TXNM Energy, Inc. (TXNM) Q1 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the PNM Resources First Quarter Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Lisa Eden, Director of Investor Relations. Lisa, you may begin.

Thank you, everyone for joining us this morning for a discussion of the company's 2012 First Quarter Earnings Conference Call. Please note that the presentation for this conference call and supporting documents are available on PNM Resources website at www.pnmresources.com. Joining me today are PNM Resources Chairman, President and CEO, Pat Vincent-Collawn; and Chuck Eldred, our CFO; as well as several 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 and the quarterly reports on Form 10-Q, as well as current reports and future reports on Form 8-K filed with the SEC. With that, I turn the call over to Pat.

Thank you, Lisa. Good morning, everyone, and I'd like to add my thanks to all of you for joining us this morning. Let me start the presentation on Slide 4 and we'll review our first quarter performance. This morning we released our first quarter ongoing earnings of $0.17 per diluted share, compared with 2011 results of $0.04. On a GAAP basis, we finished the quarter at $0.21 per diluted share. For PNM, results were considerably stronger as a result of rate relief and our ongoing efforts to reduce cost. We don't expect the 2011 rate increase to have such substantial impacts during the summer months as they did during the first quarter. The first quarter results were enhanced by rate structure impacts of the 2011 rate increase and we discussed those impacts previously. Those impacts are going to be less pronounced during the summer months this year. For TNMP, the impact of the 2011 rate increase was offset by a mild winter. While Chuck will discuss the specifics of our financial performance, I just want to take a quick second by mentioning that we do have good news on the credit ratings front as our corporate ratings and debt ratings for PNM Resources and TNMP were all upgraded last month by Standard & Poor's. Let's turn to Slide 5 for a brief discussions on economic conditions and utility load growth. If you look at load growth for both PNM and TNMP, we presented them both as weather-normalized and then leap-year and nonleap year normalized. PNM's quarterly load declined $0.3, compared with the same period last year. However, if you take out the leap year adjustments, load was up 0.8%. Since we budgeted for a 366-day year this year, we expect 2012 load growth to finish within our previously disclosed range of 0.5% to 1.5% for 2012. PNM's rolling 12-month retail sales growth rate through March of 2012 is 0.8%, which is the midpoint of our expected load growth range this year. Customer growth at PNM was also up 0.3% for the quarter and we saw both residential and commercial customer growth here in New Mexico. TNMP's quarterly load declined 0.5% compared with a year ago, but on a nonleap adjusted basis, it is up 0.6%. TNMP's rolling 12-month retail sales growth rate through March of 2012 was 0.7%. We also saw customer growth at TNMP of 0.6%, driven primarily by residential customer growth. While the industrial segment at TNMP has significant drop in load, you'll remember that industrial users represent only about 3.5% to 4% of all TNMP retail sales, so the impact is very minor compared with what you see at other utilities. We did not see any major closings of industrial customers or other indicators that say this is going to be an ongoing issue. And like at PNM, we expect TNMP to end the year within the previously-disclosed load growth guidance range of 0.5% to 1.5%. Our economic conditions here continue to improve in both New Mexico and Texas. Both states continue to fare better than the national average when it comes to unemployment. While the New Mexico rate is slightly higher than it has been in the recent past, you'll remember that several quarters ago, we and others had questioned the New Mexico unemployment rate, knowing that it would likely be revised upward. Indeed, previous rates have been restated and the current 7.2% unemployment range in New Mexico reflects that change. On the employment growth side of the equation, New Mexico gained 4,700 jobs for March '11 to March '12. We continue to expect the recovery to be a little slower than we'd like, but we are seeing improvements in this area. Just recently, Bendix King, a subsidiary of Honeywell, announced that it was creating a factory here and Lowe's has announced it will be opening up a major customer service center here in Albuquerque. Moving to Texas. Texas gained 245,700 jobs from March 2011 to March 2012, a continuing of strengthening job growth in that state, which has now surpassed its pre-recessionary peak in employment levels. The unemployment rate in Texas has dropped by 1 full percentage point year-over-year to 7%. I have a few updates on an ongoing regulatory cases on Slide 6. We continue to work toward a settlement on our FERC transmission case. If we are able to indeed reach a settlement, we are required to make that filing by June 1 of this year, and we will update you as soon as we reach any milestone in that case. Also moving toward settlement, we hope, is the FERC generation case. PNM is proposing a cost of service base rate for services PNM provides to the Navopache Electric Cooperative. We appeared before a settlement judge earlier this week and we continue to work towards the settlement. We go before a settlement judge again, on May 16 and we will keep you posted on significant developments. This Monday, we also filed the 2013 renewable energy plan, that calls for an additional 20 megawatts of PNM own solar facilities to be in service by the fourth quarter of 2013, a 20-year purchase power agreement for the output of a 10-megawatt geothermal facility to be in service by January 1, 2014, and limited land and solar rec purchases in 2013. In 2014, when the plan's components are all in motion, PNM will achieve full quantity and diversity compliance with our state mandate and we will be within the reasonable cost threshold. We're waiting the May 14 hearing in which we are seeking approval of the renewable energy rider to recover the commission-approved renewable energy procurement costs that were implemented since January of 2011. We've proposed that, that rider go into effect on August 8 of this year and as we previously discussed, this filing includes the recovery for the 5 utility scale solar power facilities that totaled 22 megawatts that went online last year and it also includes the customer own solar programs and the PNM's battery storage solar project. The rider would increase the average residential bill by about 2.1% in 2012 and enable PNM to have timely recovery of its renewable energy cost. Testimony was filed by the commission's staff in support of the rider. Regarding the future test-year rulemaking for the New Mexico retail cases, there is a public hearing regarding this rulemaking scheduled on June 13 and the record will close a month later then on July 13 or whenever an order is issued and we will certainly keep you posted on those developments. Not on the slide, but very important, is regarding the BART or the Best Available Retrofit Technology at San Juan. I'm sure many of you saw that last week, Governor Martinez sent a letter asking the EPA to stay the federal implementation plan and either approve the state plan or communicate to the state why it should not be approved. She also wrote that if the stay was granted and EPA responded to the New Mexico FIP, then PNM must immediately investigate whether there are any viable alternatives to the BART FIP that will be in both the environmental and economic best interest of New Mexico. We are hopeful that the EPA will grant the stay on the mandate to install SCR technology. With this stay, we will certainly comply with the governor's request and look at alternatives. If PNM is able to move toward a dialogue on the alternatives, we will continue to seek a balanced approach to addressing the issues at San Juan in a way that it considers customer cost, environmental benefits, and the economic impact to New Mexicans and the Four Corners region. That completes the updates we have for the day. So I'll now turn the call over to Chuck for the financial details.

Thank you, Pat, and good morning to everyone. Beginning on Slide 8, as Pat discussed, ongoing earnings were $0.17 for the first quarter, which was $0.13 increase year-over-year. Majority of the improvement came from PNM with $0.17 that was largely driven by rate relief. Another factor was a combined $0.03 decrease from First Choice Power in autumn as compared to the first quarter of 2011. And as you are aware, we exited those businesses last year. TNMP was also down $0.01. Now turning to page -- Slide 9. The primary driver for PNM was the rate relief that was implemented in August 2011, which was $0.12 for the quarter. This amount reflects the higher increase applied to the shoulder months that Pat discussed earlier. This will lessen the impact of the rate increase to customers during the summer months. There were a number of other drivers that also contributed positively to PNM. These include $0.02 of O&M reductions that we mentioned on prior calls. We have also talked about the impact that our PNM Resources share repurchases would have on our financials and we realized a $0.02 improvement for this. Outage cost are lower than Q1 2011 by $0.01. This is because the San Juan unit 1 outage last year started in January, but the outage this year for San Juan Unit 2 began in March, resulting in fewer outage cost during the first quarter of this year. Lower PV3 prices were a negative driver, causing a $0.02 decrease in 2012 compared to 2011. As mentioned, TNMP was down $0.01, the results were improved by $0.01 due to the rate relief effective February 1, 2011. However, this year's mild weather versus the very cold 2011 caused a decrease of $0.02. Since 2012 is a leap year and we gained 1 additional day in February, load had low impact on earnings even though both utilities are lower than anticipated for the first quarter. Now turning to Slide 10. S&P had once again recognized the strides that we are making in improving our business by issuing a credit rating upgrade on April 13. The corporate credit rating for PNM Resources was increased to an investment grade rating of BBB- from BB. The debt ratings of PNM Resources and TNMP were both increased one notch, bringing the holding company unsecured debt to BB+ and TNMP secured debt to BBB+. All entities have a stable outlook. We remain focused on the regulated utility businesses and earning our allowed return to further improve our credit metrics and shareholder returns. Now moving to Slide 11. We are affirming our 2012 guidance today of $1.20 to $1.32 for the year. We're also affirming the guidance for PNM at $1.08 to $1.15. TNMP at $0.28 to $0.32 and corporate and other at a loss of $0.16 to $0.15. There are a few items related to guidance for PNM that I want to discuss. At the December guidance call, we told you that the outage cost would be higher in 2012 than 2011. Although we saw an improvement in the first quarter versus the prior year for outage expenses, we expect 2012 ahead of a higher expenses in total than 2011. This is because we are scheduled for 2 major planned outages at San Juan this year, compared to only one major outage in 2011. The timing effect that we saw in first quarter will even itself out in the second quarter after that, we should start seeing the expected year-over-year increase of expenses in the second half of the year when San Juan Unit 3 moves into its planned outage. Another factor we're managing is the decline of market prices at Palo Verde 3. We are now about 85% hedged for 2012 at an average of $32 a megawatt hour, but we are seeing prices in the open market as low as $24. In December, we provided some sensitivity data related to the market prices. Since then, we have moved from being 40% hedged to now being 85% hedged and the lower average price of the newly hedged portion will cause an additional decrease of about a $0.015 in total across the remaining 3 quarters in 2012. Since we're almost fully hedged, with only 15% of Palo Verde 3 output exposed to the market prices, we would experience $900,000 pretax change in margin if market prices change by $5 per megawatt hour and this is off a base of $24. We are proactively managing a number of small initiatives to offset earnings impacts. These include very small continuous improvement and cost control efforts, as well as an increase AFUDC as a result of lower short-term debt balances. Given our current outlook for guidance, we are comfortable that we will end the year solidly in the middle of the range for $1.26. And before I turn the call back over to Pat, I'd like to congratulate Lisa Eden, who has been promoted to the Executive Director of Financial Planning. This position was opened up by the promotion of Don Terry to Vice President of Business Technology Services in Customer Service. Succession planning has been a focus for some time now, and we are pleased that we can provide opportunities to further develop our employees. Jimmy Blotter will continue as the IR manager and will be your primary point of contact. Terry Horn, our Treasurer, will also be taking investor inquiries. Their contact information is provided to you on the last slide of the appendix. With that, I'll turn it back over to Pat for closing remarks.

Thank you, Chuck. And I also want to congratulate Lisa and Don as they embark on their new roles. It's always gratifying to see when we can develop informant folks from inside PNM Resources. As always, we will finish today's presentation with a checklist for 2012. Our first quarter results for PNM demonstrate progress toward our goal of earning our allowed return on retail rate base and we continue to control costs for both utilities to maintain solid financial performance. We are also very pleased with the continued improvement of our credit ratings. Achieving our strategic goal and progressing through our checklist, we believe, will result in improved shareholder value and significant steps towards providing top quartile total return. As we move through the year and have outcomes in our rulemakings and FERC generation and transmission cases, we will keep you posted. With that, we can start the question-and-answer portion.

[Operator Instructions] Our first question is from Justin McCann from S&P Capital IQ. Justin C. McCann - S&P Equity Research: I have 2 questions. When you mention timely recovery for the renewable energy rider, could you be more specific about what you're hoping for?

In terms of the renewable energy rider, what we're hoping is to get that rider, so that we can get the cost of the 22 megawatts of solar directs that we have put in and the DOE battery, plus once we get that rider into play, it helps us greatly as we file our next renewable plan because we like to keep that rider to get recovery of the next tranche of our renewables end. So this would be contemporaneous because we've already put the plant into service, but going forward, we would hope it would be more contemporaneous for us. Justin C. McCann - S&P Equity Research: Okay. And my second question is related to the November referendum regarding the 3 changes at the Public Service Commission including moving corporate oversight to the Secretary of state office. Must each of these 3 be approved by the voters separately or is it 1 takes all and two, is there much opposition between -- from anyone and then, are Democrats and Republicans kind of divided on the issue?

In terms of your first question, it's 3 separate votes. Each item is its own issue on the ballot. There hasn't been any polling done that we have seen. It does seem to be a bipartisan issue to want to reform the commission. However, there hasn't been yet a lot of publicity on the ballot initiatives. I'm pretty sure the newspapers in the state, given what they have said, will recommend the passage of all 3 of those. So I think it's just going to depend how much energy people have when they get to that part of the ballot and how much voter turn out there is in November.

Our next question is from Paul Fremont of Jefferies. Paul B. Fremont - Jefferies & Company, Inc., Research Division: First question is, should we assume that if there were to be a San Juan filing that it would occur after you get a response on the letter that was sent to the EPA?

Yes, Paul we talked about the fact that we would make a filing, a CCN filing for San Juan, late fall, early winter. So hopefully we will hear from the EPA by then. They have told the governor that they would get back to her soon. Paul B. Fremont - Jefferies & Company, Inc., Research Division: Okay. And then, I guess, in that timeframe, I mean would San Juan then potentially be absorbed into a general rate case filing or would you still expect it to be a separate filing?

I think it depends, Paul, upon what the outcome of it is and what the timing is. We still obviously have the option to make it a separate filing based on the last rate case to roll it in, and I think it's just -- we don't have enough knowledge to tell. Paul B. Fremont - Jefferies & Company, Inc., Research Division: And then on the outages. Can you give us a sense of how many day -- how many outage days you're expecting in, I guess, it would be the second and the fourth quarter?

Yes, Paul, it's in A-7 -- or excuse me, Page A-2 in the appendix. If you look at San Juan in the third and fourth quarter, Unit 3 has 54 days and then Unit 1 has 40 days in the fourth quarter -- or excuse me I'm reading 2013, 54 days in Q3 and Q4 for Unit 3. Paul B. Fremont - Jefferies & Company, Inc., Research Division: And was there a Palo Verde outage in the first quarter?

Yes, they had 32 days in Q1 and 2Q. They had a very well done, very short outage, their best ever. Paul B. Fremont - Jefferies & Company, Inc., Research Division: So, I guess, what I'm not understanding is, given that there wasn't another Palo Verde outage in the first quarter of last year, I'm still not quite understanding how the outage expense was improved in the quarter given -- if you take Palo Verde and San Juan together?

Yes. I think, Paul, it's the timing of when the outages began last year versus when they began this year. I think earlier last year, later this year for second quarter. So we can get -- just call Jimmy and she can kind of give you some background information to make it a little bit clear, but it's just the timing of when the outages started, quarter-on-quarter.

Our next question is from Brian Russo of Ladenburg. Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division: Sorry if I missed this earlier, but is weather-normalized load growth tracking your projections for the year?

Yes, when you leap year adjust it, we're at about 0.7% and 0.8%, respectively, in the utilities and we -- our guidance has a 0.5% to 1.5% earnings -- or excuse me, load growth range, and when we budgeted, we did budget for the 366-day year. So it gives us solvently in the middle of our range. Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division: Okay. And your cost management initiatives, that's also tracking projections?

Absolutely. Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division: Okay. And then sorry if I missed this earlier as well, but just the San Juan BART. It seems to me that you're willing to reach some sort of settlement with the EPA and we've seen a settlement in Oklahoma with another utility. I'm just curious, have you run any cost projections on what any other settlement types scenarios would amount to?

Well, we've obviously taken a look at what happened at public-service Oklahoma. We've taken a look at Colorado, Boardman, but we are waiting until the governor gets her reply, because what she had said is when we get the stay she's going to direct us to look at alternatives. Because it is technically the State's implementation plan, not ours. So we've got to wait for direction from her. Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division: Okay. I guess, I'm a little bit confused on procedurally how this all plays out because the circuit court turned down the motion to stay, correct?

Correct. Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division: So now the governor is asking the EPA to essentially stop the time clock to get involved in discussions on some alternative means of compliance?

There are 2 different kinds of stays. The one we filed for in the 10th circuit would have been a judicial stay. The bar for approving that is -- getting one of those is pretty high, you have to prove irreparable financial harm and the court thought we didn't do that, but they have fast tracked the case, and they will hear it this fall during their special session, which is usually saved only for things like capital punishment cases, but she is asking the EPA for administrative stay. And the EPA has the authority to give an administrative of stay of that rule. So they were technically 2 different kinds of stays, and it is in her authority to ask and in the EPA's authority to give an administrative stay.

Your next question is from Ali Agha of SunTrust.

If I had your opening remarks, it appeared that PNM electric is pretty much tracking budget through the first quarter, A, is that correct? And B, can you just remind us, given the way the tenants is supposed to work in the shoulder months, how we should we think about the seasonality over the 4 quarters for PNM?

Yes, we'll make it simple from the second part of your question. But yes, it is tracking to earn its allowed return this year as we talked about during guidance, so that's certainly the expectation and we feel comfortable we're in that -- we've had expectation this year. The second piece of it, if you go back to the original guidance information, we put a slide in there that showed the distribution by quarter and we talked about giving you a perspective, our guidance will be at the middle part of the range of $1.26. And if you just take that slide for each quarter in that percentage, and apply to that midpoint of the range, you get a pretty good indication of how that rate structure and how we see the seasonality quarter-over-quarter occurring for this year. And that's the simplest way to take a look at it. But it does smooth things out. The shoulder months for the first and third and fourth quarters are slightly higher increase to consumers, whereas the summer rates themselves based on block design of the structure -- rate structure, a little bit less of an increase. To make it spread out for the year is really what the intention is.

I will base to what happen is the first block went from 250 to 400, and the rate increase there that has captured more usage in the shoulder months. And if you look at the energy revenues, if you just look at the total rate increase, it's about 10.47 in the summer months -- not in summer months, excuse me, that the rates would happen about 3.2% in the summer months. So that shifting of the rate structure flattened out the seasonality of it. It was in the appendix of the guidance presentation.

Right. Okay. And then secondly, as you said, on a retail rate base basis, you should be earning an authorized return as planned and budgeted. If you look at your entire rate base, including the other components of it, I don't know if you look at that, but how would you look at sort of the return on your total rate base versus authorized in terms of the potential lag there and how that improves? I know you've talked about the FERC lag in the past, but do you look at it on a total rate base RoE basis?

We look at each rate base independent. So we're looking at retail, total return for PNM retail rates and then we look at the rate base separately for FERC transmission and FERC generation and what we anticipate earning our allowed return on those segments. But keep in mind that 7% of the total retail earnings of the business is the FERC and the generation components. So not significant, but we do look at it separate when we talk about returns.

We had said that this year, we won't earn our rate of return on either our FERC transmission or our FERC generation rate basis, and it would probably take a couple of cases to get up to earning the allowed ROEs on there, but as Chuck mentioned, between FERC transmission and FERC generation, it's only 10% of the rate base.

But the settlements, potentially if they go through, don't change that scenario?

I'm sorry?

The settlements that you are pursuing on the FERC cases, if they are approved, would not change that scenario? You would still need a few more cases to earn your allowed returns?

Yes, because you -- you remember at FERC you're still looking at historical rate basis, and so you've got some regulatory lag in there because the cases are pretty slow. And you're bringing people off from a pretty big hole in there and what you really want to do on FERC is get to where you're filing just the cost of service -- cases for them and the automatic adjustors and we didn't ask for that in this case, so it would take another case to get there.

Got it. And are you still thinking that absent any EPA-related expenditures -- or let me ask it this way. Assuming that you don't have to step up on the EPA-related expenditures, what's your thought right now for a potential rate case for PNM?

We have said that we will file a rate case for PNM retail December 1, around there, of this year for implementation in January 1, 2014.

And that's still the time?

Yes.

[Operator Instructions] Our next question is from John Ali [ph] of Decade Capital.

Most of my questions have been answered, but I was wondering if you could just talk a little bit more about the regulatory schedule. I know in June, the proceeding for future-test-year rules begins and then how long after -- when would you contemplate potentially filing a rate case?

We'd file a rate case beginning of December this year for January 1, 2014. We would hope that we would have an order on the future-test-making rules by then. We may not, but if you remember, in the stipulation for the last case, there were a set of principles that all the parties agreed that we would use in the next rate case -- future rate case filings, if for some reason the commission didn't finish their rule making on it. So there are some principles in the place that I think will help. And those were the ones that said the base period was 12 months expiring at the end of a calendar quarter, no earlier than 150 days before the date of the filing, so there would be a base year period, then you would project operating results for the 12-month future period, and then it laid out the verifiable information needed for the linkage period and it specified the level of information that needed to be provided -- not 40,000 pages worth, but enough detail that they can see and then all of that information had to be certified by the CFO and the senior operating officers. So we would love to have a rule-making done and have more rules, but even if not, we do have a set of principles to go on.

Excellent. And your best guess from getting a ruling on this -- from EPA?

Trying to guess when the government agency will actually do something is tough. All we know is that the governor said -- or they said they would get back to the governor soon and I think especially with all -- you guys watch TV and saw what happened to the Region 6 administrator here, I suspect they will want to get back pretty quickly.

At this time, I show no further questions.

Well, then, thank you, everyone for joining us. And we look forward to seeing many of you soon. Have a great weekend.