TXNM Energy, Inc. (TXNM) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the PNM Resources First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now turn the call over to your host, Jimmie Blotter. Please go ahead.

Thank you, Stephanie, and thank you, everyone, for joining us this morning for the PNM Resources First Quarter 2013 Earnings Conference Call. Please note that the presentation for the conference call and other supporting documents are available on our website at www.pnmresources.com. Joining me today are PMM 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 reports on Form 10-K, quarterly reports on Form 10-Q, as well as reports on form 8-K filed with the SEC. And with that, I will turn the call over to Pat.

Thank you, Jimmie. Good morning, everyone, and thank you for joining us this morning for our first quarter 2013 earnings call. I will be providing a brief overview of our first quarter performance, load and economic conditions, a regulatory update and some information on the BART timeline. I'll start the presentation on Slide 4. This morning, we released our first quarter ongoing earnings at $0.18 per diluted share compared with 2012 results of $0.17. On a GAAP basis, we are reporting $0.13 per diluted share compared with 2012 results of $0.21. The difference in the quarter-over-quarter GAAP numbers is primarily related to the mark-to-market impact of the hedges on PV3 pricing. In 2013, we had losses of $0.04 compared with gains of $0.02 in 2012. The upgrade on April 5 from Standard & Poor's brought the corporate credit rating on our holding company to investment-grade. It's been a long-time goal to return all of our entities to investment-grade, and achieving this milestone reflects years of focused efforts by our employees. As most of you know, PNM Resources lost its investment-grade rating in 2008 when we had regulatory challenges, as well as the competitive business. Consistent with our strategy to move toward a pure-play regulated utility, we focused on managing through the regulatory challenges and also exited the competitive business in 2011. These actions greatly reduced the risk profile of the company and strengthened our financial metrics. S&P now has all of our entities at investment-grade with a stable outlook. This is beneficial on many levels, including allowing us to access financing at lower cost, which helps keep customer rates low. In our release today, we also affirmed 2013 guidance of $1.32 to $1.42 per diluted share. Next, let's take a look at the economic growth conditions in New Mexico and Texas, including retail energy sales growth. I'll start with PNM. A review of the table at the top of Slide 5 shows a low decrease compared to Q1 of last year in PNM's territory, with total retail energy sales down 1.9%, with weather normalized and adjusted for the leap year. Energy efficiency is one item that has been impacting PNM's load growth. In 2012, energy efficiency decreased load requirements by 0.8%. We expect the year-over-year impact in 2013 to be similar to last year. Looking at the load segments, you can see that PNM's industrial and commercial sales have showed weaknesses. Now remember, our industrial class is only 15% of our sales. We've had one large customer that changed some operating parameters in their facility and another large customer that took advantage of low natural gas prices to do some cogeneration. Our businesses here though are taking a while to recover from the downturn. In particular, the Albuquerque metro area continues to lag the nation in economic recovery, but now seems to be stabilizing. Recent data from the University of New Mexico's Bureau of Business and Economic Research suggests that the worst is over for New Mexico. Supporting this, we are beginning to see some bright spots in New Mexico's economy. Residential building permits on a rolling 12-month basis grew by 67% as of March 2013. Housing sales for the month increased 4% statewide over March of 2012, with a 7% increase in the average sales price and a 10% increase in medium sales price. And you can also see on this slide that our unemployment rate here in New Mexico remains lower than the national rate at 6.9% in New Mexico. PNM customer growth was also positive at 0.5%. Switching to TNMP, we see the results of the stronger economy in Texas. Total retail growth for TNMP was 2.2%, weather-normalized and leap-year adjusted. TNMP's average customer growth was strong at 0.9%. In fact, for Texas as a whole, population growth between 2011 and 2012 was 1.7%, making Texas the second fastest-growing state after North Dakota. The unemployment rate in Texas is 6.4%, which is also below the national average. Let's turn now to Slide 6 in our regulatory update. On March 19, TNMP received a ruling by the Public Utilities Commission of Texas on its transmission cost of service filing. The filing was approved and rates are now in place. An annual increase of $2.9 million is based on an increase in transmission rate base of $21.9 million. On April 5, we received final approval on our PNM's first generation case with the Navopache Electric Cooperative. The settlement, representing a $5.3 million annual increase in rates, was a block box settlement that includes the fuel costs, which adjust monthly. It also includes the ability to file formula rates beginning in 2015 and the contract was extended for 10 years. We've been collecting the settlement rates for about a year, therefore, this final approval is in line with our expectations and the guidance that we issued in December. PNM and the City of Gallup have agreed in principle on a one-year extension for our FERC wholesale agreement with Gallup. We have filed the unexecuted contract with FERC while Gallup pursued the required municipal approval to the Gallup City Council. Once that is approved, we will supplement the filing with the executed version of the contract. We expect that FERC will approve the contract no later than July 1. Under the terms of the agreement, revenue from Gallup will increase by $3.1 million for the 12-month period, which begins on July 1, 2013. We anticipate that Gallup will soon engage in a request for proposals for a long-term power supplier and we anticipate actively participating in the Gallup RFP. Our FERC transmission formula rate case that was filed at the end of 2012 is progressing and we expect the resolution of that case in 2014. When we originally filed, we requested a $3.2 million increase. FERC ordered PNM to lower its ROE to the media bar peer group, which turns out to be 6.7% -- excuse me, 8.67%. We have filed for rehearing on the ROE with FERC, which was granted on April 19. However, there is no timeline for FERC to address the matter. As you all know, there are a couple of Western utilities litigating on this very issue with FERC in terms of the use of the median of peer groups. With the update for 2012 form 1 data and the revised ROE, revenues are now expected to increase by a total of $1.3 million and will be implemented by August of this year subject to refund. In the meantime, we have begun settlement discussions on this case and we'll keep you informed on developments as we move forward. PNM's plan to purchase the Delta FERC and generating station in Southwest Albuquerque is also progressing. As we discussed last quarter, PNM filed an application on January 3 at the New Mexico Public Regulation Commission, requesting the commission approve the purchase and grant a CCN to own and operate the plant. We expect to receive that approval in the third quarter and to close the transaction by year end. We have received testimony from the commission staff that supports the purchase. We are also expecting to receive a recommended decision on our energy efficiency plan that we filed in October. We believe the recommended decision will come in the second quarter. Let's turn to Slide 7 for an update on the BART situation at our San Juan plant. To address San Juan BART, we've been talking about 3 paths now for some time. Today our discussion will be focused primarily on one path: The progress of the revised state plan. As we announced earlier this year, an agreement has been signed with the state and EPA for an alternative state plan. We are still early in the process of pursuing approvals for the plan. On this slide, you can see the timeline that we are expecting as we go through this process. PNM is responsible for a BART analysis and we filed that analysis with the state on April 1. The New Mexico Environment Department will now need to submit a revised state implementation plan, or SIP, to that New Mexico Environmental Improvement Board for approval. That approval is projected for Q4. After approval, the Environmental Improvement Board will submit the revised SIP to the Environmental Protection Agency. We expect EPA's review will take about a year. Concurrent with the EPA review of the SIP, we'll be working through the regulatory approval processes with the New Mexico commission, filing for the approval for the retirement of 2 units at San Juan and approval of CCN for proposed replacement resources that will be required. The timing for that combined filing is late 2013 or early 2014, as we want the SIP to be finalized for us to complete our filing. We expect resolution of our filing to take about a year. The installation of selected, non-catalytic reduction technology on units 1 and 4 of San Juan is expected to begin in the first quarter of 2015 and take about a year to complete. According to the plan, Units 2 and 3 will be shut down by December 31, 2017. As for the other 2 paths, as we discussed last quarter, we have stopped the work by the EPC contractor on the installation of SCR technology under the SIP, although the SIP and its deadlines are still requirements for the company. And that brings me to the last path. We are participating in ongoing court-appointed mediations for the other parties regarding the litigation in the 10th Circuit Court of Appeals. As you would expect, the mediation discussions are confidential until resolution is reached. As we stated previously, we are very pleased with the state alternative plan. I believe that in addition to being less expensive than the Federal plan, it allows for additional environmental benefit and fuel diversification that will be good for our communities, our customers and our shareholders. And now I will turn the call to Chuck to discuss the financial details of our first quarter results.

Thank you, Pat, and good morning, everyone. We'll begin on Slide 9. First quarter ongoing results were up $0.01 compared to the first quarter 2012. TNMP and Corporate/Other were each up $0.01 while PNM was down $0.01. Moving to slide 10. There were a number of drivers for PNM. Outage costs were $0.02 lower compared to last year. This was caused primarily by lower planned outage expenses at San Juan. Rate relief provided $0.02. This is comprised of $0.01 for the FERC generation rate relief that went into effect in April 2012 related to the Navopache contract and $0.01 for the renewable energy rider that was implemented in August of 2012. Weather was also a positive driver, adding $0.02 to earnings. Heating degree days for PNM were 13% higher than last year and 6% higher than normal. Higher PV3 pricing also contributed $0.01. This was driven in large part by an opportunity that we had to optimize the hedge position for this year. I will discuss this further in conjunction with 2013 guidance. AFUDC was down a $0.01 due to a slight decrease in capital expenditures along with a lower AFUDC rate. Higher depreciation expense from increased plant additions during 2012 lowered PNM's earnings by $0.01. As you are aware, we saw some weakness in load during the quarter. This resulted in a $0.04 decrease. While the quarter did not produce great results with respect to load, specifically, we are confident that we will be within our guidance range at PNM for 2013. I'll provide more details on our plans in connection with the guidance discussion. Now moving to TNMP. We are seeing load move in the opposite direction, up $0.01 compared to last year. Rate relief for TCOS filings also improved the results by $0.01. We also considered a second TCOS filing this year. Depreciation and property taxes due to increased plant additions reduced earnings by $0.01. Now turning to Slide 11. As Pat indicated at the beginning of the call, we received an upgrade from S&P on April 5. Each entity was upgraded by one notch and the outlook for all entities is stable. Importantly of all entities, we are now rated investment-grade of S&P -- by S&P. On a related note, many of you saw the press release regarding exchange of first mortgage bonds at TNMP that occurred in early April. We had $265 million of 9.5% bond with TNMP. We were able to exchange a 93.2 million of these for longer-term bonds with an interest rate of 6.95%. The result of this exchange offer -- or that the debt maturity to TNMP are more diversified, our refinancing risk is reduced and some interest expense savings are created, which is included in our 2013 guidance. Now turning to Slide 12. We are reaffirming our 2013 ongoing guidance range of $1.32 to $1.42. At PNM, we are seeing a few items that are affecting the numbers, but we are confident this will be offset. Each of us at the P&L remains inside the range of $1.16 to $1.23. We have already discussed the softness we saw in load per quarter, first quarter. If you recall in December, when we gave the PNM load guidance of 1% -- 0% to 1% load growth, I talked about this slower economy in Albuquerque Metro area. Although Pat mentioned some areas of growth, we're not seeing any significant upward movement in PNM's load at this time. The trends that we are seeing today indicate that load for 2013 could be down as much to 1% compared 2012. However, as you are aware, our largest quarter is third quarter. So we may see economic conditions in our load pick up by then. Regardless of any possible improvement, we are mitigating the risks associated with the decreased load and we still expect to meet our 2013 guidance. As you are aware, we continue to focus on cost control. One example of this relates to the revised state plan to shut down Units 2 and 3 at San Juan. As we prepared to implement the plan, we are being prudent with our spending related to the units, including review in our maintenance schedules. We also have an improvement related to PV3 pricing. As we discussed in our December guidance call, PV3 had been fully hedged in 2013. However, the hedge structure, the financial swap that gives us the opportunity to sell the physical power output in the premium over the market price should that opportunity become available. The California Carbon Legislation has presented such an opportunity. We were able to enter into an additional contract that provide upside to our original guidance. PV3 continues to be fully hedged for 2013, but a higher price of about $34. Turning to TNMP. This year had started out in line with the expectations that we set out when we originally provided 2013 guidance. We expect to meet the guidance range of $0.32 to $0.34. The Texas economy is performing well and we remain positive that TNMP will continue to add to earnings. With that, I'll turn the call back over to Pat.

Thank you, Chuck. We'll wrap up today's call with the checklist for 2013. 4 months into the year, we are still strongly focused on executing our goals. We are committed to pursuing successful outcomes for some key activities for the year, including the BART agreement, improving our FERC earnings and taking advantage of the TCOS filings in Texas. We already have a successful TCOS filing for the year and these can be filed twice a year so we're leaving this box unchecked until we evaluate the opportunity for another TCOS filing later this year. Our core operations of keeping plants up and running and the power on remains a key focus. For our base load plants, forced outage hours are 22% lower than Q1 of last year. However, Unit 1 just completed the shortest refueling outage in that plant's history, with the outage less than 30 days. Our kudos go to APS on that great performance. And we continue to watch our cost as Chuck spoke about. We're continuing to undertake efforts to manage our businesses well. Operator, we can start the question-and-answer portion now.

[Operator Instructions] Our first question comes from Paul Fremont with Jefferies. Paul B. Fremont - Jefferies & Company, Inc., Research Division: Just sort of focusing on the load growth. A 1.9% decline in the first quarter reduced EPS that had PSNM by $0.04. If you're projecting sort of a 1% decline for the year, in the remaining quarters, what type of an EPS impact for the remaining 3 quarters would that be?

Yes, Paul, this is Chuck. If we -- the sensitivity that we'd use around the decrease in load growth, anywhere from negative 1% could be as much as $0.06. So we're certainly anticipating that sensitivity. In fact, in that end, as we think about the mitigation plans that have built contingencies around that particular impact, once we began to see the trend moving in that direction, but as I said this is only 13% of earnings for the first quarter so we're really looking to see how things work towards -- as we progress with the summer months and the third quarter. But again, regardless of what happens, as I mentioned, we'll mitigate the impact of this and then look at the longer-term implications of how we address load if we don't see some improvements either through rate case or other aspects that we've got in our plans right now. Paul B. Fremont - Jefferies & Company, Inc., Research Division: And is that $0.06 for the remaining 9 months, for the full remaining 9 months?

If you take the full impact of 1%, then it could be as much as $0.06 year-over-year plus the impact of what you have when you look at 1.9% now in addition to that could, it be another $0.06 potentially. Paul B. Fremont - Jefferies & Company, Inc., Research Division: Okay. And then the second question I have is the timing of your filing for replacement power cost. Given an 18-month forward-looking test year, if you were to file in the first quarter next year, would you be able to capture any of the cost of what that replacement power would be or since it would not really come into play until the beginning of 18, would the case essentially -- at least for replacement power have to be filed at a later date?

Paul, a lot of that is open for discussion with the staff. I mean, technically, we don't need the replacement power until we shut down those units at San Juan, but that's why we're taking a comprehensive look at what these filings are like. We also don't want great shock for customers. So as we go through and talk about these, we'll see if some of the replacement power costs come in earlier, but we haven't decided yet right now. Paul B. Fremont - Jefferies & Company, Inc., Research Division: Okay. So in another words, that case then theoretically could really be more like 2 cases, right? One for the recovery of the remaining net book value investment in San Juan coming first and then another potential case to recover replacement generation?

It could definitely be that, Paul.

[Operator Instructions] Our next question comes from Justin McCann with S&P Capital IQ. Justin C. McCann - S&P Equity Research: You say the economy appears to be stabilizing, which is good, in Albuquerque. Has there been any impact at all from sequestration? And also, has there been any progress on tax reform legislation?

Let me answer the last one first. Yes, there has been corporate tax reform at the very last hour, actually about the last 2 minutes of the legislative session. The legislature passed and the Governor has signed a tax reform that lowers the corporate income tax rate and that also gives us a single weighted sales factor, which was very critical to Intel, for example, and their ability to expand manufacturing. So that's been very much a positive for the state. We've already seeing some attention from some businesses looking into the state. In terms of sequestration, we have yet to see any job loss here in New Mexico. What we've seen is for the civilian contractors at the base, many of them are working one less day every other week. So we haven't seen unemployment go up, we haven't seen job loss, but I think that's part of what got -- the lowdown is that people are just being more cautious. The credit unions in town are stretching out their mortgage payments for these folks and everybody's just kind of trying to help them through until we get sequestered done, but no job loss yet. Justin C. McCann - S&P Equity Research: And one question for Chuck. Chuck, how does the improved power market environment kind of weigh into your thinking about your options regarding Palo 33 into rate base -- putting Palo 33 and to rate base?

I think there are 2 ways to look at that. First of all, as we all know, our strategy is to be a pure regulated business and that's still unregulated assets. So the long term view of that would be to continue to work towards incorporating that asset within the regulatory rate base. And even though power prices are starting to move a little bit more positive, we're still not had a breakeven point at the low $40 per megawatt hour and even at a 10% return, getting closer to $50-megawatt hour. So we're not anywhere close to that at this point but, again, I think strategically, we'd like to see that ultimately put in the rate base and that will be the direction we'll continue to work towards.

And I'm currently showing no further questions at this time. I will now turn the call back over to Pat Vincent-Collawn for closing remarks.

Thank you. And again, thank you, all, for joining us today on this first quarter earnings call. We look forward to speaking with you all in the near future. Have a great day.