PNM Resources, Inc. Q1 2010 Earnings Call Transcript

May. 7.10 | About: PNM Resources, (PNM)

PNM Resources, Inc. (NYSE:PNM)

Q1 2010 Earnings Call

May 7, 2010 8:30 am ET


Gina Jacobi - Director of Investor Relations

Pat Collawn – CEO

Chuck Eldred - Chief Financial Officer


Brian Russo – Ladenburg Thalmann

Edward Heyn – Catapult


(Operator Instructions) Welcome to the PNM Resources conference call. I would now like to introduce your host for today’s conference, Ms. Gina Jacobi, Director of Investor Relations.

Gina Jacobi

Thank you everyone for joining us this morning for a discussion of the company's first quarter 2010 earnings. Please note that the presentation and accompanying materials for this conference call and supporting documents are available on the PNM Resources website at

Joining me today are PNM Resources CEO, Pat Collawn, and Chuck Eldred our Chief Financial Officer, as well as several members of our executive management team.

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

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

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

Pat Collawn

I’m going to start on slide four this morning. As you see, earlier this morning we reported our first quarter results and our ongoing earnings of $0.06 per diluted share compared with $0.10 a year ago. However, if you adjust last year’s earnings to exclude the $0.08 contribution of the PNM gas operations we had an improvement in 2010, the $0.06 versus $0.02 without gas in 2009.

Our GAAP earnings are down reflecting an unrealized mark to market loss on economic hedges of $17.9 million at First Choice Power. Last year’s gas results also reflect the one time gain of the sale of the gas operations.

As stated in our news release, our first quarter results were driven primarily by the performance of First Choice Power which contributed $0.11 to ongoing earnings. First Choice’s improvement primarily is a result of significantly reduced bad debt expense. I’ll go into more detail about First Choice in a moment. Weather also contributed to our earnings this quarter at PNM, TNMP and First Choice Power all of which benefited significantly from colder weather this year compared with 2009.

Let me highlight the first quarter. We’re starting to see some signals of modest improvement in our economies in Texas and New Mexico. We did see a sign that customers are at least willing to spend a little more than they have in the past. Heating degree days in Texas and New Mexico were up substantially and customers responded by turning up their thermostats.

On the regulatory front, we continue to make progress in both New Mexico and in Texas and we saw strong performance from First Choice Power and their results more than offset the weak market prices we continue to see in ERCOT which negatively affected Optim Energy.

Let me turn to slide five and provide a bit more detail on the economy. For the first time since we began showing you these data points some time ago New Mexico’s unemployment rate is higher than the Texas unemployment rate although both are still below the nation’s average which this morning was announced as 9.9% as opposed to the 9.7% on the chart.

As I’ve mentioned, both for better and for worse, New Mexico’s economy traditionally lagged behind the rest of the country in terms of showing results. Unemployment appears to be one of those economic indicators in which New Mexico lagged behind. Despite that indicator we are seeing some signs that the recession’s grip is loosening in our service territories. Customer growth albeit modest, is occurring. We saw a little more than 0.5% in PNM and 0.2% in TNMP.

There’s a little more information on Load on slide six. Energy sales are picking up in both of our regulated territories compared with 2009. Keep in mind though 2009 was a very down year so while we are seeing improvement we’re closer to the levels that we saw way back in 2006. Weather normalized load grew 1.6% for PNM compared to the first quarter 2009. For TNMP the story is a little better, TNMP saw 2.3% load growth this quarter.

There are a couple things to take in mind when looking at this chart. First, in PNM you see strength in both the residential and the commercial marketplace, while the industrial line is down. However, industrial margins at PNM represent only about 7% of our retail margins so that load decrease was only 0.2% of PNM load. At TNMP we’re not seeing residential uptake yet but you’re seeing a very strong increase of 5.5% in commercial, again showing some signs that the recession is starting to loosen its grip.

Turning to slide seven, and give you an update on the significant amount of regulatory activities we have in both of our service territories. As you know, one of our goals is to have successful outcomes in all our upcoming regulatory cases. We are aiming for a June 1 filing and are on track for a June 1 filing with the PNM rate case which will be a future test period. This is likely going to be one of the most complex cases PNM has ever filed. When we file it we’ll summarize the key points when we issue the news release announcing the filing and Gina and her team will post the supporting data and testimony on our website.

On the energy efficiency front, the Public Regulatory Commission recently adopted a rule that allows utilities to recover lost revenue associated with fixed costs. We filed our tariffs that reflect this and we’re awaiting their approval. As you know, this energy efficiency tariff would eliminate the inherent disincentive all utilities face when implementing energy efficiency programs. We’re very encouraged that the PRC recognizes the importance of saving energy in a way that does not penalize utilities.

In just 10 days, on May 17, the public hearing regarding our renewable energy plan begins before a PRC hearing examiner. You remember that we initially filed a plan that included a mixture of wind and solar power. That plan was criticized for not supporting more solar technology. We’ve since filed another plan that is 100% solar and that is the plan that is being considered. This plan has drawn criticism from the PRC staff, the AG’s office, and others for not being the most cost effective way to deliver renewables.

From our perspective we’re technology agnostic, we believe we’re required to meet state mandated portfolio standards in 2011 and beyond and we remain steadfast in our position that we will not invest in any renewable project without a clear and certain avenue for cost recovery.

As we mentioned in the February call we expect to file a FERC transmission case for PNM toward the end of this year. Our last time to increase wholesale transmission rates incurred in March 2005.

If you move on to Texas, on March 2 we filed for a $5.5 million increase to TNMP transmission cost of service rates and in April the commission file staff filed their recommendation for approval and the ALJ approved it and filed an order. It will be decided upon on the open meeting scheduled for May 14 in Texas.

Later this quarter, pending our Board’s approval, we anticipate filing for Advanced Meters for all of TNMP customers. This would be a capital investment of about $70 million. Texas regulatory environment provides for an accelerated review and approval of these automatic meter reading projects and we could be adding a rider to build as early as November on this. More to come on this project after Board approval but those of you that follow Texas know that Texas is very good in terms of these projects and they provide a very attractive return for the utilities implementing those.

We remain on track to file a general rate case for TNMP some time during the third quarter and again we’ll keep you updated on this filing.

If we turn to slide eight we’ll talk for a minute about the competitive businesses. The past 18 months or so in ERCOT have been unpredictable to say the least. We’ve seen market prices peak to all time highs and then plummet to near record lows. Throughout this turmoil our competitive retail operations in First choice and our generation company of which we own 50% Optim Energy have provided PNM resources with kind of a natural earnings balance.

With First Choice, ongoing quarterly earnings are above last year’s results, as I said, largely due to a significant reduction in bad debt expense. As you see from the slide, quarterly bad debt expense was $5.8 million or about 5.1% of revenue compared with $14.3 million or 11.7% of revenue in 2009. During the quarter, First Choice had fewer customer departures and lower average final bills. Despite the fact that we’re at 5.1% we still believe bad debt will finish the year at about 7% of revenue. Bad debt expense traditionally increases during the higher use months that are still to come.

If we look at Optim Energy, operationally Optim is solid and continues to perform well. Their power plants had excellent availability; those are in the appendix on slide A5 to look at. Optim will remain poised to maximize its fleet in respond quickly to market opportunities. They remain focused on cash conservation, a strategy which we announced to you last year. Overall with Optim the story remains the same as it did for much of 2009. Low natural gas prices continued to dampen power prices throughout ERCOT and have limited Optim Energy’s performance.

With that I’m going to turn the call over to Chuck for the financial overview.

Chuck Eldred

As we mentioned in this morning’s new release, we earned $0.06, we’re down $0.04 from last year, that includes the $0.08 of the earnings from our gas operation which we sold early last year. If you exclude that $0.08 our first quarter earnings were actually up $0.04 from last year and that’s largely due to colder weather, reduced bad debt expense at First Choice Power and the slight load growth in both New Mexico and Texas.

Turning to the individual business units on slide 11, this lists the major drivers of our quarter over quarter improvement in our regulated businesses. Let’s start with PNM, this year the New Mexico utility reported ongoing earnings of $0.02 per share while last year the utility essentially broke even. Implementation of our first phase of rate relief which went into effect on July 1 of last year added $0.03 to the utilities earnings.

Colder weather contributed another $0.02 as heating degree days in New Mexico were up 22% from last year. Lastly, normalized load growth of 1.6% added another $0.01 of earnings. Partially offsetting the favorable drivers were $0.04 of increased outage and maintenance costs at Four Corners and San Juan, and $0.01 of higher pension and retiree medical costs.

At TNMP earnings were flat quarter over quarter. The implementation and new rates on September 1 of last year added $0.01 to earnings. Additionally, normalized load growth and colder weather each contributed $0.01. This past quarter Texas weather ranked as the 9th coldest in over a hundred years. Offsetting the favorable drivers were high interest costs which reduced earnings by $0.02.

The increase in TNMP interest expense is fully recovered in rates, however, it should be noted that a recovery is usage based so we’ll see this as ancillary under recover in the shoulder months when usage is lower and over recovery in the summer when usage is highest.

Moving to our unregulated businesses on page 12. While the sustained low price environment limited Optim’s financial performance in the first quarter, First Choice Power continued to deliver strong results, proving that the two companies combined provide a natural earnings balance. First Choice Power generated ongoing EBITDA of $16.7 million in the quarter up $4.7 million from last year.

As Pat mentioned earlier, the improvement was primarily driven by lower bad debt expense which declined from a little over $14 million to about $6 million or 5% of revenue. Clearly initiatives to reduce bad debt at First Choice has been implementing were paying off. However, despite the strong performance this quarter, we still anticipate bad debt for the year to come in at about 7% of revenue.

Traditionally bad debt tends to increase in the higher usage months as electric bills increase and customers switch in an effort to avoid paying their final bills. As expected, First Choice Power gross margin was down quarter over quarter as unit margins continue to contract. However, unusually cold weather helped offset some of the impact that was negative. Although customer counts were down about 10% quarter over quarter, sales volumes increased 4.5% reflecting a higher customer usage due to the colder weather.

Turning to Optim Energy, Optim generated EBITDA of $9.8 million which is up $8.5 million from last year. Although power prices remained low in ERCOT continue optimization of plant and commercial activities coupled with cost reductions implemented last year contributed to Optim’s bottom line. One negative driver was the absence of emission sales. This year, given the current weak market for allowances, Optim did not sell any of its excess emissions. However, the company continues to monitor the emissions market and will sell its excess allowances when appropriate.

Moving on to guidance for the year. Despite slightly higher than anticipated outage costs and continued lower prices affecting Optim, we remain confident in our ability to deliver earnings within our original guidance range. We are affirming our earnings, unregulated EBITDA and cash earnings guidance. We still anticipate consolidated earnings to range between $0.60 and $0.72 per share with our regulated earnings coming in between $0.66 and $0.72 and our unregulated businesses contributing between $0.05 and $0.17. You can find the segment detail in the appendix on page A2.

Our unregulated EBITDA guidance ranges are also unchanged from last quarter although we do expect First Choice Power to come in on the high end of its range while Optim expects to be on the lower end of its range. Lastly, we still anticipate cash earnings to range between $290 and $315 million.

With that I’ll turn this back over to Pat for her concluding remarks.

Pat Collawn

If you look at slide 14 this is the list of 2010 objectives we presented to you at the February call. I’m pleased to say the first quarter resulted in progress on two significant fronts and they are noted in the green print on the slide.

First, as I mentioned we filed the transmission cost of service proposal for TNMP and received staff and ALJ approvals. This rate proposal is on the May 14th PUCT agenda for consideration. Second, on March 9th Moody’s revised its outlook on the company to stable from negative. This followed a similar move by S&P in December. Today all three rating agencies have stable outlooks recorded for the company. We’ll go through this slide every quarter and I look forward to reporting continued progress on our checklist.

This concludes the presentation portion of the call. Operation we can start the Q&A session if there are any questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Brian Russo – Ladenburg Thalmann

Brian Russo – Ladenburg Thalmann

I think previously your guidance assumed flat growth, low growth at the utilities but it looks like growth is slightly exceeding your expectations but you retained your guidance. I’m wondering are there some offsets elsewhere that we should be aware of.

Pat Collawn

Our guidance had anticipated some growth in Q1 even though it was flat for the entire year given that the first quarter in 2009 was the quarter that was extremely anemic, so that’s one thing. We also expect a little more demand response associated with the fact that the second phase of our rate increase went into effect in April so there’s a price increase there. And we true up our fuel clause in July so if we’re under recovered at all you could see a bump in prices.

We also have several industrial customers that have said they’re going to shut down some of their operations in New Mexico and while that’s only a small piece of our load that’s going to be happening later in the year. It’s just a little too early to also tell I think if that growth in usage is sustainable.

Brian Russo – Ladenburg Thalmann

We should just continue to assume flat year over year growth for the rest of the year?

Pat Collawn


Brian Russo – Ladenburg Thalmann

Elaborate on your comment earlier that this upcoming PNM electric rate case is the most complex case in your history.

Pat Collawn

It’s going to be switching from an historic test year to a future test year. That has not been done in New Mexico so that alone makes it very complicated. Our prices are currently set on a rate base in March 2008 so obviously there’s a lot of regulatory lag plus going into the future. We also need to propose a solution to energy efficiency and the lost margins on that I mentioned that the solution we have in place right now is the commission will allow us to earn $0.01 on lost margin and we filed our tariffs for that but in this case we need what’s called a permanent solution to that issue. You’ll see that in there so we’re dealing with that at the same time.

Brian Russo – Ladenburg Thalmann

I don’t want to jump the gun on the rate case filing but it seems like you’re going to have a rather impressive accumulating rate base from March 2008 that would basically lead to a high double digit rate increase request and I’m just wondering if you had any thoughts on that and maybe the reaction from consumers and interveners.

Pat Collawn

Obviously we’ll make our filing on June 1 so I don’t want to jump the gun talking about it. I will say that we are well aware of other rate cases being filed and filing strategies and reactions and we’re going to take that into account when we do our filing.

Brian Russo – Ladenburg Thalmann

Could you remind me the 100% solar renewable plan how much is that total cost?

Pat Collawn

The 100% solar renewable plan that we filed $270 million.

Brian Russo – Ladenburg Thalmann

How much were your emission sales in 2009 for the full year?

Pat Collawn

I don’t know off the top of my head.

Brian Russo – Ladenburg Thalmann

On Optim, are you completely unhedged in 2011?

Pat Collawn

We haven’t disclosed for 2011 yet.

Chuck Eldred

We still continue to take long positions but we’re about 60% hedged for 2010 and 2011 we’re still working through hedging strategies particularly with Twin Oaks which we haven’t begun to disclose our positions there. We’re not completely unhedged but we’re not fully hedged by any means. Part of that is because we continue to remain in a long position anticipating the gas prices to be a little bit higher than where they are today.

Pat Collawn

We don’t have the emissions sales right in front of us so we will get Gina to call you back with that number.


Your next question comes from Edward Heyn – Catapult

Edward Heyn – Catapult

On Optim, you highlighted that commercial optimization was up; can you give a little more color on what exactly that is?

Chuck Eldred

We’ve tried to point out the way you dispatch the power to the markets and dealing with ancillary services and also some down balancing of Twin Oaks where we can take that plant down and actually buy power in the market and sell that power. There’s some things that we’re able to do to optimize those assets. It’s allowed for us to beat the balancing market and do better than what would be market prices would normally reflect.

Edward Heyn – Catapult

Do you guys have a number of what on a per megawatt hour basis your margins were for First Choice in the first quarter?

Chuck Eldred

We haven’t provided that.

Pat Collawn

We haven’t disclosed that.

Edward Heyn – Catapult

Is it safe to say that they were above what you’re; I think you’re assuming in your guidance that they go back to long term rates.

Chuck Eldred

When you get the 10-Q you’ll see the details in there if you back out the economic hedges you’ll get a pretty good idea. It’s safe to say they were higher than what was anticipated. We still continue to see this downward trend we saw and talked about last year about a 20% decrease. We still anticipate the competitiveness in that market to support that kind of trend but certainly we are seeing margins to be slightly higher the first quarter.

Edward Heyn – Catapult

For bad debt and for margin the rubber hits the road as you get into the more meaty summer season?

Chuck Eldred

Yes, that’s why we’re being hesitant to say much more than we’re certainly doing well for the first quarter but we have the summer months anticipating to see what happens.

Pat Collawn

I think you’re starting to see the competitors be more aggressive on their pricing which is going to continue to put pressure on those margins.


I’m showing no further questions at this time.

Pat Collawn

I think everyone is probably focused on the broader market today and our upcoming rate case so thank you all for taking the time to join us this morning. As we said, we’re on track for a June 1 rate filing at PNM and Gina and her team will get that out in a news release and post it on the web and be prepared to answer any questions. Thank you all and have a good weekend.


Thank you for your participation in today’s conference. This concludes the program you may all disconnect. Thank you and have a nice day.

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