Good morning, and welcome to the PNM Resources First Quarter Conference Call. All participants will be in listen After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Jimmy Blotter, Director of Investor Relations. Please go ahead.
Thank you, Cole, and thank you, everyone, for joining us this morning for the PNM Resources Q1 2018 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 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 ks, quarterly reports on Form 10 Q as well as reports on Form 8 ks filed with the SEC. And with that, I will turn the call over to Pat.
Thank you, Jimmy. Good morning, everyone. And yes, it is another beautiful sunny Friday in New Mexico and it's also Arbor Day, so happy Arbor Day. Thank you for joining us today for our 1st quarterly earnings call of 2018. Let's start on Slide 4 with the financial results and some company updates.
Our GAAP earnings per share in the Q1 of 2018 were 0.1 $9 Ongoing earnings per share were consistent with the quarterly expectation of guidance at 0 point 2 $1 compared to $0.28 in the Q1 of last year. We are also affirming guidance for both 2018 2019. I'll turn it over to Chuck to go through the details of these results in just a few minutes. As we work our way through 20 18, we are expecting a straightforward year. At PNM, our general rate settlement is now behind us and our retail customers are already benefiting from tax reform savings.
The phase in approach from our rate case creates a transitional year in 20 18 and the full implementation in 2019 supports our 2 year plan. We weren't surprised this month that the commission did not move forward with our proposal for smart meters in New Mexico. In a state where the economy continues to lag the nation, no one likes the This demonstrates the desire to integrate this type of technology in New Mexico in the future. We continue to await a decision from the New Mexico Supreme Court on the appeal of certain items disallowed from our September 2016 general rate case order. This could be issued any day.
We announced our plans to transition out of coal generation last year, and we are moving forward with those plans. We issued an all source RFP and will consider a variety of resource possibilities to facilitate our goals to achieve a cleaner generation portfolio. It will take some time to thoroughly vet and evaluate the proposal before we make an abandonment file next year. As a condition to the BART settlement, we will make a compliance filing later this year on our intentions for the retirement of San Juan, but it's too early to look at the details for replacement power. At TNMP, the January TCOS filing was approved in March and rates were implemented March 27.
The filing reflected an annual increase of $600,000 which updates our transmission rates for investments that were made through December and for the impact of lowering the income tax rate on all of our transmission investments. We are still on track to file our general rate case in May and we'll have more information for you once we make the filing. We continue to expect new rates to be implemented in January of 2019 and to return to our typical twice annual TCOS filings in 2019. With that, I'll turn it over to Chuck for a detailed look at the numbers.
Thank you, Pat, and good morning, everyone, and thank you for joining us today. Let's start with a review of the load on Slide 6. Beginning the discussion with New Mexico, economic conditions continue to be stable. The 12 month rolling average employment growth has been consistent for nearly a year now, although it remains lower than the national average. We continue to see economic activity such as the construction work at the Facebook data center.
They announced last year that their site will grow from 2 buildings to 6 and they have anywhere from 800 to 1000 workers on-site each day due to the construction work. We also see commercial expansion from restaurants, retail and other activities such as a 200 room hotel scheduled to open at the Santa Ana Casino in July and the construction of 3 new projects to support new apartments, hotel and retail shops, bringing more than 11,000 or 1100 construction jobs and 425 permanent jobs to Albuquerque. Along with this activity, we're seeing customer growth at 0.7% for the Q1 2018. This is a slight increase over the level we saw last year. While PNM's weather normalized load is consistent with our expectations, the Q1 has a smaller impact on earnings because of the seasonality in our business and therefore has less of an impact on the load forecast for the year.
As a result, we continue to believe that we will achieve our annual forecast of flat to down 0.7 percent at PNM. Economic growth in Texas continues to outpace the rest of the country. We also see strong demand in our service territories, particularly with interconnection request in our West Texas region. We have started the year strong for both the volumetric and demand based load, exceeding the forecasted range. But as I mentioned with PNM, given that it's the Q1, we continue to hold to our annual forecast for TNMP load as well.
Now turning to Slide 7 for the Q1 earnings. As Pat indicated, ongoing earnings per share were in line with our expectations of $0.21 Throughout 2018, our results will reflect the final implementation of the 2015 Bart settlement, which were included in the rate case final order that became effective earlier this year. This reflects both the shutdown of San Juan Unit 2 and 3 and Palo Verde Unit 3 serving retail customers. As you're aware, the final order also reflects the giveback of tax reform to our customers. While these are sizable items in our earnings drivers, they are largely offsetting each other.
Other elements that cause changes to PNM's earnings include expected items such as the outage of Four Corners to install the SCR equipment, depreciation and property tax from our capital investments and load. We've talked for some time now that at Palo Verde III becomes a jurisdictional resource that we would also move our nuclear decommissioning trust to a heavier weighting of fixed income assets now that it's tied to assets funded by ratepayers. Partially offsetting these items are weather that was closer to normal in transmission margins. TNMP is up $0.03 due largely to load and the revenue from TCOS filings implemented last year. Finally, corporate and other was down $0.02 for interest expense and other items.
On March 9, we issued $300,000,000 of fixed rate notes. This results in the holding company now having little exposure to available rates. Now let's turn to Slide 8. The 2018 guidance continues to be $1.82 to $1.92 and the Q1 results are in line with our expectations. 2019 remains at $2.04 to 2.16 dollars Our guidance ranges provide the basis to achieve at the 6% earnings growth target that we have for 2018 to 2021.
We also expect our dividend to grow at a comparable rate to earnings. The chart at the bottom of this slide has an updated quarterly distribution charge for 2018. 10 1 Unit 1 had a failure in its coal silo that has the unit offline at this time. As a result, we moved up the maintenance outage that was expected occur this fall so that we don't have to take that unit down later. We have also shifted expenses between the 2nd and 4th quarters.
The outage schedule that is in the appendix has been updated as well. Before I wrap up my comments, I want to mention that when we file the TNB rate review towards the end of May, we will issue a press release with the details. Now I'll turn it back over to Pat.
Thanks, Chuck. As we wrap up today and look ahead to the the Partner of the Year for 2017 for recognition of the sustained excellence of its energy efficiency programs. This is not the first time TNMP has been awarded this honor, so I want to congratulate our team in Texas for achieving this recognition once again. Along with that, I said earlier that today is Arbor Day, but I didn't mention that our TNMP employees are commemorating the day again this year by planting trees. April is also National Volunteer Month and our employees in New Mexico and Texas are some of the best volunteers I've seen, and I'm not the only one taking notice.
Earlier this month, the Mayor of Albuquerque recognized the PNM Community Crew as the 2018 Corporate Volunteer Group of the Year. As I've said before, it's truly an honor working alongside so many individuals that committed to making our communities better. Thank you again for joining us today. With that, I'll ask our operator, Cole, to open it up for questions.
Thank you. We will now begin the question and answer session. And the first question comes from Nick Campanella from Bank of America. Please go ahead.
Hey, good morning. Happy Arbor Day.
Thank you, Nick. Same to you.
Can you remind us when you're filing for EIMA again? I'm sorry if I missed that.
It's in the next energy efficiency filing that we make.
Got it. Thanks. And then keeping with the Arbor Day theme here, just looking at replacement power for San Juan, what are you guys thinking of in terms of fuel mix? I know that your thoughts there can be changing based on cost efficiencies.
Yes. The Dick, the current capital budget reflects gas units, 2 large frame units of 3 74 Megawatts and 82 Megawatts of Recificating Engines. But as Pat pointed out, we have an RFP process going on now that would fine tune exactly what we view to be the right mix of generation. So it's likely to include some energy storage as as a possibility and maybe some of the renewables along with some peaking units. So that we really won't know the details of that until probably around the mid
part of 2019. Got it. And then just in terms of recovery for that spend, your peers in New Mexico recently had an order in which new generation they had to operate as merchant initially. Can you just kind of talk about the recovery path there? Obviously, there is a lot of company specific factors that come into play with these proceedings, but I'm just trying to get an idea of how that all plays out.
Nick, you're talking about SPS and I think that you said the key words there, the company specific factors. SPS files under historical test year, we file under a future test year. And so I think they wanted to recover some of that lag there before they got it into their rate base. Anything we do is under a future test year. So theoretically, we don't have that lag.
Got it. Thank you very much.
And Nick, the other thing is our next energy efficiency filing is in the spring of 2020. I forgot to tell you that.
Thank you. You're welcome.
And the next question comes from Ali Agha from SunTrust. Please go ahead. Thank you. Good morning. Good morning, Ali.
Good
morning. First, Chuck, can you just remind us, I recall the tax reform impact is being phased in over the 2 years. Specifically, what's the impact to earnings in 2018 2019? I'm assuming by 2019, it's neutral, but can you just remind us the tax reform earnings impact?
Yes. If you look in the appendix of the slide on I guess on Page 12 and the actual not appendix, but in the presentation, we show the tax reform to be about $0.04 for
the Q1.
For the Q1, right? For the Q1. And then for the year, you'd have to actually go back to look at some of the Q4 earnings review and get the details, which we show you the amount of tax reform for the full year of 2018 over 2017 is $0.25 And that's if you go back to the materials that we posted previously in the Q4 on Page 23.
Yes, yes, got it. Secondly, Baruchat, what is the cause for this difference between your customer growth in New Mexico and the load, which continues to be negative, what's the persistent disconnect between the 2 of them right now?
Well, really, the growth is not at 0.7%. It's still not substantive enough to impact the load to be positive, so to speak, because of the offset of energy efficiency and distributed generation. So it's just kind of at a point where we still see it relatively flat to a slight increase, but just done enough on the customer side to really see a significant positive and or benefit offsetting the energy efficiency in DG.
I see. And then I believe it's 3, but a bunch of commission seats are up for election this November. Any sense or any expectation of a change to the commission composition post the November election?
I think it's too soon to tell. Commissioner Lyons is obviously term limited out, so we know we will have a new commissioner there. Commissioner Jones and Commissioner Lovejoy, both have challengers in their primaries, but the campaigns are just getting started here. They really kind of start in earnest maybe in the middle of May. So we could have up to 3 new seats or we could have just one, but whoever it is, we look forward to working with them.
Right. Last question, you talked about the 6% CAGR you are targeting 2018 through 2021. But when you look at the profile, you have that big jump in 'nineteen. So 'nineteen through 'twenty one, we are looking at slightly more flattish or smaller growth of earnings. How are you looking at sort of the longer term picture once we get the full year impact in 2019 behind us?
We're really we're going to focus on the 6% from 2018 through 2021. And then beyond that really is going to depend on the outcome relative to the replacement power of San Juan. So even though it's in the capital budget and we have it in our projections that currently until we fine tune exactly what that replacement power mix is and the recoverability of those costs, we really don't want to speculate on growth beyond 2021. We're still encouraged by where with the opportunities we have. So don't take that message as we're concerned.
We're just not wanting to speculate on information until we get a little further along as to the details of what that replacement power looks like.
Got it. Thank you. And the next question comes from Greg Gordon from Evercore ISI. Please go ahead. Hey guys, good morning.
It's actually Durgesh on for Greg. How are you?
Good. How are you?
Good morning. Excellent. Two quick questions. 1, first for you, Pat. The Supreme Court deal, I missed the earlier part of the call.
Did you guys discuss what a timeline might be? I know there's no statutory timeline, but is there an expectation of when you could potentially get a decision, whether it's this year or next year?
Well, I think I said we're waiting. We're waiting anxiously. The court had said last year that anything was in before October, they'd hope to get out by March, and they did do that with the any Supreme Court appeal of the Barth case, which the court ruled in our favor and that came out in the beginning of March. This case is complicated. The court doesn't have a lot of utility cases.
So literally, I think it's every Monday and Wednesday when the excuse me, Monday Thursday when the dockets come out. So the team is checking every day. So we're hopeful it will be soon, but there's just as you said, there's no time to frame.
Okay, thanks. And then just on the like the low growth in Texas, I think Ali was asking asked you a question on New Mexico. The Texas low growth seems very robust. I just was wondering if with the growth that you're experiencing, is there potential upside into your CapEx? What I mean there is, could you I don't know what if you could articulate what assumptions have built if you built into your Texas CapEx plan and that CapEx plan could be higher if you keep seeing the level of growth that you're seeing in Texas?
Yes, it's still we've actually contributed more to the capital budget to reflect significant growth in the Permian Basin area, even though all the areas that we cover in Texas are seeing strong growth. But the Permian Basin is still a very robust area. So at this point, we update our annual budget in December in that timeframe. So it's too early to tell whether or not we see a continued growth, but if we see opportunities, we're Durgesh, to comment anymore other than we are contributing significant amount of capital to support the growth that we see today.
It's fair. Thank you, guys, and great quarter.
Thank you.
And the next question comes from Paul Fremont from Mizuho. Please go ahead.
Thanks a lot. Can you discuss at all the Facebook data center power needs and whether they're going to be coming out with some additional RFPs for generation?
Yes. They've already we started out with 50 megawatts, which PNM is providing a build on that. In addition to that, the commission approved 3 other different sources of renewables that are pursuing being pursued right now, one of which is 50 megawatts of what's referred to the case Mesa, which is a wind PPA another 166 megawatts of wind, which is another PPA supported by Avangrid. And then there's a 50 megawatts of solar PPA from Nexera. And they're currently looking at some additional solar, anywhere from 50 to 100 megawatts, not clear exactly what that will be.
And we're actively involved with that discussion to look at the possibility of serving that from PNM's build opportunity.
And would you be doing that on your own or would you be doing that in partnership with somebody?
Well, we'll look at it both ways, but certainly we would look at the JV we have with AEP to support that as well.
And then can you also just update us on sort of the current outstanding under the Westmoreland note and when that is expected to pay off?
Yes, the note itself is around $50,000,000 outstanding, but we do have a $10,000,000 reserve in the San Juan Coal Company structure that could be applied to that in the event that we need to pay that down further. The note itself, I think, comes due in 20 21.
21.
And so we're on track. They're making their payments. As we've said before, the San Juan Coal Company is bankruptcy remote and ring fenced and very secure to how we capture the cash flows and waterfall the excess cash to pay down the debt. So it's been right on schedule, right on plan, and I know they're going through restructuring. So there's a possibility they may decide to pay off that debt, which is fine too if they end up in that decision, But that's where it is right now.
Great. Thank you very much.
And the next question comes from Lasen Johong from Avila Research Consulting. Please go ahead.
Thank you. I'm a little confused. Why would the outage for the scrubber installation be considered a normal part of operations? I mean, it sounds like you guys are going to do a scrubber installation every year or anything like that, right?
I think what we're trying to say, Lisan, is that an outage is normal course of business. So we just moved it around and moved it up from the fall into the spring. It's not atypical when you when something happens at a plant to move an outage up. I think that the scrubber outage is at Four Corners. We were talking about at San Juan because we had the issue with the coal mill, we moved that outage up to the spring.
So the outage I thought I forget who you said that, but I thought one of the impacts on PNM's financial first quarter financials was due to the scrubber installation.
Last year, we didn't this is the outage we have for Q1 to reflect the Four Corners installation of the SCRs. Yes. In half, Q1 last year. So that's that.
Okay. That was last year. I was wondering what we're going
to have
on that.
Yes. And then the outage that we've moved up and Chuck said normal course of business is the San Juan outage, sorry. Too many coal plants up in the Four Corners area.
I apologize. I thought it was okay.
It's okay. No problem.
I'm very confused
about that.
Okay. 2nd, right now, natural gas prices are still kind of, shall we say, on the weaker side and there's no kind of expectations for anything dramatically to the upside for a very, very long time. So are you feeling any pressure to say abandon building new power plant facilities and just going into the market and buying power to replace San Juan so cheap?
No, I think if you look at that, the San Juan replacement isn't until 'twenty one and 2022. You always buy a little bit at the market, but the market is tight in the West as people retire their coal plants. And some of the natural gas capacity we need is for peaking and for quick start resources to follow all of that solar generation. So quite frankly, the cheap natural gas prices are what is driving the shutdown of San Juan because the economics for natural gas and renewables are compelling. So we haven't seen that here yet.
I don't think you'll be wrong. I would love to see you guys build a couple of big CCGTs, but I'm just wondering how feasible that might be in the current environment. 3rd, I know this is kind of a weird question, but when do you expect when does New Mexico expect that load growth will turn back towards a positive number again. A lot of the auto utilities are saying the effects of energy efficiency is kind of substantially waned, But apparently, that's not the case in New Mexico. I'm kind of wondering when the catch up will occur.
Well, that's a great question, Lassonde. And I think there's a couple of things going on. As Chuck mentioned, we're seeing a lot of small commercial and other growth. There are some nice things in the economic development pipeline, which obviously we can't talk about. But I think if you look at New Mexico, there is a real culture towards the environment and energy efficiency.
We are, for example, in Albuquerque, the number one market in the United States for green built homes. And so things are built pretty tightly here. And energy efficiency is a good thing. We're in the midst of a proceeding to talk about some sort of a lost revenue adjustment or decoupling that came out of the rate case to give us a volume true up mechanism, because if So So we hope our economy does pick up and we see a lot of good things going on. The trick I think is just to come up with an energy efficiency disincentive mechanism that works.
And Lassonde, just to add to that, we do see in 2019 load forecast for PNM. So again, it could be slightly negative, but beginning to see inching into some positive load growth in 2019 as a potential.
Okay. Pat, that answer was a fantastic answer because you set me up for my next question.
The stream and Lassonde?
When do you expect or well, I shouldn't say when, but is in the past revenue decoupling was really not a priority, but it sounds like that's kind of changing for PNM. And if that's the case, kind of how much of an urgency do you see in this? And when do you expect to make any kind of filings to get that done?
We had actually filed in the last rate case or decoupling mechanism. We were asked to move it out of the rate case into a separate proceeding, which we did. And on March 2, we filed for an approval of disincentive mechanism with the PRC. And on April 25 this year, the hearing examiner issued a procedural schedule. So there'll be a technical conference and testimony and then there's going to be a hearing on October 31 this year.
So that's how we've got the rate case, which I think is a good place for it is to be outside of the rate case.
I agree 100%. Is there any kind of resistance or is there a lot of people saying this is free money to the utility, don't do it? You know how the intervenes are and how they position this with regulators, do you see resistance a lot of it?
No, I think the discussion is over what mechanism is full decoupling? Is it a lost revenue true up? Full decoupling? Is it a lost revenue true up? And with the fact that we have a forward test year, right, we true up our volumes every couple of years.
So I think most everybody realizes that energy efficiency can cause load growth that we're a high fixed cost business. And there'll always be somebody that says we shouldn't have a mechanism, but I think most of the discussion is going to be around what's the appropriate mechanism.
Okay. So it's a matter of if a matter of how, not if?
I think so.
Yes. I mean,
I think one of the hearing examiners that addressed in the last rate case literally laid out the steps to the framework, the methodology that Pat refers to and we filed our information to reflect that. So we think we're off to a good discussion justified.
That's great. Last question is, Chuck, you had mentioned rolling out potentially some new power generation facilities. I would assume, correct me if I'm wrong, that the approval of those facilities will also coincide with a recovery for a revenue mechanism recovery for those power plants, correct?
There's 2 parts to this. When we shut down San Juan, as we said, we make a filing this year, a compliance filing But that's next year.
And so that should guarantee there should be no question about what your rate of return will be on this plan going forward.
Yes, I mean, it's just more of a question of this is what we feel is makes the most sense to address the reliability and the changes to the system to integrate in with the additional renewables that we're getting onto the system. And it's a question of what that right mix is, whether we own or there's PPAs or whatever the circumstances are. But we feel very comfortable that to address reliability, particularly on peaking units, you need to have control of those resources.
Absolutely. I'm not disagree with that. Just wondering if the revenue recovery mechanism and the amounts would be preapproved so that there's no question to the investors that the IRR you'll be receiving on these power plants are fixed and according to the regulated authorized rates?
Well, the CCN will address what the resources are that's agreed and improved by the commission and then we would just file that in our next rate case, which would remove any uncertainty. It's a question at that point of getting that into rates after the CCN is approved. Right. So it does remove uncertainty, yes.
I just want to double check. Thank you very much.
Yes, that's good. Yes.
Thank you.
And that concludes our question and answer session. I would like to turn the conference back to Pat Vincent Colan for any closing remarks.
Thank you, Cole. Thank you all again for joining us morning. Please have a happy Arbor Day. And if you plant any trees, please remember to take care of your backs. And we will talk to you all again soon.
Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.