TXNM Energy Inc (TXNM) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PNM Resources first-quarter conference call. At this time, all participants are in a listen-only mode. Later, will conduct a question-and-answer session, and instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Lisa Eden, Director of Investor Relations. Lisa, you may begin.

Thank you, everyone, for joining us this morning for a discussion of the Company's 2012 first-quarter 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 Vincent-Collawn, and Chuck Eldred, our CFO, 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 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 turn the call over to Pat.

Thank you, Lisa. Good morning, everyone. And I'd like to my add thanks to all of you for joining us this morning.

We'll start the presentation on slide 4, and we'll review our first-quarter performance. This morning, we released our first-quarter ongoing earnings of $0.17 per diluted share, compared with 2011 results of $0.04. On a GAAP basis, we finished the quarter at $0.21 per diluted share.

For PNM, results were considerably stronger as a result of rate relief and our ongoing efforts to reduce costs. We don't expect the 2011 rate increase to have such substantial impacts during the summer months as they did during the first quarter. The first-quarter results were enhanced by rate structure impacts of the 2011 of the rate increase, and we discussed those impacts previously. Those impacts are going to be less pronounced during the summer months this year. For TNMP, the impact of the 2011 rate increase was offset by a mild winter. While Chuck will discuss the specifics of our financial performance, I just want to take a quick second by mentioning that we do have good news on the credit-ratings front, as our corporate rating and debt rating for PNM Resources and TNMP were all upgraded last month by Standard & Poor's.

Let's turn to slide 5 for brief discussions on economic conditions and utility load growth. If you look at load growth for PNM and TNMP, we presented them both as weather-normalized, and then leap year- and non-leap-year normalized. PNM's quarterly load declined $0.003 compared with the same period last year. However, if you take out the leap-year adjustment, load was up 0.8%. Since we budgeted for a 366-day year this year, we expect 2012 load growth to finish within our previously disclosed range of 0.5% to 1.5% for 2012. PNM's rolling 12-month retail sales growth rate through March of 2012 is 0.8%, which is the midpoint of our expected load-growth range this year.

Customer growth at PNM was also up 0.3% for the quarter, and we saw both residential and commercial customer growth here in New Mexico. TNMP's quarterly load declined 0.5% compared with a year ago, but on a non-leap-adjusted basis, it is up 0.6%. TNMP's rolling 12-month retail sales growth rate through March of 2012 was 0.7%. We also saw customer growth at TNMP of 0.6%, driven primarily by residential customer growth.

While the industrial segment at TNMP had a significant drop in load, you'll remember that industrial users represent only about 3.5% to 4% of all TNMP retail sales, so the impact is very minor compared with what you see at other utilities. We did not see any major closings of industrial customers or other indicators that say this is going to be an ongoing issue. And like at PNM, we expect TNMP to end the year within the previously disclosed load-growth guidance range of 0.5 to 1.5%.

Our economic conditions here continue to improve in both New Mexico and Texas. Both states continue to fare better than the national average when it comes to unemployment. While the New Mexico rate is slightly higher than it has been in the recent past, you'll remember that several quarters ago, we and others had questioned the New Mexico unemployment rate, knowing that it would likely be revised upward. Indeed, previous rates have been restated, and the current 7.2% unemployment range in New Mexico reflects that change.

On the employment growth side of the equation, New Mexico gained 4,700 jobs for March 2011 to March 2012. We continue to expect the recovery to be a little slower than we'd like, but we are seeing improvements in this area. Just recently, Bendix/King, a subsidiary of Honeywell, announced that it was creating a factory here, and Lowe's has announced that it will be opening up a major customer service center here in Albuquerque.

Moving to Texas, Texas gained 245,700 jobs for March 2011 to March 2012, a continuing of strengthening job growth in that state, which has now surpassed its pre-recessionary peak in an employment levels. The unemployment rate in Texas has dropped by one full percentage point year-over-year to 7%.

I have a few updates on our ongoing regulatory cases on slide 6. We continue to work toward a settlement on our FERC transmission case. If we are able to indeed reach a settlement, we are required to make that filing by June 1 of this year, and we will update you as soon as we reach any milestone in that case. Also moving toward settlement, we hope, is the FERC generation case. PNM is proposing a cost-of-service based rate for services PNM provides to the Navopache Electric Co-Op. We appeared before a settlement judge earlier this week, and we continue to work toward the settlement. We go before a settlement judge again on May 16, and we will keep you posted on significant developments.

This Monday, we also filed the 2013 renewable energy plan. That calls for an additional 20 megawatts of PNM-owned solar facilities to be in service by the fourth quarter of 2013; a 20-year purchase power agreement for the output of a 10-megawatt geothermal facility to be in service by January 1, 2014; and limited wind and solar REC purchases in 2013. In 2014, when the plan's components are all in motion, PNM will achieve full quantity and diversity compliance with our state mandates, and we will be within the reasonable-cost threshold.

We are awaiting the May 14 hearing, in which we are seeking approval of the renewable energy rider to cover the Commission-approved renewable energy procurement costs that were implemented since January of 2011. We have proposed that that rider go into effect on August 8 of this year.

And as we previously discussed, this filing includes the recovery for the five utility-scale solar-power facilities that total 22 megawatts that went online last year, and it also includes the customer-owned solar programs and the PNM battery-storage solar project. The rider will increase the average residential bill by about 2.1% in 2012 and enable PNM to have timely recovery of its renewable energy costs. Testimony was filed by the Commission staff in support of the rider.

Regarding the future test-year rule-making for the New Mexico retail cases, there is a public hearing regarding this rule-making scheduled on June 13, and the record will close a month later then on July 13, or whenever an order is issued. And we will certainly keep you posted on those developments.

Not on the slide, but very important, is regarding the BART, or best available retrofit technology, at San Juan. I am sure many of you saw that last week, Governor Martinez sent a letter asking the EPA to stay the Federal implementation plan and either approve the State plan or communicate to the State why it should not be approved. She also wrote that if the stay was granted, and EPA responded to the New Mexico SIP, then PNM must immediately investigate whether there are any viable alternatives to the BART SIP that will be in both the environmental and economic best interest of New Mexico.

We are hopeful that the EPA will grant a stay on the mandate to install SCR technology. With the stay, we will certainly comply with the Governor's request and look at alternatives. If PNM is able to move toward a dialogue on the alternatives, we will continue to seek a balanced approach to addressing the issues at San Juan in a way that considers customer costs, environmental benefits, and the economic impact to New Mexicans and the Four Corners region.

That completes the updates we have for today. So, I will now turn the call over to Chuck for the financial details.

Thank you, Pat, and good morning to everyone.

Beginning on slide 8, as Pat discussed, ongoing earnings were $0.17 for the first-quarter, which was $0.13 increase year-over-year. The majority of the improvement came from PNM was $0.17 that was largely driven by rate relief. Another factor was the combined $0.03 decrease from First Choice Power and Optim as compared to the first quarter 2011. As you are aware, we exited those businesses last year. TNMP was also down $0.01.

Turning to page -- slide 9, the primary driver for PNM was the rate relief that was implemented in August 2011, which was $0.12 for the quarter. This amount reflects the higher increase supply to the shoulder months that Pat discussed earlier. This will lessen the impact of the rate increase to customers during the summer months. There were a number of other drivers that also contributed positively to PNM. These include $0.02 of O&M reductions that we mentioned on prior calls.

We have also talked about the impact that our PNM Resources share repurchases would have on our financials, and we realized a $0.02 improvement for this. Outage costs are lower than Q1 2011 by $0.01. This is because the San Juan Unit 1 outage last year started in January. But the outage this year for San Juan Unit 2 began in March, resulting in fewer outage costs during the first quarter of this year.

Lower PV3 prices were a negative driver, causing a $0.02 decrease in 2012 compared to 2011. As mentioned, TNMP was down $0.01. The results were improved by $0.01 due to the rate relief effective February 1, 2011. However, this year's mild weather versus the very cold 2011 caused a decrease of $0.02. Since 2012 was a leap year and we gained one additional day in February, load had little impact on earnings, even though both utilities are lower than anticipated for the first quarter.

Now turning to slide 10. S&P has once again recognized that strides that we are making in improving our business by issuing a credit upgrade on April 2013. The corporate credit rating for PNM Resources was increased to an investment-grade rating of BBB minus from BB. The debt ratings of PNM Resources and TNMP were both increased one notch, bringing the holding company unsecured debt to BB plus and TNMP secured debt to BBB plus. All entities have a stable outlook. We remain focused on the regulated Utility businesses and earning our allowed return to further improve our metrics and shareholder returns.

Now moving to slide 11. We are affirming our 2012 guidance today of $1.20 to $1.32 for the year. We are also affirming the guidance for PNM at $1.08 to $1.15, TNMP at $0.28 to $0.32, and corporate and other at a loss of $0.16 to $0.15. There are a few items related to guidance for PNM that I want to discuss. At the December guidance call, we told you that the outage costs would be higher in 2012 than 2011. Although we saw an improvement in the first quarter versus the prior year for outage expenses, we expect 2012 to have a higher expenses in total than 2011. This is because we are scheduled for two major planned outages at San Juan this year compared to only one major outage in 2011.

The timing effect that we saw in first quarter will even itself out in the second quarter. After that, we should start seeing the expected year-over-year increase in expenses in the second half of the year, when San Juan Unit 3 moves into its planned outage. Another factor we are managing is the decline of market prices at Palo Verde 3. We are now about 85% hedged for 2012 at an average of $32 a megawatt hour, but we are seeing prices in the open market as low as $24. In December, we provided some sensitivity data related to the market prices.

Since then, we have moved from being 40% hedged to now being 85% hedged, and the lower average price of the newly hedged portion will cause an additional decrease of about $0.015 in total across the remaining three quarters in 2012. Since we are almost fully hedged with only 15% of the Palo Verde 3 output exposed to the market prices, we would experience [$900,000] pre-tax change in margin if market prices change by $5 per megawatt hour, and this is off a base of $24.

We are proactively managing a number of small initiatives to offset earnings impacts. These include very small continuous improvement and cost-control efforts, as well as an increased AFUDC as a result of lower short-term debt balances. Given our current outlook for guidance, we are comfortable that we will end the year solidly in the middle of the range for $1.26.

Before I turned up call back over to Pat, I would like to congratulate Lisa Eden, who has been promoted to the Executive Director of Financial Planning. This position was opened up by the promotion of Don Terry to Vice President of Business Technology Services and Customer Service. Succession planning has been a focus for some time now, and we are pleased that we can provide opportunities to further develop our employees. Jimmie Blotter will continue as the IR Manager and will be your primary point of contact. Terry Horn, our Treasurer, will also be taking investor inquiries. Their contact information is provided to you in the last slide of the appendix.

With that, I will turn it over to Pat for closing remarks.

Thank you, Chuck, and I also want to congratulate Lisa and Don as they embark on their new roles. It is always gratifying to see when we can develop and promote folks from inside PNM Resources. As always, we will finish today's presentation with a checklist for 2012.

Our first-quarter results for PNM demonstrate progress toward our goal of earning our allowed return on retail rate base. And we continue to control costs for both utilities to maintain solid financial performance. We are also very pleased with the continued improvement of our credit ratings. Achieving our strategic goals and progressing through our checklist, we believe, will result in improved shareholder value and significant steps towards providing top-quartile total return. As we move through the year and have outcomes in our rule-makings at FERC generation and transmission cases, we will keep you posted.

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

Thank you.

(Operator Instructions)

Justin McCann, S&P Capital IQ.

Good morning. Congratulations on the good quarter and the corporate upgrade.

I have two questions. When you mention timely recovery for the renewable energy rider, could you be more specific about what you're hoping for?

In terms of the renewable energy rider, what we are hoping is to get that rider so that we can get the cost of the 22 megawatts of solar, the RECs that we have put in, and the DOE battery. Plus, once we get that rider into place, it helps us greatly as we filed our next renewable plan, because we would like to keep that rider to get recovery of the next tranche of our renewables in. So this will be kept contemporaneous, because we've already put the plant into service, but going forward, we would hope it would be more contemporaneous for us.

Okay. And my second question is related to the November referendum regarding the three changes at the Public Service Commission, including moving corporate oversight to the Secretary of State office. Must each of these three be approved by the voters separately, or is it one takes all? And two, is there much opposition from anyone? And are Democrats and Republicans divided on the issue?

In terms of your first question, it's three separate votes. Each item is its own issue on the ballot. There has not been any polling done that we have seen. It does seem to be a bipartisan issue to want to reform the Commission.

However, there hasn't been yet a lot of publicity on the ballot initiatives. I'm pretty sure the newspapers in the state, given what they have said, will recommend the passage of all three of those. I think it is just going to depend how much energy people have when they get to that part of the ballot, and how much voter turnout there is in November.

All right. Okay, thank you.

Paul Fremont, Jefferies.

Thanks. First question is -- should we assume that if there were to be a San Juan filing, that it would occur after you get a response on the letter that was sent to the EPA?

Yes, Paul, we talked about the fact that we would make a CCN filing for San Juan late fall, early winter. So hopefully, we will hear from the EPA by then. They have told the Governor that they would get back to her soon.

Okay. In that time frame, would San Juan then potentially be absorbed into a general rate case filing? Or would you still expect it to be a separate filing?

I think it depends, Paul, upon what the outcome of it is, and what the timing is. We still obviously have the option to make it a separate filing based on the last rate case or roll it in, and I think it's just we don't have enough knowledge to tell.

On the outages, can you give us a sense of how many outage days you are expecting in the second and the fourth quarters?

Yes, Paul, it's in page A2 in the Appendix. If you look at San Juan, in the third and fourth quarter, Unit 3 has 54 days. And then, Unit 1 has 40 days in the fourth quarter -- or excuse me, I'm reading 2013. 54 days in Q3 and Q4 for Unit 3.

Was there a Palo Verde outage in the first quarter?

Yes, they had 32 days in Q1 and Q2. They had a very well done, very short outage, their best ever.

What I'm not understanding is, given that there wasn't another Palo Verde outage in the first quarter of last year, I'm still not quite understanding how the outage expense was improved in the quarter, given if you take Palo Verde and San Juan together.

I think, Paul, it's the timing of when the outages began last year versus when they began this year. I think earlier last year, later this year for second quarter. So we can get -- just call Jimmie, and she can give you some background information to make it a little bit clearer. But it's just the timing that when outages started, quarter-to-quarter.

Thank you very much.

Brian Russo, Ladenburg.

Sorry if I missed this earlier, but is weather-normalized load growth tracking your projections for the year?

Yes. When you leap-year adjust it, we are at about 0.7% and 0.8%, respectively in the utilities, and we -- our guidance has a 0.5% to 1.5% earnings -- or excuse me, load-growth range. And when we budgeted, we did budget for the 366-day year. It gets us solidly in the middle of our range.

Okay. And your cost-management initiatives -- that is also tracking projections?

Absolutely.

Okay. Sorry if I missed this earlier as well, but the San Juan BART -- it seems to me that you're willing to reach some sort of settlement with the EPA, and we have seen a settlement in Oklahoma with another utility. I am just curious -- have you run any cost projections on what any other settlement-type scenarios would amount to?

We've obviously taken a look at what happened at Public Service Oklahoma. We've taken a look at Colorado, Boardmen; but we are waiting until the Governor gets her reply. Because what she has said is, when we get the stay, she's going to direct us to look at alternatives because it is technically the state's implementation plan, not ours. So we've got to wait for direction from her.

Okay. I'm a little a bit confused on procedurally how this all plays out, because the Circuit Court turned down the motion to stay, correct?

Correct.

Now the Governor is asking the EPA to essentially stop the time clock to get involved in discussions on some alternative means of compliance?

There are two different kinds of stays. The one we filed for in the 10th Circuit would have been a judicial stay. The bar for proving that -- getting one of those -- is pretty high. You have to prove irreparable financial harm, and the Court thought we did not do that. But they have fast-tracked the case, and they will hear it this fall during their special session, which is usually saved only for things like capital-punishment cases.

What she is asking the EPA for is an administrative stay.

Okay.

And the EPA has the authority to give an administrative stay of that rule. So they were technically two different kinds of stays, and it is in her authority to ask, and in the EPA's authority to give, an administrative stay.

Okay, got it. Thank you very much.

Ali Agha, SunTrust.

If I heard your opening remarks, it appeared that PNM Electric is pretty much tracking budget through the first quarter. Is that correct? Can you just remind us, given the way the tariff is supposed to work in the shoulder months, how we should think about the seasonality over the four quarters for PNM?

Yes, we will make it simple from that second part of your question. But yes, it is tracking to earn its allowed return this year, as we talked about during guidance. That's certainly the expectation, and we feel comfortable in that -- we've had expectation this year.

The second piece of it -- if you go back to the original guidance information, we put a slide in there that showed the distribution by quarter. And we talked about giving you a perspective of what guidance would be at the middle part of the range at $1.26. If you take that slide for each quarter and that percentage, and apply it to that midpoint of the range, you'll get a pretty good indication of how that rate structure, and how we see the seasonality, quarter-over-quarter occurring for this year. That's that simplest way to take a look at it.

But it does smooth things out to the shoulder months for the first and third and fourth quarters are slightly higher increase to consumers; whereas the summer rates themselves, based on block design of the rate structure, are a little bit less of an increase, to make it spread out for the year, is really with the intention is.

Basically what happened is, the first block went from 250 to 400, and the rate increase there that has captured more usage in the shoulder months. If you look at the energy revenues -- if you look at the total rate increase, it's about 10.47% in the non-summer months, that the rates went up, and 3.2% in the summer months. So that shifting of the rate structure flattened out the seasonality of it. It was in the appendix of the guidance presentation.

Right. Okay.

Secondly -- as you said, on a retail rate basis, you should be earning your authorized return as planned and budgeted. If you look at your entire rate base, including the other components of it, I don't know if you've looked at it, but how would you look at the return on your total rate based versus authorized in terms of the potential lag there, and how that improves? I know you talked about the FERC lag in the past, but you look at it on a total rate basis, ROE basis?

We look at each rate base independent. We are looking at retail total return for PNM retail rates, and then we look at the rate base separately for FERC transmission and FERC generation and what we anticipate earning our allowed return on those segments. But keep in mind that 7% of the total retail earnings of the business is the FERC and the generation components. So not significant, but we do look at it separately when we talk about returns.

We had said that this year we won't earn our rate of return on either our FERC transmission or our FERC generation rate basis, and it would probably take a couple cases to get up to earning the allowed ROEs on them. But as Chuck mentioned, between FERC transmission and FERC generation, it is only 10% of the rate base.

Right. But the settlements, potentially, if they go through, don't change that scenario?

I'm sorry?

The settlements that you are pursuing on the FERC cases -- if they are approved, would not change that scenario? That you will still need a few more cases to earn your allowed returns?

Yes, because you remember at FERC, you are still looking at historical rate bases. You've got some regulatory lag in there, because the cases are pretty slow, and you are bringing people up from a pretty big hole in there. What you really want to do on FERC is get to where you're filing just the cost of service cases for them and the automatic adjusters, and we did not ask for that in this case. So it would take another case to get there.

Got it. Are you still thinking that, absent any EPA-related expenditures -- or looking at it this way, that you don't have to step up on the EPA-related expenditures -- what is your thought right now for a potential rate case for PNM?

We have said that we will file a rate case for PNM retail December 1, around there, of this year for implementation on January 1, 2014.

And that's still the plan?

Yes.

Got it. Thank you.

(Operator Instructions)

John Alli, Decade

Most of my questions have been answered, but I was wondering if you could talk a little bit more about the regulatory schedule? I know in June, the proceeding for future test-year rules begins. How long after, or when do you contemplate, potentially filing a rate case?

We'd file the rate case beginning of December this year for January 1, 2014. We would hope that we would have an order on the future test-making rules by then. We may not, but if you remember, in the stipulation for the last case, there were a set of principles that all the parties agreed that we would use in the next rate case -- future rate case filing, if for some reason the Commission did not finish their rule-making on it.

There are some principles into place that I think will help. Those were the ones that said the base period was 12 months, expiring at the end of a calendar quarter; no earlier than 150 days before the date of the filing, so there would be a base-year period. Then you would project operating results for the 12-month future period. And then it laid out the verifiable information needed for the linkage period, and it specified the level of information that needed to be provided -- not 40,000 pages worth, but enough detail that they can see, and that all of that information had to be certified by the CFO and a senior operating officer. So we would love to have the rule-making done and have more rules, but even if not, we do have a set of principles to go on.

Excellent. And your best guess from getting a ruling on this from the EPA?

Trying to guess when a government agency will --

Fair enough.

Actually do something is tough. All we know is that the Governor said -- or they said they would get back to the Governor soon, and I think especially with all -- you guys watch TV and saw what happened to the Region 6 administrator here. I suspect they will want to get back pretty quickly.

Excellent. Thank you very much.

At this time, I show no further questions.

Thank you, everyone, for joining us. We look forward to seeing many of you soon. Have a great weekend.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Good day.