TXNM Energy Inc (TXNM) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your PNM Resources fourth-quarter conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to [dissolve this] conference call to, Ms. Lisa Eden, Director of Investor Relations. You may begin.

Thank you, everyone, for joining us this morning for a discussion of the Company's 2011 fourth quarter and year-end earnings conference call. Please note that the presentation for this conference call and supporting documents are available on PNM Resources website at pnmresources.com. Joining me today are PNM Resources Chairman, President and CEO, Pat Collawn, and Chuck Eldred, our CFO, as well as several members at 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 the Private 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 assume no obligation to update this 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 current reports and future reports on Form 8-K filed with the SEC. With that I will turn the call over to Pat.

Thank you, Lisa, good morning, everyone and thank you for joining us on this leap year day morning. Going to start the presentation on slide 4 and review the significant progress we made last year's strategic goals.

Regarding our first strategic goal, earn authorized returns on our regulated businesses, we have made momentous progress. As you are aware, we implemented a $72 million retail rate case for PNM in August and PNM is pursuing separate FERC transmission and generation rate cases. As we reported to you before, PNM is well positioned to earn it's allowed return on it's jurisdictional rate base by the end of this year. For 2011, PNM's return on it's New Mexico retail rate base was 8.9%, a significant improvement from a couple of years ago when it was in the low-single digits. At TNMP a general rate case and advanced metering system docket moved forward smoothly and with the needed pieces to provide the foundation for TNMP to earn it's allowed return of 10.1% in 2011.

Regarding our operational goals, PNM has strong plan ability -- availability in 2011, and both of our utilities had solid reliability. Page A4 of our appendix has the details of base load power plant performance for 2011 and expected performance for 2012. As you know, securing rate release is half the story for providing strong financial performance. The other half is keeping O&M and capital costs under control and within budgets. 2011 resulted in superb cost containment and our employees continue to do more with less and work efficiently in all corners of our business. It is worth emphasizing that we have aligned and synchronized our expenses with revenues and we'll pursue future rate cases and other appropriate regulatory mechanisms to balance the need for earn an appropriate return for our shareholders while providing affordable rates for our customers.

As we reported last fall, we have maximized the value of the competitive business and used the proceeds to reduce debt and repurchase equity to strengthen our balance sheet. And we also reported to you previously that our utilities are now at investment grade. With the positive regulatory outcomes achieved in both New Mexico and Texas, combined with the exit of our competitive businesses, both Standard & Poor's and Moody's have issued credit rating upgrades. Clearly, the rating agencies have recognized the transformation of the Company going back to a regulated utility model, which provides us with a strong financial platform with stable and predictable earnings. The ultimate goal of returning PNM Resources to solid investment grade is still a work in progress.

Before turning to the next slide, I'd like to take a moment to recognize all of our employees for their contribution to the Company's accomplishments in 2011. The past year was filled with many changes and challenges that required an unprecedented level of focus and hard work. From the constructive outcomes on the regulatory fronts in both New Mexico and Texas, to the complicated and time-consuming efforts needed to successfully exit from the competitive business, not to mention taking care of our customers, our employees never wavered and demonstrated their commitments to accomplishing their goals.

Turning to slide 5, this morning we released our 2011 results and reported we had ongoing earnings of $1.08, which is higher than the top range we had previously provided, Chuck will provide the details in just a moment. Overall, 2011 was a strong year for PNM Resources financially and operationally, as I highlighted on the previous side. Both PNM and TNMP benefited from rate release, cost control efforts and favorable weather in 2011 over 2010. Lower power plant outage cost in 2011 versus 2010 also improved PNM's earnings. And a quick note about December weather. Albuquerque had a 37% increase in heating degree days during that month compared with that same period in 2010.

I will touch briefly on another significant developed announced earlier today in our news release. Yesterday, the PNM Resources' Board of Directors increased the dividend payment by 16% to an indicated annual rate of $0.58 per common share. This will create a foundation to provide top quartile total return to our shareholders and bring our dividend yields closer to industry averages. Chuck will provide more detail about this in a few moments. And as you read in today's news release, we are affirming our 2012 ongoing earnings guidance range of $1.20 to $1.32.

Turn to slide 6 for a brief discussion on utility load growth. A year ago I was hopeful, I think we all were hopeful, that by this time we would have seen more definite and tangible signs of a rebounding economy. Unfortunately, what we're seeing is just a modestly improved economic environment. While New Mexico's unemployment rate was on a downward trend early in the year, the last five months of 2011 showed little to no improvement. New Mexico has still fared better than the national average in terms of unemployment rates, but the trending decrease in the unemployment rate in New Mexico is due to a decreasing labor force rather than employment growth. New Mexico's unemployment rate for December was 6.6% compared with the national rate of 8.5%. And year-over-year employment growth continues to show strength in Texas in TNMP service territory. TNMP service territory saw an increase in single-family building permits of 3.3%, which built upon the 15% increase in building permits in 2010. Load growth was positive at 1.4% for PNM and 1.3% for TNMP, which was just above our projections from a year ago for PNM and slightly below our TNMP forecast. As you can see from both line graphs, we are seeing a steady climb in load growth, even with an increase in both PNM and TNMP's energy efficiency efforts.

Turn to slide 7 for an update on the regulatory and legislative matters. As we've talked we have an ongoing FERC transmission case. Our original filing was for $11 million based on an ROE of 12.25%. The FERC staff has filed its response and we remain in settlement discussions among the parties, and we will keep you posted of any developments. We also have an ongoing FERC generation case associated with the Navopache Electric Coop. PNM is proposing a cost of service base rate for electric service and ancillary services PNM provides to Navopache, which would result in an annual increase of $8.7 million over current rates. We remain in settlement discussions and no procedural schedule has been issued on this docket.

On January 10, we made a filing with the New Mexico Public Regulation Commission, seeking approval of a renewable energy writer to recover certain commission approved renewable energy procurement costs implemented since January 2011. We have proposed that the rider go into effect August 8, 2012, and this filing includes recovery for the five utility scale solar power facilities that total 22 megawatt's that went online last year, our customer-owned solar programs and the PNM battery solar storage project that we are doing in conjunction with the Department of Energy. The rider would increase the average residential bill by about 2.1%, or $1.38 a month, and allow more timely recovery of our cost of renewable energy programs. A procedural schedule has been established in this case calling for a hearing to begin on May 14. The filing is posted on our website in the rates and filing section, and we'll add our supplemental testimony as it gets filed with the PRC.

Regarding the future-test-year rule making for New Mexico rate cases, on February 8, PNM, the Commission staff and Southwestern Public Service Company filed a joint petition asking the PRC to start a rule making proceeding to address future-test-year filings. A proposed rule is included in that filing. The rule specifies the filing requirements necessary to support a rate case application based upon a future-test-year period. That filing and the proposed rule are both posted on our website. We will keep you up to date of significant developments. Any comments on the proposed rule would come after and if the Commission issues a noticed of proposed rule making. Some of you have inquired about PNM's next rate case. We plan to file the next case this December proposing for rates to go into effect in January of 2014.

I 'd also like to update you on the developments regarding the legislation here in New Mexico that was aimed at making some changes at the Public Regulation Commission. Three resolutions were passed, but they all require constitutional amendments and therefore will have to be passed by voters in November. Let me quickly recap the three resolutions. There is a measure that would place the oversight of corporations within the Secretary of State's office instead of the Public Regulation Commission. There is a measure that would remove the insurance division from the Public Regulation Commission and place it under an appointed superintendent of insurance. And then there is the resolution that would establish minimum qualifications regarding education and/or relevant work experience for the PRC. And again, all of these three we will be on the ballot in November and must be passed by the voters.

Before I turn the call over to Chuck, I just want to mention the BART issue at the San Juan generating station. On page A17 in the appendix, you'll find detail on BART, but just last month we issued a request for proposals for the installation of the SCR technology at San Juan. While we have asked both the EPA and the court for a stay, a five-year timeline for compliance means we must move forward while we wait for the EPA and the court to rule. We would hope to hear from the court sometime in March.

With that, I'll turn the call over to Chuck.

And thank you, Pat, and good morning to everyone. As Pat described, 2011 was a true transitional year for PNM Resources. We've had a long journey of evolving and executing the strategic vision of the Company. Looking back over the past several years, we sold our gas business, reinstated our fuel clause and moved merchant plants into rate base. Not to mention having achieved a number of rate increases totaling more than $200 million between PNM and TNMP. 2011 also marks our exit of the competitive businesses, and resulted in a further strengthening of our balance sheet and improved credit ratings. Going forward, we are a regulated utility with a strong focus on earning our allowed returns. As we discussed in our guidance call in December, we have a number of areas that we'll be concentrating on including adding to our rate base and working to improve the returns in our FERC generation and transmission businesses at PNM.

Now turning to slide 9, as you read in the news release, ongoing earnings were $0.22 for the fourth quarter of 2011, this was a $0.25 increase year over year. The majority of the improvement (technical difficulties) came from PNM and TNMP for a combined total of $0.16 and was largely driven by rate relief. Another factor was the fourth quarter 2010 loss at Optim of $0.05 for which there was no comparable activity this quarter due to the exit of the business. Our full-year 2011 ongoing earnings were $1.08, up $0.21 from 2010. We exceeded our guidance range by $0.03, primarily because of the cold weather in December. PNM and TNMP were the major contributors to the improvement in earnings and I'll cover the drivers for those businesses in a moment.

The Corporate and Other segment was up $0.06 year over year primarily because in 2010, we impaired some production tax credits related to our wind farm tax investment that we did not expect to utilize before they expired due to our NOL position through 2013. Another favorable driver was reduced interest expense related to the $50 million debt repurchase in November 2011. Optim accounted for another $0.04, which was offset by a decrease year over year from First Choice Power of $0.19. The hot summer in Texas had a favorable impact on Optim and a negative impact on First Choice. Remember that 2011 results for Optim and (technical difficulties) First Choice Power do not reflect those operations for the entire year. Optim is shown through August 31 and First Choice through October 31.

Now turning to slide 10, PNM was up $0.18 year over year. Rate relief accounted for an improvement of $0.21 and lower outage costs improved EPS by $0.10 year over year. Load growth added $0.04 and weather was $0.03 year over year. Our cost control efforts accounted for $0.02 in 2011. We have been able to implement a number of cost saving measures in 2011 including process improvements and labor reductions. These savings have been large enough to offset other increases in our business such as higher depreciation in property tax, expense related to plant additions and right-of-way costs, and still result in a net improvement to the bottom line.

The realized gains in our Nuclear Decommission Trust contribute another $0.05. You will recall that portfolio management activities at the Nuclear Decommission Trust occasionally affect our earnings but are not a consistent driver for us. These increases were partially offset by the expiration of that Palo Verde tolling agreement which was down $0.27 year over year. TNMP was up $0.12 year over year and also had improved results due to rate relief, this accounted for $0.08 of the change. Weather contributed $0.03 and load $0.01 year over year.

Now turning to slide 11, as you saw in the earnings release this morning, we have announced a dividend increase of 16% to an annual rate of $0.58 per share. This is the first change in our dividend since 2008 and demonstrates our confidence in our earnings now that we have shifted toward a more regulated and less volatile business model. We expect this increase to be the first step in moving the dividend payout ratio toward our long-term target of 50% to 60% of ongoing earnings. The Board will continue to evaluate the dividend each year, considering sustainability, growth, capital planning and industry standards as they determine the annual payout's.

Now moving to slide 12, as we discussed in our 2012 guidance call in December, we have a long-term goal of providing top quartile total return to our shareholders. We are currently seeing top quartile as an average annual total return of 10% to 13% over a 5-year time frame. Over the next 5 years, we expect our earnings growth to be driven primarily by increases in rate base but also by improvements in other parts of our business such as FERC generation and transmission that are currently not earning their allowed returns. Depending on when we file rate cases and the timing of our capital spending, the earnings growth rate will exhibit some variability from year to year. We expect the other component of total return, dividend yield, to go over time. As I discussed before, we are now on a trajectory where we will be able to provide a sustainable dividend increases in the future.

And with that, I'll turn the call back over to Pat.

Thanks, Chuck. We'll finish today's presentation with a 2012 checklist. We introduced this particular checklist last December to communicate to you the specific objectives we need to accomplish in order to be successful in achieving our strategic goals listed on the left side of the slides. We will continue to focus on our key strategic goals of earning our authorized return on our regulated businesses, improving our credit ratings and providing top quartile returns. We feel strongly that by being successful in the future-test-year rule making, our FERC transmission and generation rate cases as well as the PNM renewable rider will make significant strides towards the goals. And as always, we focus on maintaining strong electric reliability and power plant availability. We will also continue to control our O&M and our capital cost to ensure that our businesses are operating as efficiently as possible to keep rates down for our customers.

With that, we can start the question-and-answer portion of the call.

(Operator Instructions) Anthony Crowdell with Jefferies.

Hi, good morning. A question I guess on the SCRs, I believe you guys are planning or you're I guess going about installing (inaudible) difficulty). I mean are you going to wait for a court decision, or does the Company plan to file a single issue rate case in New Mexico to recover associated environmental costs?

Good morning, Anthony. What we're doing on those is we should know in March whether or not we have a stay by the Tenth Circuit Court of Appeals. We will continue to go down the road of getting the bids in for the SCRs for the 5-year compliance period. We haven't decided when we will need to do a single issue or if we will need to do a single issue for that to get that cost recovery but it wouldn't necessarily be linked to the court decision. If we are spending significant amounts of money, we would want to go ahead and file for that.

Great, thank you.

You're welcome.

Brian Russo with Ladenburg Thalmann.

Just your five-year total return performance of roughly 10% to 13%. If we just kind of assume your 3.3% yield, does that imply about 7% to 10% average annual EPS growth over that time period, how should we kind of think about that?

Well, think of it in terms of understanding that we'll look at both components of dividend yield and earnings growth in the timing of rate relief and what the Board and Management thinks is appropriate relative to be consistent in our ability to grow that dividend and make it sustainable. So you can back into the numbers that way and look at it that way, but we also want to emphasize that the total return over 5 years on average along with our peer groups as to how we measure the results, and we realized from year to year you could have some variability relative to earnings and some lack on rate recovery, but the objective is to get a total of 10% to 13% would be in the top quartile.

And are you using 2012 as the base?

Yes, Brian, 2012 is the base year.

Okay, great. And you mentioned on the next PNM electric general rate case filing for new rates in '14, assuming you move forward with a forward test year, what would be the test year that would be -- would it be a '14 test year reflected in 2014?

Yes, Brian it would be a '14 test year.

Okay. And then lastly, you mentioned PNM Resources pursuit of investment grade is still a work in progress. I mean, any thoughts or initiatives to pay down some of that parent debt that's creating quite a bit of earnings drag?

Brian, right now that debt is at 9.25%, and it's not callable, so it would be expensive to pay it down. Obviously we'll monitor interest rates, and if interest rates would change and go up that dramatically, we would look at it, but right now we just plan to leave it there.

Okay. Thank you very much.

(Operator Instructions) Ali Agha with SunTrust.

Chuck and Pat just to be also clear when you talk about the total return and you talk about 2012 base year, so to be clear, we are looking at that mid, let's say the midpoint of the '12 guidance range, that's the starting point and then we are taking 5 years from this or '12 through '17, are we looking at the '11 actual and then '11 through '16?

You're looking at '12 being the base, so the results from 2012 going forward and what kind of earnings projections that we would ultimately provide along with the dividend yield that we set for this year in 2013 going forward. So, I think just look at 2012 and the growth in '12 to '13 and so forth.

Got it. And on the dividend itself, you mentioned ultimately the goal is 50% to 60% is kind of where you think you need to be. Just from philosophically thinking about it, you took a step towards that, when do you think you should be there? I mean is this a multi-year process, or should we think that the next increase should basically get you there?

Well what we've said is we want to make sure we have a pretty clear direction relative to the capital requirements of the business going forward given the SCRs, renewables, other types of investment peaking units, et cetera. And once we gain certainly around that path, then certainly we'll evaluate at what point we think the payout ratio would be achieved at that target of 50% to 60%. So just I think at this point the message is really should focus on the average 5 year return, the 10% to 13% knowing that there could be some movement on earnings year over year and trying to work towards achieving a competitive dividend yield as a regulated business. So it's really hard to pin down, I don't want to say this point any particular date, but know that we are committed and very focused on delivering that total return.

Absolutely, the Board, Ali, looks at it every February and the more clarity we get around capital, the more we're able to do. We've got a lot of big capital staring us in the face.

Right, right. And then lastly, if I looked at the PNM electric business as a whole, so I threw in the FERC components et cetera, can you just remind us so for 2011 what was the actual ROE for PNM electric and TNMP and what's sort of embedded in that midpoint for your '12 guidance range?

The actual for that PNM retail was 8.9% last year, and for TNMP we earned our allowed return which was about 10%.

And what's embedded --

And so the assumption for PNM for 2012 is that we will earn our allowed return. So--

And for TNMP.

Yes, for TNMP. If you go back and just pull the guidance information, investor relations can kind of walk you through some of the information we provided back in December to make sure it's clear on what the assumptions were behind that.

Yes, so the 8.9% was retail, so it's fair to say that as a whole [within] maybe 100 to 200 basis points below that because of the FERC, or is that too big of a drop?

We were break-even on the FERC portion of our rate base, and that's --

Well, yes, just I think -- to do the numbers, it's pretty much 7% of the PNM rate base.

Right.

It's really reflected on that FERC piece, so you can just kind of work through the numbers and come up with what that return would be.

(Inaudible), thank you.

Maury May with Power Insights.

A couple of questions, first of all you didn't mention the outlook for Palo Verde 3 investment, and I was just wondering whether you could give us some kind of insight there as to what you expect in power prices and profitability and whether you plan on trying to rate base that investment?

Yes hi, Maury, this is Chuck. I think the conversation we've had around Palo Verde 3 when we've talked about our outlook towards that, is it is an option for us in how we think about the business going forward. We are focused as being a regulated business and so certainly that option does allow for us to consider putting that into rate base at some point in the future. At the current state of where power prices are, we certainly realize that the energy prices in the market today don't allow for a very -- any real contribution to the business in the earnings power of the business. But the potential is there with the energy prices going up that we could certainly see some significant improvement. When we talked about guidance, we were around 60% unhedged and 40% hedged. We continue to look at a rolling 12-month hedging strategy, which there have been some opportunities to benefit slightly from where we had originally projected, but it's just too early to say where we might end up for the year. But at this point, we want to keep that asset as an option. We consider the nuclear to have a lot of value for the business and certainly we'll play that option to where we think shareholders can gain the greatest value.

Okay, if you wanted to put into rate base, what kind of push back might you get from the PRC?

Well, they've been very supportive towards nuclear in the past, and there's no reason to think they wouldn't consider that going forward. So as we file for integrated resources plan and what our load growth is and our needs for resources, that gives us the option to have that kind of discussion. But certainly, they view it, have indicated in the past that they are very supportive towards nuclear assets.

I think, Maury, the discussion would be more around what the price to put it in as opposed to the fact that it's a nuclear power plant.

And what is --

To answer that, the past comment, is the fact it doesn't have emissions, so there some value from an environmental standpoint that would also gain some benefit to other intervener's that might think of our resource additions going forward.

Okay and what is the book value of Palo Verde 3? I know it's in the 10-K, but I don't have it open.

It's about $1000 per kilowatt, so it's about-- and there's 134, excuse me, it's about $1000 per megawatt and there's about 134 megawatt's.

Okay $1000 a kilowatt, I think you were right the first time.

Yes, sorry. I haven't finished my coffee yet this morning, Maurice.

Okay. And then second of all this initiative on rules for the forecast test year. I know the staff was working on it in January, I guess you have -- you've opened a docket in February, but what is the outlook there timing wise?

Maury, I don't know that I would forecast what the timing outlook on that is. I think that there's two things. One, remember in the stipulation that was filed last time, there were some future test making principles that all the signatories agreed to use, even if the commission didn't have a rule making. So there is a back stop even if this rule making doesn't happen. We would hope that they get started on it relatively soon and I know FDS and the staff and we would all like to do that, but trying to forecast the time up there isn't a winning proposition.

Okay. And last question has to do with the dividend. The mid-point in your guidance range for 2012 is $1.26, and that is really less than where the dividend went. And, I mean if you take the 50%, if you take the bottom end of your dividend range as-- from the midpoint of the $1.26, it implies a dividend rate of a little higher than $0.58. And I was just wondering why the Board was so conservative in the dividend boost?

Yes, Maury, we want to be conservative because to Pat's earlier comments about the uncertainty around the capital spend to support a number of different aspects of the business going forward with the SCRs, the renewables, peaking units, potential for new gas units down the road. So we would just want to be sure that the message is very clear that the dividend is very sustainable and we're very comfortable with the outlook towards the business and as we plan and execute our strategy within the business, we expect to deliver above average dividend growth. I think this is the right thing to do as a first step. The Board feels good about where we position the business today and it is sustainable and we fully expect to have average dividend growth that could exceed normal expectations going forward. But we just want to take it in steps.

Okay, all right. So it'll be more than a couple of years out until you get to a competitive dividend?

I don't want to commit to anything at this point.

There's just too many variables in that equation, Maury to make commitment.

Okay. Good enough, folks. Thank you very much.

Thank you.

I'm not showing any further questions at this time, I'd like to turn the call back over to Pat for closing comments.

Thank you. Well thank you all for joining us. I hope you all enjoy this extra day of the year that we have this year, and we look forward to talking to you on our first-quarter earnings call. Have a great one.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.