PNM Resources Management Discusses Q4 2012 Results - Earnings Call Transcript

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 |  About: PNM Resources, Inc. (PNM)
by: SA Transcripts

PNM Resources (NYSE:PNM)

Q4 2012 Earnings Call

March 01, 2013 11:00 am ET

Executives

Jimmie Blotter

Patricia K. Vincent-Collawn - Chairman, Chief Executive Officer and President

Charles N. Eldred - Chief Financial Officer and Executive Vice President

Analysts

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Maury May

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Anthony C. Crowdell - Jefferies & Company, Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the PNM Resources Fourth Quarter Conference Call [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Jimmie Blotter, Investor Relations Manager. You may begin.

Jimmie Blotter

Thank you, Kate, and thank you, everyone, for joining us this morning for the PNM Resources Fourth Quarter 2012 Earnings Conference Call.

Please note that the presentation for this conference call and other supporting documents are available on our website at pnmresources.com.

Joining me today are PNM Resources' Chairman, President and CEO Pat Vincent-Collawn; and Chuck Eldred, our CFO, as well as several other members of our executive management team.

Before I turn the call over to Pat, I need to remind you that some of the information provided this morning should be considered forward-looking statements pursuant to the Private Securities Litigation Reform Act of 1995. We caution you that all of the forward-looking statements are based upon current expectations and estimates, and that PNM Resources assumes no obligation to update this information.

For a detailed discussion of factors affecting PNM Resources' results, please refer to our current and future annual reports on Form 10-K, quarterly reports on Form 10-Q, as well as other reports on Form 8-K filed with the SEC.

And with that, I will turn the call over to Pat.

Patricia K. Vincent-Collawn

Thank you, Jimmie. Good morning, everyone. Happy March 1, and let me add my welcome to Jimmie's to our 2012 earnings call. We thank you all for joining us this morning.

I will start the presentation on Slide 4. I'm going to provide a brief overview of our fourth quarter and year end performance and then provide some company updates.

I'm sure you've all seen our news release issued this morning. We are very pleased to report that 2012 ongoing earnings came in at the upper end of our guidance range at $1.31 per diluted share. This compares with 2011 ongoing earnings at $1.08 per diluted share.

On a GAAP basis, the year also ended at $1.31 per diluted share compared to $1.96 in 2011 and remember, 2011 included the gain from the sale of First Choice Power of $1.08.

2012 marks the first full year of our operating as a traditional regulated utility so we are pleased to have our business strategy already demonstrating to shareholders strong earnings growth.

We saw both PNM retail and TNMP earning their allowed returns in 2012.

Ongoing earnings for the fourth quarter were $0.13 per diluted share compared to $0.22 in the fourth quarter of 2011. Fourth quarter 2011 GAAP earnings were $0.11 per diluted share. The comparable GAAP number for the fourth quarter of 2011 is $1.35 per diluted share, due primarily to the gain on the sale of First Choice Power of $1.17.

Our Board of Directors yesterday showed their long-term confidence in the company by approving a 14% increase to the company's dividend. They also moved the annual dividend review to December and Chuck will cover more details on this in this discussion.

Today, we are also affirming 2013 guidance of $1.32 to $1.42 per diluted share.

Next, let's review our overall performance. On Slide 5, I'd like to review our 2012 checklist. 2012 was a great year for PNM Resources. We achieved all of our checklist commitments that helped drive our performance for the year. We are very pleased with the efforts of our employees in negotiating regulatory settlements, making timely and effective fillings and engaging in constructive discussions in New Mexico, Texas and federal proceedings.

Providing reliable electric service to our customers was a 2012 checklist item and will continue to be a top priority in the future. Our average outage time for PNM customers was in line with historical top quartile performance and our San Juan generating station had its best performance in 7 years.

Managing our operating and capital costs was and remains a top priority. You can see from the effort from our employees on that front in so many ways, from the BART negotiations to the PNM renewable energy plans, that has our company meeting the state requirements while remaining beneath the reasonable cost threshold. You see it in the strong earnings in 2012 that show we are keeping our operating costs aligned with revenues. Developing efficiency in our organization has become a focus for us and during 2012, our employees dedicated 10,000 hours to process improvement projects company-wide.

Let's take a closer look at load growth now, as well as economic conditions and unemployment in both Texas and New Mexico.

If you'll turn to Slide 6. We'll start with PNM. We continued to see sluggish retail load growth at PNM, down 0.2% in 2012 on a weather-normalized basis. PNM does continue to experience moderate customer growth at 0.3%. This is driven by the lack of substantial employment growth in the state. However, on the other hand, our unemployment rate in New Mexico remains lower than the National rate where it's 6.4% here in New Mexico. We do not expect to see substantial improvements in load at PNM in 2013 with our projections at 0% to 1% growth.

We are starting to see some positive trends in building permits here in PNM's territory. On a rolling 12-month basis, residential permits are up 74% as of January 2013.

Over in Texas, at TNMP, the quarter resulted in good weather-normalized load growth. TNMP's 2012 weather-normalized load growth of 3.7% shows how well the Texas economy is doing. The Dallas/Fort Worth and Houston areas are some of the stronger growth areas in Texas right now and most of our service territory is near these areas.

TNMP's 2012 average customer growth rate was 0.7%, another sign of strength in this area. And the positive economic conditions in Texas has also showed in their employment rate -- unemployment, rate, excuse me, which is 6.1%.

Our projections for load growth in Texas are 1% to 3% for 2013.

Let's now turn to regulatory issues in Slide 7. Our FERC generation case with the Navopache Electric Cooperative is progressing. PNM and Navopache filed a settlement with FERC on December 7, representing a 5.3 million annual increase in rates. This settlement is a black box settlement with an imputed 36.7 million rate base, a 10% return on equity and a 50-50 debt-to-equity capital structure. The settlement provides for extending the contract for 10 years and it also provides that PNM will be able to file an application for formula-based rates to be effective in 2015.

The new contract also includes a fuel clause, which is adjusted monthly.

The ALJ certified this settlement on January 23 and we are now awaiting FERC approval. We do not have a timeline for that action.

On January 2 of this year, we were pleased to receive FERC approval of the settlement that we reached last July in PNM's transmission case. The settlement includes a $2.9 million increase to transmission revenues and importantly, the parties to the settlement agreed not to oppose the concept of a formula-based filing at FERC. The company has already filed that formula-based case with FERC. The filing was made December 31. That formula-based rate transmission filing proposes a return on equity of 10.81%, a 49 51 cap structure, a rate base of $140 million, and a $3.2 million revenue increase.

We expect to implement rates subject to refunds by August of this year.

As we announced in December, PNM has signed an agreement to purchase the Delta-Person Generating Station located in southwest Albuquerque.

On January 3, we filed an application at the New Mexico Public Regulation Commission requesting the commission to approve the purchase and grant a CCN to own and operate the plant.

The application also asks that the commission provide a determination of rate making treatment to assure recovery of associated cost in future rate cases.

We would expect to receive PRC approval in the third quarter and to close the transaction by year end.

In addition to filing with the New Mexico commission, PNM has filed for and received FERC approval of the Delta-Person purchase.

In Texas, on January 31, TNMP submitted a TCOS filing with the PUCT. The final request in the increase in total transmission rate base of $21.8 million and we expect a ruling from the commission by the end of March.

Now let's turn to Slide 8 for an update on the BART situation at our San Juan plant. On our third quarter call, we talked about addressing San Juan BART on 3 different paths. Those paths are the safe alternative plan, litigation in the test circuit Court of Appeals and the installation of FCRs.

As we announced several weeks ago, we are very pleased that an agreement has been signed with the state and the EPA for an alternative state plan.

The agreement focuses on meeting the requirements of the Clean Air Act by shutting down units 2 and 3 at San Juan by the end of 2017 and then installing SNCRs on the remaining units.

The SNCR installation is planned to be complete in early 2016.

Next steps includes the state approving a revised state implementation plan and then the EPA approving that state implementation plan.

In addition to the NOx reductions associated with these shutdowns, this alternative also has environmental benefits of reducing other greenhouse gas emissions and reducing freshwater consumption.

We will be identifying replacement power options in the future, which Chuck will provide more details on.

Overall, we are very pleased with this alternative. It's the lowest cost for customers and it allows us to further diversify our generation, limiting our exposure to coal in the future.

In the meantime, at the 10th Circuit Court, we and the other parties have provided a report to the court on reaching the agreement on a revised state plan.

With the agreement now in place, we are no longer pursuing the SCR path. We have halted the work that our EPC contractor was performing.

With that, I'll turn the call over to Chuck for the financial details.

Charles N. Eldred

Thank you, Pat, and good morning to everyone.

As Pat mentioned, we are very pleased with the 2012 performance and the progress we have made as we continue to focus on our efforts of our regulated utilities.

We achieved positive rate outcomes in late 2011 and 2012 and we're on a constructive path to resolve the BART compliance at the San Juan generating station with the agreement reached on February 15 with the EPA and the New Mexico Environmental Department to pursue a revised plan.

I'll discuss this in more detail later in the presentation.

As we turn to the details of the year, ongoing consolidated earnings were up $0.23 from 2011. PNM was up $0.38 for the year and TNMP added $0.04.

Corporate and Other decreased $0.02. The exit from First Choice Power and Optim caused a combined $0.17 decrease year-over-year.

Now turning to Slide 11. The biggest driver for PNM was a retail rate increase implemented on August 2011 and the renewable writer implemented on August 2012.

These were a combined $0.29 improvement for the year. AFUDC, driven by -- primarily by higher rate because of lower short-term debt balances added $0.07.

Our focus on process improvement continues to deliver O&M reductions, resulting in a net improvement of $0.06 year-over-year.

FERC generation rate relief accounted for a $0.02 improvement and the FERC generation rate relief was up $0.01 for a total of $0.03.

We expect the returns for these businesses to continue to improve.

Outage costs were $0.03 higher in 2012, driven primarily by planned outages at San Juan.

In 2012, we had 2 major outages at San Juan compared to only one in the prior year.

Interest expense increased $0.03 due to the $160 million debt issuance at PNM in October 2011.

Load was down compared to 2011 for a $0.05 change in EPS. It's important to note that while our load is down, we did refine our unbilled revenue methodology in the fourth quarter of 2011 and added $0.03 to load in 2011. If that impact is removed, our load would only be down $0.02 year-over-year.

The 2.2% decline in load that Pat discussed excludes this change.

As discussed, lower Palo Verde 3 reprices were a negative driver causing a $0.05 decrease compared to 2011.

The PNM Resources 2011 share repurchases associated with the exits in the competitive businesses and recapitalization improved PNM results by $0.13.

Now turning to TNMP. It was up $0.04. As Pat discussed, TNMP is continuing to see strong load growth contributing $0.04. The peak cost rate relief implemented in September 2012 added $0.01.

Weather had a negative impact of $0.06 compared to last year. Cooling degree days were down 10% in Texas from last year's record-breaking heat, were up 10% compared to normal.

The PNM Resources 2011 share repurchase improved results by $0.03 from last year.

Now turning to Slide 12. As Pat discussed, ongoing earnings for the quarter were $0.13, which is $0.09 lower than last year. TNMP was up $0.01, but PNM was down $0.06. The primary drivers at PNM were decreased load, increased outage cost and lower PV 3 market prices.

The detail of the quarterly drivers is provided for you in the appendix to the slide presentation.

Corporate and Other was down $0.02 and the sale of First Choice Power on November 1, 2011, also caused a $0.02 decrease.

Now turning to Slide 13. Our 5-year core capital spending is now projected to be $1.8 billion, which results in 2% to 3% rate base growth over that period.

Now that there is a signed agreement to pursue a revised plan for San Juan BART, we have updated our core capital base growth without the San Juan environmental capital additions. Deferred taxes are increasing due to bonus depreciation, which also decreases rate base.

TNMP's rate base growth for the same period is expected to grow between 7% and 9% resulting from an investment in our transmission assets.

Now turning to Slide 14. We are still working through all the implications of an alternative plan for San Juan as described in the agreement. If the plan is approved, we would shut down units 2 and 3 by the end of 2017 and we plan to sell SNCRs on units 1 and 4 at a cost of $63 million by early 2016, depending on when the EPA approves the revised sale.

As part of the agreement, we committed to building 150 to 200 megawatt natural gas plant in the Four Corners region to partially replace the capacity from the retired units. We also expect to build a 40-megawatt gas peaker. We are also estimating that these peakers will cost approximately $280 million. Our core capital spend and additional capital costs associated with the SNCRs and peaking capacity would result in a rate base growth at PNM up to 3% to 5%.

We also need some baseload replacement resources. We may need additional gas generation and we could consider the incorporation of Palo Verde 3 as a replacement resource.

As you're all aware, Palo Verde 3 is not currently included in retail rates. We would be open to putting Palo Verde 3 into rates. If Palo Verde 3 is added to rate base, it would not require any additional capital spending. Whatever baseload replacement power options are settled upon, they will boost the rate base growth of PNM above the amounts shown.

Now turning to the Slide 15. As we've been saying, we are continuing to grow our dividend at above industry average rates. Our board approved a 14% dividend increase yesterday. This brings our annual dividend to $0.66 and the payout ratio to 48% based on the midpoint of our 2013 guidance range. This moves us another step closer to our target payout range of 50% to 60% of ongoing earnings.

The board also agreed to accelerate their next review of the dividend from February 2014 to December 2013. And we'll be considering an increase comparable to the amount announced today with a goal of moving the dividend payout into our target range.

Going forward, the dividend will continue to remain inside the 50% to 60% payout range. The board then remain on an annual cycle, reviewing the dividend each December so that the dividend announcement coincides with the issuance of our guidance.

The board will continue to evaluate the dividend based on substantially -- sustainability and growth, while considering our capital investment needs and industry standards.

Now wrapping up on Slide 16. As you saw in our press release this morning, we are affirming our 2013 guidance range of $1.32 to $1.42. We continue to expect PNM to be in the range of $1.16 to $1.23 and TNMP to be $0.32 to $0.34.

Before turning the call back to Pat, I want to address the filing of our next general rate case for PNM. We have previously announced that we anticipate filing a request for a general rate case in New Mexico in mid-2013. With the uncertainty related to the timing of the environmental capital spending and our strong operating results, we are reevaluating when we will need to file our next general rate case.

Since we are confident that PNM retail will continue to earn at or close to its allowed return, we are not under pressure to file for an increase right away. We will provide you with status updates in the future as we begin to expect to file -- as to when we expect to file the next PNM retail rate case.

Finally, on another note, many companies are seeing increased pension costs related to the defined benefit plans. I want to remind you that we froze our pension plans to new entrants, salary levels and service in 1997 for PNM and late 2005 for TNMP. Therefore, we're not exposed to the same level of risks that many other companies are facing.

With that, I'll turn the call back over to Pat for closing remarks.

Patricia K. Vincent-Collawn

Thanks, Chuck. On Slide 17, we'll wrap up today's call with a checklist for 2013. We are committed to ensuring cost recovery of our rate base additions in New Mexico and we'll complete the necessary filings to earn our allowed return. We expect to achieve positive regulatory outcomes in our FERC and Texas rate filings. We will continue to focus on strong reliability and power plant availability. And of course, we will not take our eye off the ball when it comes to our O&M and capital costs.

With that, operator, we can start the question-and-answer portion of the call.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Brian Russo with Ladenburg Thalmann.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Just at the evaluation of adding Palo Verde 3 to the rate base versus, I guess, building or requiring a gas plant. What kind of criteria will you be using in that evaluation?

Charles N. Eldred

Well, we'll certainly -- we'll have our own view what the valuation would be of nuclear generation, but this is really a comprehensive approach to how we replace all the baseload and the peaking generation and other aspects of the ultimate settlement and agreement we filed with the commission. So we certainly are very open and wanting to pursue the opportunity to bring that into retail rate base, but we want to make sure we do it at a reasonable expectation of receiving fair value and a reasonable outcome. So it's really too early to really discuss more details other than the fact that we're very open and willing to consider that as a replacement power.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Right. And so, I guess, it's not necessarily the least cost option, but it also could be diversification of your generation capacity, et cetera, right?

Charles N. Eldred

It does, exactly right. And at the same time, it does provide opportunities, as you mentioned, for the diversification of our generation supply and the -- willing to take a look at ways in which we can provide good baseload going forward in the future, along with the gas generation, et cetera. And good for the customers, but keep in mind the base economics of all the analysis will be against the economics associated with installing the SCRs, which is really the baseline of making sure we understand where customers receive the benefits and where we can bring value to shareholders with the ultimate solution.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

And correct me if I'm wrong, but the EPA's BART cost was estimated at $398 million, correct?

Patricia K. Vincent-Collawn

Brian, are you talking about our share of the SCRs?

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Yes.

Charles N. Eldred

Yes, that's about where our share was, yes.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Okay. And so, in this new alternative plan, it looks like you're spending a minimum of $340 million on the SNCRs in the 2 gas peaker plants, then there's additional upside depending on PV 3 and/or a third gas plant, is that the right way to look at it?

Charles N. Eldred

Yes, I mean, that's right. And also, we have looked at incremental T&D capital spend at PNM roughly about $154 million, which we have in the capital numbers you have in the slide, but that's some additional capital that we were able to work into a prioritizing and working into our plans over the next 3 years, a little bit of that will be spent this year and then the -- putting that into rates would actually go through 2015. So the next 3 years, roughly $154 million.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

And that all flows through the TCOS silence?

Charles N. Eldred

This will be for PNM. If you recall, we were going to spend about $100 million on SCRs this year. That allows us since the capital really in replacement power comes in latter years, we're able to release some opportunities for aging infrastructure improvements and improving reliability in our systems. So we'll be spending roughly about $150 million over the next 3 years.

Brian J. Russo - Ladenburg Thalmann & Co. Inc., Research Division

Okay, great. And one last question. I think at your Analyst Day back in December, you were fairly confident that you could finance the EPA's BART plan without any external block equity. Should we consider that the same for this new state alternative plant?

Charles N. Eldred

Yes, currently, no plans for any equity issuance.

Operator

Our next question comes from the line of Maury May with Wellington Shields.

Maury May

Going to Palo Verde 3 earnings. You said that earnings in 2012 were down $0.05 a share, but I'm just wondering about the absolute level of earnings at Palo Verde 3 in 2012 versus 2011.

Charles N. Eldred

In 2012 Palo Verde 3 was about $0.09 down as far as earnings are concerned. $0.07 down for total for the year. Is that right, Jimmie? Okay. And we had some of that basically still unhedged throughout the year we had that on a rolling 12-month basis. So we have hedged it out for this year and I showed in guidance for 2013 that would be another $0.07 loss.

Maury May

Okay. But what were the absolute level of earnings or loss in 2011 and 2012?

Charles N. Eldred

I actually don't have those numbers. I will call -- have IR call you and give you those numbers.

Maury May

Okay, great. Because looking -- if you were to put this in the rate base, I think your book value -- if you got it in the rate base at $116 million and finance the 50% by equity, 10% RoE, you could actually earn about $6 million, $5 million to $6 million on this aspect in rate base, could you not?

Charles N. Eldred

I mean, I think if you, obviously, if you do away with a negative drag and then you get the 10% of whatever value you agree to put it in the rates. So your thought is right. This is a question of what that contribution and value would be that we put into rates.

Patricia K. Vincent-Collawn

The net book value, Maury, is about $125 million.

Maury May

$125 million, okay. So it could be a little bit better than $6 million. Okay, good enough.

Operator

Our next question comes from the line of Ali Agha with SunTrust.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Chuck, could you remind us what were the actual earned ROE for TNMP and PNM retail in '12?

Charles N. Eldred

For PNM, we earned our allowed return, we were at a solid 10% for PNM. And TNMP, we were at -- our allowed return was well. So solid earnings in that business for TNMP.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Yes. I mean, if I run the quick math, I thought TNMP was over earning. Would that be fair?

Charles N. Eldred

I'm sorry, what did you say?

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

TNMP looked like it earned more than its allowed ROE in '12. Is that a fair statement?

Patricia K. Vincent-Collawn

No. They were...

Charles N. Eldred

It's very close. You have 10 and an 8, so we're very close to that 10 and the 8.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Separately, as, I guess, the commission also, New Mexico Commission would also approve the plan -- that state plan on San Juan. If I look at the map, I think you were mentioning earlier if you had gone down the SCR path, you would have spent there, what was it, $398 million, is that right?

Patricia K. Vincent-Collawn

That's right.

Charles N. Eldred

That's right, roughly.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

And as part of this plan, you're going to spend $343 million plus, perhaps more, depending on the national generation options. So help me understand how the cost saving is going to be looked at from the commission's perspective? I mean, the total CapEx spend roughly is the same in this plan versus SCR plan?

Patricia K. Vincent-Collawn

There's a couple of things here, Ali. One is the capital expenditures here are -- depending on what your baseload replacement is, will be less than the SCR plans. Obviously, not as small as just -- if we just did 4 SNCRs, but there is a lot of savings for customers involved when you look at avoided costs on coal handling, coal supply, greenhouse gas cost. So there's a lot of sort of incremental savings there that we get from reducing our exposure to coal.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And the timing of this, remind me, assuming this all goes as planned and assuming you determined and the commission agrees that Palo Verde 3 is the best base load replacement option, when at the earliest could that transfer happen in to rate base?

Charles N. Eldred

Well, the assumption built into the current plan is the base load would go in by 2018. So all this will be worked through to determine the right solution for that base load replacement, but the target would be 2018.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And last question and you folks alluded to that, that when you look at the dividend again in December the goal was -- the goal is to get you into that 50% to 60% payout and you're almost there right now. So that should get you there, but when you look longer term, I mean, utilities with a purely regulatory footprint like yours target a payout closer to the 60% to 70% range or mid-60% range, have you folks thought about taking it further beyond the 50% to 60% target or what's the thinking there along that?

Charles N. Eldred

Ali, we're taking things, as you well know, in steps and making sure that we understand the certainty of the capital spend and we'll be getting some clarity around what that plan is going forward. So we'll continue to look towards the movement of a comparable increase in December of this year and we'll always consider what we think is the right move on a payout ratio and currently, it's 50% to 60% and any other consideration, certainly, will be brought up to the board and discussed. We do want to maintain predictability and sustainability in a payout ratio that's comparable to the industry. So we're keeping a very close eye on that.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

And your target total return, if I recall, was for the 10% to 12% of the 12 to 17 period. Just remind me of those parameters and dividend, was it EPS yield [indiscernible]?

Charles N. Eldred

You're close. I mean, it was off in 2012 as a base and looking at 10% to 13% total return. We didn't break down EPS or dividend yield. We really just kept that as a component of both of those combinations would get us to that 10% to 13%.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

'12 through '17, was it?

Charles N. Eldred

'12 through '16.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

'12 through '16, got it.

Operator

Our next question comes from the line of Anthony Crowdell with Jefferies Group.

Anthony C. Crowdell - Jefferies & Company, Inc., Research Division

I'm not sure if you addressed these questions. Just a couple of things. One is I guess, when your Unit 1 came up with your lease option, you guys assumed to re-lease. Can I make the same assumption for Unit 2? And the next 2 questions is kind of similar. If I think of the -- what type of proceeding determines the retirement of San Juan Unit 2 and 3? Does that become part of a general rate case? And then also, what type of proceeding would determine, what type of generation would be needed to make up for the retirement of San Juan? Is that going into like an integrated resource planning or JRC?

Patricia K. Vincent-Collawn

It would be -- I'll start with your second question and then have Chuck answer your first question. It's a series of filings we would need to do with the PRC. Obviously, we need to have the State Environmental Improvement Board and then the EPA approve the revised shift. In terms of the PRC, we will need to make an abandonment filing because we're shutting down 2 of the units at San Juan. So that would be an abandonment filing. And then the filing that determines the baseload would really be a CCN, a Certificate of Convenience and Necessity, and we're starting -- we're kicking off our IRP process this year. So I think that will be a part of, it but the real trigger is that CCN's filing and then ultimately, we would file a rate case for the recovery of these costs. So it's really probably 3 filings. It's an abandonment filing, it's a CCN filing and then ultimately, it's a rate proceeding.

Charles N. Eldred

And your earlier comment was relative to the plans for Unit 2 and the lease extensions and discussion around that. So we gave notice on Unit 2 in January, which we indicated will retain our interest in Unit 2. And then we'll give notice in January of 2014 and indicate at that point what our decision will be to either extend the lease or purchase option and we haven't made that decision at this point.

Operator

[Operator Instructions] Our next question comes from the line of John Alli [ph] with Decade Capital.

Unknown Analyst

Just a quick question. I apologize if I missed this, there's kind of a lot going on. The San Juan units, what is the remaining book value there? And is there any chance you picked up any incremental capacity from those units?

Patricia K. Vincent-Collawn

When we looked at what the San Juan, we're really not interested in any incremental capacity with coal. We still are hanging onto our share in Four Corners, we like to have that diversity of assets and in terms of the stranded cost, it's about $200 million, $283 million.

Unknown Analyst

$283 million?

Patricia K. Vincent-Collawn

$283 in the unrecovered assets, yes.

Unknown Analyst

And that will get rolled in the rate filing?

Patricia K. Vincent-Collawn

We would roll that into the rate filing, yes.

Operator

I'm not showing any further questions at this time. I'd like to turn the call back to Pat Vincent-Collawn for closing remarks.

Patricia K. Vincent-Collawn

Okay. Thank you. And thank you, everyone, for joining us this morning. We know it's been a busy morning for everyone. We look forward to continue to bringing value to our shareholders and continue to chatting with all of you. Have a great day.

Operator

Ladies and gentlemen, thank you for participating n today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.

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