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PNM Resources, Inc. (NYSE: PNM ) Q3 2015 Earnings Conference Call October 30, 2015 11:00 AM ET Executives Jimmie Blotter – Director of Investor Relations Patricia Collawn – Chairman, President, Chief Executive Officer Charles Eldred – Chief Financial Officer, Executive Vice President Analysts Anthony Crowdell – Jefferies & Company Brian Russo – Ladenburg Thalmann Paul Ridzon – KeyBanc Capital Markets Operator Good morning and welcome to the PNM Resources Third Quarter 2015 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. Please go ahead. Jimmie Blotter Thank you, [Annie] and thank you everyone for joining us this morning for the PNM Resources third quarter 2015 earnings conference call. Please note that the presentation for this conference call and other supporting documents are available on our website at pnmresources.com. Joining me today are PNM Resources Chairman, President and CEO, Pat Vincent-Collawn and Chuck Eldred, our 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. And with that, I will turn the call over to Pat. Patricia Collawn Thank you, Jimmie and good morning, everyone. Thank you for joining us on this beautiful New Mexico morning. I’m sorry you aren’t here in person to enjoy the weather and to see our wonderful Halloween costumes. I am pleased to report that PNM Resources delivered a solid performance in the third quarter continuing to build on the momentum that we have established. Start with Slide 4. Our GAAP earnings per share for the third quarter of 2015 were $0.76 compared to $0.69 in the third quarter of last year. Year-to-date in 2015 our GAAP earnings are a $1.34 compared to a $1.21 in 2014. Ongoing earnings were $0.76 compared to $0.68 from the third quarter last year. Year-to-date ongoing earnings in 2015 are a $1.41, up $0.16 from this time last year. We are also narrowing our guidance range for the year to a $1.56 to $1.61. Chuck will provide more detailed look into the numbers in a few moments. Before we do that, I will provide updates regarding our BART plan and other regulator proceedings and review the timeline for PNM’s general rate case filing. But first I would like to take a momentum to share something of which we are very proud. PNM was recently honored with the 2015 reliability one award recognizing the company as one of the very best midsized investor of utilities in the nation. As Jeff Lewis ReliabilityOne program Director stated in the new release about the award, reliability is ultimately one of the most tangible means to customer engagement any added. PNM has demonstrated that is understand the essence of customer engagement and is consistently providing superior service. This achievement is the result of tireless efforts and dedication of our employees who focus each and everyday on serving our customers and our communities. I would like to thank them for their hard work. Moving onto Slide 5, will discuss the latest development regarding San Juan generating station and the BART process. The new hearing on the case began as schedule on October 13 and concluded on October 20. The purposes of the hearing was to consider the new stipulated settlement agreement that the company reached with the majority of parties in the case. The hearing also covered the filing of signed ownership restructuring and coal supply agreements the lack of which was the primarily reason for the hearing examiners recommendation in April. In addition to commission staff and the Attorney General, signatory to the agreement include two environmental groups Western Resource Advocates and the New Mexico Coalition for Clean Affordable Energy. The New Mexico Industrial Energy Consumers, New Mexico Independent Power Producers and the renewable energy advocacy groups, Interwest Energy Alliance, also joins the agreement. This is the list that shows strong and diverse support for what we’re confident is a good settlement. Santa Fe and Bernalillo Counties and Albuquerque Bernalillo County Water Utility Authority are not joining the settlement, but they no longer oppose the deal. While the City of Santa Fe oppose the original agreement, the city has not taken a position on the new settlement. The highlights of the agreement are the CCN for the additional 132 megawatts in San Juan Unit 4. A CCN for bringing a 134 megawatts of Palo Verde 3 into rate base. Retirement of San Juan Units 2 and 3 and the recovery of half of the remaining un-depreciated investments and the instillation of SNCR Technology on San Juan Units 1 and 4 with accelerated cost recovery. One Environmental Group, the New Energy Economy continues to approach any agreement on San Juan. As filed a motion with Commission asking that four to five commissioners recuse themselves from the case. The group alleges the commissioners have improper ex BART case communications about the cash with PNM, claims that the commissioners are biased and then they have also prejudged the case. The commissioners denied the New Energy Economy’s claims and rejected the call for their recusal. And then they filed the petition with the New Mexico Supreme Court asking the justices to force the recusal of the commissioners and requesting a stay of the case until the petition is acted on. They also asked that PNM’s application of the Commission be dismissed. The court ultimately permitted the hearing to proceed as scheduled but state the commissioners from taking any action on the matter until the court makes a decision. As we clearly demonstrated in previous filings at the Commission, we believe any easy position is baseless. Oral arguments will be held on November 9, and we believe the court will act quickly on this matter. Let’s now go to Slide 6, and take a look at other regulatory matters. The Commission’s hearing examiner recommended approval of PNM’s 2016 renewable energy plan. The company continues to meet the renewable portfolio standard and our plan continues the rate rider for recovery of the associated costs. We expect the Commission to issue a final order in late November. Regarding, PNMs appeal of the New Mexico Commission’s definition of the future test year. The Commission held workshops to attempt to reach agreement among interested parties on the definition. Agreement was reached on a definition that would allow a future test year to begin 13 months from the date of a rate case application. On this basis PNM and the PRC filed a joint motion to remand the final order of the Commission in for 30 days stay of the appeal to allow reconsideration by the Commission. This will also gives the Commission and opportunity to docket a new rule making to incorporate the agreed-upon definition into the future test role. The Supreme Court has not yet acted on this motion. Meanwhile PNMs rate case filing is moving forward. The procedural schedule calls for staff and intervener’s to file testimony by January 29 and the hearing is scheduled to begin March 14. At FERC regarding our transmission formula rate case, we are still waiting on the FERC to act on the settlement we filed in March. We filed a settlement on the Navopache contract with FERC yesterday. I will give some high level comments on this and then Chuck will walk you through the detail in his section. Navopache made filing at FERC earlier this year requesting the authority to source their power from other suppliers based on a particular clause in the contract. Although we do not agree with their interpretation, we saw as an opportunity to return this portion of our assets to serve our retail costumers. With increased environmental regulations like the Clean Power Plan we believe that there will be continued reduction of base load generation assets in the future especially coal, as well as the introduction of more intermittent renewable resources. As this happens the stability of the grid will be diminished and one of the best way to protect our retail customers is to have generation resources that we own and are dedicated to serving these customers. Serving our customers with reliable and cost effective power is a core element of our business strategy. We felt it was in the best interest of our New Mexico customers to exit the contract with Navopache knows and brining those resources back to the retail jurisdiction. Over in Texas, TNMPs July 17 key cost filings requesting an increase of $1.4 million was approved and went into effect September 10. This reflects a $7 million increase in transmission rate base over our last filings. Now, I’ll turn things over to Chuck for in-depth look of the numbers. Charles Eldred Thank you, Pat and good morning, everyone. Beginning with Slide 8, load at PNM continues to be in line with our guidance of flat to down 3%. We saw continued strength in customer growth at PNM increasing to 0.8% for the quarter and holding to 0.7% year-to-date. Those are above our 2015 forecast at 0.5%. Residential was flat year-to-date and total load is down 1.4%. Economic growth in New Mexico continues to be slow. Looking at employment growth for Albuquerque, which is a major portion of PNM service territory. You can see that we are up from where we were a year ago and then it has trended around 1.5% through this year. This supports what we have been experiencing that the economy has not yet seen any significant upticks, but it’s holding fairly steady. You can see also that the U.S. average is a bit higher than Albuquerque at 2%. The economy in Texas continues to perform well. We do however see some softening of employment growth in recent periods particularly in the Houston area. As you can see on the chart there continues to be employment growth in both the Houston and Dallas, but Dallas is continuing with stronger performance. Load at TNMP is up 2.7% year-to-date which is in the guidance range to 2% to 3%. TNMP did have strong customer growth again coming in at 1.5% year-to-date which is higher than the forecasted 1%. Now turning to Slide 9 for the Q3 financial results. Ongoing earnings were $0.76 compared to $0.68 last year. Looking at the segments, each came in higher than last year, PNM up $0.05 and TNMP up $0.02, corporate and other up $0.01 because of the payoff of the 9.25% in May of this year. Now for more detail on PNM and TNMP drivers on Slide 10. Starting with PNM, AFUDC was up $0.04 this quarter. This is due to increased capital spending from the La Luz Gas Peaker in the 40 megawatt of solar that comes online this year in the San Juan, SNCR equipment. The half price renewal of Palo Verde Unit 1 leases caused a year-over-year improvement of $0.03. Weather was up $0.03. Cooling degree days this year were 6% higher than normal and 14% higher than Q3 2014. The refined coal process at San Juan which began last year in mid-November also improved earnings by $0.01 and the nuclear decommissioning trust had gains that were $0.01 higher than third quarter of last year. Renewable rate releases $0.01 improvement in Q3 of this year versus last year. As expected load cost earnings to lower by $0.03. Outage costs were $0.02 higher in Q3 of this year driven primarily by unplanned outages at four corners in San Juan. Other O&M expenses were $0.02 higher primarily caused the increases in employee medical cost. Depreciation and property tax expenses were higher by $0.01 because of the higher capital spending. Interest expense was also over $0.01 primarily due to the August issuance of $215 million of long-term debt and 3.85%. Now moving to TNMP. We saw an improvement for rate relief from the semiannual TCOS filings of $0.02. Combined load and weather were by $0.01, cooling degree days were 4% higher than normal and 8% higher than Q3 of 2014. Depreciation and property tax expenses were higher because of more capital additions. This caused results to be $0.01 lower. Now, turning to Slide 11. Today, we are narrowing our guidance range. We expect 2015 to be $1.56 to $1.61 and our previously issued guidance range was $1.50 to $1.62. This moves the end point of guidance to $1.58. We have also adjusted our segment enhancement for the remainder of the year which are on the slide. PNM will come down slightly this caused by the delay an implementation of rate case to third quarter 2016. This reduces revenue that was originally expect in December 2015 which has a [recent earnings back] for the year. Another factor that year-to-date whether is lower than normal. The remainder of the year-over-year drivers that were given but we issued 2015 guidance remain intact. TNMP is performing better than expected so guidance on that segment has been raised to account for the increases in load and weather. Finally, I would like to address the Navopache settlement. Pat is already walk you though the strategic rationale for our exist from this contract. As far as the detail to the settlement we will be able to manage the exist process from the contract and have time this considering the need for additional generation the results from the two unit shutdown at San Juan that will be including the 2018 rate case. The settlement that will have no earnings back in 2015. In 2016, the contract price will be lower but the full load will continue to serve for the entire year. In 2017 we will serve 10 megawatts around the clock which is about 23% of the current energy. Beginning in 2018 we will no longer serve this load and will plan to reallocate the rate based in the Mexico retail jurisdiction. This would allow us to reduce the cost to customers by lowering our investment in new generation capital. Since this was an agreed upon settlement with Navopache we have been able to develop plans to offset the financial impact both in 2016 and 2017. These plans include selling power in a market that would otherwise been allocated to them. Reductions in fuel and transmission expenses and other cost control measures. As a result we do not expect to have any significant earning gaps which is similar to how the expiration of Gallup contract was handled. Furthermore we will be able to execute the strategy the Pat described dedicating our jurisdictional generation resources to serving retail customers. Outside of Navopache, there are two remaining per coal sale generation contracts that we serve, which combined only represent nine megawatts. One of these contracts will terminate mid-2016 representing six megawatts this contract termination has already been reflected in our 2016 rate case filing. The final contract is three megawatts of load with the contract termination in 2019. Moving to Slide 12. We are making the number of capital adjustments to account for the changes in our resource requirement forecast. I will start by review in the generation capital. The changes that we are making the account for both Navopache in the lower load projection filed in our 2016 rate case. The $133 million investment and $187 megawatt gas peaker they have been planned to build has been reduced about $100 million which represents approximately 100 megawatts of peaking capacity. In addition the 20 megawatt of 2019 solar for $43 million has been eliminated since we do not anticipated that will need this additional capacity. The reduction in generation capital allows us to reprioritize or TNMP capital. We are able to now found about 16 million of additional projects that will continue to support the reliability for our service territory. We also made the decision to invest 50 million more into TNMP through 2019. To support their continued above the average growth. The investments are for transmission infrastructure in North Texas and in distribution systems in South Texas because the customer growth there. In summary, this makes our capital spending total $2.3 billion, up slightly from our previous forecast at $2.2 billion. We continue to expect the five-year rate base growth of PNM to be 5% to 7% and TNMP rate base growth has increased to 75% over the period. On a regulatory front is important to note that we have now made a decision regarding the CCN proceeding for the 187 megawatt gas speaker with the Commission. Additional time is needed to further evaluate other alternatives. However we are certain that we will need additional gas peaking capacity to drive the flexible reserves that are required to meet NERC operating criteria. We are therefore evaluating the 187 megawatt peaker versus smaller units to come up with the solution the best balances costs with net rate system support. We expect to make a final decision by early 2016. Now let’s take a look at what this does to the earnings power of the business on Slide 13. To begin with we have updated the 2015 guidance midpoint for the narrowed earnings range. This bring us starting point of earnings power to $1.58 for the year. For 2016, you will notice the majority that rose are consistent with our prior presentation of this slide. PNM FERC now represents only transmission, this is consistent with our long-term strategic plans that we have been discussing. As you can see the rate base number is down slightly and this is because we’re showing the FERC generation contracts and items not in rates for 2016 and 2017. But you’ll also note there is an increase in EPS because the transmission business has a higher return. The ROE assumed for the transmission business is 79%, which accounts for the lag that inherent in the formula rate methodology. Let’s move to items note in rates were Navopache is now included. In 2016 we’ll serve the entire load but at a reduced price result in a $0.03 reduction in earnings potential. We’ve also refined some of the other estimate such as our gas pension expenses. As you are aware in 2009 we exited the gas business as part of that sale. We retained the obligation for the pension of those employees. When we filed for the rate case in August we notified the Commission that we were considering annuitizing the gas portion of the pension obligation. With these plans beginning in 2016, we have removed the impact of the gas portion of the pension, which is $0.02 to $0.03 improvement to ongoing earnings. You will recognize that the bottom line for 2016 earnings potential is unchanged at $1.50 to $1.73. Now turning to Slide 14. Looking at 2017 you will notice that total PNM has shifted slightly. Again FERC now only represents transmission rate base. 2017 Navopache is included in items not in rates as a $0.06 incremental decrease compared to 2016. We have updated the other items like the gas pension assumptions. So that in total it comes to a penny to a $0.04 earnings contribution in 2017. I mentioned earlier that we have allocated additional capital to TNMP and therefore rate base is up causing earnings to increase by a penny. Overall, this brings the earning potential in 2017 slightly down to a $1.94 to $2.01 which is a $0.03 reduction to our prior presentation. Moving to 2019, what you see here is that the effects of the Navopache are no longer included in the items not in rates. The former Navopache rate base moves to PNM retail beginning in 2018 that along with our current capital forecast brings the 2019 retail rate base up to $2.5 billion. You will also notice that FERC shows a considerable increase in rate base, we expect to add additional FERC transmission customers. For example we have signed transmission service agreements for delivery of more than 400 megawatts of wind power from Eastern New Mexico that will be sold to utilities in California beginning in 2017. The bottom line for 2019 is now $2.25 to $2.36, this is a $0.06 increase over the previous low end of the range, which was $2.19. Wrapping on Slide 15, as you can see with the potential earnings power of the business, we anticipate delivering 79% earnings growth by 2019. We also expect to provide strong dividend growth over this timeframe as well. The next review of our dividend will be done by the Board in early December. With that, I will turn it back over to Pat. Patricia Collawn Thank you, Chuck. As you can see we continue to move forward constructively. The company is on track financially and we are working through our key regulatory filings. We continue to focus on the core elements of our strategy, which is centered on serving our customers. And I’m very pleased to say that in the latest JD Power customer satisfaction scores PNM showed significant increases on all areas and that’s especially significance given our high-profile of regulatory filings. I am proud of what we have accomplished and I am especially proud of the excellent work of our dedicated employees. They truly drive the success of PNM Resources and they do it by putting our customers first every day. Operator, let’s open up the call for questions. Question-and-Answer Session Operator Thank you. [Operator Instructions]. Our first question is from Anthony Crowdell at Jefferies. Anthony Crowdell Hey, good morning. I know there was a lot of moving pieces about the Navopache stuff. But I guess if I look on Slide 13, on the Palo Verde free line, now for 16 years showing a loss of $0.12 there was before you were showing just a loss of $0.05? Patricia Collawn Good morning, Anthony. I’m going to turn that one over to Chuck. Charles Eldred Yes, Anthony, as you all know given where power prices are in the market, we’ve shown in the footnote the projections that Palo Verde 3 are down about $29 a megawatt hour, it takes about $43 a megawatt hour to breakeven. So we’ve reflected in our numbers for 2016 the fact that we have prices at a lower level. We continue to manage that, but focus here is to eventually get this into rate base and we’ll have to deal with the volatility of the market until such time occurs. Anthony Crowdell Over to Navopache the generation I guess that you were serving that contract, now you are going to use that generation to serve I guess retail customers and I’m assuming that’s in a lower margin and what the contract was for? Charles Eldred Yes, if you kind of understand that what we are talking about is whether prices in the market and as low as they are really was not beneficial for us to continue to work with Navopache on wholesale contract that begin to move that generation. That was previously allocated from the retail rate base back into rates so we can serve our customers. And coincide that, we negotiated to coincide this with the 2018 plan, two unit shutdown and Palo Verde coming in and also plans for the gas peaker. So really does balance out nicely for our overall plans and work towards getting out of the wholesale market and allowing these resources to be dedicated to our customers in serving reliable and power further going forward. Anthony Crowdell I guess, when we think about 2018, you filed a rate case I heard for the August and September, and you filed the rate case maybe get a decision sometime in October. You are going to have to file the second rate case since I guess the future test your decision came during this year was not favorable. Do you file again right after the decision comes out? I’m assuming to get rates in for early 2018, you need to file rather quickly once you get that decision out? Charles Eldred Yes, we would be looking at file in December 2016 in order to work towards an effective rate case of January 2018, so it will be coming very quickly after we settled this current rate case. Patricia Collawn And remember Anthony that our future test year cases still on appeal and we hope to get that back and then we’ll have an idea of which definition of the future test year there is so we are still waiting on that decision also. Anthony Crowdell But you cannot change the current filing now regardless of what have to the future test year, is that correct? Charles Eldred That’s correct. Patricia Collawn That’s correct. Anthony Crowdell Okay. And just lastly, my question was related to – if I go to Slide 5, you list in terms of the settlement you’ve already spend some of the money or maybe a lot of the money on the SNCR for Units 2 and 3. What would be the total – if BART is not going to approve, what is the strength, what is the total amount of stranded cost. You have a 128 here for Unit 2 and 3, but that’s only half of the investment. So that you are looking at a total somewhere like 258 then what’s also the scrubber cost that you’ve put SNCR cost for 258. Charles Eldred Yes. And Anthony, Jimmie can give you more details, but the bottom line, the SNCR capital cost for PNM are about $26 million, so 150% and also the megawatts that we intend to spend for our involvement in Unit 4. Anthony Crowdell Any other capital that you’ve spent in the plan that’s involving [indiscernible] other than SNCRs? Charles Eldred There is some balance draft capital, but we also have in the current case. Anthony Crowdell And the total of that? Charles Eldred Total of that is about $52 million so brings it up to about $78 million when you add those together. Anthony Crowdell Great, thanks for taking my questions. Patricia Collawn Thank you. Charles Eldred Thank you, Anthony. Operator The next question is from Brian Russo of Ladenburg Thalmann. Brian Russo Hi good morning. Patricia Collawn Good morning, Brian. Charles Eldred Hi, Brian. Brian Russo Just when we look at Slide 14 and the 2017 earnings potential, obviously making assumption of a 10% ROE which I guess would be subject to change, but it seems like while you get a full year of new rates in the pending rate case you are going to file another case for the 2018 future test year. Is there any reason for us to believe that your experience regulatory lag in 2017 or contingent on what the lower ROE is, are there any like major net plant expenses that hit the income statement in 2017 that to create lag? Charles Eldred There could be a slight lag on the ROE, but for the most part given what we assume the 10% continuing to make that assumption going forward. Each year there is a slight lag in returns relative to additional investment in capital and clearings that occurred at depreciation and just normal O&M cost et cetera. So just the – within the 100 basis points, we’d probably again a rule of thumb is that regulatory lag works towards the actual filing and effective rate case for 2018 to get us caught back up. Patricia Collawn But nothing major Brian, there is no expenses there. Brian Russo Okay, got it, okay. And then I think in Texas the staff recently filed a memo noting that TNMP was over earning in 2014 but recommended no action. I was just curious you know what drove the over earning in 2014 was it load, weather? Charles Eldred Yes, I would say it’s mostly load and weather and what they saw when we sat down and have discussions with them is that we continue to invest a significant amount of capital both in transition and distribution. And when you think about the clearing of the capital and the added depreciation it really gives the earnings back in line to what is allowed. So they were very open and supportive and understanding what our business model looks like in Texas and the fact that because of that growth, we’re not holding back, we’re actually investing more as I pointed out in this presentation to continue to improve the growth in the investment and transmission in TNMP. Patricia Collawn Yes, Brian we pointed out the PNM on a reliability work but TNMP’s reliability is also very good and customer complaints almost nothing in Texas. So I think the fact that we keep investing and taking care of our – they understand we are committed to the business and that’s very helpful. Brian Russo Got it. And just could you talk about the voting parameters or requirements by the New Mexico Commission meaning do you need a majority of the five’s, you need three votes in favor or against BART on order for to get approval or not. Do you understand what I am saying meaning if one commissioner [indiscernible] that you down to four, you still need three of those four to vote one sided? Patricia Collawn That is correct. You got it Brian. Brian Russo Okay, great. Thank you. Patricia Collawn Thank you. Operator [Operator Instructions] Our next question is from Paul Ridzon KeyBanc. Paul Ridzon I think you said but I may have missed it. What is the weather year-to-date versus 14 in normal? Patricia Collawn You mean in terms of the cents? Paul Ridzon Yes. Patricia Collawn Cents on earnings per share. Paul Ridzon Correct. Patricia Collawn Hang on let me go back to that page. Okay, weather was $0.043 in PNM and load and weather combined in TNMP were $0.01. Paul Ridzon This is year-to-date? Patricia Collawn Quarter. Paul Ridzon Do you have year-to-date numbers? Charles Eldred Not in front of me right now and why don’t you just call Jimmie shall give to you. Paul Ridzon I can dig a more. And then there is no procedural schedule per se at the Supreme Court, but you are expecting an expeditions review. Patricia Collawn That is correct, there is no procedural schedule, but we clearly understand the time sensitive nature of it and the benefits of getting the same of restructuring the coal contract and so we would expect them to roll quickly. Paul Ridzon Next end of November, is that fair? Patricia Collawn By the end of November we would hope sooner, but by the end of November I think that’s fair gas. Paul Ridzon Got it. Okay, thank you very much. Patricia Collawn Thanks, Paul. End of Q&A Operator There are no further questions 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. Patricia Collawn Thank you, and again thank you all for joining us today. We are looking forward to seeing many of you in 10 days at EDI and will have any relevant updates there. And I hope you all have a very safe and happy Halloween. Thank you. Operator The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.