TXNM Energy Inc (TXNM) 2017 Q1 法說會逐字稿

Good day, 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, Anita, and thank you, everyone, for joining us this morning for the PNM Resources First Quarter 2017 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 Charles 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 reports 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, and good morning, everyone. Thanks for joining us this morning, and Happy Arbor Day.

We'll begin this morning on Slide 4 with the financial results and some key company highlights. Earnings for the first quarter of 2017 were $0.29 on a GAAP basis and $0.28 on an ongoing basis. Both of these numbers are increases over the $0.13 earned in the first quarter of 2016.

We continue to affirm our previously announced 2017 consolidated ongoing earning guidance of $1.77 to $1.87.

I am pleased to report that we have reached an agreement on the parameters of the settlement with many of the parties to our New Mexico general rate case.

Yesterday, we asked the commission to extend our time to file the settlement to next Friday as the parties need to obtain their various approvals in order to officially sign on to the settlement. Once we are able to file the settlement with the commission, we will share the details of what is being proposed. But until then, we will not be able to answer questions on it.

Last week, we published the first draft of our Integrated Resource Plan in preparation for the filing due by July 3. This allows time for public input and comments.

The IRP includes a generation resource portfolio that would make PNM coal-free after 2031.

As had been previously indicated, the most cost-effective resource portfolio included in the draft IRP includes the full closure of the San Juan Generating Station after the current coal supply and participation agreements expire in 2022.

Additionally, this portfolio also includes an exit from our 13% position in the Four Corners generating station when the coal supply agreement expires in 2031.

While this plan is the most cost-effective course for our customers, it has a significant impact on the communities in which those plants operate. We have been working with these communities, and we will continue to identify how we can help to mitigate the impacts of these potential plant closures.

All that being said, the final decisions on these plants are not ours alone to make. There will be plenty of regulatory, legal and other processes to work through as these plants are considered.

Keep in mind that after the filing of the final IRP by July 3, PNM is still required to make a filing with the commission on the San Juan Generating Station in 2018 to determine its future.

Next, let's cover updates from the quarter on our other regulatory filings on Slide 5. On our advanced metering infrastructure, in order to provide time to consider rate design opportunities and update our cost benefit analysis, we are considering requesting a 3-month suspension of this proceeding. We would also continue to determine whether there is interest among the parties in order to settle the case.

The New Mexico Commission has opened a rule-making docket that is intended to simplify and increase the transparency of rate cases. The commission hopes to accomplish this by reducing the number of issues litigated in rate cases and to provide a more level playing field among the parties to rate case filings. The proceeding is expected to address various aspects of ratemaking policy, including developing a standardized method for determining ROEs. We will be participating in the process, including the workshop to be held on August 9.

We remain in a briefing period of the New Mexico Supreme Court's appeal of certain items from our August 2015 general rate case, which is currently scheduled to be completed by the end of June of this year. The court may then hear oral arguments prior to rendering a decision. Remember that we filed this appeal on September 30, 2016, and estimated about 15 months for this proceeding to be resolved, including a final ruling from the commission to reflect the Supreme Court's decision, although there is no statutory time frame. We'll keep you updated on this item each quarter.

Over in Texas, the TNMP TCOS filing was made in January, was approved, and the rates became effective March 14. This represents a $4.8 million annual increase to revenues. We expect to make our usual second semiannual filing during the third quarter. We are still on track to file TNMP's general rate case. Our current plan is to file in May of 2018 with a 2017 calendar year test period. We expect these rates would be effective in January of 2019.

With that, I'd like to turn it over now to Chuck Eldred for a detailed look at the numbers.

Thank you, Pat, and good morning, everyone. Let's begin our review with the load details for PNM and TNMP on Slide 7.

At PNM, we continued the trend of positive weather-normalized growth in the residential class. We're up 1.6% quarter-over-quarter. This is reflective of what we believe is improving economic conditions, evidenced by information such as upticks in the number of residential housing sales and prices.

Commercial load this quarter was down 2.6%. This is consistent with some of the recent flattening to Albuquerque's employment growth rate. We are beginning to see some of the previously announced economic development wins starting to [bank] their hires, reflecting expectations of improvements in the commercial class.

Industrial was down 3.8%. Thinking about 2017, while we have a large industrial customer who continues their decline in usage, some of our large customers are expected to increase. Therefore, 2017 is planned to be flat compared to last year.

In total, this results in weather-normalized retail load for the first quarter in 2017 being down 0.8% compared to the same period in 2016. Our load guidance for PNM in 2017 was flat to down 1%, so this is in line with our expectations.

TNMP continues to perform well. Volumetric load was up 5.4% for the first quarter of 2017 and demand-based load was up 6.7%. Keep in mind that, last year, we saw some abnormal results between Q1 and Q2, with Q1 being lower than expected and Q2 being higher, which brought the year-to-date amount back in line with expectations by the end of the second quarter.

This year, we're seeing growth numbers aligning with our expectations, but the year-over-year review is being skewed because of the prior year results. I expect that Q2 2017 year-to-date results from a year-over-year perspective will be in line with our guidance for the year.

We continue to see strength in the Texas economy. The relocation of various national and global corporate headquarters to the Dallas and Fort Worth area not only results in commercial growth but also residential and small business growth in the surrounding communities.

Now moving to Slide 8. We had ongoing earnings of $0.28 for the first quarter of 2017 compared to $0.13 for the same period of 2016. The $0.15 increase is seen at PNM, while both the TNMP and Corporate and Other segments were flat year-over-year.

Turning to Slide 9 for our earnings drivers. At PNM, $0.08 of the increases is the impact of the rate relief that was implemented on October 1 of last year. We continue to expect the full year-over-year increase in 2017 to be $0.26.

Outage costs were an improvement of $0.05 compared to Q1 of 2016. The timing of expenses are influencing this driver. In the first quarter of 2016, Four Corners generating station had both a major and minor outage at the plant.

There are similar outage plans at Four Corners later this year that will offset some of the timing difference we see this quarter. Therefore, our guidance is $0.01 to $0.02 decrease in outage expense. For the full year, it's still consistent with our expectations.

The cost savings we implemented last year contributed a $0.03 reduction in expenses compared to the first quarter of last year.

Revenues from new third-party transmission contracts increased earnings by $0.01, as did the increase in the hedged market price for Palo Verde Unit 3 sales.

We expect Palo Verde Nuclear Decommissioning Trust gains for the year to be lower than last year, though market performed better in Q1 of this year versus what it did first quarter of last year. As a result, we saw an increase of $0.01.

Other represents a $0.03 improvement between the periods. Included in this amount is $0.01 due to the FERC-mandated amount that we received from Tucson electric power in the first quarter of 2017, reflecting interest on amounts Tucson charged us under new transmission rates before they were filed with FERC. Also included is the $0.01 improvement related to an income tax expense reduction at PNM this quarter as a result of new stock compensation accounting standards that became effective in 2017.

The weather was milder and, therefore, reduced PNM's earnings during the first quarter by $0.03 compared to normal and $0.02 compared to the first quarter of 2016. Heating degree days during the quarter were $0.12 lower than the same period last year and 18% lower than normal.

The combination of depreciation and property tax expense increased $0.02 quarter-over-quarter due to the increased plant balances.

The Navopache FERC generation contract was also $0.02 lower than Q1 of 2016.

Finally, O&M expenses reduced earnings by $0.01 this quarter, which includes our expected increases from labor escalations and increased health and benefit costs along with higher software implementation costs.

Now moving to TNMP. ESP (sic) [EPS] was $0.02 higher as a result of the increase in load that I discussed earlier, and rate relief from TCOS filings added another $0.01.

Weather offset some of the increases in load during the first quarter. Heating degree days were much lower, coming in at just over half the 10-year normal level.

Depreciation expense and property tax reduced earnings by another $0.01 as a result of the continued planned investments supporting the growing load in our service territory.

As I wrap up today, I want to make you aware that although a preliminary draft of the IRP is available, we're not planning to provide any substantive updates to our capital spending plans until we gain more clarity about the replacement power associated with the potential shutdown of San Juan. We expect that we'll begin providing more detailed information on what the capital plans will be going forward later this year.

Also, as you're aware, we are encouraged by the announcement of how close we are to reaching final settlement in our pending PNM rate case. It's important to note that the ability to achieve any settlement must consider the [variety] positions of all the participating parties.

One of the areas of concern is the customer impact of rate increases, since our last increase was in October 2016. As we said all along, we are mindful of the impact on customers, and even in the original filing, we proposed a phased-in approach to mitigate the increase.

This being said, we continue to focus on 2019 as the year when our earnings potential can be realized, and we should have the ability to earn our allowed return.

Furthermore, a settlement allows us to move forward and focus on the upcoming regulatory workshop that Pat mentioned as well as the IRP process and future replacement power given the possibility that we will exit coal at San Juan and Four Corners.

Assuming the settlement is attained, we will properly release -- promptly release the agreed-upon terms and subsequently update our earnings potential slide.

In addition, our plan is to provide 2 years of guidance for both 2018 and '19 in December this year. This will enable greater clarity through 2019.

Thank you for your time this morning. Now I'll turn the call back over to Pat.

Thanks, Chuck. As Chuck and I mentioned, we're pleased that we have reached the final stages of negotiation on the settlement in our PNM general rate case, and we look forward to discussing it with you as soon as it is finalized.

The IRP process is proceeding on schedule as we gather public comment about our draft plan that calls for an exit from coal and a transition to cleaner energy.

In addition, the opportunity to participate in the commission's workshop for improving the ratemaking process could pave the way for more efficient rate filings in New Mexico.

Our company's focus is always to balance the interest of our many stakeholders while maintaining affordable, reliable and environmentally responsive energy for our customers.

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

(Operator Instructions) Our first question comes from Insoo Kim with RBC Capital Markets.

First, congrats on getting the initial agreement with the different parties. I know you can't speak in the details, but regarding the 8-day extension that you've requested to the commission, is that just more of a formality and they kind of have an understanding that a settlement is very close to being filed so there shouldn't be any pushback from that kind of extension request?

Well, so the hearing -- the PRC delegated to the Hearing Examiner the ability to approve the extension. And given that the extension is so widely supported, the list of -- almost all of the intervenors are on that extension request. We would hope that it would be approved. We don't know whether or not it will be, but I think it's a pretty widely supported extension.

Got it. And then regarding the potential earnings power slide that you guys mentioned, the '18 earnings potentials, as it currently stands, doesn't incorporate the splitting up of the 2-step increase in the rates, right?

That's right. It does not include any phase-in approach if that were actually adopted in the settlement.

Got it. And then just finally for me, regarding the Facebook data center solar project, how -- what's the latest on that? And I guess, the expansions beyond the initial investment, how -- what are the thoughts on how that's going to be structured? Is it still going to be mostly net neutral to you guys in terms of earnings? Or what's the growth looking like for that type of project?

The expectations on the earnings front is still as planned. It's about a $40 million investment to Facebook for a solar facility. We mentioned the book earnings on that was about $0.5 million, so it's not material. There is a process now underway for a Phase 2 that we will participate for the possibility of adding some additional solar capacity, and that process is underway. So we continue to work very well and closely with Facebook and trying to pursue any opportunities for meeting their needs to serve their load through renewable sources. It's too early to tell anything beyond that because we're -- they're in a process now of looking at Phase 2, Insoo.

The next question comes from Ali Agha with SunTrust.

Pat, you mentioned in your comments that you've potentially reached a settlement with most of the parties on the rate case. Any key parties that are not onboard the settlement?

Ali, we can't comment on who's onboard the settlement and who's not onboard the settlement now. All we can comment on is who signed the motion for the extension.

Well, I understand that. I didn't want a specific party who's not signed. But among -- there are, presumably, I think from your comments, I just want to confirm, there are some folks that have not signed. Is that an accurate statement?

I'm sorry, there are some folks that are not onboard?

Yes. I mean, I thought I heard you say majority, not all. Did I hear that right?

That's correct.

Okay. I was just wondering, among the folks that have not gotten onboard, is there any big-picture concern from you in terms of that having any implications in the approval process?

No.

Okay. And then, separately, we've had a little bit of change on the commission from the last election, et cetera. But in general, we continue to see the commission come in and make rulings that are surprising, to say the least. I'm sure you saw the ruling on the Xcel filing. Any concern that, presumably, once the settlement is done, that there could be any changes -- unexpected changes coming from the commission side? Or is the confidence level, given the parties onboard, that there should be a high probability of getting approved as is?

Well, commissions can always do what they want to, but that's why we'd like to settle things. Because I think you always -- no matter who the commission or what the commission, you have a higher chance of approval when you have a settlement.

Yes, yes. And Chuck, just to understand the comments you made at the end. So fair to say, to maybe think about the implications, once the settlement is out public, think of it over a 2-year period and not look at one year in isolation. Is that the way we should be thinking about this as...?

I think that's fair, Ali. I think if we were to agree to some sort of phase-in approach, if that was the result of the settlement, then '18 would be more of a transition year and '19 would focus on the earnings potential of the business, as you're well aware of, in our -- in the earnings potential slide.

Right, right. Last question. Pat, any signs that you're seeing locally in New Mexico that's giving you any greater clarity or confidence that the overall load picture in New Mexico starts to stabilize and, at least, flatten out versus last year?

Yes. I think when we look at out -- well, the unemployment in New Mexico is not great. The unemployment -- it's mostly in the oil and gas areas. The unemployment in the Albuquerque metro area is much lower than it is state-wide. We're starting to see some gross receipts tax, and we're starting to see new construction in both residential and small commercial. So it's not going back great guns, but I think we feel much better about the fact that it's stabilized.

Okay. So, but you would expect, as we exit the year -- I know your forecast is flat to down 0.7% or so. You would expect that we reach that 0 level by the time we are exiting the year?

I think we're comfortable with the range that's in our guidance.

Ali, you're limited to 5 questions, you've exceeded that number. But...

Look, I appreciate your indulgence. Thank you very much.

The next question comes from Anthony Crowdell with Jefferies.

One follow-up from Insoo's question. When should we expect the Hearing Examiner to approve the 8-day extension?

Soon.

Soon? Okay.

Yes. We -- I wish I could give you a better date, but we think it should be soon. I think all the parties want to know, because if it's not going to get approved, everybody's got a lot of work to do, so we would hope to hear soon.

What's in the -- I didn't read the entire IRP filing or the, like, draft. What is your assumption for load growth in the IRP filing?

Well, Anthony, first I got to say, I'm so disappointed that you haven't read all 260 pages.

I printed it out, though, if that matters.

He's working on it. So the load growth assumption is very consistent. The same thing we have in our rate case that we filed that's pending now. So nothing's changed in that regard.

And Anthony, in the IRP, there's a wide variety of assumptions around gas prices, load growth, carbon prices, a whole bunch of things, because we test the scenarios -- or we test the plans against the different scenarios. And pretty much in every case, the shutting down of San Juan and the exiting Four Corners is what's called for.

Yes, and just add to that comment, Anthony. I think you'd have to have load growth through 2022, about 15% or so, and then you'd have to have about 3% average after 2022 in order -- and also gas prices of $7 to $8 really to support the San Juan unit station for continued servicing the load.

Okay. And lastly, I guess, from Ali's question and from your comments at the end, you kind of have us looking at this as a multiyear filing or look at '19, you're going to give guidance for a longer time. My question is, how much -- in your Slide 13, your earnings potential on '18, how much rate relief is baked into that number then? In the $2.02 to $2.10.

I'd (inaudible) the rate-based math on the allowed return that we have in the business. So as you know, the calculation, ROE times the rate base, 50%, that gives you the calculation of the earnings potential. So we don't bake any assumptions in that slide. Now when we actually -- if we do have a settlement, we'll go back and update the slide and show you the adjustments that were agreed to in the settlement that reflect what the adjustment would be for a phased-in approach in 2018, transitioning to the earnings potential in 2019. So we would update that information for you based on the simple math of what actually occurs in the -- if the settlement is reached. Also, let me comment on the settlement, too, that the limited time includes time for the respective parties in the settlement, if it were pursued, to get approval from their appropriate boards. So that -- the 8 days extension is including additional time for those that have that need to get approvals.

But what -- from your comments, though, if I take your comments as looking at a 2-year deal and a more phased-in approach, would I be wrong to look at the midpoint in 2017 for total PNM of $1.33 and slide that over to the 2018 column because it looks like that, a phased-in approach, it's more going to be a '19 story? You understand what I want to do?

Yes, I think we just -- the best thing to do is to wait and see if we have settlement and then let us do the update at that point. Because any discussions at this stage would really be speculative in trying to make some assumptions that I don't think are appropriate until we really know what the real math is on the -- if there's a settlement.

And just -- like are you able to state if the settlement is comprehensive or there's the ability to maybe settle some issues and maybe punt some down the field for a later time? Or do you believe the settlement will address all of the things that were filed on back, I guess, December?

Anthony, you're so good about asking questions. I wish we could answer those questions, but there's just so many parties involved and so many different issues and positions that were regarded in discussions on the settlement that I think we just need to leave it and let this thing play out as it may, and then we'll be cleared on what the information is for you to understand, okay?

Our next question comes from John Barta with KeyBanc.

And I just want to clarify. So in -- this June is when the Supreme Court's going to rule on the potential $0.09?

No. This June is when the briefings are all done, and then they -- then there may or may not be oral arguments. They can request them, and we can request them. They usually do grant them, but there is no statutory time frame for them to rule. It's just the briefing schedule is done by June.

Okay. And then, I guess, looking at -- with the San Juan closing, is the probably next best capacity resource just a peaker then? I'm trying to think back a couple calls. I think you went over this.

It's -- if you look at the IRP, it'll show you it's a mix of generation. Most likely solar, some gas, possibly some wind. The issue on wind becomes transmission constraints. So it will -- it's sort of TBD. It won't be coal. And possibly some battery storage. So we'll have to put up some RFPs to get some good pricing once we come up with the San Juan -- the final San Juan plan, but it will be a mix of stuff.

This concludes our question-and-answer session. I would like to turn the conference back over to Pat Vincent-Collawn for closing comments.

Thank you. And thank you all for joining us this morning. I hope you have a wonderful weekend, and please stay safe.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.