Q2 2022 PNM Resources Inc Earnings Call

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Good day and welcome to the PNM resources second quarter 2022 conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an.

Tuning to ask questions to ask a question you May Press Star then one on a touchtone phone to withdraw your question.

Please press Star then two.

Please note. This event is being recorded I would now like to turn the conference over to Lisa Goodman Executive Director of Investor Relations. Please go ahead.

Thank you, Dave and good morning, and thank you everyone for joining us. This morning for the PNM resources second quarter 2022 earnings call. Please note that the presentation for this conference call and other supporting documents are.

Available on our website at PNM resources Dot com joining.

Joining me today are PNM resources, Chairman and CEO , Pat Vincent colon.

President and Chief operating Officer, Dan, Terry and senior Vice President and Chief Financial Officer, Lisa Eaton.

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.

Early reports on Form 10-Q, as well as reports on form 8-K filed with the SEC.

With that I will turn the call over to Pat.

Thank you Lisa good morning, everyone and thank you for joining US today today is special you do get to pick the National day, you want to celebrate with us National Chocolate Chip Cookie day.

National IPA day, or National White, one day, and I know the choice don't come easy.

On slide four I'll start with our financial results ongoing earnings increased during the second quarter compared to last year coming in at 57.

We are affirming our guidance for about 2022, and 2023 Dawn and Lisa will talk more about the detailed results and guidance considerations.

During the second quarter, we announced the promotion of Dan Terry to President and Chief operating Officer, and Lisa <unk> to senior Vice President and Chief Financial Officer. Many of you have already met with this team from their roles in the finance organization over the last 20 some years.

Both of them had been an integral part of our leadership team and I congratulate them on their newest role.

Laura we will file a report reply brief at the New Mexico Supreme Court in our merger appeal as you know.

We've requested the court hear oral arguments and we will be waiting to hear if the court granted this request there.

There is no requirement for the court to hear oral arguments nor any timeframe for their consideration.

As a reminder, there is also no statutory time frame for a decision and we continue to expect a 12 to 18 month process from our initial filing in January .

The process for a point commissioners in new Mexico is also ongoing the.

The seven members of the nominating committee have been announced and the committee held its first meeting earlier this week, taking care of administrative items occur.

According to their published schedule candidate applications will be reviewed in October <unk>.

Interviews will be held November seven and eight and finalist interviews and committee selection will be made November 14th.

The committee must provide a list of at least five candidates and the governor with select three individuals for appointment prior to the end of the year.

These commissioners will be ceded January 1st.

The appointments will need to be confirmed by the Senate. However, they will be able to begin acting in their roles while pending confirmation.

Before I turn it over to Don for update on PNM and TNMP I will cover some quick ESG highlights.

On slide five.

We retired unit one of the San Juan generating station from service on June 30.

This is a big step in our exit from coal and then next step will be the full retirement of the plant when unit forecloses on September 30th.

At that point coal generation will comprise less than 10% of Pnm's total generation portfolio and more than half of our resources will be carbon free moving towards our goal of 100% carbon free by 2040.

We have also joined a number of other utilities in climate.

Climate ready initiative.

As the impacts of physical climate risks grow more prevalent each year, a resilient and adaptive grid has become increasingly critical.

This collaboration will allow us to integrate consistent science based information into our planning processes and prioritize the investment that will best serve the grid and our customers in the face of increasing climate challenges.

These types of partnerships are a great way to leverage the strength and expertise from disparate organization as we develop new solutions to today's challenges and it is a model that we practice throughout our business.

We announced the partnership in June with the University of New Mexico with the goal to expand internship programs.

Terms of state education, and economic development efforts. In addition to our own internships, we committed to building a coalition of businesses and universities across the state to create a global employment opportunities for college students and keep skilled graduates employed in the state.

We have also partnered with Central New Mexico Community College, and their continued efforts to further cyber security programs in this space.

We brought together a travel telecom utility with military cyber experts.

The training event was part of the Department of Defense innovative readiness trading is one it's one of the first event focused on cyber security.

Military personnel carried out a vulnerability assessment on the travel utility and provided instruction to participants are building their own programs and assessments.

These exercises are intended to defend critical infrastructure, while leveraging military and community resources with careers available to bring opportunities to those who may not otherwise have access.

As Internet and data communications become increasingly important important for travel communities to grow and thrive we were particularly motivated to bring the program to one of the travel utilities in the state.

You can read more about our support for travel community and our broader ESG initiatives on our website, where we have recently updated our reporting templates and annual sustainability report.

With that I will turn it over to Don for an operations update.

Thanks, Pat and good morning, everyone I'll start on slide seven with an update on our clean energy transition. The first phase of this transition our exit from coal was designed to achieve more than environmental benefits. Each step of our plan has been carefully considered to also balance customer rates and provide support for the <unk>.

Meet our rising demand.

Wanted to give a special thanks to the team at San Juan we have been working towards these plant retirement dates after serving new Mexico for decades. There is still plenty of work to be done to facilitate the decommissioning and reclamation of the plant at the mine.

But these are significant occasions, and I don't want to pass them up without acknowledging the contributions of our great teams.

In July we completed the funding required by the energy transition Act.

In the meantime, the portions of the energy transition act pertaining to when the utility issues bonds and research customer rates has been challenged once again and has gone back to the new Mexico Supreme Court for resolution since the onset of the pandemic PNM has been deferring a general rate review to support our customers through these difficult.

Times also agreements with parties to the merger stipulation was to not file a rate review until December of 2022, and we have kept that commitment with the time new rates are put in place in January of 2024, we will have made over $2 billion of investments since our last rate review that are not part of our current cut.

<unk> rates.

Overall cost.

Overall cost control and cost reductions from retirement of San Juan partially offset this regulatory lag and allowed us to agree to defer any rate increases to our customers.

Despite the overall plan that benefits customers, the New Mexico Commission ordered us in June to separate out those pieces of provider rate credit to customers tied to San Juan without any consideration for other investments that have been made since our last rate review, we have appealed the order to the new Mexico Supreme Court and also.

Requested a stay to pause the right credits during the appeal process there.

The request for this day is under consideration by the court and we have begun to implement the credits in the meantime, the appeal process does not have the statutory time period, but the monthly credits will end once new customer rates are implemented which is expected in January of 2024. We also continued to pursue an exit from the four corners.

<unk> at the end of 2024 to complete our full exit from coal. This case is also under appeal with the New Mexico Supreme Court, We filed the final briefing under this schedule in mid June and will also request oral arguments in this case.

The transition to clean energy is our industry's most significant change of our time. We also know that it is the right thing to do for our customers our communities the environment and our shareholders and we will continue down this path.

Now turning to slide eight and our load growth by service area at PNM, our growth expectations for the year are running a little behind guidance expectations for 2022, the primary driver of growth and guidance was from our industrial customers. This growth has been slightly delayed by supply chain and other customer specific reasons.

These customers have our lowest per kilowatt hour rate. So there is not a significant impact on earnings for this delay on a positive note residential and commercial load growth is slightly ahead of expectations.

Second quarter weather was milder than normal we warmed up quickly in April and in the heating season earlier than usual temperature soared in may, but then cooler temperatures came in with some welcome to rein in June as we move past the quarter ended July <unk> had a stretch of several hundred degree days and hit a new system peak for.

The first time since 2013. This demonstrates that we have been what we've been saying seeing on the PNM system for several years as energy efficiency and rooftop solar has kept our total load growing at a slower rate. The peak used on this system is growing and requires additional investments to meet the increased demand of the future.

The state economic development efforts continue to attract businesses relocations and expansions and the current level of inquiries from potential customers is significant.

Turning to TNMP weather and load had significant impacts in the second quarter, both volumetric and demand based load is growing above our expectations as the Texas economy spur is expansion of our communities in North, Texas and the Gulf Coast area in West, Texas, New crypto mining customers push demand.

<unk> load higher for the quarter.

Unlike new Mexico temperatures in Texas were above normal due to the border and TNMP set a new system peak in June .

As temperatures continue to rise in July and several new system peaks were recorded.

Turning to slide nine I'll cover the key regulatory filings in upcoming filings in each jurisdiction.

At PNM, we have already talked about our merger San Juan and four corners Appeals at the New Mexico Supreme Court I also wanted to update you on upcoming filings in the second half of the year. We are scheduled to make a grid mod filing in October . This filing was originally requested by the commission in March and our communications with the Commission.

We indicated that we were preparing our multiyear grid Mod plan that would include automated meters as well as associated communication networks auditor automated control systems investments related to reducing outage and restoration times.

A customer portal and enhanced cyber security measures. The commission was supportive of these efforts and for granting more time to prepare the corresponding application covering our five year planning horizon, we will look to update our investment plan and next quarter to align with our filing.

And then in December we plan to file Tnmp's General rate review based on a future test year of 2024, we will share more information about the filing once it's made but you can expect the primary driver to be recovery of rate base.

Since our last future test year filing in 2016 on the FERC transmission side of the business. We continue to recover our PNM transmission investments under FERC formula rate in this year's update we're covering an additional $65 million of rate base with new rates that became effective June one.

TNMP progress continues on the regulatory agenda for this year following the approval and implementation of our first transmission cost of service increase in March we made an annual distribution recovery filing in April we reached a settlement in principle with parties in this filing and interim rates based on this agreement have been approved.

Greg will mentation of September one.

And this settlement the recovery of replacement Ams meters is deferred until our next filing the expenses and taxes associated with these meters are also deferred as part of this settlement, resulting in 99% of our requested net increase and a recovery of $95 7 million of.

Transmission investment this marks our third year, reaching a successful settlement on these filings.

On July 2022, we filed our second transmission cost of service filing for 2022 for a recovery of another $36 million of new rate base.

Based on previous years, we would expect rates associated with this filing to also be implemented in September .

Overall, the Texas economic and record of regulatory environment continues to.

Positive <unk> well for continued growth and recovery of investments needed to maintain and expand our infrastructure I'm going to turn things over to Liza to walk through earnings impacts for the quarter and considerations for guidance going forward.

Thank you Don I'm going to pick up on slide 11, with our high level year over year results for the second quarter.

The detailed drivers are available in the appendix TNF.

TNMP increased 13% year over year in the second quarter due to higher load and weather along with rate relief from our tea coffee and decon filings PNM decreased 7% compared to the prior year increased transmission margins, including the Westin.

<unk> contract were more than offset by the realized market performance of our decommissioning trust and higher O&M, including planned outage costs.

In addition, new investments at both PNM and TNMP increased depreciation and property tax expenses.

At corporate we are seeing the impact of higher interest rates on our outstanding parent company debt.

As a reminder, this debt was and still is intended to be paid off at the closing of our merger with Avon grid.

We expect interest expense to continue to be a driver for the remainder of the year.

To mitigate some of the exposure created by the current environment, we have entered $450 million in interest rate swap, which will limit part of the exposure.

Turning to slide 12, we're affirming our consolidated guidance for 2022 and 2023.

The strength in our consolidated earnings for the past two quarters has has provided room to cover any cost increases within our guidance.

Historically, the third quarter has generated half of our annual earnings and can be significantly impacted by weather.

Based on what we have seen so far and barring any significant unexpected changes we are targeting results in the top half of our range for 2022.

In addition, we have updated our quarterly distribution for 2022 to reflect actual earnings for the first half of the year and revised expectations for the second half.

Turning to slide 13, we're also maintaining our current capital plan focused on T&D infrastructure as we indicated last quarter. We continue to monitor supply chain any inflation impact and are shifting project as necessary to allow.

Our teams to work, most effectively and maintain and maintain our current investment plans.

John mentioned that we will file our grid Mod plan later this year.

We will update our capital plan with this filing when we report third quarter results.

As always we will be mindful of the customer impact.

Our plans continue to support 5% annual EPS growth through 2025.

With the majority of our forward looking rate base growth recovered through the FERC formula rate and TNMP rate mechanism.

We have a strong track record of delivering results and remaining flexible and adaptable to changing market conditions.

As always we will continue to focus on ways to navigate in the current environment without losing sight of our long term goals and strategic direction that supports our customers and communities and deliver shareholder results.

That I will turn it back over to Pat.

Lisa before opening it up for questions I'd like to add my thanks to the teams that are responsible for the retirements at San Juan and those who have been working through some incredibly hot summers to keep our systems running and to keep their fellow crew members safe in this heat.

Safety is our top priority and one of our core values, whether you work in the field or in an office.

Dave Let's open it up for questions.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys.

If at any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.

The first question comes from Ryan Levine with Citi. Please go ahead.

Good morning.

Hi, I was hoping to start off in terms of the IRI, how do you see the.

The proposed.

<unk> impacting your core business outlook.

As a standalone case, and then also into the pending merger.

I pay what Ryan we have Don answer that question, but before I do which national day are you going to celebrate.

They all sound pretty good to me a lot of diplomat, okay over to Dawn, Hey, Ryan Good morning.

Chocolate chip Cookie guys I'll go that route.

Absolutely I mean, new Mexico and in our service territory is in new Mexico, and Texas, and I'll talk specifically about new Mexico, I mean, we see it very beneficial obviously were below the $1 billion. So we don't have that threshold issue.

Some of the benefits that we've explained in the past, how new Mexico sits third and potential in wind and solar provides opportunities.

From a from a transmission development perspective, as we look longer term and the benefits associated with that but specifically.

With the with the tax law change a couple of the benefits that we really like relate to the first one probably relates to allowing PTC for solar development.

And the benefit that allows utilities may be to participate in more of these as PTC. It doesn't get caught up in the the tax normalization.

And it's also good for customers any type of these credits they get pass through.

And lower prices to customers. So that part is beneficial on the capacity side on the battery being able to do an ITC and with ITC being able to.

Self select out of tax normalization as a benefit as well too because it allows us to be competitive from the from the utility perspective. So in essence, those would be the big areas and I think you'll find it most utility is very positive on this.

And those benefits continue.

Even with the merger from Alvin Great I'll, let Pedro discussed an oven grid overall corporate benefits, but those are things that I think lineup very well for utility ownership of storage and renewables and as Don said, we spent a lot of renewable and storage potential here and we'll be having some more.

Resource solicitations. So we're looking forward to that new tax package. The IRA excuse me passing Congress.

Thank you I guess to follow up on that.

Hearing you correctly, you see incremental opportunities for capital deployment.

Further the strategic rationale to partner with a larger more capitalized entity.

Are there any other considerations that may speak to the pluses and minuses the proposed transaction.

Yeah, No I think Brian I think I think that the strategic.

The rationale for the merger in terms of.

Better capitalized access to technology <unk>.

<unk> remains the same and these tax credits just.

To help not only the transaction, but I think mostly helped the transition to clean energy and carbon reductions in the U S.

Okay. Thanks for taking my question. Thank.

Thank you.

Our next question comes from Paul Fremont with Mizuho. Please go ahead with your question.

Good morning, Good morning, Paul.

Really two questions. This morning. The first question has to do with the timing of when we would expect you to issue securitization bonds.

Okay, and I'm going to celebrate National Wildlife day, and what are you going to celebrate hall.

The end of second quarter earnings.

And I bet, there might be an IPA involved in there okay. Don Don is going to talk about securitization. Good morning, Paul I mean, our plan for securitization has been and will continue to be a tailor aligns the securitization with new rates going into effect and we expect that to be January of 2024, but clearly we'll continue to evaluate the process that it goes to the Supreme Court appeal.

Okay. So I guess, maybe a follow up on that I mean.

There was a proposal to sort of track changes in interest cost between now and when you actually issue the bonds.

Is there.

Any potential liability and delaying the issuance.

You know we have reports that you are right. We have reports that we have to file that I think the first one comes October one.

Going through all the analysis that we need to do to do that but again.

There are things, we can do to position us to.

Protect us from downside as we move forward so.

Great.

The other question that I had is on <unk>.

Planned equity issuance is there any update to planned equity since the beginning of the year is it is it the same.

And Lisa <unk>, who is our national IPA day person to answer that question.

Hi, Paul. Thank you. So yeah, we're all of our equity plans have not changed we still have.

Assumed in our plans that we will issue up to $200 million of equity by the end of 2023 and <unk>.

We are right in line with that Paul.

And can you give us any update have you issued any.

So far under our year to date.

No we have not I think youre, referring to an ATM right and we are still in the process of putting that in place and Paul and so that's something that we're looking to do at the end of the year.

Alright, I think thats it for questions from me. Thanks.

Thank you Paul Thanks, Paul.

Again, if you have a question. Please press Star then one.

This concludes our question and answer session I would like to turn the conference back over to Paul Vincent <unk> CEO for any closing remarks.

Thank you Dave and thank you all for joining US. This morning, I hope you enjoy whichever national day or other day you choose to celebrate this evening. We hope you enjoy the last of your summer and look forward to seeing many of you in the coming months stay safe.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Yeah.