PNM Resources, Inc.
Q3 2012 Earnings Call Transcript

Published: 2 Nov 2012

[Operator:]

Good day, ladies and gentlemen, and thank you for standing by, and welcome to the PNM Resources Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference may be recorded. It's now my pleasure to turn the call over to Jimmie Blotter, Investor Relations Manager. Please go ahead.

[Jimmie Blotter:]

Thank you, Huey, and thank you, everyone, for joining us this morning for the PNM Resources Third Quarter 2012 Earnings Conference Call. Please note that the presentation for this conference call and other supporting documents are available on our website at pnmresources.com. Joining me today are PNM Resources Chairman, President and CEO Pat Vincent-Collawn and Chuck Eldred, our CFO, as well as several other members of our executive management team. Before I turn the call over to Pat, I need to remind you that some of the information provided this morning should be considered forward-looking statements pursuant to the Private Securities Litigation Reform Act of 1995. We caution you that all of the forward-looking statements are based upon current expectations and estimates, and that PNM Resources assumes no obligation to update this information. For a detailed discussion of factors affecting PNM Resources results, please refer to our current and future annual report on Form 10-K, quarterly reports on Form 10-Q, as well as reports on Form 8-K filed with the SEC. With that, I will turn the call over to Pat.

[Patricia K. Vincent-Collawn:]

Thank you, Jimmie. Good morning, everyone, and let me add my thanks to you for joining us this morning. Before talking about our company performance this past quarter, I want to say that our thoughts are with all of you who are on the East Coast in the wake of Hurricane Sandy. I want to acknowledge the 87 crew members that we currently have deployed to various points along the East Coast to assist with restoration efforts. And just as importantly, the men and women who remain in our service territory to ensure that our reliability isn't affected during this critical time. These are experienced workers, many of whom have worked storm restorations in the past. We have asked that they keep safety the primary focus for everything they do. We, as I know everyone back East is, are extremely appreciative of the work they are doing and wish them safe work and a safe return. I'll start our presentation this morning on Slide 4 and review our third quarter performance and provide some company updates. I'm sure you all have seen our news release issued this morning. As we expected, given our new business strategy, the third quarter was strong resulting in ongoing earnings of $0.69 per diluted share compared with 2011 third quarter results of $0.61. On a GAAP basis, we ended the third quarter at $0.72 per diluted share compared with $0.48 last year. For PNM, we are continuing to see improved performance year-over-year. This is a result of a number of factors

[Charles N. Eldred:]

Thank you, Pat, and good morning to everyone. Beginning on Slide 10. As Pat discussed, ongoing earnings were $0.69 for the quarter 2012, which is up $0.08 year-over-year. The majority of the improvement came from PNM with $0.16 that was largely driven by rate relief and the effect of last year's recapitalization. TNMP continues to be a solid contributor and was up $0.01 for the quarter. Corporate and other was $0.01 lower. The exit from First Choice Power and Optim caused the combined $0.08 decrease. Now turning to Slide 11. Quarterly drivers for PNM include the retail rate increase that was implemented in August 2011, and a renewable rider that was implemented in August 2012. These were a combined $0.04 improvement for the quarter. The cost control efforts we discussed when we issued 2012 guidance resulted in O&M reductions representing a $0.03 increase. These cost reductions were driven by items such as labor reductions, benefit plan savings, revised IT contracts and other process efficiency. There are a number of other small drivers listed on the slide that also contributed positively to PNM. Included in the list is the FERC generation rate relief that we began collecting in April of this year. The PNM Resources share repurchases associated with recapitalization from last year's exit of the competitive businesses improved PNM results by $0.08. As expected, lower Palo Verde 3 prices were a negative driver causing a $0.01 decrease compared to 2011. Interest expense increased due to the debt issuance at PNM in October 2011 for a $0.01 change. Weather accounted for $0.02 decrease due to the higher temperatures in 2011. Cooling degree days for PNM were 10% lower than last year, but were still $0.09 -- 9% higher than normal for the third quarter 2012. TNMP was up $0.01. As Pat mentioned, TNMP has continued to see strong load growth, contributing $0.02 over last year. The PNM Resources recapitalization improved TNMP's results by $0.01. Weather had a negative impact of $0.02 compared to last year. Cooling degree days were down 17% from last year's record-breaking heat, but were up $0.02 compared to normal. Now turning to Slide 12. As you see in our press release this morning, we are narrowing our 2012 guidance range to $1.26 to $1.32 from the previously announced range of $1.20 to $1.32. Our performance for the first 9 months of 2012 has been strong, with year-to-date ongoing earnings of $1.18. There are a number of factors that will be affecting fourth quarter performance. So far this year, we have been running under our guidance for outage expenses, but by year end, we expect to be in line with the annual guidance of an additional $0.03 of expense compared to 2011. We will be incurring some additional operating expenses in the fourth quarter that will help ensure that we're able to maintain strong electric reliability and power plant availability. PNM has had top quartile reliability for the past 10 years and TNMP has been top quartile in 6 of the last 7 years. We've also had strong power plant performance. We expect these fourth quarter expenditures that we're making will help keep these trends going in the future. The increased spending will offset some of the fourth quarter O&M reductions that we discussed when we originally issued 2012 guidance. These adjustments will also cause the quarterly distribution of earnings that we provided in our 2012 guidance materials to be lower for the fourth quarter. When we issued guidance, we anticipated that PNM's load growth would be -- would contribute about $0.03 to $0.07 in 2012 compared to 2011. As Pat mentioned earlier, year-to-date load growth is at 0.2% and we now expect 2012 to come in roughly flat compared to 2011. Although we'll provide 2013 guidance and indicators for 2014 on December 7, we'll currently see only a slight load improvement in 2013. As I mentioned earlier, so far in 2012, PNM has experienced weather that had more cooling degree days than normal, which has helped to make up the difference generated by the lower-than-expected load. We continue to expect Palo Verde 3 pricing to be lower than it was in 2011. And as we mentioned in last quarter's earnings call, we were well-hedged, now at about 93% for 2012, at an average price of $31. We're also effectively fully hedged for 2013, at an average price of $32, which is the current market price. These are the primary factors that will cause our total year to be in the range of $1.26 to $1.32, making our fourth quarter earnings between $0.08 and $0.14. We also want to note that we continue to expect to earn our allowed return in 2012 for PNM retail. TNMP is also expected to come in very close to their allowed return this year. Pat indicated early that we'll be delaying the timing of our PNM rate case filing. We have continued to manage our business well and our allowed retail return trajectory at PNM is remaining stable. This, combined with the uncertainties related to the BART issue at San Juan and the other BART related regulatory filings that Pat discussed, has prompted us to delay our PNM general rate case filing until next year. We currently anticipate filing in either the second or third quarter in 2013. As we get more clarity, we'll solidify those dates. As you are aware, we have strategic goal of earning a total return of 10% to 13% over a 5-year period. 2012 was the base year for that measurement. Our return to a regulated utility model with a more predictable earnings path and our strong performance gives us continued confidence that we will meet that 5-year total return goal. We are making sure that our decisions will support the achievement of that goal. Now looking to Slide 13. We have extended the revolving credit facilities at PNM Resources and PNM for another year until October 2017 to support our future liquidity needs. As of last Friday, the availability of liquidity for the consolidated company was $660 million. And with that, I'll turn the comments back over to Pat.

[Patricia K. Vincent-Collawn:]

Thanks, Chuck. I'll wrap up today's call as usual, with the checklist for 2012 on Slide 14. Earning our allowed returns is a top priority for us and I'm pleased to be able to demonstrate continuous progress on the goal with the strong earnings for the quarter and the approval and implementation of the renewable rate rider at PNM. On the other regulatory matters, we are making progress, as I discussed earlier. As Chuck discussed, we are making investments today to ensure we continue to meet our strong electric reliability and power plant availability. Operator, with that, we can start the question-and-answer portion of the call.

[Operator:]

[Operator Instructions] Our first question comes from Justin McCann with S&P Capital.

[Justin C. McCann:]

I have 2 questions. One related to BART, the other the significance of the next week's ballot proposals. When the Court of Appeals rejected Casper, I mean, they kind of specifically stated that while the EPA had -- could set overall guidelines that it was basically up to the state to decide how to implement it as long as it was -- met those guidelines. How has that affected your own negotiations with the EPA or your own potential litigation? And two, assuming that you would have to -- that the EPA -- you had to go with the $824 million to $910 million, how would you get the -- what kind of accelerated cost recovery would you get for that? And with the fact that, that would be added to your rate base kind of make the expenditure, say, more economic than otherwise? And regarding the ballot proposals, given the improved relations you have with the regulators in -- or the improved regulatory environment in New Mexico, how much significance would there be if all of these proposals went through?

[Patricia K. Vincent-Collawn:]

Thank you, Justin. Let me answer the last question first. The ballot proposals, I think, would be helpful in a couple of ways. First of all, our Public Regulation Commission has an absolutely incredible workload in terms of the fact that they oversee many industries and one of the ones that takes a long time is insurance. So moving insurance out under a separate insurance superintendent really just helps the PRC be able to focus more on what are the traditional Public Regulation Commission functions of utilities, water, wastewater, telephone, and same with moving the corporations into the Secretary of State's office. In terms of the minimum requirements for the PRC, as long as commissioners are fair and willing to learn, which we see with our commissioners, we're happy to work with any commissioner and we have, as you said, have gotten very constructive regulatory outcomes with our commissioners. So we have not had an opinion actually on those ballot amendments because we think that our job is to work with regulators no matter who they are. In terms of BART, negotiations with the state and the EPA are confidential so we can't reveal the details of that. In terms of the Casper argument, the argument that the state made in the hearings at the 10th Circuit was about the state's rights here and the state's ability to have the plan and that the EPA should respect the state's plan. So that was a key piece of our argument that we feel obviously was bolstered by the Casper decision, but from listening to the judges ask question, it's hard to read judges' tea leaves, I think, as it is sometimes to read election polls. So we're just going to have to wait to see the outcome of that decision.

[Operator:]

Our next question comes from Kent College [ph] with BGC [ph].

[Unknown Analyst:]

In terms of the election of the commissioners, have, in particular, the folks running for the Marks seat, have -- first of all, have you seen any polls, speaking of reading tea leaves, are polls indicating who's going to win that in your view? And secondly, have the candidates said anything while they're campaigning about how they feel about utility regulation or PNM in particular?

[Patricia K. Vincent-Collawn:]

Kent, there have been no polls done on the down ballot races including the commission races. So we don't know from that who's likely to win. Probably Karen Montoya has the edge because she's the current Bernalillo County Supervisor and has very good name recognition. And the district that she is in is expected to go for President Obama and Martin Heinrich, the Democrat for Senate, and the Democrat for Congress. So there's probably momentum swinging to the Democratic Party in this district but again, we haven't seen any polls. Each candidate fills out a questionnaire for the Albuquerque Journal when they do their -- when they run and they have both been, I think, very measured in what they have said and that they want to learn the facts and they want to be fair and they want to balance interests. So we have not heard anything from either of those candidates or from the unopposed candidate in Santa Fe that gives us pause and they have been very open about wanting to learn and understand the issues. So we feel comfortable with whoever ends up winning that seat.

[Unknown Analyst:]

Very good. Okay. And secondly, on the timing of the next rate case, Chuck, I think you said there's a couple of factors that the business is being managed well. I'm taking that to mean that maybe you're earning better allowed returns at this point than you thought you might be, but if you can follow up on that? And secondly, you said the uncertainty over BART makes you want to delay. Can you be more specific about what it is that the BART negotiations would result -- the outcome there? Are we looking at you ask the commission to put quip and rate base or other items that would likely be part of a rate case?

[Patricia K. Vincent-Collawn:]

Kent, I'll answer the second part of that and have Chuck answer the first part. What we really would like before we file the rate case is to know whether or not we're going to have the state plan or the -- excuse me, the alternative or the FIP. And if we end up with the FIP with the 4 SCRs, we will have established a very good prudence record that we tried to come up with an alternative and were not able to do so and we really want to -- with the EPA, we really want to make sure we have that because the SCRs are expensive to our customers. That will help, we believe, in rate recovery of those SCRs. If we come up with an alternative, it's a very different looking rate case because it has abandonment of 2 of the San Juan units in there, along with some replacement generation. So we would look at, depending upon which plan we get, what kind of rate-making treatment we want. And if we put a rate case out there with a lot of work and then have to switch in midstream, we know our intervener group would rather us wait and have a more settled path on the capital spending.

[Charles N. Eldred:]

Kent, the only thing I can really add to that is to say that trying to look ahead and prioritize what flow of information and request we demand on the commission to address some of these issues that we think it's prudent to delay the rate case. We're very comfortable with our performance this year and as we think about even the 6- or 7-month type delay, that we're [indiscernible] outlook towards the business going forward to still meet our total return commitments that we've been making. So there's a number of items that just need to be prioritized and the flow of the information, but we're very comfortable where we stand. And just a 6-month delay will allow us to get some time to see where the forward test year and the rules come out and where some of the information that would provide some clarity for us into how we can adequately go forward with our plans for the next rate case.

[Operator:]

Our next question comes from Brian Russo with Ladenburg Thalmann.

[Brian J. Russo:]

Early on, I think you've expressed confidence in earning close to your allowed ROE at PNM Electric, and part of that confidence was the cost-cutting efforts you've implemented, as well as over 1% annual load growth. And it seems that you're now becoming more conservative on the load growth side yet you still expressed confidence in earning your allowed ROE. I was just wondering if you could just add a little insight into the confidence level?

[Charles N. Eldred:]

Yes, I mean, I think that some of which we all know that when you look at weather and the economy and energy efficiency and trying to work through adequate load projections, it's a little more challenging. So we're just trying to be reasonable and reflective of what we think is probably our outlook going forward to be a little more conservative and are thinking about that growth. But certainly, we continue to manage the costs of the business, align the revenues and expenses to work towards meeting the allowed returns. So at this point, Brian, we don't see, even with the load projections, any reason to be concerned that we won't manage the business well enough to ensure that we're comfortable with meeting those long-term objectives.

[Brian J. Russo:]

Okay. And assuming you guys file a PNM Electric general rate case in the second or third quarter of next year, what would the forward test year be?

[Charles N. Eldred:]

If we did it middle of the next year, it would be mid June of 2014 to 2015, June 2015.

[Brian J. Russo:]

Okay. And correct me if I'm wrong but it seems like the total cost range of the BART expenditures have declined?

[Patricia K. Vincent-Collawn:]

They've declined a little bit. We've said $750 million to $1 billion, and that range has narrowed as we have gone through. We had 4 -- we had bids from 4 contractors and then selected 1. So as we have gone through the process and refined it, it has -- the range has narrowed and declined. Yes, you're correct.

[Brian J. Russo:]

And the state alternative plan, could you give us a rough estimate of what those total costs would be relative to your 46% share of the revised BART cost?

[Patricia K. Vincent-Collawn:]

We can't at this time because we're still in negotiations with the Environmental Protection Agency in the state, but overall, it would be a less costly plan to customers.

[Brian J. Russo:]

Okay. And also in last rate case settlement, did you get some sort of environmental rider approved or am I totally off on that?

[Patricia K. Vincent-Collawn:]

What we got in the last rate case was when we agreed to stay out of rate cases until January -- or new rates until January of 2014, the one exception to that was any environmental expenditures that were mandatory for us to do. So we could go ahead and file for that but given that we've managed to put off spending any significant capital until now, we really don't need that environmental carve out or exception.

[Brian J. Russo:]

Okay. And any thoughts on how the commission or how you would file for -- to recoup the book values of the San Juan's Unit 1 and 2 plants that you plan on retiring in the SIP?

[Patricia K. Vincent-Collawn:]

I think we'll wait on that until we come up with -- until we know which plan we're going to have.

[Brian J. Russo:]

But I would imagine it would be critical for you to recover that book value, right?

[Patricia K. Vincent-Collawn:]

Yes, correct.

[Brian J. Russo:]

Okay. And then lastly, any update on the Palo Verde lease expiration? What your strategy is with that?

[Charles N. Eldred:]

No. We've -- at this point, because we don't have a requirement to give notification to the lessors until January 2013, that we're not disclosing what our notifications would be, but we can talk probably more clearly about that in December when we give the guidance information and some of the outlook towards the business.

[Operator:]

Our next question comes from Ali Agha with SunTrust.

[Ali Agha:]

Assuming that the state alternative plan does go forward and you do retire those units, just remind us what the incremental capacity need you would have to make up the difference, and is the plan to build and own that difference, would you need PPAs, could Palo Verde 3 come into the mix? Can you just prioritize to us what realistically would be the alternative that you would need to make up for that difference?

[Patricia K. Vincent-Collawn:]

Yes, we would -- you know that we like to own our own generation here and our commission likes us to own our generation here. So we would end up looking at -- we said publicly, looking at some possible new gas-fired generation at the Four Corners region, looking to see if there's any existing generation around. We would need about 340 megawatts replacement for the 2 units that would be shut down there. So we're looking at a combination of things, but the new gas in the Four Corners to help that region deal with the impact of the shutdown of 2 units and looking at existing generation is as much detail as we've given publicly right now.

[Ali Agha:]

Okay. But net-net, looking at how depreciated those units are, is it fair to assume there would be a net increase in rate base when all is said and done here, if that's the path you go down?

[Patricia K. Vincent-Collawn:]

Yes, that's a fair assumption.

[Ali Agha:]

Okay. And then secondly, I guess, you're indicating that December 7 you're going to have a separate call like I think you did last year. But as I look at 2013, given the timing of the rate case, et cetera, is it fair to assume that there is no significant rate increase that's going to be effect in 2013, that the delta year-over-year are really going to be load growth-driven or is there AFUDC or anything else that compensate for that or am I right in my thinking there?

[Charles N. Eldred:]

Yes, you're right in your thinking. There's no rate increases and just the continued cost-cutting initiatives that we have in place. The fact that even load growth is slightly off, we'll still be able to communicate strong performance when we have that meeting December 17. So it's too early for us to discuss any details, but certainly, we're confident that you'll continue to see improvement in PNM.

[Patricia K. Vincent-Collawn:]

And remember, the renewable rider that went into effect this year on August 20 is in effect for the full year next year, so that is the one rate impact that you would get.

[Ali Agha:]

Right. And then, Chuck, if I heard you right, I think you said you are now fully hedged for Palo Verde 3 next year at around a $32 level. And if I recall, the cost for that unit is probably more than the low $40 range. So fair to say that we are looking at losses, at least in '13, to continue for Palo Verde 3?

[Charles N. Eldred:]

Yes, that's correct.

[Operator:]

[Operator Instructions] Our next question comes from Paul Fremont with Jefferies.

[Paul B. Fremont:]

First question would be would you expect that the state and the EPA will be able to reach an agreement before the stay expires or are you anticipating another extension of the stay?

[Patricia K. Vincent-Collawn:]

Paul, we would expect that they would be able to reach an agreement before the stay expires or shortly thereafter. For us, the reason we signed that EPC contract is that we are now to the point where we have to start spending money to comply with the FIP, so that window is going to close pretty much right around the time of that -- of November 29, plus or minus a little bit of time.

[Paul B. Fremont:]

So that would mean that when you talk about sort of 4 months after a final agreement was reached, you would potentially file a rate case within that window, right?

[Patricia K. Vincent-Collawn:]

No. What we talked about filing within 4 months was the approval of the plan, not the rate case for the plan. And when we talked about our next general rate case, we talked about filing that in June of next year. So 2 separate filings.

[Paul B. Fremont:]

Okay. And approval of the plan by who? Would that be by the EPA?

[Patricia K. Vincent-Collawn:]

Well, there's a whole series of plan approvals. This particular filing, we have to have the State Environmental Improvement Board approve a new state implementation plan that then has to be approved by the EPA. We would also like to have the commission approve sort of in general that it's the right plan without specifying necessarily the amounts in it, but get some pre-approval for them on the plan also to help cost recovery. If we're doing new construction, you need a CCM so we get that as part of it

[Paul B. Fremont:]

And I take it by your earlier comment that you've been in discussion with some of the major intervener parties and your -- the thought process of delaying the GRC and combining these all meets with -- all basically, they agree with sort of your strategy, right?

[Patricia K. Vincent-Collawn:]

In general, all the interveners would rather deal with 1 case than 2. And so we've been keeping them up to speed on where we are with BART.

[Paul B. Fremont:]

Okay. And then in the quarter, you guys experienced an increase in AFUDC contribution, it looked like quip through the second quarter was nearly flat to what it was last December. Was there a large increase in quip in the third quarter or what's driving the AFUDC higher?

[Charles N. Eldred:]

Paul, it's really driven by higher AFUDC rate because we have lower short-term balances. So it's just the way the accounting works to have the appropriate rate, apply it against quip.

[Paul B. Fremont:]

So the quip -- there was no major change in quip in the third quarter?

[Charles N. Eldred:]

No, not at all, it's just a higher rate. If you maintain lower short-term balances, then you're going to get the benefit of the higher rate, whereas if you have the higher short-term balances, you have to use the short-term rate.

[Operator:]

And presenters, at this time, I'm showing no additional questioners in the queue. I'd like to turn the program back over to Pat Vincent-Collawn for any additional or closing remarks.

[Patricia K. Vincent-Collawn:]

Thank you. And again, thank you, all, very much for joining us. We hope all of you on the East Coast are warm and dry and have your power back on and just want to salute the whole industry for their effort to try to restore everyone after Sandy, and we look forward to seeing many of you at EEI the week after next. Thank you.

[Operator:]

Thank you. Again, ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. Attendees, you may disconnect at this time.