're narrowing our guidance for Optim Energy from a loss of $0.07 - $0.10 to a loss of between $0.09-$0.10, due to the continued adverse price environment in ERCOT.

We are also increasing our outlook for First Choice Power's EBITDA. The company is now expected to come in between $59 million to $63 million, due to better-than-expected third quarter results. That's up from $40 million to $50 million we had presented last quarter.

EBITDA guidance for Optim remains unchanged at $60 million to $65 million of EBITDA.

Our cash earnings outlook for the year is also up from last quarter's projection. We currently expect cash earnings to come in between $380 million to $395 million, which is up from a range of $305 million to $325 million, or about $75 million. The increase is primarily due to two factors. Higher projected earning and lower tax payments, reflecting the extension of bonus appreciation in 2010, and additional tax benefits from the IRS-approved change and method for determining repairs and relocation expenses for tax purposes. Amounts related to these adjustments are estimates, and will be trued up in the fourth quarter.

All in all, we are very satisfied with our performance this quarter. However, we recognize that our regulated businesses are still underperforming, and that's why we remain immensely focused on doing our utmost to earn our allowed return, further strengthening our financial position and enhancing our credit profile.

I'll turn it over to Pat for concluding remarks.

Thanks, Chuck. You turn to slide 14, we'll end our presentation with our familiar checklist, where we get to put some more check marks on some of our items. As you can see from the slide, we continue to take the steps to help to improve our allowed return for both PNM and TNMP, and we have filed the four rate cases that we told you we would file this year. Our focus remains steadfast on those regulated businesses.

While our renewable resource plan was scaled down and therefore reduces our projected rate base growth, we expect to have prompt and full recovery plus a return on equity on our new solar assets. And as we discussed, we updated First Choice Power's EBITDA and affirmed Optim's energy EBITDA.

This concludes the presentation portion of the call. Operator, we can start the question-and-answer session if there are any questions.

Excellent.

(Operator Instructions)

Our first question comes from Emily Christy.

Good morning.

Good morning, Emily.

With respect to First Choice Power, going forward, could we expect that your commercial growth efforts might offset some of that margin compression? Or, is there further compression to come?

First Choice Power President, Brian Hayduk, is with us this morning, and I'm going to ask him to answer that question.

Hi, Emily. I think you would expect, with a greater commercial mix, you would expect margin compression anyway. Because there is a natural lower margin with commercial customers than residential customers.

Okay. And in terms of the low growth, so if it's 2% growth in New Mexico, in a recession, does this mean there's still more weakness to come into next year? Or, is this the bottom rate for New Mexico?

Well, we're not forecasting any load for 2011. But I can tell you that the Department of Workforce Solutions here in New Mexico, which tracks unemployment, says they don't expect to be seeing a net gain in jobs before the end of next year and we are officially still in a recession here. So, I think 2011 is probably, if you read what the economists are saying, it's probably still -- we're not going to experience a recovery in New Mexico that the general US has.

Okay, thanks.

Our next question comes from Brian Russo.

Hi, good morning.

Good morning, Brian.

Hey, Brian.

You mentioned earlier a revised procedural schedule for the PNM electric rate case, and a hearing set now for January 31? What was the motivation behind adjusting that schedule?

Brian, I think what -- as you remember, the last quarter, there had been some going back and forth about whether or not PNM had satisfied the requirements in terms of its documentation and we delivered to the commission all the documentation we had delivered to the interrogatories. When they got that, the hearing examiner rescheduled based on the delivery of those documents. So, we kind of really restarted the schedule.

I see. Understood. And could you at all comment on the settlement conference that was held on October 14, and any upcoming settlement-related meetings we should be aware of, ahead of, I believe, intervenor testimony in December?

Yes, the settlement discussion you're referring to was the one in front of the mediator. Parties came but nothing was decided. You know, we continue to discuss with intervener, and we are encouraged that the discussions are ongoing, but we really can't say anything about the nature of those discussions right now.

Okay, thank you very much.

Our next question comes from [Ted Heine.]

Good morning.

Good morning, Ted.

Just to follow up on Brian's question on the settlement -- First, if there were to be some sort of settlement, what would be the timing of that? Would that be coming out probably before a staff recommendation?

You know, Ted, we really don't know when it would come out. You can settle, as you know, at any point in time in a case. So, no predictions on that.

Okay, fair enough. And then, on the First Choice margins, can you -- What were the actual margin, dollar per megawatt margins, for the quarter?

We don't disclose that, Ted.

Okay. But is it -- my bigger question is when at I'm thinking about 2011, I know that -- I think in the past you have talked about a normalized run rate, and appears it's been taking a longer time to get back to that normalized run rate. Is there any thought that maybe that run rate is -- was maybe too conservative that you gave out?

Yes, as Pat mentioned, I think the best way is we talked about a long-term run rate, but we really don't know the timing of that. And what the actual -- There are so many variables in the market and conditions in ERCOT that it's really hard to pin that down. So, it's best to say that we do think that's a reasonable range to think about in the business, but we just don't know the right timing for that.

Okay. I'm sorry --

You've got [NODO] coming on in December and while we don't think that has an impact at First Choice or Optim, when you start up a new system, you never know exactly what's going to happen. So --

Okay, got it. Just -- Can you remind me, what do you think the long-term run rate is for retail? Was it high 20s? Is that right?

Yes. We talked about it in the range of 25 o to 35.

Okay. Have you disclosed what's embedded for this year?

No.

Okay. And the last -- the last question I had was -- When you came to New York back in June, you laid out some of the plus and minus drivers for longer-term earnings power related to the New Mexico rate case. What you excluded from that were the Texas rate case and the FERC rate case because you hadn't filed those yet. Could you give us a sense of what the potential earnings upside -- that piece that was left out of the June conference? What's the potential upside in `11 and `12?

What we put in for the Texas -- let me start with the FERC rate case. The FERC rate case that we just filed was on our transmission rate base. It was $11 million increase to 12.25% ROE,the transmission rate base is $171 million. So you can figure that in.

And then, the Texas rate case that we filed, should go into effect at the end of February, next year. And that was a $20.1 million, and that was a 10.9% increase on an ROE of 11.5%, so you can figure that in.

Okay. And within those revenue requirements, is there any kind -- will most of that -- I mean, if you were to get the whole thing, would most of that flow to the bottom line? Are there depreciation or accounting adjustments that don't -- that overstate the impact from a revenue perspective?

There's some minuscule depreciation adjustments in Texas, but most of it throws -- flows to the bottom line. As you know, the big issues in Texas are the consolidated taxes, which would flow through to the bottom line. And then the cap structure change.

And again, a little bit of depreciation change in the FERC rate case, but most it flows through to the bottom line.

Great. Thanks a lot. Congrats on the good quarter.

Thank you.

Our next question comes from Eric McCarthy.

Hey, good morning.

Good morning, Eric.

Hey, Eric.

My questions are very similar to Ted's on margins. And if you can't disclose what those margins are in on an absolute basis, can you give us a picture of what the market looks like in ERCOT right now with the decline in gas and similar moves in ERCOT market prices?

Sure, I'll have Brian give you a little color on the market in ERCOT.

Sure. I can probably do two things, Eric. One is give you a sense for how we have seen compression, at least historically. If you look quarter-over-quarter, there's about a 20% reduction in our margin year-to date. It's about a 13% reduction in the margin. So you see that compression, the speed of compression, slowing.

Generally in the marketplace, and this is true whenever you have persistent low prices as we do now, you're going to see margin compression, competitive pressure will push it there. The more volatility there is, the less you typically see of that. And we just haven't seen much volatility late lately.

To highlight something you mentioned -- the competitive pressures, it looks like we're very disciplined this quarter. In that we're not competing for customers on the basis of price. Is that -- is that accurate?

Sure. I think no one likes to compete on the basis of price. We go where the market allows us to go with the skill set that we believe we're bringing to the market, the value we're bringing to the marketplace. So, to the extent that's in some cases on the commercial side versus residential because we don't chase uneconomic customers, that will happen. We let the market dictate a little bit of that, depending on, again, where we feel like we're adding value to the customer.

Okay. And in a bigger picture -- Competition. Are we seeing more competition come into the market? Are there others that are coming in, seeing somewhat rich markets and trying to compete?

You know, I don't -- I don't think it's so much new entrance. I think where you see the new entrance is up in the northeast, where you have Pennsylvania and markets opening up. There's a lot more new activity in those areas. I think for Texas, it's really the same players, it's what they're doing on price in that market.

Okay, great. Well, thank you, guys. I appreciate it.

Thanks, Eric.

Once again, ladies and gentlemen, if you have a question at this time, please press star, then one now.

Our next question comes from Maurice May.

Yes, good morning, folks.

Hi, Maury.

A couple of questions. First of all, on the pending rate case -- I know you filed for a forecast test year. But it is controversial in the state. And I was wondering if you could remind us, what is the difference between the forecast rate base for 2011 and the historic rate base for 2009? How big is the difference?

Well, we didn't file the historic rate base, because we didn't want this to be perceived as a historic rate case -- or, a forward-looking test year with a historic rate base option. And I think, as we have always said, I don't think it's the forward-looking year that is so controversial, Maury, I think it's the amount that is controversial. And that is what is, what people are talking about whether it's historical or forward-looking.

Okay, all right. But the forecast test year in 2011 is not that much more than the historic test in 2009. The big difference, really, is between December `09 and your previous rate case -- the previous rate base in the previous rate case. Is that correct? Is that where the big lump of investment takes place?

Yes, Maury, that's where the big lump takes place.

Okay, okay. And second question -- On the load growth, in New Mexico, you're experiencing 2% load growth on 5% customer growth and this indicates higher usage. I was wondering whether you could give us some color on that.

We have seen higher usage per customer. More on the residential side than on the other side. Despite the fact that the economy is down, customers are not really dialing down their electric usage. We saw them, when the economy was really bad -- they weren't feeling really comfortable. But we know what is happening is that people that are employed feel better about their jobs so they're not actively conserving.

Okay. All right. Thank you very much.

Thank you, Maury.

Our next question comes from John Ali.

Hi, guys, good quarter.

Good morning, John. Thank you.

I apologized if I missed this -- the schedule for the FERC rate case?

The schedule for the FERC rate case is -- we filed it on Wednesday, we have asked for the rates to be implemented on January 1, 2011. As you know, FERC usually suspends those rates. So we could put them into effect on June 1, subject to refund. But we have not set a procedural schedule yet, so as soon as we get that out, we'll get that to you.

What's your expectations, ballpark, how long the rate case would take?

I would say third quarter.

Okay, so faster than New Mexico?

Yes.

Thank you, guys.

Thanks.

Our next question is a follow-up from Brian Russo.

Yes, thanks for taking my follow-up question. Just on First Choice Power, the 5.5% bad debts a percent of revenue, run rate for 2010 -- Is that a good run rate to use post 2010? Or, do you think that might still come down as a percent of revenues?

Hey, Brian, it's Brian here. We're certainly not giving guidance for 2011. We would hope that the trend we are on in terms of benefit from the initiative that we have been taking over the last couple of years will continue to press that down. But I don't think we have have any specific guidance for that today.

All right, thanks.

Our next question is from Ted Heine.

Hi, thanks for letting me ask another one.

Sure.

Could you remind us -- Tuesday is election day. Can you give us a refresher on what seats are open and everything for -- so while we're out in Palm Springs we might be able to ascertain what the direction of the commission is going?

Sure. The first seat is obviously open is the Governor and New Mexico will have its first female Governor. The attorney general is up for reelection and the polls show now that he is -- Gary King , the current attorney general has a comfortable lead over his opponent, Matt Chandler. In the PRC, district two is open. And that is where Pat Lions, who is the current state land commissioner, is running against the Democrat Stephanie DuBois. In district four, that is up in the northwest corner of the state, that was Carol Swoon's seat, [Theresa Benseti Augulair] the Democrat, was appointed to fill that seat by Governor Richardson. But she is running against a gentleman named Gary Montoya, the Republican. And then in Sandy Jones' current seat -- he's not seeking reelection -- the Democrat McCannly is running over the Republican Ben Hall. So those are the five election seats I would watch in New

Okay, okay, and is there -- I would assume the poll -- do they do polling for the PRC or is not as global an issue of the state, where you can get a sense of whether the Democrats or the Republicans are going to potentially take those seats?

No, they don't do any polling on those down ballot elections. They do governor, attorney general, and then the Congressional seats and that's about it for the polling.

Okay, fair enough. Okay, I appreciate it. Thanks.

No problem.

There appear to be in further questions on the phones.

Thank you. And we know that many of you have a busy day today, so we'd like to thank you for joining us on the call, to continue to hear about the progress we are making in our journey of restoring PNM Resource's financial health.

I'll see many of you at EEI. Chuck, Brian Hayduk, our First Choice Power President, Terry Horn, our Treasurer, and part of the IR team will be there. We look forward to meeting with you all. So travel safely and see you next week.

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