TXNM Energy Inc (TXNM) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PNM Resources second quarter conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference over to Jimmie Blotter, Investor Relations Director. Ma'am, you may begin.

Thank you, Shannon, and thank you everyone for joining us this morning for the PNM Resources second quarter 2014 earnings conference call. Please note that the presentation for this conference call and other supporting documents are available on our 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 other 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 assumes no obligation to update this information. For a detailed discussion of factors effecting PNM Resources' results, please refer to our current and future annual report on Form 10-K, quarterly reports on Form 10-Q, as well as reports on Form 8-K filed with the SEC. And with that, I will turn the call over to Pat.

Thank you, Jimmie. Good morning, everyone, and thank you for joining us on this beautiful sunny New Mexico morning. I am going to start on slide 4, with the headlines from the second quarter. Before I get into the numbers, I would like to start by saying that overall, it was a solid quarter for the Company. We continue to face some challenges with the New Mexico economy, but we are managing through them. At the same time, Texas continues to be strong, and the Company remains on track.

GAAP earnings were up $0.02 per share compared to Q2 in 2013, and ongoing earnings were up by $0.01. Today we are narrowing our 2014 consolidated ongoing earnings guidance to the range of $1.44 to $1.51 per diluted share. We are making substantial progress on resolving the ownership of San Juan generating stations, following the two unit retirement. Non-binding agreements were reached regarding the restructured ownership of the plant, which is an important step forward. We will have more on the BART process in a few minutes.

Now let's move to slide 5. In the second quarter, PNM experienced an overall decline in load. However, on a positive note, residential load showed a slight increase. As you can see, we have revised our load guidance to reflect the decline. However, we continue to effectively manage the business, and we expect to be at the midpoint of our guidance. Employment growth for both the state and the Albuquerque metro was essentially flat for the quarter. While analysts estimate that we will see modest employment growth this year, with predictions varying from 0% to 0.17% -- excuse me -- 1.7%, we believe it will likely be in the lower end of that range. New Mexico's unemployment rate is down 7% in the first quarter to 6.5% as of June.

And at PNM, we do continue to see modest customer growth. Across the state line in Texas, TNMP continues to see strong growth because of the very strong economy there. As you know, last quarter, we explained that the growth number was an anomaly, and as a result the second quarter number appears modest. However, year-to-date results reveal the actual consistent growth trend. The commercial class is up 6.5% and residential is up 2.5%, with an overall load growth at 4.1%. We expect that TNMP will come in at the upper end of its load forecast for the year, and we anticipate steady growth to continue through 2014 into 2015. The Texas unemployment rate dropped from 5.5% in the first quarter to 5.1% at the end of June.

Now let's go to slide 6 for more details on the BART filing. We continue to work to obtain final approval for the revised state and limitation plan for our San Juan generating station. The plan is being reviewed by both the EPA and the New Mexico Public Regulation Commission. As noted last quarter, the EPA issued a proposed draft approval for the plan on April 30, as it is expected to take final action by about September 29. As I mentioned earlier, on July 15 PNM filed a non-binding term sheet and resolution with the New Mexico Commission regarding restructuring the ownership of San Juan between the exiting owners and remaining owners, and ongoing participation of the remaining owners. This means the Company is proposing to assume 132 megawatts of power from Unit 4, instead of the 78 megawatts originally proposed.

But it does not change the originally filed replacement power plan. But because of the ongoing ownership negotiations, we propose that the New Mexico Commission hearings on the plan be pushed back until October. The hearing is now scheduled between October 6 and 24. We expect the final order to be issued no later than February of next year, although the Commission has indicated its desire to still have it done by the end of the year. And as always, settlement discussions can occur at any time.

Now let's turn to slide 7 for a quick update on other regulatory filings. As you can see, this is another busy regulatory year for the Company. I am pleased to say we continue to make progress with our strategic plan, and we remain on target with our regulatory filings. On July 17, PNM closed on the purchase of the Delta Person peaking facility. This is expected to add about $0.01 to 2014 earnings. This will also benefit our customers, because the Company will be able to operate the facility more efficiently at a lower cost.

On June 18, the New Mexico Commission gave final approval for PNM's application to build the 40-megawatt $56 million La Luz gas-fired peaker. This facility is expected to be online in late 2015. On June 2, PNM filed its 2015 renewable plan. In this filing, the Company is seeking the approval of 2015 renewable energy rider to allow us to recover the cost of renewable energy. It also includes a request for CCN to build and operate 40 megawatts of Company-owned solar, which is a part of the replacement power strategy for BART.

Also in regard to PNM, I want to mention that it is still our intent to file a general rate case by the end of this year. We take a look at TNMP, on July 18, we filed for a TCOS increase. The rates are expected to take effect in September, and boost revenues by $4.2 million on an annual basis. And now, I will turn things over to Chuck for an in-depth look at the numbers.

Thank you, Pat, and good morning. Let's begin the financial review with the second quarter results, beginning on slide 9 of the presentation. Second quarter ongoing EPS was $0.39, up $0.01 compared to the second quarter 2013. TNMP was up $0.02, and corporate and other was up $0.01. Corporate and other benefited from lower interest expense, and the reversal of a tax reserve for R&D credits, resulting from the settlement of a 2003 to 2008 IRS exam. These benefits at corporate and other were offset by some expired tax credit investments at the holding company. Finally, PNM was down $0.02, compared to the second quarter of 2013.

Now for more detail on PNM and TNMP drivers on slide 10. Starting with PNM, rate relief is up $0.01. This consists of the renewable rider in the Gallup contract which expired on June 29. [Halabre] market prices improved results by $0.01. Outage costs were also better by $0.01, compared to 2013 when San Juan Unit 4 was in a major outage.

We noted last quarter that we had reached the settlement on our fuel cost continuation filing, and that we are able to keep 10% of off-system sales to 2016. We recorded the catch-up entry that goes back to July of 2013, and it improved earnings by $0.01 We have discussed how the load continues to be soft in New Mexico. This represented a $0.02 decrease compared to last year. Weather at PNM was also down $0.02. April and May were very mild, and although June did some -- did have some hot days, it was not enough to counterbalance April and May. Cooling degree days overall were 4% above normal, but down 13% compared to Q2 of 2013.

Finally, at PNM there was a $0.02 impact year-over-year for the IRS exam that I mentioned earlier. This offsets the benefit recognized at corporate and other. At TNMP, we saw an improvement for rate relief of $0.01 This is related to the TCOS filings. As Pat mentioned, we have recently filed for our second TCOS increase this year. We expect the $4.2 million increase to become effective in September.

Although load and weather weren't offset this quarter, on a year-to-date basis TNMP's load is up 4.1%, and should be well within their guidance range of 1% to 3% for the year. TNMP has also had an improvement in O&M expense by $0.01. This was driven by a number of small items, including higher A&G credits related to capital spending and lower insurance claims expense.

Now turning to slide 11, as Pat mentioned, we have narrowed our guidance range to $1.44 to $1.51 for this year from $1.42 to $1.52. We are still on target to meet the midpoint of the range at $1.47. We are continued to focus on executing our regulatory strategy well. We are also benefiting from the geographical diversity of our Company, as it relates to the economic conditions in Texas and New Mexico. As a result, we are making adjustments to our segments. We are guiding PNM to $1.11 to $1.15. TNMP is expected to be above the original guidance range, at a $0.43 to $0.45. We also expect corporate and other to come in slightly better than the original guidance range of a negative $0.10 to negative $0.09. The strength we are seeing at TNMP is not only a result of the strong economy there, but is also influenced by other revenue increases like energy efficiency bonus.

We also have had some savings in pension and medical expenses for both PNM and TNMP. This has been caused by a number of factors, including good asset returns on our pension plans. At PNM, a combination of things will help to offset the load decline. There is the pension and medical savings I just mentioned, our ability to keep 10% of off-system sales, the adjustment in spent nuclear disposal fees to the DOE that was eliminated in May, the contingency plans that we have enacted, to just to name a few. We are comfortable that we are well-positioned to close the gap, and hit the midpoint of guidance for this year. And with, that I will turn it back over to Pat.

Thanks, Chuck. To wrap things up, overall it was a steady quarter for the economy -- the Company. We continue to effectively manage to the economic challenges in New Mexico, and again our ability to meet our total return goal is not dependent on load. We are confident that the Company remains on track, both financially and operationally. Operator, now we will open it up for questions.

Thank you.

(Operator Instructions)

Ali Agha, SunTrust.

Thank you, good morning.

Good morning, Ali.

Good morning. Chuck or Pat, can you tell us on a LTM basis, what is the earned ROE at PNM right now?

We don't disclose that, Ali.

Just look at it from the things that we have talked about, that this year we fully expect with the guidance adjustment of a range between 99 -- 9.5%. So we are still on target to meet that expectation to -- given the current guidance and the updated information today.

But in terms of -- I think, Pat, you said still plan to file the rate case by the end of the year. If this 3% kind of decline that is new throughout the year might that change your plans for filing?

No, Ali, while we have lowered our load forecast. As you saw, we narrowed our guidance range, and we are confident in the midpoint of guidance, we have got a pretty full regulatory agenda. And so, and while we will file for a rate case and load will reset, and we are going to ask for a decoupling to recognize kind of the new reality, we are still very confident in our ability to manage the business, to not have to move up that rate case.

Okay. And then conversely actually, if the BART process spills into next year, as if -- if it goes the full distance, would that perhaps cause you to also on the reverse side, delay the filing, just so you don't want to put too many things in front of the Commission at the same time?

No, because the hearing on the BART would have already taken place, Ali. It would just be in front of the commissioners, and as you know the rate cases first start with the staff. And so, the staff would have done their big piece on the rate -- on the BART filing and would have been before the Commission, and so that timing wouldn't cause us to delay the rate case either.

Okay. Last question. On the TNMP, just conceptually or roughly, what was why such a big difference in weather normalized sales between the first quarter and second quarter?

A lot of it was timing over the way the numbers were last year. I think last year, in the first quarter we had an anomaly, and this year we also had -- in the first quarter had an anomaly. So I would look at the year-to-date number as being the most accurate projection of load.

Okay. Thank you.

You're welcome.

Paul Ridzon, KeyBanc.

Good morning.

Good morning, Paul.

When we look at the lower load growth forecast for New Mexico, and then the lower guidance, how would that map over onto the potential earnings power slide?

Well, keep in mind the -- we will make the adjustments. But if you really look at the earnings power slide, we will adjust the PNM down to the range that we talked about to hit the midpoint of what we would expect to be reflective of that segment. But then we will improve the TNMP slide to indicate the additional earnings power that we have, relative to that segment of the business. So there is really kind of just an exchange.

And also remember, Paul, that that's 2016 earnings, and we will have a new rate case that we file this fall, for rates to go into effect on January 1, 2016, and we reset the volume when we do the rate case. So that should pick up all the volume degradation in that case.

And then, you will have decoupling hopefully after that?

Yes, we plan to file for that, and hopefully have that.

And then, so the starting points will flip-flop kind of, but the deltas will still be relatively the same?

Yes. To get to the midpoint of where we target today, you can see that flip-flop, and then you will see it -- be working towards the -- as Pat pointed out the rate base is still intact to get the earnings power that we would look for in 2016, with some rate designed to address some of the load issues that we are seeing today with decoupling.

So -- but the delta from now til then at -- in New Mexico would be the same? Or would you pick up some more, because of the rate case capturing lost volume?

You mean in 2016, or are you talking about in --?

2016, sorry, from 2014 to 2016, the bridge.

Yes. We will continue to -- well, we will really best reflect the guidance in December, to really look at what the adjustments look like for next year. Because we want to make sure that the load profile, and as we look at New Mexico, we continue to monitor that. But we will just have to wait to December really to talk about 2015. I think that is the best way to answer that.

And what ROE is embedded in Texas for the midpoint?

Well, we still -- we earn a [10 1/8]% ROE, and we are on track to continue to earn a solid return at -- in Texas.

Okay. Thank you very much.

Okay.

Paul Fremont, Jefferies.

Thanks. I just wanted to get a sense in terms of what offsets this year might also spill over into 2015, as assuming that that load growth is weakened in 2015?

Well, Paul, we will really want to spend more time in December to talk about 2015 guidance. But we continue to execute plans in the business to address the potential decrease in load for PNM. And so, our efforts to manage the O&M cost of the business certainly is a continued driver. As I mentioned earlier, we pick up about $0.01 on the Department of Energy, the nuclear spent fuel fee that is no longer paid. That is about another $0.01. We continue to -- with the Delta purchase, we will pick up $0.02 for next year for that. So there is a number of different items that are small, but certainly begin to close the gap for things that frankly, would have been a nice upside. But certainly at this point, are being reviewed more as closing the gap for the impact on load.

Remember, Paul, we also have renewable rider reset, the off the year of an off-system sales go over there. The [Palo Verde] leases go into half next year. So as we said earlier we are really comfortable in our ability to manage through the 2014 and 2015 bridge to the volume reset in 2016, which correlates to the earnings power slide.

And then, is there any reason to believe that the load growth decline will begin to mitigate at some point? And what are you focusing on in terms of potential improvement?

Paul, I think there are a couple offsetting things. First of all, I think customers have a new -- as we have talked about -- kind of a new ethic about energy use, and taking advantage of energy efficiency programs. On the other hand, you saw the residential load pick up in this quarter.

The economy here is not going great guns, but we are seeing some job growth here. And on the industrial side, we talked about the fact that we had a customer kind of retooling its operations. That started in the second half of last year. So the reason the first half looks bad this year, is because they hadn't done that in the first half of last year. So those comparators look kind of funny. So we don't see things going great -- good great guns, but we see flat to a little pick up in the load, and we can mitigate against that.

Thank you very much.

Kit Konolige, BGC Partners.

Good morning.

Hello, Kit.

So obviously, load is the topic of the day. So I think, Pat, you just gave some pretty good insight into some of the drivers there. What -- how should we think of -- what you would be expecting for future years now, as a mode growth kind of idea in New Mexico say, over the next two to three years?

Well, Kit, we obviously haven't given 2015 guidance. And starting in 2016 in a way, it becomes a moot point, because we reset the volumes. And we go to from a future test-- excuse me -- from a historical test year to a future test year. So if we would think there are going to be continued volumes declines, we would be able to forecast that, and we would have decoupling. That said, we don't see any huge drivers for this year and next year. And we think the economy will kind of continue to bump along, but we can manage through that. And as a matter fact for this year, you can see we are managing through that because, we had an idea the economy could not grow. So we are just comfortable with our ability to manage through it.

Have you broached the idea of decoupling at the Commission at all so far?

Well, we haven't filed our rate case officially, so we really haven't had any discussions with them about that. But I think you are seeing it in a lot more states. I believe on the electric side about half of the states now have decoupling, and people are starting to embrace it as a way to encourage energy efficiency. And if you look at the clean power plan the administration just submitted, a lot of what you're going to need to do to meet those carbon reduction goals, are energy efficiencies. So I think it all feeds into a very nice argument for decoupling at this time.

Okay, fair enough. And have you done any rough calculations so far of what kind of a rate increase would be needed, just with respect to the load weakness in order to true you up at the time of the next rate case?

No, but when we file a rate case, we will come and go through all of the drivers of the rate case, and how much of that is related to that. But we haven't done that yet.

Okay. And finally, on the BART proceedings. You mentioned I think that settlements could come anytime. Do you have -- can you give us any better sense of -- if you have had any winks and nods or other indications from the other parties, on where we stand with possibly a meeting of the minds on that proceeding?

Well, in general, you get settlements at two times. One is either before testimony is due, because then you only have to file a settlement testimony, or one is usually before the hearings begin. In this case, if I was stopped and the other interveners, I would want to file my testimony, get my positions down, because this is such a big case. So you would typically then see discussions going on in the September time frames, because this is a very complicated case. And I think the majority of the parties would rather not litigate. So that would be the timing that we would think about.

So discussions in September -- could there be an actual settlement announced in September, or just the start of some back and forth?

It depends on how discussions go.

Fair enough. Okay. Thanks a lot.

(Operator Instructions)

Brian Russo, Ladenburg Thalmann.

Hello, good morning. My questions on load were answered as well as BART. But I was just curious, Chuck, if you could discuss the details of your financing strategy, for your five-year capital budget that leads to an avoidance of issuing equity?

Yes, really the cash flow business has been very strong. And so, if you kind of look at the five-year plan, we continue to have no equity requirements, and no change in that understanding. But as we go into the rate case in 2016, you think about picking up some additional revenue for that. Really the strength in the cash flow business and the liquidity we have in place, just doesn't require that we have a great deal of new financings. A little bit of refinancings that is required, maybe a couple $150 million to $[200] million to $[300] million over the next couple years for PNM. But it is just -- the cap structure remain strong and on target and on plan. And so, really the 2016 rate case will bring in enough revenues, that we would anticipate that would continue on that course.

Well, can you be more specific? It is my understanding that you are going to utilize short-term debt at the parent to fund the utility CapEx, and then the utility over time, will dividend cash back up to the parent to pay that down. I am just wondering like, what level of short-term debt on average, should we look for over the five-year period?

Well, it obviously varies depending on what -- on how the year goes. But again, we are going to pay down the holding company 9.25% debt in May of next year, and that is about $120 million roughly outstanding today. So you could probably continue to see on a short-term basis maybe $100 million to $200 million of short-term debt. And it's going to be variable based on the timing of when things occur, and the cash flows, the cycle of the business each quarter. So that's probably a reasonable assumption. Again, that is at a revolver rate which is probably running around 2%.

And how soon after the capital budget winds down, can you pay that off?

I would begin to look at some decrease at the holding company debt, after the rate case in 2016.

Okay, great. Thank you.

Thank you.

Paul Patterson, Glenrock Associates.

Hello. Brian just -- can you hear me?

Yes.

Brian kind of asked my question. I was just sort of wondering, what about the idea of maybe keeping on a more permanent basis debt at the parent level, considering interest rates are so low and what have you? Are there any thoughts about that or?

Well, actually, you get a strong -- with the credits being strong at the operating subsidiaries, you get a lower interest cost. And so, we really just use the holding company facilities We could look at convertible securities and other kinds of structures at the holding company, but frankly the cash flows just don't support any kind of permanent financing at the holding company. So we think that we the approach we have today, using the revolvers and the timing of cash flows at the operating subsidiaries, and how we dividend monies up to the holding company and vice versa, really serve the purpose that maintains the right capital structure, that we don't get ourselves into permanent long-term debt at the holding company.

Okay. On the whole load growth thing, obviously it is a bit of a challenge here, and you are talking about decoupling and everything. But I am just wondering, you obviously think ahead and what have you, and you have known about this issue. Have you thought of maybe any opportunity, either with respect to technology or deployment of different technologies and what have you, that could be a utility opportunity for investment, that maybe could lower customers bills, but increase rate base what have you? Is there any thought process on that? Or am I getting too far ahead, and we are just trying to deal with the current shortfall right now?

Well, when you take look at the long-term plan and the five-year capital budget, you can see that with the BART settlement and the replacement power, and potential of bringing Palo Verde into rate base, there is good rate base growth there, and we reset the volumes in 2015 and 2016 so -- excuse me -- in 2016. So it's really just 2014/2015 problem, and New Mexico is a very poor state, so we are always mindful of our customer increases, our customer bill increases. So it is really just managing through a short-term issue for that long-term rate base growth, and ability to make total return. And we don't want to do anything in the short run that hurts our ability to get that into rate base in the long-term, the capital spending.

Okay. Thanks so much.

Thank you.

Ali Agha, SunTrust.

Thanks. Hey, Pat, on this EPA CO2 rule that has been proposed. I know that the BART plan is completely separate and looking at a different issue, but just wondering would that have any bearing on your plan here at all in terms of the CO2 reductions? And does that fit into the equation, as you are going down this road on the BART?

I am, Ali, actually, the BART settlement they have these very nicely into the CO2 rule. And when we put together the BART settlement, we actually utilized carbon pricing in it, because our Commission has asked us to use carbon pricing. So those two units that shutdown help the state get very, very close to what it will need to get to -- to meet its reductions under the clean power plant. And obviously, there is a lot of analysis still to be done in that rule, and I am sure it's going to get challenged legally. But the two unit shutdown is going to go a long way towards helping the state. So it is advantageous on two fronts. It meets the regional haze rules, and it will meet the clean power plan reduction.

Okay. And overall, as part of your fiver year CapEx plan, on a [renewable] basis, as you are looking at the rule as proposed, does that cause any major swing to your outlook for your CapEx programs?

Not really, Ali, because the rules don't -- the first reduction is in 2020, and the next tranche for EPA is in 2030. So it may require some additional renewables in the out years, but probably not until you get to that 2020 to 2030 time frame.

Got it. Thank you.

Thank you, I am showing no further questions at the time. I would like to turn the conference back over to Pat Collawn for closing remarks.

Thank you, and thank all for joining us this morning. And thank you for your continued interest in PNM Resources, as we are on our journey to produce top quartile shareholder returns. We hope you all enjoy the rest of your summer. Thank you.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation, and have a wonderful day.