TXNM Energy Inc (TXNM) 2017 Q2 法說會逐字稿

Good day, and welcome to the PNM Resources Second 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, queen of the universe. Please go ahead.

Thank you, Andrew, and thank you, everyone, for joining us this morning for the PNM Resources Second 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 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 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. Thank you for joining us today on this Friday of Shark Week. We'll begin on Slide 4 with the financial results and some key company highlights. Earnings for the second quarter of 2017 were $0.47 on a GAAP basis and $0.49 on an ongoing basis. Both of these numbers are increases over the $0.34 reported on a GAAP basis and the $0.40 on an ongoing basis in the second quarter of 2016. We continue to affirm our previously announced 2017 consolidated ongoing earnings guidance of $1.77 to $1.87.

I'll get into the details of our regulatory agenda on the next slide, but first I want to report that Moody's updated the outlook for both PNM and PNM Resources to positive in June. In the report, they noted strong financial metrics for our current ratings that helped to offset what they call a challenging regulatory environment. As we've demonstrated in the past, we will continue to focus our regulatory filings to achieve results that are balanced between customers and shareholders.

Now moving on to Slide 5. I'll discuss the updates on PNM's rate case, Integrated Resource Plan and other regulatory filings. I reported on last quarter's call that we had reached an agreement on the parameters of a settlement with many of the parties on our PNM general rate case. We filed that settlement agreement in early May, but the hearing examiners took issue with some aspects of the settlement, so we worked closely with the other parties and came back later in May with a revised agreement that resolved these concerns while maintaining much of the original agreement, including the overall revenue requirements and ROE. We're particularly pleased that all of the signatories to the original settlement remain part of the revised settlement, demonstrating each of the parties’ commitment to finding common ground on issues that impact all of our customers. Along with the filings, the parties filed for an extension to the suspension period through December to allow sufficient time for commission review of the agreement. The suspension period on the case was told for 2 months, moving the current end date to January 16 -- January 6 and maintaining the option for an additional 2 months extension. The hearing examiners issued a new procedural schedule that called for the completion of testimony this past month and hearings beginning August 7. After hearings, we would expect a recommended decision sometime in the early fourth quarter and then it would be up to the commission to prepare and issue a final order.

We also filed PNM's 2017 Integrated Resource Plan with the commission on July 3. The filing was consistent with the draft published in April, which we discussed on last quarter's call. The most cost-effective resource portfolio presented in the 20-year plan shows a coal-free generation portfolio with the full closure of the San Juan Generating Station after the current coal supply and participation agreement expire in 2022, and an exit from participation in the Four Corners generating station when its current coal supply agreement expires in 2031.

Keep in mind that the IRP process does not involve a commission's approval of the plan. The commission accepts or rejects the filing. However, any additions or retirements of retail generation resources would require commission approval through a separate filing. Following the submission of the plan, there is a 30-day period ending on August 2, during which time protests can be filed. If the commission takes no action within 45 days of the IRP, the IRP is deemed accepted as being compliant with the rule. In the event there are protests, the commission will consider those protests and decide whether to hold a hearing on the plan. Keep in mind that any final decision on San Juan's future will require commission review and approval. As part of our BART settlement approved in December of 2015, PNM is required to make a filing with the commission on the San Juan Generating Station by the end of 2018 to determine its future.

In our proceeding to implement smart meters in New Mexico, additional time was granted in the case to make a supplemental filing with updated installation costs and other benefits. That supplemental testimony is due September 1, and the hearings are scheduled for October 25 and 26 of this year.

On June 1, we filed our annual PNM renewable plan to identify any new resources and true-up the rate rider for our current asset values. This year's filing identified resources that are required to meet New Mexico's 20% by 2020 Renewable Portfolio Standard. PNM requested approval to build 50 megawatts of solar facilities on 5 sites that would be completed in 2018. The selected contractor is a local company [affordable solar]. The filing also requested approval to purchase additional wind from a repowering effort at the New Mexico Wind Energy Center where we currently have a PPA in place. Hearings on this case are scheduled to begin September 18, and we expect to have a decision on this filing during the fourth quarter. The docket opened by the New Mexico Commission with the intent to simplify and increase the transparency of commission rates cases continues to move forward. Initial comments were filed by the 4 investor utilities in the state, including PNM as well as other parties on July 10, and response comments are due today. The goal for this proceeding is to reduce the number of issues litigated in rate cases and provide a more level-playing field among parties by addressing various aspects of ratemaking policy such as a standardized ROE methodology. While there may not be broad agreement on the specific solutions proposed, the comments demonstrate support of the commission's objectives and a desire to move the docket forward. After today's responses, the next step is a public workshop, which is now scheduled for September 14. In the appeal of certain items from our August 2015 general rate case, the briefing period ended in July. The court has not yet ruled on whether it will 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 remember there is no statutory time frame.

PNM filed its annual update to its FERC transmission formula rate on June 1, reflecting an effective annual increase of $8.5 million. This is an informational filing and does not require any action from FERC with rates effective on the June 1 filing date.

Now switching to TNMP. Our second TCOS filing of the year was made in July for an amount of $4.7 million increase to annual revenues. We expect rates from this filing to be implemented in September. And finally, we're are still on track to file our TNMP's general rate case in May 2018 with the 2017 calendar test year period. We expect rates to be effective during January 2019.

Remember that once we file the general rate case, we are not able to make any additional TCOS filings until the general rate case is resolved. So we'll not have our typical 2 filings in 2018.

And with that, I'd like to turn it over to our favorite shark, Chuck Eldred, for a detailed look at the numbers.

Your favorite shark? Okay. I got no choice, but to jump in the tank. So -- but, thank you, Pat, and good morning, everyone. Let's begin our discussion with Slide 7. We had a good quarter with ongoing earnings per share of $0.49 compared to $0.40. PNM was up $0.10, TNMP was up $0.02, and corporate and other was down $0.03 compared to second quarter 2016.

On Slide 8, let's review the low details for the second quarter. On a year-to-date basis, we're tracking to the middle of PNM's guidance range. Overall, we continue to see the economic conditions in Albuquerque stabilizing and even improving in certain areas, evidenced by continuing upticks in the number of residential housing sales and prices. We also continue to see some of the previously announced economic development wins continue their hiring and other customers expanding their current operations. This leads us to believe that we still are staying within our guidance range for 2017. TNMP continues to perform very well because of the strength in the Texas economy. In fact, they hit an all-time system peak of 1,683 megawatts last Thursday. As a result, load is tracking toward the upper end of the guidance range for 2017. The relocation of various national and global corporate headquarters to the Dallas-Fort Worth area not only results in commercial growth, but also residential and small business growth in the surrounding communities that are within our service territory. Earlier this month, CNBC identified Texas as the "Top of the Tops" economy for 2017, as businesses continue to migrate to and expand in the state.

Additionally, the number of new transmission and interconnection requests in our service territory, particularly in West Texas, has been increasing over the past several years. This demonstrates that customers are willing to commit sizable dollars to support the expansion of their oil and gas producing and processing businesses. TNMP has also been rebuilding portions of its transmission system and upgrading the voltage on some of the existing facilities to support the increased demand in West Texas. This growth doesn't seem to be slowing down anytime soon.

Now turn to Slide 9 for our earnings drivers. At PNM, $0.09 of the increase is related to the impact of the rate relief that was implemented in October 1 of last year. We continue to expect the full year-over-year increase in 2017 to be $0.26. Higher revenues under transmission formula rates updated in June of each year and a new third party transmission contract increased earnings by $0.02. Outage cost were an improvement of $0.02 compared to Q2 of 2016 due to the higher outage costs at Unit 4 of the Four Corners generating station last year.

As I mentioned in the first quarter, we'll see some offset to these costs in the second half of the year when Four Corners Unit 5 comes down for its major outage, bringing us back to our annual guidance of $0.01 to $0.02 decrease in outage expense. The cost savings that we've implemented last year to align our business with the revenue we recovered in our last general rate case contribute $0.02 reduction in expenses compared to the second quarter of last year. If you look further down the list, to the item called O&M expenses -- increases, you can see the impact of labor escalations and another general expenses going up. This results in a reduction of earnings of $0.02. The combination of these 2 items demonstrates our continued progress in controlling costs and keeping O&M relatively flat. AFUDC in the hedged market price for Palo Verde Unit 3 sales increased earnings by $0.01.

The combination of depreciation and property tax expense increased $0.02 due to the continued investments in our system. In the second quarter 2016, we had interest income from the IRS of $0.02 that is expected to not repeat this year. The Navopache FERC generation contract was also $0.01 lower than Q2 of 2016 as expected.

And moving to TNMP. EPS was $0.01 higher as a result of the increases in load that I discussed earlier, and rate loading from TCOS filings added another $0.01. Depreciation and property tax expense reduced earnings by $0.01 as a result of the continued transmission and distribution investments supporting the growing load in our service territory. Finally at Corporate and Other, income from the Westmoreland loan agreement is $0.01 lower in the second quarter compared to last year. As we discussed in the second quarter earnings call last year, the 2016 results included additional income related to the recognition of loan origination fees under the agreement that did not repeat this year. We've also had $0.01 of additional interest expense this year at the holding company related to rising short-term interest rates and higher debt levels. We have entered into hedging agreements this year that fixed the interest rate for a portion of our floating-rate debt, limiting the future exposure to rising rates.

Now turning to Slide 11. As Pat indicated at the start of the call, we're affirming our 2017 guidance. We've had a strong start to 2017 and both utilities are doing well. For Corporate and Other, guidance included an assumption that the income tax expense reductions related to stock compensation accounting changes would remain at the holding company. The benefit was actually recorded at the utilities primarily in the first quarter. This along with rising short-term interest rates cause us to expect Corporate to be lower than the current guidance range. PNM has also had the upside of stock compensation income tax benefit as well as solid performance in the Nuclear Decommissioning Trust due to the strong stock market. These items, as well as some stabilization in load, have enabled PNM to perform well in the first half of the year. TNMP is also performing very well. And if the trend continues, we'll likely be at the upper end of their guidance range. As we look forward to the second half of the year, we look to provide an update to guidance during the third quarter earnings call, since that is our biggest quarter of the year. Understanding both load and weather for that time period will give us a good indication of how 2017 will look. However, as you may have gathered from my comments today, we currently expect that 2017 in total will be the inside of our guidance range but closer to the upper end rather than the midpoint.

Before I wrap up today, I want to note that our capital plan including the appendix is largely unchanged from the recent presentations. We're working on the plan for the replacement power resources for San Juan that are described in the IRP. This is intended to be a mix of natural gas peakers, renewables and possibly energy storage. For PNM we'll ultimately need to have commission approval both to exit San Juan and to build any replacement power. We're also identifying additional capital support to growth in Texas. We expect to provide updated information on our capital forecast at our third quarter earnings call ahead of our December issuance of 2018 and '19 earnings guidance.

Thank you for your time this morning and I will turn it over to Pat, who has agreed to join me in the shark tank, but we need some more bait for that.

Thanks Chuck. And no, we are not dressed as sharks here, just in case anybody is wondering. As you can see, we continue have a full agenda in front of us for the remainder of the year, particularly on the regulatory front. We will continue to work hard to deliver results in line with our financial and strategic objectives. You know, this is a special year at PNM. We're celebrating our 100th year of service this quarter and TNM is not too far behind, at 82 years old. We look forward to bringing in a new century of service to serve our customers in both Mexico and Texas. Again, thank you for joining us today. Operator, let's open it up for questions.

(Operator Instructions) The first question comes from Ali Agha of SunTrust.

Chuck, first question. I wanted to pick up on your comments and you indicated your trending was the high end. Even at the high end of the range, the math would imply that your second half earnings this year would be down from last year. Is there any logical reason for that to happen? How should we be thinking about that?

Well I think there is another major outage at Four Corners, so that's probably driving some of the second half of the year comparison. So I would take that a consideration. And I would add any other chance to look at the details, I would just say that's probably the more significant driver.

But you would still indicate keeping within the range? I mean, is there a scenario that you actually exceed that?

Yes, as I mentioned, we're actually improving on the load as the guidance was [0.7%] in the 0 to negative 1, we're actually seeing 0.5%. So that strength in itself is giving us some confidence that we can continue if we have a good -- continue to have even a hot summer as we've seen hotter days in the month of June and early July that we would certainly be moving towards the higher end of the range. And we see the same kind of outlook towards TNMP and the growth in the weather has certainly been some factors to that.

Yes. Second question, once this rate case is done and you get the full benefit of that in calendar 2019. As you're looking at your earnings profile longer-term beyond '19, I mean, are you able to sustain that kind of growth rate? Or were there some unique circumstances that helped you between the moving of Palo Verde into rate base, et cetera, that probably don't replicate? I mean, how should we be thinking about the growth rate post '19 ?

We'll talk about that during guidance. But as you can imagine, the growth is going to be driven by the replacement power for San Juan, should the commission continue to -- if we continue to go down the path of abandoning that asset. And also as you've [curtailed] from my comments, we're seeing a lot of organic growth within the TNMP and Texas. And so we begin to see the opportunity to allocate more capital to Texas and serving that additional load growth. So I think those are some of the considerations to think about. It's a little bit too early yet for us to put out the capital projection and some of the thinking beyond 2019. But certainly, we're seeing some drivers of the business that are not -- that are related to opportunities to sustain some reasonable growth in the business and it's just too early to say what that number is.

And last question. Pat to you, we continue see extremely high, lofty valuations on the [unity] M&A front. I guess, the Canadian folks have a lot of capital to spend here. I know you've said in the past consistently, "Hey you know somebody comes, obviously, we'll do the best thing for shareholders." But as you look at the market and you keep looking at these kind of valuations, does that cause you to think about being more proactive in looking out and seeing if there are opportunities to get huge premium multiples like we're seeing in the industry?

Our focus remains on the plan and our continued ability to execute on that plan. And certainly, as we begin to recognize that consolidation in the industry doesn't appear to be changing any, regardless of whether it be some delay with tax reform or the Canadian companies continue to pursue things. So we'll continue focus on the plan and we'll always try to find ways to create value for our shareholders in doing the right thing in regards to any M&A activity.

The next question comes from Insoo Kim of RBC Capital Markets.

First question, I don't know if I missed this earlier, but regarding PNM low growth, it seems like the decline year-over-year into the second quarter was definitely less than the yearly forecast than for the year, we're kind of in that midpoint. Are you seeing anecdotally or just business-wise things happening that may give you more confidence in that figure going forward?

We're seeing small wins in New Mexico that give us some confidence, it's just a very slow recovery of the economic conditions and the load growth. So it's nothing to the extent of seeing significant upticks in the load growth. But certainly, our view is more trying to look for stabilization in that load growth and not a continued significant decline as we've seen in the last few years. So at this point, we're encouraged by the fact that we're doing better than we anticipated. Certainly, with Facebook's load increasing, the load on the system that may have given appearance. That load will continue to increase. But as we know the economics in the way we treat that Facebook is slightly different. But we're beginning to look for stabilizing the load expectations going forward.

Understood. And just one other question from me. Regarding the '18 filing of the future of San Juan. What's the time line after you file for a decision? And as the decision is for an ultimate retirement in 2022, what is the time line process for getting ready for that replacement capacity with peakers or renewables and whatnot?

So there are couple of things that are going on since the filing of the IRP. We're certainly in an outreach effort between now and the end of the year to talk about the IRP within the communities and other community leaders that are interested in learning more about what the process is about and what the decisions are around San Juan. But the next step in any IRP is to begin to look at the replacement power. So we'll look to begin to put out RFPs around September time frame and begin to evaluate those certainly early next year, looking to select potential bids in the February to April time frame next year. And as you know, we have to file with the commission sometime between July and December of 2018 our plans for any abandonment of the asset itself. So we're working to identify what the replacement resources would be, what the actual cost would be and what the right mix would be and then work towards the final abandonment filing with the commission and looking for a decision certainly sometime in 2019.

And then the CapEx related to that potential replacement capacity would be, let's say, second half of '19 and into '20, '21 time frame, I guess, more back-end loaded to the beginning of '20, '21.

You got to keep in mind, you still have inventory of that coal supply that kind of pushes the closure into the mid-part of 2023. So you get some additional months involved with after the plant is shutdown in 2022, it allows for some continued operation, and then we would look to begin to -- we have 2-year time frame for permitting and actual construction of any replacement power off of that mid-2023 date.

(Operator Instructions) The next question comes from Lasan Johong of Auvila Research Consulting.

So have you guys done any studies on the cost effect to your retail customers shutting down San Juan and Four Corners. And how much of a consideration will this be going forward -- how contentious do you think it will be going forward?

Yes. In the IRP itself and Jimmie can send you some summary information in the IRP that kind of helps capture the message. But we factor in all the costs of abandonment, retirement, decommissioning, return up and return on, to make the decision to whether we continue operation or we have a shutdown. And so the economics are really driven by the load environment within New Mexico as we've seen in the past a significant degradation, and as my earlier comments, just a very slight, maybe working towards a stabilized flat type of load going forward. But the load growth along with lower gas prices, the economics of that plant just don't continue to justify its operations. So we can provide you more detail and sensitivity around that information, Lasan, to give you better understanding of it, but that's really what's driving it, is the conditions around low gas prices and the fact that load doesn't continue to significantly increase, which is what it will have to do into Mexico to justify the operation of that baseload plan between now and 2022 and then even beyond that, it would be a significant increase in load to justify it. So that's what driving the decision and certainly, we'll work towards working with the commission on that abandonment process and then also how we feel it would be most affordable and reasonable for the replacement power.

Lasan, our IRP rules require that we pick the least cost portfolio, so the portfolio we pick is the least cost to customers.

Excellent. I'm kind of curious since San Juan was your baseload generation and you're looking to replace it with peakers and renewables. Can I assume that the renewable in both wind and the solar are kind of designed to act as a baseload generation plan and the peakers are going to be selling in the gas and covering for the volatility or the consistency in the delivery of the renewable. Is that how you guys starting to think about it?

Lasan, you've explained it well. It's the balancing of the system and the fact that as you add more renewables, including the renewables we'll be putting online for Facebook, that continued energy output from both wind and solar requires that we have peaking units to fill the gaps that would balance the system, and provide more reliability for our system as we go forward and transform out of the need for the baseload generation to a more flexible and reliable generation source.

Got it, got it, excellent. [Your 2018 adjusting, you've got] the suspension period in January 6 and you've got potentially 2 months extension option that I think is in March 8. Can I still assume that the effective date will be January 1, 2018 when the decision is handed down?

That's -- the litigation period really would end to that January 6 and that was the original expectation when we filed the case. It did take a little bit longer for us to work through settlement and the commission, I think, in their own efforts to caution and give themselves adequate time to have proceedings and make the right decision felt the request for additional 60 days was appropriate, given the fact that stipulation was a little bit longer than anticipated. So it's too early to tell when the hearing examiner makes a recommendation, we'd like to think that they make it in early October, and there would be sufficient time for the commission to render decision before the end of the year. But to be cautious, certainly, they have every right and authority with what we've granted with the extension to wait till March 6 for a final decision. So we'll just have to let the process roll out and see what happens.

But I'm assuming that, that final decision will be retroactive to January 1, correct?

No, actually it doesn't. It goes in effect at the date in which the order is rendered, then we go ahead and implement that rate. So there is no retroactive. And then you could see that we talked clearly that 2018 is a transition year for us, and we have a phased-in on this stipulation which reflects that, obviously, '18's earnings potential is was going to be lower than what we had anticipate year-over-year, but that's because of the phase-in and potential consequences of a delay in the rate case. And our focus continues and has been on 2019 to reflect the full year earnings and valuation in the business.

Understood. Last question to me on the rule making on [utility rate-making] policies. Is that going to cover the time of use and simplification of the rate structure issues?

No. It's more around policies in rate case in terms of standardized methodology for ROEs, regulatory assets, those kind of things. It really -- it doesn't go into rate design.

Part of the reason why (inaudible) examiner rejected the original 2018 rate case was because there was some rate design issues in there. And I was under the impression that was going to be handled through a separate docket. Am I misunderstanding something here?

The rate design issues for 2018 rate case were more just a couple of class-specific issues, and we've handled those and then there is also the fixed charge issue. But -- and we continued to try to work through decoupling. But right now, there is really no set docket for rate design. The commission is pretty busy.

And we're going to drive the LCFC, some of the other components that were in contention with the settlement parties. So that if we do come to some agreement, we would file that in the next rate case, which we haven't announced at this point.

In the next rate case. Okay.

It would have to really have fall into next rate case that we -- if we came into an agreement of some rate design relative to the LCFC component of the rate design to include that in the next rate case filed.

The next question comes from John Barta of KeyBanc.

I just want a follow-up, Chuck, and just to be clear, So to date, you will be in upper half of guidance this year, but with good weather, you could hit the high end?

Yes, that's that. We're still within guidance as the expectation for the year and given where we've had a good performance for the 6 months, we'll see how the summer months go, but we feel like we're moving in the direction of the upper end of that guidance range.

This concludes our question-and-answer session. I would like to turn the conference back over to Pat Vincent-Collawn, Chairman, President and Chief Executive Officer, for any closing remarks.

Again, thank you all for joining us this morning. I hope you all enjoy the rest of the summer, and we look forward to seeing all of you throughout the year. Thanks, again.

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