Tag Archives: industry

Time

Can you teach me ’bout tomorrow And all the pain and sorrow running free ‘Cause tomorrow’s just another day And I don’t believe in time Hootie & The Blowfish – Time Just a few days after writing our last letter about the warning sign that the high-yield market was flashing, Third Avenue went and closed an open-ended mutual fund to redemptions because it, essentially, couldn’t find reasonable bids for its bonds. In the aftermath, some commentators have noted that this fund was an exception, because its portfolio was particularly risky, made up of really low-quality bonds, and that it wasn’t symptomatic of larger issues in high-yield. I kinda agree and disagree. The issue was clearly that what they owned was a bunch of dreck, bottom-of-the-barrel type stuff, in a structure that really shouldn’t own such things. They forgot one of the key risk factors in managing money – time. The issue of time is often recast as one of a liquidity mismatch – owning assets that are less liquid than the liquidity terms offered to the investors in the structure. Mutual funds offer daily liquidity, which is great for assets like stocks and government bonds that have deep and liquid markets. Low-quality junk bonds aren’t quite as good a fit – a much better fit would be closed-end funds, where there are no redemptions, or in a private equity type fund of the sort that Oaktree and others run. But owning them in a regular retail mutual fund? Not a good idea. Is this going to be a systemic problem? Probably not. It appears that a lot of the mutual funds that own high-yield bonds only have portions of their funds in them, or, even better, are closed-end. Interestingly, many closed-end funds run by decent managers are trading for extremely deep discounts to NAV currently, and probably are good buys here. Our fund has been buying a few of these in the past week. Closed-end funds don’t have to worry about this liquidity element of time. However, another asset that is often confused with closed-end funds definitely does – ETFs. Time the past has come and gone The future’s far away And now only lasts for one second, one second Hootie & The Blowfish – Time ETFs have been hailed as the savior of retail investors. Some claim ETFs eliminate the risks in investing alongside other investors, whose time horizons may not match your own. In the case of Third Avenue, this issue was made clear by the fact that those who sold early realized a much better return than those who sold later, because Third Avenue was able to sell its better-quality bonds to redeem them. But ETFs suffer from the same problem. They have investors who can not only redeem daily, they can redeem at any time throughout the day as well. Amazingly, The Wall Street Journal published an article on the front of its Business and Finance section yesterday that is 100% wrong. Very wrong. Incredibly, I can’t believe this got published wrong. In it, Jason Zweig, who writes their weekly Money Beat column, states that ETF managers don’t have to sell their holdings to meet redemptions. Instead, they give a prorata share of those holdings to ETF dealers called authorized participants (APs), who in return give the ETF back some of its shares. This part is correct. But what Zweig misses completely, and I really don’t know how he does, is that the APs then turn around and sell those securities. APs are not in the business of just holding onto whatever the ETF manager gives them. Zweig says, “The ETF doesn’t have to fan the flames of a fire sale by dumping its holdings into a falling market.” Well, actually, it does. APs are in the business of arbitraging, for very small amounts of money, the differences between the price at which the ETF trades and the underlying value of its assets. That is why ETFs have to publish their holdings daily. It is why ETFs that invest in less-liquid assets will trade with a higher bid-ask spread. It’s why – oh man, it’s why a lot of things. But one thing ETFs are not are closed-end funds with an unlimited time horizon. They are a fund with an even shorter redemption time period than regular mutual funds. And yet, The Wall Street Journal has it completely backwards. Amazing. Time why you punish me Like a wave bashing into the shore You wash away my dreams Hootie & The Blowfish – Time But there is a more subtle, and more pernicious, aspect of the time factor in investing. That is the mismatch between investor expectations and time horizons for returns on the underlying investments. Different investors have different time horizons of course, but I’ve found in the more than 20 years I’ve been investing that what people say their time horizon is and what it really is are very different things. For all of its smug insularity and inability to hire women or minorities , one thing venture capital has gotten right is matching the duration of its investors with the duration of its investments. Investors in venture capital funds are conditioned to expect the investments to both take a long time to payoff and often not work out. It is a lesson that most retail investors miss. Instead, retail investors say they are “long-term” investors, when in reality they are generally uninterested investors. Until, suddenly, they are very interested – at which point they usually panic. This panic creates a selloff that punishes those investors who thought they had a lot of time to let their investments grow and generate the returns they expected, at least on a marked-to-market basis. This sell-off then triggers fear of further losses in investors who thought they owned “safe” assets, or “liquid” assets, so they sell too, which leads to a downward spiral. This is the contagion effect we’ve discussed here previously. It’s being exacerbated by the destruction occurring in many retail investor portfolios, because they, despite all the clear warning signs, chased yield instead of total return in recent years. In a world of low interest rates, they looked at the yields being paid by MLPs, private REITs, BDCs, and other yield vehicles and decided that getting a high current income was so important that they invested in companies or funds they didn’t really understand. They were happy, so long as prices were going up and they were getting paid. But now that prices are going down, often dramatically, they are realizing that there is no such thing as return without risk, that their tolerance for volatility is lower than they thought, and that their time horizon for their investments is shorter than they thought. Not a good combination. Time why you walk away Like a friend with somewhere to go You left me crying Hootie & The Blowfish – Time In my experience, mutual fund boards are no different in their short-termism than retail investors, and in some ways are worse. They get regular reports showing how the funds under their purview have performed on monthly, quarterly, yearly and 3-5 year time horizons. Usually there is a 10-year comparison as well, but it is routinely ignored as not relevant, as most investors ignore it too. These fund boards will harshly question any manager that dares to deviate from their benchmark, even for good reasons, and even if it is just to hold more cash during times of market excess. A mutual fund manager may well believe that the bonds or stocks it holds are overvalued, but be unable to do anything about it since they are, for the most part, supposed to be fully invested at all times. This means that even if the manager fully believes that the most prudent course of action would be to sell and hold cash, he or she generally won’t, because making a market bet is a quick way to find yourself looking for another job. Therefore, when markets do sell off, mutual funds are generally not a good source of buying support – they have to sell something to buy something. Twenty or thirty years ago, fund managers had a lot more flexibility to use their judgement about markets and fund positioning, but today much of that flexibility is gone. Similarly, another source of market buying during times of panic used to be the investment banks and bond dealers, but Dodd-Frank has killed that off. Today, dealers are just middle-men – they are not allowed to position securities on their books. When I interviewed at Goldman Sachs (NYSE: GS ) after business school, the interview took place on the equity trading floor, where I was surrounded by hundreds of traders and salesmen. Today, Goldman has less than 10 traders making markets in U.S. stocks. Think they are making a big two-way market anymore? I don’t think so either. Time without courage And time without fear Is just wasted, wasted Wasted time Hootie & The Blowfish – Time One of them main advantages of hedge funds is that their investors, for the most part, understand that in order to make money, you need to be willing to tolerate some volatility and wait out the market’s recurring cycles. (Full disclosure: I manage a hedge fund, and am biased toward the structure). Another advantage is that, because their managers are granted flexibility to go both long and short, and to hold cash, they can take advantage of these market dislocations to buy good assets at distressed prices. They can cover shorts, sell one asset to buy another, or use leverage to buy when others panic. Granted, some managers will get their markets wrong, and fail spectacularly, but that doesn’t mean that overall the industry is flawed. It’s simply part of being in the markets – not everyone can be right all the time, and those that fail to manage their leverage and risk exposures will be carried out of the arena accordingly. But the impression that hedge funds are all the same, that they all are rapid day-traders (some are, some aren’t) misses the point that they are one of the few sources of buying support left in the markets today. They are, as a group, the only ones that have both the time and ability to step into falling markets and buy when others are panicking. ______________________________________________________________________________ This week’s Trading Rules: If you’re going to panic, panic early. Retail investors often panic later, and for longer, than market professionals expect, creating larger crashes than fundamentals dictate. Match your investment time horizons to those of your investors. “Forever” is not a choice. The Fed hiked rates by 25 basis points for the first time in 7 years, and after initially popping higher, stocks have begun to fall again. Retail investors have seen most of the asset classes they flooded into in recent years decimated in the past 6 months. Large cap stocks have massively outperformed small caps over the past 6 months, with the Russell 2000 Index falling 12.7% versus a 4.9% decline in the S&P 500. This is inflicting pain on active fund managers and forcing performance chasing in the few winning stocks. Time ain’t no friend of these markets. SPY Trading Levels: Support: 200, 195, then 188/189. Resistance: 204.5/205, 209/210, 213 Positions: Long and short U.S. stocks and options, long CEFs, long SPY Puts.

iShares MSCI New Zealand Capped ETF: The Other Down Under

Since the inception of the fund, the New Zealand economy has met some extraordinarily difficult obstacles. The dividends are above average, but the sustainability of some of the holdings seems questionable. New Zealand has a stable, well managed economy in a region experiencing a severe economic contraction. One would expect that a newly emerged economy such as New Zealand to eventually reorient itself towards domestic growth. To be sure, New Zealand is still heavily dependent on exports; up to 40% of GDP, in fact. New Zealand’s government is not letting any grass grow under its feet, however, making every effort to diversify its GDP sectors. According to the government’s promotional website, New Zealand Now , the World Bank ranks New Zealand as ” the easiest place in the world to start a business ” and ranks it third in economic freedom, after Hong Kong and Singapore. Even the well respected Forbes magazine has noted that “… Over the past 20 years, the government has transformed New Zealand from an agrarian economy dependent on concessionary British market access to a more industrialized, free market economy that can compete globally…” However, this growth has not come easily. New Zealand’s 21st century economy has been turbulent. During the boom years of the early 2000s, New Zealand began to experience increasing inflation, requiring the Reserve Bank of New Zealand to raise the benchmark lending rate several times. This led to an economic slowdown even before the economic crises of 2008 began! Then, as New Zealand wrestled to get its economy back on track, two devastating earthquakes struck the island nation. The first, Canterbury quake, struck in September of 2010 and the second, Christchurch quake , in February 2011, resulting in loss of life, injuries and damages totaling more than US$40 billion. New Zealand’s export economy is greatly dependent on trade in the Asia-Pacific region which caused the economy to suffer an unexpected double blow in late 2014 and early 2015. The first was the rather sudden economic contraction in the region greatly affecting strategic commodities, particularly metal ore and petroleum. The second was the European Union’s decision to end the EU dairy quota system. A global chain reaction followed, flooding the market with dairy products, thus collapsing dairy product prices. ‘Dairy’ happens to be New Zealand’s top export in the region. Data from OEC There’s one other little known fact about New Zealand’s commodities industry. New Zealand has recently discovered potentially large, very high quality oil reserves. These reserves (a major export to Australia at 16% of total, by the way) earned US$270 million in revenue for the government . Unfortunately, the very last thing global oil markets needed in 2015 was a brand new major oil field discovery. Data from OEC So is this a good time to have a stake in New Zealand’s economy? If so, there’s only one port of entry, found in BlackRock’s (NYSE: BLK ) portfolio of single focus country ETFs. It’s the iShares MSCI New Zealand Capped ETF (NYSEARCA: ENZL ) . The fund first listed on September 1, 2010; just three days before a devastating earthquake struck New Zealand’s South Island. The fund is not large, with approximately US$72.00 million of net assets. The expense ratio is 0.48%, reasonably in line with the industry average of 0.44%. The three-month average volume is adequate at approximately 25,000 per day; more than enough for a small position. The fund’s P/E ratio is 16.85 and the price to book multiple is 1.81 times. The volatility is a bit high at 1.37 times the S&P 500. The yield is a very attractive 5.44%; the trailing 12-month yield is 5.61% and the 30-day SEC yield is 3.62%, which is most likely why the fund is selling at a surprisingly high premium to NAV of 1.13%. If the companies in the fund are stable and profitable, this looks worth holding even just for the distributions. The best way to tell is to take a closer look, starting with the sector allocation. Data From iShares The fund leads off with a very defensive sector, Utilities at 18.58% of the fund. Equally surprising were the payout ratios: each well over 100%. This is significant since by Investopedia ‘s definition, “. ..payout ratio is the proportion of earnings paid out as dividends to shareholders… ” There’s a likely reason for this and it’s worth noting here before examining the entire fund. Over the past two years, the New Zealand Dollar has lost a great deal of value relative to the US Dollar. The high payout ratios may be, in part, due to the devaluation of the NZ Dollar vs. the US Dollar; note, too, the negative 5-year earnings growth. To give a simple example of how the currency exchange factors in, the market cap of Contact Energy Ltd. ( OTC:COENF ) in New Zealand Dollars is $34.01 billion; in US Dollars it’s $23.03 billion. Both currencies use the same symbol ” $ ” and this may be causing confusing on some widely used financial media sites; the market cap is listed as $34.01 billion in both US Dollars and New Zealand Dollars , which is impossible. Hence, it isn’t as much the underlying metrics as it might be the currency exchange, or lack of it. (click to enlarge) On the other hand, the total debt to equity measures is a little more in line with Utility companies. There’s one exception: Infratil (IFT) ( OTC:IFUUF ) at over 100%. This is a diversified utility with energy, transportation and social infrastructure holdings. Recently, Infratil and the nation’s sovereign wealth fund, New Zealand Superannuation , sold their combined holdings in Z Energy ( OTC:ZNRGF ) . The high total debt to equity as well as the high P/E may be a temporary reflection of the sale of that large portion of that equity holding. So although the numbers look a bit alarming, they may be reflecting a currency translation. Utilities 18.5839% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Contact Energy Ltd. OTC: COENF 5.6117% $2.318 5.51% 13.18% 143.34% 26.00 -6.63% 55.19% Meridian Energy Ltd. NZ: MEL 4.5252% $4.026 5.54% NA 133.60% 24.05 -3.56% 23.76% Mighty River Power Ltd. OTC:MGHTF 3.4734% $2.531 5.15% NA 417.02% 79.35 -31.34% 35.27% Infratil Ltd. IFUUF 3.1813% $1.170 4.29% 14.87% 261.34% 100.82 -12.45% 140.25% Genesis Energy Ltd. NZ: GNE 1.7923% $1.297 8.33% 17.22% 152.58% 18.31 -3.95% 52.49% Averages 3.27% $2.27 5.76% 15.09 excluding MEL and MGHTF 221.58% 49.706 -11.59% 61.39% Data from Reuters and Yahoo! and others The second largest weighting is Health Care at 15.65%. If one of the companies’ name sound familiar, it’s because it is. Fisher & Paykel Healthcare ( OTCPK:FSPKF ) was spun off from the famous appliance manufacturer of the same name. The health care spinoff is a global provider, specializing in respiratory devices. Health Care 15.65% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Fisher & Paykel Healthcare Ltd. OTC: FSPKF 7.8125% $3.158 1.77% 2.16% 65.11% 41.83 8.00% 24.44% Ryman Healthcare Ltd. OTC:RHCGF 4.7019% $2.783 1.77% 17.39% 13.69% 15.47 25.15% 41.65% Summerset Group Holdings Ltd. NZ: SUM 1.7655% $0.588 0.99% NA 11.57% 11.61 151.06% 44.24% Metlifecare Ltd. NZ: MET 1.0516% $0.628 1.03% NA 7.79% 7.55 0.99% 123.56% Orion Health Group Ltd. NZ: OHE 0.3233% $0.342 0.00% 0.00% 0.00% NA NA 0.00% Averages 3.13% $1.50 1.11% 9.78% excluding SUM, MET 24.54% 19.12 excluding OHE 46.30% excluding OHE 46.78% Data from Reuters and YaHoo! and others The more cyclical industrial sector contains three companies which all tie in together: Air transportation, airport management, and mail, parcel and freight transportation. The yields, payout ratio, P/E and debt to equity are well in line for this sector. Industrials 13.3491% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Auckland International Airport Ltd. OTCPK:AUKNY 8.5518% $4.301 2.73% 9.89% 77.76% 28.46 48.24% 56.61% Air New Zealand Ltd. OTC:ANZFF 2.9468% $2.160 5.61% 17.98% 55.05% 9.81 30.72% 118.17% Freightways Ltd. OTC:FTWYF 1.8505% $0.653 3.92% 11.84% 87.33% 22.33 13.02% 85.20% Averages 4.45% $2.37 4.09% 13.24% 73.38% 20.20 30.66% 86.66% Data from Reuters and Yahoo! and others New Zealand has a small consumer population and this is reflected in the fund’s telecom services holdings. Spark New Zealand ( OTCPK:NZTCF ) is the fund’s largest holding. Spark offers all telecom services, nationwide 3G and 4G Wi-Fi, fiber broadband, content, data and more. Chorus Ltd. ( OTC:CRRLF ) focuses on telecom infrastructure and provides 90% of all New Zealand’s fixed network connections to service providers. In short, both companies complement each other. Again, the data is scarce, but might indicate the two companies are still in a growth/buildout phase. Telecom Services 12.2952% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Spark New Zealand Ltd OTC: NZTCF 9.7968% $3.937 6.28% 3.86% 98.12% 15.67 149.11% 38.92% Chorus Ltd OTC: CRRLF 2.4984% $0.830 0.00% 0.00% 0.00% 15.80 NA 295.85% Averages 6.15% $2.38 3.14% 1.93% 49.06% 15.74 74.55% (excluding CRRLF) 167.39% Data from Reuters and Yahoo! and others ” SkyCity Auckland ” is the nation’s premier entertainment and convention center. Sky City Entertainment Group ( OTCPK:SKYZF ) manages property assets in SkyCity, Auckland . However, the interesting holding in the consumer discretionary sector is Trade Me Group ( OTC:TRMEF ) , an online marketplace which, except in size, is not too unlike eBay (NASDAQ: EBAY ). The sector yields are good, average payout ratio high but still well below 100%, as well as average debt to equity. Consumer Discretionary 11.1946% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Sky City Entertainment Group Ltd. OTC: SKYZF 4.3633% $1.703 4.71% 3.00% 90.71% 19.34 8.37% 85.58% Trade Me Group Ltd. OTC: TRMEF 3.1684% $1.562 3.73% NA 80.20% 21.08 4.69% 24.01% Sky Network Television Ltd. OTC:SKKTY , OTC:SYKWF 2.9325% $1.135 6.94% 16.47% 34.09% (of EPS) 9.80 10.77% 26.26% Warehouse Group OTC:WHGPF 0.7304% $0.609 6.15% -7.79% 105.84% 17.28 -4.93% 61.23% Averages 2.80% $1.25 5.38% 3.89% 77.71% 16.88 4.73% 49.27% Data from Reuters and Yahoo! and others The financials are dominated completely by REITS or property investment groups. The yields look really good and are well sustainable. Financials 10.0932% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Kiwi Property Group Ltd OTC: KWIPF 3.1954% $1.172 4.66% -3.84% 58.32% 12.65 NA 47.78% Goodman Property Trust REIT NZ: GMT 2.5863% $1.060 5.16% -1.05% 23.59% 9.62 112.29% 57.00% Precinct Properties New Zealand OTC:AOTUF 2.5743% $1.022 4.32% -2.34% 13.36% 11.43 NA 25.41% Argosy Property Ltd OTC:IGPYF 1.7381% $0.632 5.17% NA 66.30% 12.77 NA 68.66 Averages 2.52% $0.97 4.83% -2.41% (excluding IGPYF) 40.39% 11.62 ———- 49.71% Data from Reuters and Yahoo! and others It seems that, for any fund these days, the two weakest sectors in the entire Asia-Pacific region would be Materials and Energy. It’s a simply a matter of too much supply and too little demand. One of the problems of a smaller economy fund is that one or two companies may dominate the fund. Hence, when the domestic sector weakens, there are few ways for the fund to be diversified enough to offset it. Nuplex Industries ( OTC:NPXIY ) , although in the weak materials sector, is a company with good global reach; it produces polyester, vinyl-esters and coating resins. Operations are located in Germany, Russia, Netherlands, the UK and the Americas as well as the Asia-Pacific. Materials 9.9369% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Fletcher Building Ltd. OTC:FRCEF 8.0959% $2.205 6.15% 25.15% 209.57% 18.13 -2.50% 53.05% Nuplex Industries Ltd. NPXIY 1.841% $0.567 6.07% 12.47% 89.71% 15.16 -2.02% 40.68% Averages 4.97% $1.39 6.11% 18.81% 149.64% 16.65 -2.26% 46.87% Data from Reuters and Yahoo! and others In the energy holdings, Z Energy ( OTC:ZNRGF ) distributes a full range of fuels; NZ Refining ( OTC:NZRFF ) is a refiner of raw petroleum and ‘pipeline’ distributer. The investor should make careful note again that New Zealand may have some of the largest, untapped high quality oil reserves on the planet. Light Sweet Crude is the easiest grade to refine and has the most desirable qualities of all extracted oils. Right now, supplies of oil are so abundant that it simply wouldn’t be worth a major extraction investment. However, the potential cannot be ignored, especially as new technologies come to market which greatly reduce emissions from fossil fuels. Energy 5.2033% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Z Energy Ltd OTC: ZNRGF 4.2524% $1.835 3.68% NA 192.31% 50.16 NA 86.93% New Zealand Refining Ltd OTC: NZRFF 0.9509% $0.777 1.36% NA 19.02% 13.87 -17.36% 37.77% Averages 2.60% $1.31 2.52% ——— 105.67% 32.02 ———- 62.35% The IT holdings are pretty much standard, offering accounting and business services, mobile tablet device software particular for ‘B2B’. Information Technology 3.172% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Xero Ltd. OTCPK:XROLF 2.2816% $1.661 NA NA NA NA NA 0.00% Dilligent Corp. NZ: DIL 0.8904% $0.353 NA NA 0.00 61.21 NA 0.36% Data from Reuters and Yahoo! and others To sum up, much of the data may be distorted by currency translation. Further, the data gathered when going from sector to sector was inconsistent. This, again, may be due to currency adjusted data vs. unadjusted data. The New Zealand economy is in fact experiencing a slowdown, much in part due to the economic contraction of the two major ‘import economies’: Japan and China. However, New Zealand maintains a triple top credit rating: S&P, AA stable; Moody’s, Aaa stable; and Fitch, AAA stable. Lastly, is the interest in the fund itself. The full chart clearly demonstrates continued interest even as the relative value of the currency declined. Compare the chart below with the currency chart above. (click to enlarge) Some metrics of some of the fund’s holdings may give the impression that they are far more risky than they actually are. If the fund was currency hedged and the data more consistent, it would look far better. Over a long period of time, say in a retirement account, it might be well worth the risk to dollar cost average over time, reinvest dividends and use any market corrections as buying opportunities. The end result, especially in a tax deferred retirement fund, just might end up being a top performing portfolio asset. As always, the investor must weigh the risk to the region in general which is heavily dependent on the Chinese and Japanese economies and the demand for Australian raw commodities. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

PNM Resources’ (PNM) CEO Pat Vincent-Collawn on 2016 Earnings Guidance Conference – Call Transcript

PNM Resources Inc. (NYSE: PNM ) 2016 Earnings Guidance Conference Call December 18, 2015 11:00 AM ET Executives Jimmie Blotter – Director-Investor Relations Pat Vincent-Collawn – Chairman, President and Chief Executive Officer Chuck Eldred – Executive Vice President and Chief Financial Officer Analysts Brian Russo – Ladenburg Thalmann Anthony Crowdell – Jefferies Leon Dubov – Luminus Management Tim Winter – Gabelli & Company Operator Good morning, and welcome to the PNM Resources 2016 Earnings Guidance Conference Call. All participants will be in 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, Laura and thank you everyone for joining us this morning for the PNM Resources 2016 earnings guidance conference call. Please note that the presentation for this conference call and other supporting documents are available on our website at pnmresources.com. Joining me today are PNM Resources Chairman, President and CEO, Pat Vincent-Collawn and Chuck Eldred, our Executive Vice President and Chief Financial Officer. As well as several other members of our Executive Management team. Before I turn the call over to Pat, I need to remind you that some of the information provided this morning should be considered forward-looking statements, pursuant to the Private Securities Litigation Reform Act of 1995. We caution you that all of the forward looking statements are based upon current expectations and estimates and that PNM Resources assumes no obligation to update this information. For a detailed discussion of factors affecting PNM Resources results. Please refer to our current and future Annual reports on Form 10-K, Quarterly Reports on Form 10-Q, as well as reports on Form 8-K filed with the SEC. With that, I will turn the call over to Pat. Pat Vincent-Collawn Thank you, Jimmie and good morning, everyone. I hope you all are having a wonderful holiday season. As we approach the end of this very busy and successful year, it’s time to look ahead and provide our earnings guidance for 2016. But first I would like to talk about our most recent and very important news, the New Mexico Public Regulation Commission approval of BART that we’ve received earlier this week. Let’s start on Slide four. I’m very pleased to say that on December 16, the PRC formally approved our plans for the San Juan generating station. This ruling comes almost exactly two years after our initial filing with the commission. We knew that this plan was the best for our customers, for the company, for the state as a whole and the environment. It also paves the way for New Mexico’s compliance with the Clean Power Plan. Now we can move forward with implementation. I would like to congratulate and say the PNM team that has worked tirelessly on BART. This has been a long and challenging process and I am proud of the people, who are responsible for bringing it to a successful conclusion. I would also like to acknowledge and thank the other folks that have been involved including Governor Martinez and her office, various community and business groups. The Navajo Nation, the EPA and many of our interveners who have involved – have been involved extensively for years now. BART has been an all consuming task for many people for quite sometime and I am thankful to see the Commission support, the settlement agreement that we presented to them. We will now move forward with plans to retire Units 2 and 3 at the end of 2017. And we will replace the power with the mix of resources we’ve proposed, which is an additional 132 megawatts from San Juan Unit 4, and additional 134 megawatts from Palo Verde Unit 3, 40 megawatts of solar for which construction is almost complete and a gas peaking plant to be built on the San Juan site. The New Mexico Commission approval was a critical milestone in completing this process. In addition, we need FERC approval on the 203 filing. And we have asked for that to be done before year end. The approval we need is at a staff level. So it does not need to be addressed by commissioners in an open meeting. Once all of the regulatory approvals are received the sale of the mine can be completed. And we will be able to enact the new coal contract and the ownership restructuring agreement for San Juan, which together brings significant savings for our customers. And finally the SNCR equipment has been installed on San Juan Unit 1 and 4 and is expected to be fully operational next month. We will recover the cost of the equipment in the rate case that is currently pending before the commission. That case also includes a previously approved 40 megawatts of solar replacement power. The remaining items related to the BART settlement will be included in the 2018 rate case, which we expect to file in December of 2016. I want to emphasize that the implementation of the BART plan combined with the significant investments we have already made position San Juan for continued operation into the future while meeting and in many cases exceeding environmental regulations. Emissions from BART will put the plant in compliance with the haze regulation and place New Mexico in good shape to comply with the Clean Power Plan. The environmental upgrades we have made between 2006 and 2009 and the installation of the BART result in significant reductions as several emission including a 78% reduction in NOx and 87% reduction in SO2 and 85% reduction in particular matter emissions. In addition the plant has a 99.5% removal efficiency for mercury. Balanced draft will assist the plant in complying with the National Ambient Air Quality Standards by eliminating fugitive emissions of NOx, SO2, mercury and other pollutants. Coal ash at San Juan is dry handled and returned to the former surface mine pit for reclamation. There are no wet coal ash storage ponds or pipes transporting coal ash. Regarding 316(b), San Juan uses the closed cycle cooling systems and is thus well situated to comply with the rule. EPA’s final stream effluent guidelines rule, that was issued earlier this year is expected to have minimum impact on San Juan since it is a zero discharge facility. So the bottom line, we know of no existing, or anticipated environmental regulations that would reduce the viability of our plants going forward. Let’s now move to Slide 5. Looking forward, we continue to focus our strategic financial goals of earning our authorized returns, maintaining investment grade credit ratings and providing above average industry earnings and dividend growth. We remain on track with our earnings growth call, you can see that our 2016 guidance range of $1.55 to $1.76 continues along our 7% to 9% growth trajectory. I’m pleased to say that TNMP is expected to continue to perform well driven by increased loads and recovery of our transmission investments. PNM had a challenging start to 2015 in the regulatory environment, but we’re back on track. The re-file rate case is proceeding as expected. Rate should be effect in the third quarter of 2016. From a customer perspective, when you net the fuel and other savings against the rate request, the overall impact to customer bills is only 5.4%. Over the last few years, we have implemented companywide efforts to strengthen relationship with customers and to improve their experiences with PNM. Despite the challenges we continue to face, we have achieved company record high levels of customer satisfaction. Another regulatory challenge this year was related to the definition of the future test year. Now that the commission has modified its interpretation of the future test to a definition to make it consistent with the statue, there is no longer a need to continue the appeal we filed in the state Supreme Court. We will be taking step to conclude that matter in the next month or so. And obviously, the PRC approval of BART lays the ground work for our 2018 rate case. If you turn to Slide 6, will give you an update on the dividend. As you saw last week, the Board increased the annual dividend by 10%. This makes the annualized dividend $0.88. We continue to target our 50% to 60% payout ratio. The Board will continue to review the dividend each year, and in the near-term we expect continued above average increases. Once we are through our heightened CapEx period, the Board may consider increasing the 50% to 60% payout ratio to bring it more inline with the industry. Now, I’ll turn it over to Chuck Eldred, our Chief Financial Officer for a closer look at the numbers. Chuck Eldred Thank you, Pat and good morning everyone. 2016 will be a transitional year for the Company. We have much for the uncertainty behind us now with the PRC approval of the BART plan, and going forward our regulatory filings at PNM should be focused on recovery of the investments that are required to prudently run our business. At TNMP, we continue to see low growth, and we’ll continue to make prudent investments to support the reliability of that business. Now let’s go to the details of 2016 guidance beginning on Slide 8. On this Slide, we compare the previously issued 2016 earnings potential to the 2016 guidance we’re issuing today. As you can see the ranges between earnings potential and guidance are similar. But there are adjustments to the individual items as you move away from the rate base math that the earnings potential is based on. Beginning with PNM retail, 2016 guidance is at $1.08 to $1.24. This is a slight adjustment to the earnings potential view. The expectations shown here reflects the full ask and varies depending on the implementation date between July 1 and October 1. I’ll provide you with some information to help you make your own assumptions on the rate case in a moment. In addition to the rate case, PNM retail will also be affected by other drivers. For example, regulatory lag for the first portion of the year and load, which we continue to forecast conservatively. Next is renewables at $0.06. This is inline with the earnings potential previously shared. Per transition earnings potential showed a range of $0.08 to $0.10, but we’re guiding this business to be $0.09 to $0.10. The tightened range is based on our forecast for 2016. However unit three is fully hedged for 2016 and we have updated the guidance for the prices we expect to see. Items not in rates is expected to be inline with the midpoint of 2015 at $0.03 to $0.04. This brings total PNM to $1.12 to $1.30. Santa Fe continues to be an example of what the differences between our earnings potential and guidance. Santa Fe is expected to continue to have key cost filings and strong load growth. Therefore guidance is $0.49 to $0.51, which is above their earnings potential, but slightly lower than the 2015 midpoint. Corporate and other is also a little higher than the earnings potential that we have discussed with benefits in 2016 provided by the retirement of the 9.25% debt in 2015 and the restructuring agreement in the San Juan. That brings the total range of 2016 to $1.55 to $1.76. Once we have the rate case finalized, we’ll be able to provide an updated guidance range for you. Now turning to Slide 9, we continue to see positive movement in Albuquerque’s employment growth, outpacing the state in New Mexico and getting closer to the U.S. rate. We also continue to forecast customer growth at PNM at 0.5%. We’re forecasting low growth at a range of flat to down 2%, while we see signs of the economy continues to stabilize, we do not see enough growth to counterbalance the effects of energy efficiency. Now turning to Slide 10, I walk through the assumptions related to PNM’s general rate case in 2016. As you remember, we filed for $123.5 million increase based on a 10.5% ROE. Implementation of this full request on July 1 would increase PNM’s EPS by $0.40. A 25 basis points difference in the ROE would impact EPS by $0.04 on an annualized basis. Implementation of full request after July 1st would also reduce the amount in 2016. There you can see some sensitivities around the effect of delays in the rate implementation would have on our 2016 EPS. As a reminder, key dates upcoming for the rate case includes staff and intervener testimony due at the end of January, rebuttal testimony due in February, and hearings in March. It’s our objective to stay on the current schedule with this case. Now turning to Slide 11, it reflects the rest of PNM’s assumption for 2016 compared to 2015. The purchase of the 64 megawatts of Palo Verde Unit 2 leases in January were increased earnings by $0.12. This represents a full year impact of the eliminated O&M costs for the actual lease expense, partially offset by increased depreciation and interest expense tied to the purchase. Weather has lowered PNM EPS in 2015 by $0.03 through the third quarter. So we’d assume an increase to get us back to normal weather for 2016. O&M cost associated with the outages should be lower in 2016 by up to $0.02 as we’ve gotten through some major outages at San Juan for the installation of the SNCRs. The outage schedule is in the appendix. Palo Verde Unit 3 earnings are expected to come in $0.12 lower than 2015 as market prices continue to be depressed. These sales are fully hedged for 2016 at an average around the clock price at $26 per megawatt hour. Since Palo Verde 3 will serve the New Mexico retail customers beginning in 2018, we’re not able to sell that power for this asset under the long-term contract, so we’ll be able to – we’ll be exposed to the lower price levels in the meantime. As I mentioned earlier, we have projected low growth at the range of flat to down $0.02 with each percentage point equals a $0.05 of earnings. Also reducing earnings in 2016 is lower AFUDC as our capital spending level comes down from 2015 peak that was in our capital plan. In addition to the 2016 total capital being lowered, $164 million is for the Palo Verde 2 lease purchase. This capital will not earn AFUDC as the asset is already constructed. Depreciation and property tax are expected to increase $0.04 to $0.06 as a result of the capital that is placed into service. Interest expense should be higher in 2016 due to the $250 million of long-term debt that we issued in August of this year. On the third quarter earnings call, I talked about how the FERC Generation and Navopache contract will begin to face out in 2016, reduced in earnings by $0.03 that you can see here. Also you’ll remember that we saw a pickup in 2015 of $0.03 related to the one-time El Paso Natural Gas FERC tariff refund. This will not occur in 2016. Finally, revenue from our renewable rate rider is expected to decline in 2016 as our renewable rate base deprecates. You’ll remember that we added 40 megawatts of solar in 2015, but we have included this in our general rate case and it’s not part of the rider. One item that is typically a driver for us that you do not see on this list that the impact of the Palo Verde Nuclear Decommissioning Trust gains. That’s because the gains are expected to be similar to 2015. As we continue to position the Unit 3 portion of the trust for addition to retail rate base in 2016, you can find an assumption on this item as well as our usual breakdown of quarterly EPS for the company in the appendix. Now let’s turn to TNMP beginning on Slide 12. We continue to see strong growth within this business segment. While employment growth in Houston has decreased from a year-ago, it continues to be positive measure and Dallas continues to outpace the State of Texas in the United States. Keep in mind, the Dallas area accounts for nearly 40% of TNMP’s revenues, while the Houston area accounts for approximately 50% and West Texas makes up less than 10%. I want to note that the West Texas portion of the TNMP’s territory is the Permian Basin. Although the area has been more exposed to oil prices and drilling is down, their production is up. And as a result, we have not seen a reduction in our load. TNMP residential customer growth is forecasted at 1% again for 2016, and overall load is also again projected to increase between 2% and 3%. Now let’s turn to TNMP’s full earnings guidance and drivers on Slide 13. Once again we expect to implement two TCOS increases during the year. We expect to make those filings in January and July with implementation in March and September respectively, adding $0.03 to $0.04 to EPS. We are projecting the load increase of 2% to 3%, which increases earnings by $0.01 per each percentage point. We expect to see O&M to be flat to an increase, this results in drivers that are zero to negative $0.02. We continue to make capital investments to support the growth in our service territory, which leads to increase depreciation of property taxes that we’ve forecasted at $0.02 to $0.03. A portion of these cost related to transition assets which is about 40% of capital are recovered through TCOS filings. Interest expense also rises in 2016, this is in fact of issuing the long-term debt. Next let’s review some of the changes we’re seeing in the corporate and other segment on Slide 14. Well, I know that you’re all familiar with a retirement of our 9.25% debt in 2015, and the associated increase in short-term debt levels. I also want to remind you that San Juan restructuring agreement is expected to go and effect in January 2016, and if the demand charges paid to PNM Resources from the existing parties related to the additional 65 megawatts at Unit 4 is part of corporate and other segment, until it is moved to PNM which will likely occur at the end of 2017. This will result in $0.01 improvement to earnings in 2016. Therefore in total, we expect the corporate and other segment to improve slightly over 2015. So now let’s review some detail on how we’re investing at the business and what that means for earnings beyond 2016. So wrapping up on Slide 15, you can see the earnings potential for each of the remaining years for 2019, our view is consistent with our earnings target of 7% to 9% growth for that time period, and it’s consistent with the numbers that we have seen before. We continue to execute on our current plan to maximize the earnings potential that we can realize in our business by focusing on regulatory outcomes and earning our authorized returns. Now I’ll turn it back over to Pat. Thank you. Pat Vincent-Collawn Thanks, Chuck. We’re focused on execution, we’ve remain committed to achieving constructive regulatory outcomes, maintaining operational excellence, improving customer satisfaction, and running the business efficiently. We’re now happy to take questions. Question-and-Answer Session Operator Thank you. [Operator Instructions] And our next question will come from Brian Russo of Ladenburg Thalmann. Brian Russo Hi, good morning. Pat Vincent-Collawn Good morning, Brian. Chuck Eldred Good morning, Brian. Brian Russo Just Chuck to clarify on PV3 is it completely unhedged in 2017? Chuck Eldred Yes, we – it’s not hedged in 2017 at this point. We typically try to hedge in our rolling 12 month basis and obviously with prices as low as they are. We would like to think that there would be some anticipation or some improvement in 2017, but it’s just too hard to predict. So we’re really on the downside of the lower gas prices and hedging that asset and – but it’s fully hedged in 2016. And that as a result of the lower prices that we’re able to hedge in 2016 resulting into the $0.12 hit… Brian Russo Got it, understood. And then how does the sales assumption in the current rate case of PNM electric compare with your flat to negative 2% outlook assumption for 2016? Pat Vincent-Collawn I’m sorry Brian, would you give us the question again. Brian Russo Yes, just the sales assumption in current rate case filing. How does that compare with your actual outlook for 2016? Chuck Eldred Brian, it’s really – the final would be more flat to what we expect over 2015, but again we’re going to be conservative because we just don’t see enough consistency in the trends to give us comfort to think it would be any better than that and we’re going to continue to be a little more pessimistic on the – thinking about the downside effect of that on a continuous basis. And then address that, and there’s a rate case it’s pending right now. Brian Russo Okay, great. Thank you. Pat Vincent-Collawn Thanks Brian. Operator And the next question comes from Anthony Crowdell of Jefferies. Anthony Crowdell Good morning. Chuck Eldred Good morning. Pat Vincent-Collawn Hi, good morning, Anthony. Anthony Crowdell Just one housekeeping question and something else I think you had said, when do you expect to file the 2018 general rate case? Pat Vincent-Collawn In December of 2016. Anthony Crowdell Got it, okay. And then – and I guess just lastly, if you look at 2015 your regulatory calendar was very busy we had future test years, BART we had settlements I guess people pull out everything else. It looks like things have maybe cleared or maybe a little easier in 2016. I guess my question is has all the emotion that went on in 2015 poisoned the well that when we look at the 2016 rate proceeding going on and then you’re going to file again in December of 2016 for the 2018 case, has all that emotion poisoned the well in the next couple of rate proceedings. Pat Vincent-Collawn I don’t think so Anthony I think that given the fact that we’ve remained constructive throughout the whole 2015 rate case and we’re willing to go back and work with the interveners. I think they’ve really appreciated that and I think the commission even said at the hearing that they appreciated everybody’s positive attitude and working towards the settlement obviously we had one party that did not join that settlement or a couple of parties that didn’t join that settlement. But I think everybody understands that we remain positive, we stay positive, that this was the most complicated case ever to be seen in New Mexico and now we’re kind of back to much more plain-vanilla rate cases. So I don’t think that, that anything got poisoned I think that the way the company and the employees handled itself was very good. Anthony Crowdell And just lastly, the BART proceeding, I think the BART was like – I believe 4 to 1 do you know the last time the commission unanimously approved something? Pat Vincent-Collawn Anthony, we have to get back to you on that for certain, there have been some smaller things the commission has unanimously approved in terms of some riders. I think they unanimously approved opening a workshop and something, so I don’t know off the top of my head, but we will get back to you. And when commissioners have voted against, there have actually been different commissioners voting differently, there was about yesterday for example, some of the folks wanted more time on the SPF rate case and the commissioner said no – it was 4 to 1 but it was commissioner Montoya voting against that as opposed to commissioner Espinoza who voted against the BART proceeding. So it’s been a different mix of commissioners voting, but… Chuck Eldred I think some of the smaller items… Pat Vincent-Collawn Yes. Chuck Eldred Solar at 40 megawatts the delta purchase, which we called the Rio Bravo generating station. There has been a lot of smaller projects throughout the proceedings over the last year that are included in the 2016 rate case that have been approved that have been supported by the commission. So, but, we can go back and give you some answers and details. Anthony Crowdell Thanks and… Pat Vincent-Collawn The future test year unchanged, Anthony when the commission decided to go with the definition that we and SPF had advocated that was unanimous. Anthony Crowdell Okay, great. Thanks for taking my question and enjoy the holidays. Pat Vincent-Collawn Thanks, Anthony, you too. Chuck Eldred Thank you. Operator [Operator Instructions] Our next question comes from Leon Dubov of Luminus Management. Leon Dubov Hi guys, good morning. Pat Vincent-Collawn Good morning, Leon. Chuck Eldred Good morning. Leon Dubov I just want to make sure I understand the assumptions for the rate case that you are having guidance. So if I look at the Slide 8 or the PNM Retail, $1.08 to $1.24, you said that includes the full implementation of – your full ask for the rate case? Chuck Eldred That’s a full ask use in the July 1 and the October 1, and then we’ve adjusted it for load in some of the regulatory lag to reflect that… Leon Dubov So again, this assumes full ask with… Chuck Eldred Full ask, yes… Leon Dubov Or the different implementation dates that’s what make the difference? Chuck Eldred That’s correct. Pat Vincent-Collawn Correct. Leon Dubov Okay. And then I can use that with the sensitivities you gave on the Slide 10, so effectively if we got in August first implementation date, it would be $0.08 off the top end, is that the right way to read that? Chuck Eldred That’s correct. Yes. Leon Dubov Okay. Got, it. Thank you, I just wanted to … Chuck Eldred And again I want to answer that. We are focusing very, very intently on the July 1 date. So the schedule we have out there is, our objective is not to – from our standpoint have any alteration to that timing. Leon Dubov Thank you. Pat Vincent-Collawn Thanks Leon. Operator And next we have a question from Tim Winter of Gabelli & Company. Tim Winter Good morning, and congratulations on getting all of this approved. The BART approval and the test year. Pat Vincent-Collawn Good morning, and thank you, Tim. Tim Winter You should see if Jimmy and Chuck, will let you take a vacation anytime soon. Pat Vincent-Collawn Actually I canceled my vacation to be here today Tim. So, but maybe next year they’ll let me have one. Tim Winter I was wondering if you could talk a little bit about the future test year procedures. Do you have, basically all the procedures and processes setting out to file for that or do you still need to do some more work with the commission? Pat Vincent-Collawn Well, we need to go ahead and take back the appeal at the Supreme Court and finalize that. But in terms of hours we practice this so we now have that in this rate case. That we have under right now, while it is not a future test year we worked through with the staff and interveners to make sure we had the models and the data in a way that they felt was complete. So between that and the fact that we’ve done it before and that SPS has done this before. We feel we’re in good shape to file the one in December of next year. Tim Winter Okay, great. Thank you. Pat Vincent-Collawn Jim, if I need some help getting a vacation next year. Can I call you? Tim Winter Absolutely. Pat Vincent-Collawn Great, thank you. Tim Winter Thanks for having the call. Pat Vincent-Collawn Thanks, Tim. Operator And this concludes our question-and-answer session. I would like to turn the conference back over to Pat Vincent-Collawn for any closing remarks. Pat Vincent-Collawn That’s okay. Thank you all for joining us. I know it’s a busy holiday season for everyone. We’ve had a good year here at PNM. Resources and again I just want to thank everybody at the company and the community and the Governor’s office at the Navajo Nation that worked with us to bring the BART plant to a fruition. I hope you all have a wonderful, safe and happy holiday season. I look forward to seeing you all in the New Year. Thank you. Operator The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com . Thank you!