TXNM Energy Inc (TXNM) 2016 Q1 法說會逐字稿

Good morning, and welcome to the PNM Resources first-quarter conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Jimmie Blotter, Director of Investor Relations. Please go ahead.

Thank you, Rocco, and thank you everyone for joining us this morning for the PNM Resources first-quarter 2016 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 Executive Vice President and Chief Financial Officer. 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 affecting 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, Pat, I will turn the call over to you.

Thank you, Jimmie. Good morning everyone, and happy Arbor Day.

Thank you all for joining us this morning as we report on the Company's first-quarter performance and take a quick look ahead. I'll start on slide 4, with a look at the numbers and our achievements from the first quarter.

First-quarter earnings were lower than last year, but consistent with our expectations. Consolidated ongoing earnings were $0.13 per diluted share, compared with $0.21 per diluted share in the first quarter of 2015. In addition, today we are reaffirming our 2016 consolidated ongoing earning guidance of $1.55 to $1.76 per diluted share.

At PNM, concerted efforts to create a more favorable customer experience continue to pay off, despite the challenges associated with high profile filings such as our current rate proposal. JD Power reported the overall customer satisfaction index reached a high point for PNM. I am particularly proud of our customer service results, which came in among the highest in our benchmark peer group.

This achievement is the result of the effort and dedication of our employees from departments all across the Company, who are focused on being responsive to and meeting the needs of our customers. Our Company has stayed the course, proactively communicating and sharing information that customers need the most.

I am proud of the work we have done. We know there is no silver bullet. It takes countless decisions being made every day on behalf of our customers.

I am confident our strategy is on target, and we are doing the right things for our customers. I am also pleased to say that TNMP has again been recognized by EnergyStar for the Company's successful energy efficiency efforts.

TNMP received the Partner of the Year Energy Efficiency Delivery Award for its high performance homes program. The initiative promotes the construction of new EnergyStar certified homes, and provides financial assistance and other assistance to homebuilders. This honor is on top of receiving EnergyStar's Market Leader Award for the 11th consecutive year.

So now let's turn to slide 5. Throughout the first quarter, we were preparing for the hearing at the New Mexico Public Regulation Commission regarding our $123 million general rate case. The hearing began on April 11 and after three full weeks of testimony, it is scheduled to end today.

As you all know, this filing is primarily driven by capital, the more than $650 million of investments we have made since our last rate increase, to improve the electric service and better serve our customers. Our top priority is to achieve timely cost recovery to support strong credit metrics. I am not going to speculate about the outcome.

However, thanks to the knowledge and endless hours of preparation of our employees and our witnesses, we are confident that we presented a strong case. At this point, we anticipate a recommended decision by the hearing examiner in June, with a final ruling by the commission in July. We expect to implement new rates August 1.

Part of our replacement power plan for BART includes adding a natural gas peaker on the San Juan site. On April 26, PNM filed an application for a CCN for an $87 million, 80 megawatt facility. We hope to receive a procedural schedule in the next few weeks, with the goal to have the facility online by June 2018, before the summer peak season.

I am also very pleased to say that on March 17, FERC issued an order approving the settlement in the PNM formula transmission rate case, which includes a 10% return on equity. On April 15, the Company made the final compliance filing for the rates that have already been in place. Going forward, rates will be updated annually on June 1, including this year.

Over in Texas, on March 23, the PUCT approved TNMP's most recent TCOS filing, and new rates went into effect totaling $4.3 million annually. We plan to make our next TCOS filing in July, with rates expected to go into effect in September. Now, I'll turn it over to our Chief Financial Officer, Chuck Eldred, for a more detailed look at the numbers.

Thank you, Pat, and good morning everyone. I'd also like to say happy Admin Week for all the Administrative Assistance that help all of us in our daily work.

Beginning on slide 7, as Pat said earlier, we are reiterating our 2016 guidance of $1.55 to $1.76. As you know, this is a broader range than we typically provide because of our pending rate case at PNM. I want to remind you of the quarterly distribution of earnings that we provided to you when we issued the 2016 guidance.

We have provided that information here for your reference. Because of the third-quarter rate case implementation, we expect the second half of the year to have a higher percentage of our earnings than we normally see. With Q1 being 8% to 9% of our earnings for the year, our first-quarter results of $0.13 is inside the guidance range for the quarter.

Turning to slide 8, let's review the PNM's load details. [Load to] PNM was down 1% compared to the first quarter of 2015. Residential was down, but growth in the small commercial sector helps to offset that decrease.

Industrial, although only a small portion of overall load, was down 7.2% between the periods. In this group, Intel is a large customer, and they continue to show a decline on a year-over-year basis. As many of you are aware, they announced a major restructuring in their business during their first-quarter earnings call.

We are carefully monitoring the situation. We have received no communication from Intel that they plan to close this site. Our 2016 guidance range, for the load of flat to down 2%, considers sensitivities for changes to Intel's load.

We continue to see overall improved economic development efforts locally. This resulted in the Albuquerque metro area having the best month for job creation in March on a year-over-year basis since May of 2007, at 1.6%. The bulk of that job growth was in private sector jobs.

We anticipate that the increased focus on growing the private sector jobs will result in a more diverse and resilient economic base. We see some of the results of these efforts in our continued customer growth, which is above forecast at 0.7%.

Now moving to TNMP's load on slide 9. Volumetric load for the first quarter of 2016 was down 1.6% compared to the first quarter of last year, but demand-based load was up 1.5% for the same period. Most of TNMP's commercial and industrial customers are billed based on their peak demand, which is not reflected in the volumetric-based load figures.

This offsetting impact causes load, in total, to have a slightly positive financial impact, for the quarter, of about $0.005. Both volumetric and demand-based load were used to create our load forecast. We continue to expect load for the year to be at an increase of 2% to 3% compared to 2015.

As you have read in many publications, this has been a warmer and drier winter than normal in Texas. As a result, the quarter-to-quarter load comparison has likely been skewed by this, particularly in the residential customers, as this group is more sensitive to weather. This has been more than offset in our results by the demand-based customers, which are much less sensitive to weather changes.

Turning to Texas economy. As we talked about on our last earnings call, it continues to be strong due to its diversified base. While Houston is feeling the impact of the low oil and natural gas prices, the state overall is diversified, and this helps to compensate for the weakness in the energy sector.

The Permian Basin, which TNMP serves a portion of, continues to show the most strength in the oil market. We saw that Chevron made an announcement this week that it plans to invest more heavily in this area, even though it may be cutting costs in other areas.

Several other economic factors in the state also continue to show strength, including increases in building permits and existing home sales, to name a couple. We see the impact of the strong economy by way of continued higher than forecasted customer growth, at 1.6% for the first quarter of 2016.

Now slide 10, let's review the drivers for PNM. We purchased 64 megawatts of Palo Verde Unit 2 leases in January of this year. The savings from the lease purchase, offset by the additional depreciation, results in a $0.03 improvement to earnings in the quarter.

Outage costs were $0.02 higher. While San Juan had outages in the first quarter of 2015 for the SNCR installation, which were not experienced in the first quarter of this year, Four Corners had an extensive outage this year. In addition to the planned outages at Four Corners, San Juan Unit 3 had a 12 day unplanned outage.

We had higher depreciation and property tax expense of $0.02, due to increased improvements -- investments. Lower market prices for Palo Verde Unit 3 sales caused results to be $0.02 lower this quarter, and interest expense also reduced earnings by $0.02, because of the additional long-term debt that PNM entered into in August of 2015.

Load, AFUDC and Navopache FERC generation contracts each caused results to be $0.01 lower than Q1 of 2015. We also recorded $0.01 in Q1 of 2015 for the cumulative reimbursement of prior year's Palo Verde spent fuel storage cost that did not repeat in 2016.

Moving to slide 11, we will review TNMP and corporate drivers. At TNMP, rate relief from the TCOS filings was up $0.01 compared to the first quarter of 2015. Weather was down $0.01, and depreciation and property tax expenses were also higher by $0.01. At corporate, we were up $0.02 compared to the first quarter of 2015.

This change was driven by less interest expense because of the repayment of the 9.25% debt in May of last year, and the incremental interest associated with the financing agreement with Westmoreland, offset by additional interest expense from higher short-term debt balances. On a side note, since Westmoreland took over the San Juan mine on February 1, we have been pleased with the operational performance of the mine.

Things are running smoothly, and the transition has gone very well. Westmoreland taking over the mine has proven to be a great benefit to our customers, as well, and the associated cost savings helped to offset the rate request that we have before the commission now.

In conclusion, I wanted to reiterate that we are pleased with the progress so far in the rate case. As Pat indicated, we believe that we have presented a strong case during the hearings. We expect to receive the hearing examiner's recommended decision in June, and ultimately to implement new rates at PNM August 1.

As a result, we plan to update our current-year guidance, the potential earnings power schedules, and capital spending forecast during our second-quarter earnings call. This concludes my comments, and I'll turn it back over to Pat.

Thanks, Chuck. We are pleased to say that the Company continues to perform well. Customer satisfaction is up.

We are confident we have presented a strong case to support our rate increase. We continue to execute our plan and manage our businesses effectively and responsibly. And at all times, the focus is on our efforts to serve our customers with safe, reliable, and environmentally sensitive energy at low prices.

I am also pleased to say that as Chairman of the New Mexico Economic Development Partnership, I am in a position to see the fruits of all of the policy changes that the governor has made to make New Mexico a more business-friendly state. Our pipeline is as robust as I have seen it in many years.

Thank you for joining us today. Operator, let's now open it up for questions.

(Operator Instructions)

Ali Agha, SunTrust.

Thank you. Good morning.

As I recall, Chuck, you mentioned in your guidance you presume that new rates go into effect August 1 of this year. Can you remind me, is there some flexibility for the commission to delay that or push it back? And if so, remind me what the sensitivity is for every month in delay?

Yes, I think we provided that in the guidance of the sensitivity. While Jimmie is taking a look to see what the numbers are, legally, they could delay the rate case, the hearing examiner or the commission, up to August -- or excuse me, October 1 of this year. But we have seen that the hearing examiner, although the one-moth delay that we've -- that you are aware of has been very disciplined towards trying to stay to this current state schedule.

So if you looked the sensitivities, the implementation on August 1, we dropped the earnings about by $0.08, and then September 1, it drops down to about $0.07, and then $0.06 in October of one implementation of those rates. So you can see that. Jimmie can lead you to the guidance information, to give more detail, if you need to reference some of the previous slides that prepared on that.

Right. And then secondly, if this comes into effect August 1, I recall if the timeline is valid that the San Juan retrofit rate increase would go into effect beginning in 2018. Historically, has there been any precedence when you've had two rate increases in New Mexico so close to each other? And is that a concern, from a regulatory approval process, with two back-to-back rate increases?

No, Ali. Everybody understands that the next one, on the primary drivers of that, are the San Juan, the BART settlement. And so that will have some normal capital spending into it, but I think everybody understands that these are special circumstances with the BART settlement here, that the State settled for regional haze, and will help us with the clean power plan. So long answer, I don't think it has any worries for us on that

Okay and the last question on the load trends. First, in New Mexico, any light at the end of the tunnel, where we may reach an inflection point and start to see if these load flattening, this constant negative trends for the last several quarters? So let me start with that. Are you seeing anything that tells you we may have bottomed out here?

I'll give you a high-level answer, Ali and then I'll let Chuck fill in. I think what we are seeing is, the economy is starting to turn around. Chuck mentioned we have seen the best job growth since 2007.

And I think that you are seeing most utilities are having negative usage per customer growth on the residential side. They just haven't seen the customer growth. The job growth here is going to help us bring back the customer growth on that end. And as I mentioned, our economic development pipeline looks very strong right now. So we are starting to see some of those turnarounds.

The trends are beginning to reflect more of a flattening indication on load. Because what we are benefiting from, on the small commercial and some of the growth, is being offset by still some of the economic hardship in the area of Albuquerque. Bet again, we are beginning to see some flattening. Hopefully not much of a decrease, but certainly even the sensitivities I mentioned with Intel are still within that 0% to negative 2% guidance range that we gave you.

Right.

And in Texas, I think it's the first time, at least in the recent past, you've broken out this demand side and volumetric load trends. But you're putting them together, you come up to a negative number. I know you mentioned that weather normalization may have been a challenge here, but anything else that concerns you on Texas? We haven't seen a negative load number there forever, I think, as well as I recall.

No, a lot of that -- and we mentioned a little bit about the weather being unusual the first quarter, that we are a little sensitive on the weather normalization in that calculation. Because it was a drier period in Texas, it created a little different kind of adjustment as you think about weather normalization. But we added that the demand-based load, because we consider that, that we see that with the AMI implementation, we are getting more readings and shifting customers more to that demand-based, to be more reflective of the type of customers that they are, and providing that tariff.

So as we go forward, we'll continue to incorporate the demand-based load and be more reflective of the expectations of the entire load projections with that consideration. But as I mentioned, the end result, even this last quarter, was about a $500,000 benefit on an earnings basis, as a result of the load in first quarter.

And Ali, I think a key number to look at on that slide 9 is, right, our customer growth forecast is 1%, and we're at 1.6%. So our territories in Texas are still growing.

We don't see anything -- and a quarter does not a trend make. Just as we have a good quarter, we don't call it an upswing on the load growth for just one quarter, especially when it was a leap year normalized, and a weather normalized, and heaven only knows what else in there. It's tough. So we are not changing our forecast on Texas.

Understood. Thank you.

Ben [Budas], Jefferies.

It's Anthony Crowdell. I don't know how I came in as Ben, but that's okay. I've been called worse. (laughter)

On slide 11, you have (multiple speakers) a $0.01 benefit for the Westmoreland financing agreement for the quarter. Is that something we can annualize and make it $0.04 to $0.05? And when I compare it to the slide 14 earning -- potential earnings power, shouldn't that offset some of the corporate and other? Because that looks like it has not changed. It's still at a $0.06 to $0.04 loss.

Yes, I think I've talked about, even on the last call, that the Westmoreland would be about $0.04 benefit this year, in corporate and other. So that's a good indication of what you can expect, going forward.

We haven't updated our potential earnings power slide to reflect any incorporation of the Westmoreland loan. So we are really intending to wait until the rate case, that we have all the information necessary to update the slide.

And that point in time, we will include the Westmoreland loan. So we just don't want to put pieces of information out there. We really want to give you more of a comprehensive view, based on the major driver, which is the rate case at PNM, to give you a better reflection of how we see all these additional earnings, and the impacts of the rate case, to be incorporated into the earnings power slide.

Great. Thank you so much.

John Barta, KeyBanc.

Good morning everyone.

So we go back maybe a month ago, it seemed like ROE, PV2 and the balance draft technology were probably the most contentious pieces of that rate case. After three weeks of hearings, do you have a better feel on any of those items? Just from talking with staff, et cetera?

John, we really don't want to bring any color to the results of the discussions going on. But I think you have certainly pointed out some of the areas that the interveners have questioned. But we look at this as a capital rate case. It's being litigated with the idea that we think we can build the right record on our capital investments, as being prudent and reasonable for the utility to maintain the reliability of the business itself. So there's a lot of different factors, the ROE depreciation, some of the capital items that you mentioned that were -- interveners had questioned. But again, we felt like our testimony, and the record that we've built, was very solid and well justified the Company's position to recover those costs.

Okay. And then just in Texas, on the load growth. So it sounds like the volumetric percentage is going to transition more to a demand-based load over the coming years?

You see that split out. We really have taken that into consideration. Because it's becoming more of a driver, as the automated meter reading gives us a more accurate indication of the type of customers, commercial, industrial, and the type of demand that they have on the system. It's more reflective of that now, going forward. So you'll see us evolve into adding that additional component to our load forecast. Again, no concerns about TNMP's continued guidance and growth of 2% to 3%. Just want to give you another variable, how we are driving towards those numbers.

It's easier for us to split it out, now that we have the data from the automatic meter reading cassettes, how it is billed. And so it just provides another level of transparency.

Makes sense. And then have you disclosed how many megawatts Intel is?

No.

All right. Thank you.

(Operator Instructions)

Lasan Johong, Auvila Research Consultants.

Thank you.

Question on, looking forward, in your presentation, you put out 2017, 2018 and 2019 outlook. Have you taken into consideration the changes in Texas, from potential ORDC regulations, shutting down the coal plants, buildup of solar, more wind power, probably, as well? And how does that affect -- is that all being taken into consideration in your outlook? How does that -- how do you incorporate that into your outlook?

The nice thing for us now is that since we are a T&D utility, that really only impact it would have is that if energy prices get extremely high over there, I think you would see customers starting to conserve, so our volumetric load might fall. Customers in Texas have been pretty inelastic to price sensitivity there. Their rates, for example, in Texas are higher than in New Mexico, but their usage is a lot more. On the solar side, we are seeing some solar penetration in Texas, but not a lot.

Texas does not have net energy metering, and so the solar penetration in Texas has been low. We are seeing more of it. But so far, all of the growth we've seen has been able to overcome that. So the trends we pay more attention to in Texas are the overall economy. And in particularly, our service territory, since we are around Dallas, we are South and East of Houston, in a petrochemical manufacturing area, refinery area, and then we're over in West Texas. So we -- the thing that drives our numbers is more of those general economic positions. And in the outlook we've put forward, in terms of potential, earnings potential, we haven't really seen anything that drives us to believe we will see a lot of macro changes in the economy.

And you don't think these events will have any kind of mass migration in customer usage or patterns of switching, for example? As prices go up and down, do you think there's vulnerability with bigger players such as yourselves, relatively speaking? Versus smaller players who are, quote-unquote, more nimble and take more market risks, shall we say? You don't see shifts in customer switching?

No, we don't really see that impacting our piece of the business right now. I think obviously, the Texas market is in a little bit of flux right now, in terms of where they're going to go with their regional haze plans and their clean power plans, in terms of what the generation mix is. But we don't see anything to incorporate into our numbers.

And lastly, Texas has experienced some really bad weather as of late, tornadoes, hurricanes -- not hurricanes, hailstorms and such. Any impacts?

No. We've -- the really bad whether that you saw missed our service territories. It was more in the Houston Metro, which is CenterPoint. So we've had some outages and some impact, but nothing major for us.

Great. That's fantastic. Thank you very much for your time.

This concludes our question-and-answer session. I'd like to turn the conference back over to Pat Vincent-Collawn for any closing remarks.

Thank you, and again, thank you all for joining us today. We hope you have a wonderful rest of your day and a wonderful spring, and we look forward to talking to you again on the second-quarter call. Have a great day.

And thank you. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.