PNM Resources, Inc.
Q3 2016 Earnings Call Transcript
Published:
- Operator:
- Good morning and welcome to the PNM Resources Third Quarter Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [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.
- Jimmie Blotter:
- Thank you, Danielle. And thank everyone for joining us this morning for the PNM Resources third quarter 2016 earnings conference call. Please note there is a presentation for this conference call and other supporting documents are available on our Web site 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 know 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.
- Pat Vincent-Collawn:
- Thank you, Jimmy. Good morning everyone. Happy three days before Halloween. Thank you all for joining us this morning to discuss the company's third quarter results. We will begin on Slide 4. Third quarter earnings per diluted share were $0.68 on a GAAP basis including write-downs associated with the final rate case order at PNM. Ongoing earnings per diluted share were $0.78 for the third quarter of 2016 up slightly from $0.76 in the third quarter of 2015. We continue to affirm our 2016 consolidated ongoing earnings guidance of $1.55 to $1.65. After 30 months the general rate case at PNM resulted in a final order on September 28 granting a non-fuel revenue increase of $61.2 million. While the order represents an improvement over the hearing examiners recommended decision in the case it only represents about half of our 121.5 million requests and does not provide full recovery of all of the investments we have made in our system. On September 30, we filed a notice of appeal with the New Mexico Supreme Court and this past Wednesday we filed our statement of issues outlining how we believe the commission misapplied the law and facts with regard to our investments in Palo Verde and the Pollution Control Technology at the San Juan generating station. While some recovery is approved in the rate increase for the 64 MW of Palo Verde unit two purchase capacity and the half-price extended lease payments both the purchase and extensions were deemed imprudent in the final order. This determination on prudence was used to disallow the fair market value price and limit recovery to know more than the estimated net book value of the 64 MW to disallow the undepreciated value of past resold improvements associated with the 64 MW and shift the future responsibility for Palo Verde decommissioning cost away from the customer's and on to shareholders. We do not believe that these determinations are consistent with either the law or the facts. Outside of Palo Verde, mission determined that because PNM proposed the balanced draft conversion to the New Mexico environment Department as part of the air permitting process for San Juan, PNM was responsible for this permit condition. The commission rejected the air permit condition as a justification of the cost of the balance draft and held that PNM was imprudent in proposing this condition. As a result, the commission disallowed the investment. We clearly believe that this determination is also inconsistent with the law and the facts and failed to recognize properly the New Mexico environment Department's authority over air quality compliance issues in the state. After the commission filed the case record, the New Mexico Supreme Court will set the calendar for the rest of the process. There is no required timeframe for the court to act on the appeal although utility appeals do have priority under New Mexico law. For purposes of writing down the value of the assets under appeal, we have estimated a minimum of 15 months based on the timetable of other utility cases in the past. The timing of this schedule will not affect our plan to file our next rate case using a 2018 future test year. We will file that case in December of this year. Return to economic development for a minute, we continue to see promising results from our state's economic development efforts. As you are aware Facebook selected New Mexico for its data center and the groundbreaking ceremony for their facility was held earlier this month. While this is not a significant earnings driver for us, it is a major win for New Mexico. It supports our ability to attract major companies. Since this announcement, we have seen increased interest from other companies. The New Mexico partnership which is the state official business recruiting organization was instrumental in recruiting Facebook to New Mexico. I am honored to chair this organization and I am pleased with the group’s accomplishments, but we still have a lot to do. We continue to work with various organizations to bring new businesses to the state and help existing businesses expands. Site selectors are commenting on a noticeable improvement in the business friendliness of New Mexico. Remember though, relocation and expansion of companies has a long sales cycle. As for existing businesses, we're seeing sector growth in the areas of education, healthcare services and professional services. New Mexico's nominal personal income is growing, housing prices are increasing and home inventory is decreasing. We have all of the leading indicators for residential and commercial growth. It will take some time to see the results reflected in our sales, but we're moving in the right direction. I will go ahead and turn the call over to Chuck to talk about the financial details of the quarter.
- Chuck Eldred:
- Thank you, Pat and good morning everyone. Beginning on Slide number 6, we're beginning to see slight traction in the economic developments efforts that Pat talked about. PNM’s residential weather normalized load was up 0.2% for the quarter and commercial continues to show strength with an increase of 1.8%. The strength in this segment is spread across various sectors and represents small business growth in our service territory particularly the Albuquerque Metro area. This sector is responsible for the employment growth in Albuquerque, which was 1.2% on a rolling 12-month average. Industrial, however, was down 12.1% compared to third quarter 2015 and down 8.9% year-to-date. This brings total weather normalized load at PNM down 0.4% compared to the third quarter of 2015 and down 0.6% year-to-date, which is in line with our guidance for the year of flat to down 2%. We continue to experience customer growth at 0.7%. TNMP continues to perform well. The volumetric load was up 3.7% in third quarter this year compared to last year it is up 3% on a year-to-date basis. This is at the upper end of our guidance range of 2% to 3% growth for 2016. Demand-based load also continues to show strength at 4.2% for the third quarter and 2.9% on a year-to-date basis. We continue to see growth in TNMP service territory driven by employment growth in the diverse Houston and Dallas economies and the continued customer growth in the Permian Basin and West Texas. For example in TNMP South Houston area end user growth year-over-year has been 2.5% year-to-date, in North Texas 1.6% year-to-date and in West Texas 1.9% year-to-date. Other areas of our service territory continue to see end user growth around 1%, which brings the total growth to 1.5% compared to the forecast of 1% growth Now, moving to Slide 9. We had ongoing earnings of $0.78 for the third quarter of 2016 compared to $0.76 in the third quarter 2015. PNM was flat, TNMP was up $0.01 and corporate and other was also up $0.01 which represents a net interest income on the loan with Westmoreland that was entered into earlier this year. Now turning to Slide 8 to review the earning drivers. At PNM you are aware that our rate case filing was vote delayed and the final order did not include full recovery of our prudently invested capital. As a result we have been managing our business cautiously, implementing cost savings since June. This contributed to have $0.04 reduction in O&M cost compared to the third quarter of last year; it was part of the narrowed guidance range we provided last quarter. As expected the elimination of the Palo Verde unit two lease cost represents an increase of $0.03 although load overall was down during the third quarter, the increase in residential and commercial segments to pay higher prices in industrial have caused the earnings to increase by $0.02 compared to third quarter of 2015. Looking forward to Q4, I expect the load will remain in the forecasted range likely coming in flat to down 1% for the year. Given that fourth quarter is a seasonably weaker quarter, I would not expect to see an earnings pickup for the load in the quarter. Given the October 1 implementation of new rates under the final order of the rate case, some higher revenue was recorded in September as the new rates are applied to any September usage that was built in October under our normal billing cycles. This increase results by $0.01. FEDC continues to be a reduction. As expected due to a lower construction balances after last year's peak spending levels and reduced earnings by $0.04. We also had higher depreciation in property tax expense of $0.02 due to the increase plant balances. Palo Verde unit three sales were hedged for 2016 at a lower market price than 2015, which caused results to be $0.02 lower and interest expense also reduced earnings by $0.01 primarily because the additional long-term debt that PNM entered into August of 2015. The Navopache FERC generation contract was $0.01 lower than Q3 of 2015. Moving to TNMP, the increases in load that I discussed earlier added $0.01 compared to the third quarter of 2015. Rate relief from [P-cost] [ph] filings added another $0.01. These increases were partially offset by higher depreciation expense and property tax on the increased plant investments that support this growing load. Now, moving to Slide 9, I will review our capital update. Today, we're providing both an update to our capital forecast into our potential earnings power slides. Overall, we have added $184 million to the forecasted spending at PNM, TNMP and corporate. These changes at the companies’ represent a net increase to PNM at $42 million, $90 million at TNMP and $52 million at corporate. Specifically I want to point out the change in PNM's generation, which includes the modification to the plant 80 MW peaker. The rationale for this decision is coming out the analysis being done for the integrated resources plan which is due by July 3, 2017. We're still early in the process, but one of the initial elements we are analyzing is the demand forecast. While our system continues to be peak year that it has been historically we're finding the highest points are not as high as we had been previously forecasted. As a result of this, we have decided to file a motion to withdraw the [CCN] [ph] application for the 80 MW peaker later today. We believe that it is appropriate to change our capital forecast from 80 MW peaker to a 40 MW peaker that is operational in 2020. As a reminder part of the BART agreement that was finalized in December last year is that we are required to file in 2018 to determine the extent to which San Juan should continue to serving PNM’s retail customers after June 30, 2022. To facilitate the 2018 filing, we plan to develop two resource portfolios in our 2017 IRP. One with San Juan continued beyond 2022 and one where it shuts down. Consequently the IRP which includes the public input process will be a valuable guiding document as we look at our total generation mix in the years to come. Also at PNM, we have committed additional spending to TNMP. This additional spending enhances the transmission system to serve the additional renewable projects that are expected to come online in New Mexico. The 30 MW is a solar we built for Facebook is included in the corporate and other category. Together these changes result in rate base compound annual growth for 2015, 4% to 6% for PNM and 8% to 10% for TNMP. Now, moving to Slide 10. We have updated the potential earnings power slide to reflect the outcome of the PNM rate case including the reduction in PNM's retail and renewable ROE from 10% to 9.575% and the new capital forecast. Corporate and other has also been updated for the Westmoreland an additional debt. As you can see, the result is, there is potential earnings power in 2017 of $1.80 to $1.87. The rate base for 2017 has been reduced for the Palo Verde unit two and balanced draft disallowances, which are being appeal to the New Mexico Supreme Court. In 2019, we have shown the full range of outcomes from the Supreme Court appeal. The result in earnings power in 2019 is 205 to 223. Let me point out that in 2018, we have presented the earnings power assuming that we will not realize any earnings related to the rate base items that are under appeal. We expect that those items will be ruled on sometime during 2018 and so there may be some upside depending on the timing of when the Supreme Court's decision and any resulting commission actions occur. Now, moving to Slide 11. We have reflected the rate case results particularly the lower ROE in our five-year earnings growth goal that began in 2014. As you can see we expect to achieve 7% to 8% earnings growth through 2019. Also I want to remind you that board will review the dividend in December. We continue to expect above average industry dividend growth there likely will be an increase similar to last year. Overall, we continue to be on track with our preparations for the next rate case, which we expect to file in early December. Keep in mind that this rate case includes recovery for the shutdown of San Juan units two and three in addition to Palo Verde unit three to rate base that was part of the BART settlement. We will discuss the rate case as well as the 2017 guidance during our Analyst Day in New York City on December 14. Again, we appreciate the continued support of our company and with that I will turn it back over to Pat.
- Pat Vincent-Collawn:
- Thanks Chuck. Before I conclude the call today, I would like to draw your attention to the new sustainability portal that we have added to pnmresources.com. We operate PNM Resources in an ethical open and transparent manner and have created the sustainability portal to give our stakeholders information about these activities. The information provided here will be updated on a regular basis and is categorized by environmental, economic, social and governance information. I strongly encourage you to visit the site and learn about all of the great work that we do at PNM Resources to ensure that we are providing for a sustainable future. As we wrap up the call today, we certainly continue to have a full plate of regulatory activities in New Mexico between the Supreme Court appeal; the integrated resource plan process; and our upcoming general rate case filing. It’s a testament to both the ability and the dedication of our employees as we move straight into these items from a lengthy rate case proceeding and it’s also a testament to the hundreds of employees that continue to provide reliable electricity and excellent customer service to our customers in both New Mexico and Texas. PNM set another all-time high for overall customer satisfaction in the latest JD Power residential customer satisfaction survey. It is encouraging to see that our focus in this area has not gone unnoticed by our customers. And our crews in Texas, with [indiscernible] in October traveling to aid in hurricane Matthew restoration efforts, I would like to thank them for doing such great work with no injuries. This type of work is a true reflection of our company and our industries value. Thank you, again, for joining us today. Operator let's now open it up for questions.
- Operator:
- [Operator Instructions] The first question comes from Insoo Kim of RBC Capital Markets. Please go ahead.
- Insoo Kim:
- Good morning, guys.
- Pat Vincent-Collawn:
- Good morning, Kim.
- Chuck Eldred:
- Good morning.
- Insoo Kim:
- Just regarding the plan to withdraw the middle peaker CCN proposal. I guess, in your analysis, has the future potential build-out of renewables and the potential need for backup generation also been accounted on this decision?
- Chuck Eldred:
- Insoo the decision is really primarily driven at this point where the demand forecast being slightly under what we projected and the other factors that go into this is cost and the actual reliability of the system, which is important when you are beginning to add renewables in the system of making sure that we can maintain that reliability with more renewables to the system. So, in our analysis that are preliminary at this point, we felt it was prudent to recognize that the demand forecast is falling slightly off or we originally projected, basically this means the peaking is continue to grow, but not at the pace that we anticipated so we need about 20 MW in those years that we thought we would need to have the additional peaking capacity and we can do that from just purchases in the market and then we see the growth in that peaking going into 2019 and 2020, and of course, if there is additional data centers or other components that could be considered at some point in time that could certainly accelerate that. But, at this point we think it is better to be conservative relative to where we are today, what we see in the forecast and the fact that we think we can solve less than 40 megawatts of peaking capacity through purchases in the market. So we just push that capital into 2019 to 2020 at 40 MW peaker.
- Pat Vincent-Collawn:
- Remember Insoo the next jump in that renewal portfolio comes in 2020, when we go up to 20% by 2020 so that is when we have that need and as Chuck said if we get some more data centers we can obviously accelerate that peaker.
- Insoo Kim:
- Understood. I do not know if I missed this earlier, but what are some of the items that when into the additional CapEx -- PNM as well as TNMP.
- Chuck Eldred:
- Yes. There's a number, TNMP certainly we continue to invest in the transition component of the business but also we are seeing growth in the distribution side. So we're just seeing opportunities given the growth that we can continue to invest more to allocate capital to meet that continued above average growth. In New Mexico, we continue to see some opportunities really on the transmission side as we begin to see more renewables being built in our service territory around in the territory in New Mexico and also in the distribution side and mainly in substations and reliability aspects of our system. So, we have had pipeline projects in anticipation of what would be an update when the time came to reallocate the capital to both businesses and we have just completed that analysis and as a result of that we're reflecting that of a new capital plan to be more current on what we see in the next several years to 2019 and 2020.
- Insoo Kim:
- Understood. And just lastly turning to the earnings power slide given the implementation of the future tester and a part of that was applied in the recent rate case and the full future tester that is going to be implemented in the up coming rate case. How much do think that will help in reducing regulatory lag in New Mexico and allow you to earn close to that 9.75 that is allowed level.
- Chuck Eldred:
- Yes. For 2017, obviously, didn’t get the four tester this rate increase went in October 1, so you will start to see some regulatory lag in 2017 just by additional capital investment in depreciation that gets cleared with projects that clear in 2017, but you are probably still in that 30 basis points range within the 9.575% return, so it’s still an attractive earnings expectation but you can’t get to the allowed return and given the fact that you will have some additional capital and depreciation that will be picked up in 2017. Then in 2018, would be a full for test year, we look in 2018 to begin to earn our live return based on that being a true for test year.
- Insoo Kim:
- Got it. Thank you very much.
- Pat Vincent-Collawn:
- Thank you, Insoo.
- Operator:
- The next question comes from Ali Agha of SunTrust. Please go ahead.
- Ali Agha:
- Thank you. Good morning.
- Pat Vincent-Collawn:
- Good morning, Ali.
- Chuck Eldred:
- Hi, Ali.
- Ali Agha:
- Good morning. First question, Pat or Chuck, given the experience you had going through this current rate case and the kind of pushback on issues that you would have assumed were pretty settled how does that influence your thinking as you file the next one in December, does that change much in terms of how you're thinking about that having gone through this one?
- Pat Vincent-Collawn:
- Ali, if you look at the last case in this upcoming case, they are really kind of different animals, the pushback in this current case was really around what value and was it prudent to buy Palo Verde and then the balanced draft. This next case what is going in is what’s agreed-upon in the BART settlement is the majority case obviously there's some catch-up TNMP. But in those items were already agreed on, the values have been set for those and we had everybody with a signatory to the case other than one party. So you've got an agreed-upon value for all of those and so the only discussion around those really should be around what the ROE, obviously no commission can bind a future commission but again since everybody signed onto it all of the interveners will have to support that.
- Ali Agha:
- And roughly, I know the filing comes in December, but just to give a some perspective, what kind of a rough rate increase would be embedded in this next filing?
- Pat Vincent-Collawn:
- December, December -- when the rate case comes out, we will go over that with you.
- Ali Agha:
- Okay. And then, I know I believe a couple of seats are up for election in November. What is your read on what comes out of that and does that in any way in your mind change the tone of the composition of the commission?
- Pat Vincent-Collawn:
- The two future already decided as both candidates are running unopposed. Nora Espinoza up in Santa Fe ran unopposed and so she would be the Commissioner. Cynthia Hall here in Bernalillo County beat Karen Montoya in her primary, she is running unopposed, so she will also be the Commissioner. Hard to tell where they are going to be. I think we are going to continue to have discussions and the main questions are going to be what is the future of our generation portfolio look like and as Chuck mentioned we are doing that integrated resource plan with the two separate scenarios and I think that will help sort of set the tone for the commission discussion more than anything else.
- Ali Agha:
- Okay. But you would take Commissioner Hall -- future Commissioner Hall wouldn't be much of a change from what we have been seeing so far?
- Pat Vincent-Collawn:
- Hard to tell. They are very careful when they campaign not to say anything because of the fact that it can get them taken off the cases, so it will be hard to call. Again, I think a lot of what’s going to set the tone is what the generation portfolio is going to be because if you look out what the discussion is at the commission it is all around coal and nuclear. It is not around PND.
- Ali Agha:
- Last question, looking at the overall load picture in New Mexico, are you getting any signs to suggest that we may be close to a bottom, we have been still seeing this negative year-over-year comparisons, I guess industrial was the big driver this quarter but any sign that you can point to that tells you we may have bottomed out here?
- Chuck Eldred:
- Ali as Pat pointed out there's a lot of economic development activity that is occurring and certainly some successes that we are seeing, but it still takes time for that to be reflected and incorporated into a more solid trend in our load growth. And we still see a decline on the industrial side, but since the customer growth although it being slightly above average with energy efficiency and renewables would still kind of offset any kind benefit we get from customer growth. So if you net all of that against these slight declining on the industrial side probably still feel like there is a slight trend downward. Maybe not as aggressive as much as 2% as we have seen in the last year and this year's guidance but certainly a slight negative into 2017 just to be reflective of what we see today.
- Ali Agha:
- I see. And just to clarify Chuck I think I heard you right, but did you say that given the test year issues, you think about a 30 basis point lag is probably what will happen in 2017?
- Chuck Eldred:
- I think that’s a reasonable expectation. You are going to see some lag off of the 9.575, so I think recently considering we haven't provided guidance in 2017, but I think that’s probably fair just as a perspective as how we see some regulatory lag going into 2017 around 30 basis points, probably an area to think about.
- Ali Agha:
- Got it. Thank you.
- Pat Vincent-Collawn:
- Thank you, Ali.
- Operator:
- The next question comes from Anthony Crowdell of Jefferies. Please go ahead.
- Anthony Crowdell:
- Good morning. First question I have is on the Slide 9 depreciation any chance you could break that out for us -- help us to separate this for PSNM and TNMP?
- Chuck Eldred:
- Yes. Anthony I think it would be better just to call Jimmy or I will have Jimmie call you and she will work that through with you.
- Anthony Crowdell:
- Okay. Also when I look in 2017 and 2018 , the PSNM, how much revenue each year do you get from the writers or for expanding like there should be a some rate increase in there that are not related to NMP or rate increases, what’s a reasonable estimate to assume you get each year?
- Pat Vincent-Collawn:
- Actually Anthony, if you look at Slide 10, you can see the renewable writer and you can see FERC.
- Anthony Crowdell:
- Right, but there is some lag you mentioned, there is some lag there. So, have you provided any guidance on what type of revenue you get each year?
- Chuck Eldred:
- Well, you can calculate this, but on the FERC side, we talk about 7% to 9%, roughly 8% is probably a reasonable assumption given the fact you are filing on a historical basis. And obviously, get a decline in the rate base for the renewables just the depreciation of the assets that we have. We can break it down for you that would help you, but Jimmie can do that for you and give you some detail.
- Anthony Crowdell:
- Lastly, I just want to make sure I am understanding all the peaker math. But, when I look at, so first, I think when you guys are on the road in October, or maybe September, you had mentioned the key elements of the next filing involved 80 MW gas peaker that’s lower to 40 MW, but that’s 40 MW is going to be in the next rate filing?
- Chuck Eldred:
- Actually a pick up in 2020 if we file a rate case because if we start spending that in 2019 and finish and clear that peaker in 2020, so if we file for 2020 rate case that is when it would be picked up.
- Anthony Crowdell:
- Okay. So it’s not going to be part of the filing in December and that is also the difference between the previous CapEx slide of TNM generation in 18 of 168 not a 112 that is the loss of the peaker?
- Chuck Eldred:
- Yes. For the most part, it’s -- the loss of the peaker than we would reallocate with some capital both amongst the businesses and it is a net increase in PNM, but it’s a slight amount but it still covers the fact that we have moved the capital to 2019 and 2020, we picked up a little bit for PNM in 2017 and the slight decrease in 2018 in a more significant pickup in infrastructure investment and the peaker that we will start building in 2019. So again and that's out to be overall a slight increase, and overall capital including PNM but a shifting of that capital to be more on the backend instead of the front-end that we had originally projected.
- Pat Vincent-Collawn:
- And we have been studying Anthony. We've been studying a lot of capital and generation and so the transmission and distribution folks have a lot of projects that they would like to do here in New Mexico and in Texas it continues to grow so there is opportunities for capital over there.
- Anthony Crowdell:
- If I think of its -- just last question, if I think about the bumps that have gone on in the regulatory process for some time and also now with load growth looks like it's pretty anemic. It seems like getting generation built or generation in rates in New Mexico has clearly been the biggest challenge or maybe it is just fossil and nuclear generation rates. And also just not even looking at that and with the peaker going just PPA and just looking to maybe type of utility scale, solar or something else to meet the needs?
- Pat Vincent-Collawn:
- Yes. When we look at that integrated resource plan, we will be able to look at what new sources make sense and is the utility scale solar and actually in the San Juan replacement case when you just let the models run on their own. They did pick megawatts of utility scale solar. So we will continue to look at that. We will look at PPA's where they makes sense but one of the things we found is that, we tend to operate our plants better and we know how the maintenance is done and a permitting is done. So if there is gas plants we tend to like to own them and the same with peakers. So we will look at them. But, I think Anthony, it’s mostly about coal and nuclear and if you think about and just step back from New Mexico that is where the national discussion and quite frankly the international discussion in certain countries is on coal and nuclear and I think what you see here is just a reflection of that broader conversation about what kind of generation this country should have.
- Chuck Eldred:
- And I will to add to that Anthony, when you get to that 40 MW peaker, you really need the technology for quick start and you cannot really dissolve that through PPA. So what we're indicating is that, we can use the PPA's when we are under 40 MW and balance the system but when it comes to uncertainty of that peak hitting that 40 MW requirement, we need to have the quick start capability to build the reliability in the system.
- Anthony Crowdell:
- And is it linear previously I think the 80 MW peaker was roughly 80 million is it 40 million for this peaker?
- Chuck Eldred:
- Roughly, that’s about right. Yeah.
- Anthony Crowdell:
- Great. Thanks for taking my questions.
- Chuck Eldred:
- Okay.
- Pat Vincent-Collawn:
- Welcome.
- Operator:
- The next question comes from Lasan Johong of Auvila Research Consulting. Please go ahead.
- Lasan Johong:
- Good morning. Thanks for taking my questions.
- Pat Vincent-Collawn:
- Good morning, Lasan.
- Lasan Johong:
- How are you?
- Pat Vincent-Collawn:
- Good.
- Lasan Johong:
- Okay. So, I wanted to follow up on these excellent question, I understand 2018 is mostly the BART agreement coming to place, so there's not a lot of maneuvering little more changes, but how do you -- given the final decision on the commission, is that kind of shake your confidence about spending money going forward without getting prior approval?
- Pat Vincent-Collawn:
- Not really because I think if you look at what the commission did not like it was Palo Verde and it was balanced draft. And if you look at this next case as we mentioned all but one party signed on to this agreement.
- Lasan Johong:
- But beyond this first, beyond this on the 2018 rate case, I’m talking about longer term for 2019 and 2020 and beyond. And did that kind of give you pause?
- Pat Vincent-Collawn:
- Well, if you look at generation, we always get a CCN before we would spend money on a power plant and we will continue with that or we get it approved through renewable writer. So we will continue on with that. And the T&D spending is not where there has been much pushback on, so either generation spending goes down and see if they are going to build there, if you are going to build the peaker for example, we got peaker, we will have to get a CCN before hand. So that gives you that assurance obviously what was different in this case that we have taken to the Supreme Court is that we have CCN's and that was challenged so.
- Lasan Johong:
- Agreed. Okay. So going back to the peaker situation, things change somewhat differently if you have San Juan coming back after June of 2022 or not coming back after June of 2022 or are you going to just wait until you have more stability on that before you make any decisions on additional generation.
- Pat Vincent-Collawn:
- Yes. That is the great part about this integrated resource plan process that we're going through, it’s a public participatory process and as Chuck mentioned we will run the two scenarios one with San Juan and one without San Juan. So that will give us clarity on under either scenario what our generation needs and mix looks like going forward. So, you won’t see us proposing a lot of new generation until we have that plant and because obviously our needs would be very different if the commission decides that we should shut down San Juan for example.
- Lasan Johong:
- So, if you shut down San Juan, could the 40 MW peaker turned into an 80 MW CCGT?
- Pat Vincent-Collawn:
- It’s a different scenario.
- Chuck Eldred:
- Look at this way, if you shut down San Juan you'd be shutting down 500 MW of power. And so, 500 MW is going to be a combination of baseload, peaking capacity, renewables, whatever that combination replacement power would be, it’s going to be a different set of capital investments towards a generation over the next 20 years that would accommodate the fact you are shutting that 500 MW down. So the peaker is really more reflective how the demand forecast on the system occurs over the next few years and the potential addition of renewables in the system i.e. more data centers if that would come about in order to balance the system in a cost effective way. Shutting down San Juan is a much different set of circumstances to determine the replacement power of the 500 MW, which would begin with the accommodation of a lot of different resources to meet that requirement.
- Lasan Johong:
- Chuck I understand that. But my point is, given that you already have a plan in place for your 40 megawatt, could that be upside to accommodate part of the baseload equation that you were just talking about? And then you do something else with the peaker and the renewables?
- Chuck Eldred:
- Yes. You could have a larger gas unit but again the difference in how the system needs to balance itself, the peaking capacity being more for quick start as opposed to larger intermediate gas type plants. So, it’s a combination of both and that’s what the integrator resources plan is intended to do is to take all the variables in consideration lay out the next resource requirements over 20 years making a necessary adjustments into how we look at that load requirement in the future with different generation mixes the 40 MW peaker right now would be more isolated in our view towards what the peak demand forecast would be in the system. Not so much of the replacement of San Juan.
- Lasan Johong:
- I see. Any preference which way you want to go shutting down San Juan or not shutting down San Juan?
- Pat Vincent-Collawn:
- We will let the numbers speak.
- Chuck Eldred:
- Good question. You make me want to do my trump impersonation but I won’t do that.
- Lasan Johong:
- No.
- Chuck Eldred:
- I’m getting close. Okay. I’m being held back.
- Lasan Johong:
- Thank you very much.
- Chuck Eldred:
- Okay.
- Operator:
- The next question comes from Paul Patterson of Glenrock Associates. Please go ahead.
- Paul Patterson:
- Good morning.
- Pat Vincent-Collawn:
- Good morning, Paul.
- Paul Patterson:
- Actually would like to hear the Trump impersonation, if it is okay.
- Pat Vincent-Collawn:
- Paul, the problem is, if he does that I have got a big can of hairspray here and I will aim it at him.
- Chuck Eldred:
- But, I have a sign that here this is such a nasty woman.
- Paul Patterson:
- Okay. All of my questions have been answered, but just the smart [indiscernible] thing, I know it’s been suspended, I think what’s the outlook for that? I do not think it is in your plan but is that just off the table for now or how should we think about that?
- Pat Vincent-Collawn:
- We are still looking at that. Talking with folks that are part of the case we would obviously still like to do that, it is a little tough cell right now given the economy in New Mexico because obviously one of the things that AMI does is, over time it will eliminate meter reading jobs but we're still working on that one.
- Paul Patterson:
- Okay. And then, the sales forecast for the next three years, I apologize what is it that you guys are projecting weather adjusted?
- Chuck Eldred:
- Well, we didn’t show a forecast over the next year, we just said that year-over-year we continue to see a slight decline driven more like -- more from the industrial side. Some benefit on the commercial residential side, but again even though we have a slight improvement in customer growth it is not enough to offset the impact of energy efficiency in some accommodation of growth in the solar residential solar. So, again, that would pretty much put it on a flat year-over-year basis and then slight decline because of the industrial load. So maybe not as much as we had this year in the guidance, which was zero to minus 2, but maybe along the lines of a 1% reduction year-over-year. So again slight decline, it’s going to take a while for some of the benefits of the economic development activity that Pat alluded to in her earlier comments. We're making progress, things are beginning to show some slight improvement in tracking to that expectation, but just too early to pick that up into the forecast and know exactly when that will transform into some real benefit there.
- Paul Patterson:
- How should we think about next year or the year after that, I mean was leap year in this number by the way?
- Chuck Eldred:
- Pardon me. What did you say? I'm sorry.
- Paul Patterson:
- Leap year was that in this 6.6 decrease that you guys have here?
- Chuck Eldred:
- It is adjusted for leap year. Again, I would say to be reasonable based right now probably -1% in the area of that range year-over-year.
- Paul Patterson:
- Okay. And then, I think that’s all my questions actually.
- Pat Vincent-Collawn:
- Thanks Paul.
- Paul Patterson:
- Thank you.
- Operator:
- The next question comes from Chris Ellinghaus of Williams Capital. Please go ahead.
- Chris Ellinghaus:
- Hey, good morning, guys.
- Pat Vincent-Collawn:
- Good morning, Chris.
- Chris Ellinghaus:
- Can you just clarify, I wasn’t sure on the load growth expectation in the earnings power does that sort of slight decline cover all three years?
- Pat Vincent-Collawn:
- The earnings power slide is just rate based math. So it’s just taken the rate base and the ROE, so there's really no load upside or downside built into that.
- Chris Ellinghaus:
- Okay. So does not consider load at all?
- Chuck Eldred:
- No, no. We tried to do that when we do the guidance, but the earnings potential shows you what the potential earnings obviously of the business is from a rate base perspective. There's a few baskets of cost in there that we provide to you that a lot of moving variables that we try to give you some perspective on that. And then, once we tighten up guidance and we take everything else into consideration, O&M, cost controls, load et cetera.
- Chris Ellinghaus:
- Can you give us a little color on the industrial weakness where it’s coming from and why you think that might continue?
- Chuck Eldred:
- We don't have a strong industrial base as it is. We are around 12% for and the most utilities, so there is a larger customer here in New Mexico in the Albuquerque area that tends to be slowing down the operations mainly because of some of the obsolescence of their technology. So the [best] [ph] that we know provide that publicly, but it wouldn't take too much to figure out who is in Albuquerque to understand who that customer might be and they are global and nationally recognized.
- Chris Ellinghaus:
- Right. I think we all know who that is,
- Chuck Eldred:
- So, I am just being very careful although I could do my Trump impersonation right now. Really got this going but I won't do it. That is really what is driving it. There's a little bit of other variables on some cogeneration and dealing with New Mexico, things like that but again it’s really driven by that customer.
- Chris Ellinghaus:
- Is that really that one singular entity?
- Chuck Eldred:
- That’s the driver. In all honestly that’s the driver.
- Chris Ellinghaus:
- Okay. Pat in light of the rate case and certainly the continuing long-duration of rate cases have you got any thought about a legislative effort to maybe try to get some relief on that?
- Pat Vincent-Collawn:
- You can only ask for so much at a legislature and the fact that we now have a fully forecasted test year. We got that and we're going to stick with that. We are filing 13 months ahead of the time we need rates so the commission can have the entire time that they are allowed if they choose to do that. The last rate case was obviously a bit of an anomaly because of the fact that they set our filing wasn’t complete and that we have used the wrong test year and two things have changed since then. One is, we have a ruling from the commission that the test year that we believe -- we and SPS believe it’s appropriate, is appropriate, secondly, we have worked out all the filing requirements with the staff. So, I think that our legislative agenda on that probably would not look to shorten that timeframe.
- Chris Ellinghaus:
- Okay. And then, one last question about the San Juan process in determining what happens in 2022, can you go through how that determination is going to be made and what sort of lead time you are going to get to make decisions in terms of replacement?
- Pat Vincent-Collawn:
- If you look at the process, the integrated resource plan process, it started this year. It is a year long process. So it goes into the middle of next year and then we will present an integrated resource plan to the commission. In New Mexico IRP's are not formally approved by the commission. They are accepted and consistency with that integrated resource plan, if you put generation and constitute, prima fascia evidence of that type of resource, but you still would get a CCN. But we also agreed as part of the BART settlement that we would present a plan to the commission one with San Juan and one without San Juan and all of the signatories to the -- said they would support having a decision and the commission will make a decision on that in six months, probably in 2018. So there is a lot of lead-time there at 2018 and right now San Juan coal contract goes all the way to 2022. So lots of lead time, long answer to that question, but.
- Chris Ellinghaus:
- Okay, great. Thanks for the color. We will see it a little bit.
- Pat Vincent-Collawn:
- Okay.
- Chuck Eldred:
- Thank you.
- Operator:
- The next question comes from John Barta of KeyBanc. Please go ahead.
- John Barta:
- Hey, good morning, everyone. And can you hear me all right?
- Pat Vincent-Collawn:
- Yes, John. Good morning.
- John Barta:
- Sorry, if I missed this, but on the peaker, are you completely withdrawing or just revising it to the 40, CCN.
- Chuck Eldred:
- No. We're withdrawing the peaker completely. And then, as I mentioned, we are looking at an updated forecast on the demand side that is included in this IRP process that Pat has alluded to. But, currently our preliminary analysis which showed the 80 MW peaker would adjust itself to about a 40 MW requirement that would begin to build out in 2019 and 2020.
- John Barta:
- Okay. And then, on the IRP you said 2017. Do you have any timing first or back half of the year?
- Pat Vincent-Collawn:
- It is July of 2017, it will be done.
- John Barta:
- And then, I guess lastly, are you aware that the commission is taking on an initiative or if they're looking at any potential workshops on better understanding some of the current rate design issues that are out there?
- Pat Vincent-Collawn:
- They are not. They’re looking at some workshops possibly on that metering but nothing on the rest of rate design. We tend to handle that here in New Mexico through our rate cases. So for example in the last case we -- bumped our fixed charge up a little bit and we were able to eliminate some of the residential subsidies and keep the large commercial and industrial customers much more harmless than before. So we deal with them sort of individually through our rate cases here in New Mexico.
- John Barta:
- All right. That’s all. Thank you.
- Pat Vincent-Collawn:
- Thank you.
- Operator:
- This concludes our question-and-answer session. I would now like to turn the call back over to CEO, Pat Vincent-Collawn, for closing remarks.
- Pat Vincent-Collawn:
- Again, thank you all for joining us on this beautiful morning. I hope you all have a safe and Happy Halloween. And you get all the kind of candy that you want. And we look forward to seeking many of you at EEI in a couple of weeks. Have a great weekend.
- Operator:
- The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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