Q3 2022 PNM Resources Inc Earnings Call

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Good day and welcome to the PNM resources third quarter 2022 conference call.

All participants will be in a listen only mode should you need assistance. Please signal what conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone to.

To withdraw your question. Please press Star then two please.

Please note this event is being recorded.

I would now like to turn the conference over to Lisa Goodman Executive Director of Investor Relations. Lisa. Please go ahead.

Thank you Mike and thank you everyone for joining us this morning for the PNM resources third 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 me today are PNM resources, Chairman and CEO , Pat Vincent Golan.

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

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 res.

<unk> assumes no obligation to update this information for a detailed discussion of factors affecting PNM resources results. Please refer to our current and future annual reports on Form 10-K quarterly reports on Form 10-Q, as well as reports on form 8-K filed with the SEC.

With that I will turn the call over to Pat.

Thank you Lisa good morning, everyone and thank you for joining us today on both National Jersey, Friday, and National Candy Day were all decked out in our jerseys today eating our leftover Halloween candy with of course, the exception of our general counsel, but since it's also lobby or lawyer day, we're going to let that slide.

On slide four I'll start with our financial results.

GAAP and ongoing earnings earnings increase in the third quarter over the prior year, bringing year to date ongoing earnings to $2 54.

As a result, we are raising our guidance for 2022 ongoing earnings to a range of $2 63 to $2 68.

We are maintaining our guidance for 2023 at a range of $2 60 to $2.75 based on the continued strength at the utilities offset by higher interest rates Lisa will walk through these numbers in more detail.

In October PNM filed its application for a grid modernization plan to bring smart meters and other system upgrades to our customers.

We ask for approval of our planned by next July and hearings have been scheduled for March Don will talk more about our application.

This quarter also brought us a step forward as we execute our plan to be emissions free by 2040 with the retirement of our last unit of the San Juan generating station.

Significantly reduces the amount of coal in pnm's generation to less than 10% and brings our portfolio to 55% carbon free.

I'd like to thank the teams at San Juan who operated the plant safely inefficiently to continue serving our customers through one last summer.

On the regulatory front, the New Mexico Commission had ordered us to begin providing rate credits associated with the retirement of San Juan.

We appealed the order and requested a stay of the right credits during the appeal in September the court responded with an emergency state stopping to credits and then earlier. This week confirmed the stay will remain in place for the duration of the appeal.

The New Mexico Public Regulation Commission is preparing to change in January to a new appointed Commission.

The nominating committee will present, the governor was at least five names for appointment by November 14th.

The Governor will select three commissioner appointees, who will begin their turns on January one of 2023 and serve staggered terms of up to six years.

These appointments will need to be confirmed by the Senate. The commissioners will be able to begin acting in their roles while awaiting confirmation.

Lastly, in our merger with oven grid.

Tom Petty so beautifully sung the waiting is truly the hardest part there had been no procedural updates since our last call. We've requested the court to hear oral arguments and are waiting to see if the court granted that request. There is no requirement for the court to hear oral arguments or any time frame for their consideration.

We estimate a 12 to 18 months process from our initial filing in January .

Before I turn it over to Don I will cover some quick highlights on ESG on slide five.

As I've already mentioned the shutdown of San Juan significantly reduces the amount of coal in Pnm's generation portfolio and Mark significant progress in the full elimination of carbon emissions from our generation.

Our first interim target was for a 60% reduction by 2025 and we have reached this target ahead of schedule along with significant reductions in Nox and <unk>.

Particularly important here in new Mexico. This closure also significantly reduces the majority of our freshwater consumption.

We've also had a number of social highlights this quarter as we were finally able to return to some community activities in new Mexico that hasn't happened in person for some time.

We volunteered companywide for annual day of service and also returned to hosting our Albuquerque community assistance Fair. This is the largest of the PNM customer assistance events held statewide throughout the year and this one is particularly valued by our customers as we coordinate to bring together resources.

From the gas and water utilities and dozens of other organizations in the community in a single venue or.

Our employees coordinated and volunteered at the event and nearly 300 customers and families received over $100000 in assistance.

We've also taken part in activities within our own organization to learn and grow from each other and.

In recognition of the indigenous peoples day in October we gathered to view a documentary about the recognition of Pueblo independence and the struggle for sovereignty by new Mexico's 19 prevalence.

We have these types of learning opportunities regularly to continue developing a mindset of diversity and a culture of inclusion.

Native Americans are at an important voice in our community.

We integrate this mindset into our business decisions as well.

We just issued an RFP this week for new resources and are specifically looking for proposals located on Navajo lands utilizing our best in class bid evaluation and shortlist election to encourage more of these proposals.

We value our business relationships with our travel partners and look for opportunities to help this community thrive.

With that I will turn it over to Don for an operations and regulatory update. Thank you Pat and good morning, everyone I'll start on slide seven with our load growth by service area with PNM burst.

The third quarter is typically our highest demand and as temperatures soared in early July <unk> set a new system peak, our first since 2013 in terms of overall load our growth has been coming in slightly lower than our original expectations.

The primary driver of growth in our original guidance was from our industrial customers delays related to customer supply chain initiatives and other pressures of mood. This timing out till next year residential and commercial load has done better than expectations for the year with these overall shifts in load.

We have reduced our 2022 retail load growth expectations to a half a percent. So one 5% industrial customers have the lowest rate. So this does not have significant impacts on our EPS.

Looking ahead to 2023, our expectation is for industrial customers to move through their delays and get back to the original forecast of 2% to 3%.

Economic development efforts and new Mexico have increased the number of continuing inquiries coming from companies looking to relocate or expand in our state, particularly from those who are looking to achieve their own clean energy goals. We play a key role in working with these companies to plan for their <unk>.

<unk> needs and as a result, we anticipate growth in our system in the years to come.

Load growth at TNMP has exceeded expectations across the board volumetric growth has been two 8% year to date and we have increased our expectations for the year to a range of 2% to 3%.

On demand base load usage from crypto mining customers has pushed growth up to double digit levels without crypto mining usage demand base load is growing consistent with our expectations for the year of two 5% to three 5%.

For this year, our demand base load should come in around 14% to 16%.

Weather was also a factor for TNMP in the third quarter the quarter started out looking like it would set a new record for the hottest summer in Texas until a shift in weather pattern broad in some rain the record for the hottest summer in Texas still belongs to 2011 Tnmp's.

Peak demand however has grown nearly 40% since 2011 and hit its most recent peak at the end of September .

Now turning to slide eight I'll cover some operational highlights for PNM.

As Pat mentioned PNM filed its grid modernization plan with the commission in October legislation passed in 2020 encourages utility investments in grid infrastructure to meet the evolving needs of customers today and into the future. Our current infrastructure only provides one way communication.

When monthly usage data is collected by <unk>.

So our first priority of the plan is for smart meters and multi directional communication.

With these investments customers will be able to gain insight into their own energy usage and make real time decisions to impact their bills data will also be able to improve service to our customers by using our real time data to identify and respond to outages more quickly.

Okay.

Investments also support. The addition of both utility scale and distributed renewable generation and storage resources, which will be critical in PNM meeting the state's clean energy goals.

Newer technology can also facilitate more demand response programs something that has been requested by our commission.

$344 million plan was filed.

In early October .

And hearings are scheduled to begin March 20th we requested approval for our investment plan by July one with implementation for a rate rider beginning in September which is after summer rates in customer bills are lower year, one of investments under the plan begins upon plan approval and the table.

On this slide shows how the $344 million is expected to breakdown by calendar year.

I also wanted to highlight our FERC regulated transmission business.

We have been seeing strong earnings growth in this area. The western sphere contracts began in December of last year and is providing 17 to 18 of increased earnings for US. This year. This contract is tied to a new transmission line one of the only new lines constructed in new Mexico in decades.

In addition to this contract we have also seen a higher overall system demand resource constraints across the west of driven up market prices as well as demand for transmission to move energy across our grid as power prices increase we see greater interest in higher frequency.

Short term transmission purchases to meet specific needs at the lowest cost.

Demand remains elevated across the west we expect to see a corresponding level of transmission activity on.

On slide nine I will cover updates on our key regulatory proceedings, we have already covered this week's ruling from the new Mexico Supreme Court.

We will be filing at PNM General rate review in December our last rate review was based on a 2018 test year with rates phased in over 2018 and 2019, we will file this review with a 2020 for future test year. So there will be six years of rate base investments to recover.

Our original plans to file rate cases in 2020, and 2021 were deferred because of Covid and the merger proceedings.

The rate base additions in this case will show steady investments in T&D infrastructure, fueling improved red resilience enhance reliability and support the transition to carbon free resources, new substations theaters and power lines directly enhance service to our customers.

The impact to our customers' rates of these investments will be significantly mitigated by the benefits of our transition out of coal and the lower cost renewable resources coming online. In addition, pnm's participation in the Western energy imbalance market provides offsets to fuel cost and this year has benefited.

Customers $23 million through September .

As a result, pnm's customer bills have remained well below the regional and national averages through.

Through our July 2022, the average annual residential bill at PNM was $83 compared to our regional peers of $117.

We'll share more details about our general rate review once we have submitted our application with the commission in December at TNMP, we have implemented new distribution and transmission rates for timely recovery of over $225 million.

New rate base investments 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 and good morning, everyone turning to slide 11, with a summary of the changes in third quarter earnings compared to last year as you show the detail drivers for each segment are available in the appendix.

Earnings per share for the third quarter grew from one dollar and 37 cents in 2021 to $1 46 in 2022, as Don mentioned load and weather increased earnings this year, particularly in Texas, and the T cost and D cost rate mechanisms in.

Increased earnings on our capital investments at TNMP.

Continued resource constraints in the west increased market prices and spark transmission demand at PNM. In addition to earnings from the new Western Spirit transmission line.

These increases were partially offset by depreciation expense on new investments across both utilities.

At PNM lower market performance on our decommissioning and reclamation trust reduced earnings compared to last year.

This long term trust along with our pension remain well funded despite the challenging market conditions in 2022, and we don't anticipate making any cash contributions to these trusts in our current plan.

Higher interest expense also reduced earnings and I will talk more about our financing plans in a few minutes.

Slide 12 has our revised capital plan through 2025 of $3 $7 billion. This investment plan continues to be focused on T&D infrastructure and meeting the growing needs of our customers across new Mexico and Texas.

We have added $131 million for our grid Mod plan as part of PNM T&D, along with additional $100 million across the business to support investments in reliability and resiliency.

We continue to monitor supply chain and inflation and our partnership with our integrated supplier has mitigated impacts to our business we.

We have also taken steps to improve our equipments that innovation identified critical equipment and where possible. We have put in earlier orders for long lead time equipment.

We will continue to monitor these trends and look to manage any impact with our within our capital investment plans.

Slide 13 shows the rate base associated with this investment plan grows 8% over 2020 levels.

At PNM retail, we continue our transition out of coal plant investments and the rate base remains stable over the period.

Majority of growth in our plans Samsung recovery.

Base attributed to PNM FERC transmission operations and TNMP.

The recovery mechanism for these investments through the FERC formula rates and a T cost and <unk> cost mechanisms at TNMP allows for more timely recovery as these portions of our business expand.

In addition investments made associated with PNM grid Mod program are expected to be recovered through a rate rider, resulting in approximately 75% of our rate base growth being recovered through formula rates.

Annual filings or writers.

Slide 14 provides details around our financing plans.

We have limited refinancing needs in the near term and have ample liquidity under our existing facilities.

At PNM the proceeds from securitization bonds next year, well, we do see the need for new debt to fund near capital investments.

At TNMP, we have been accessing the capital market each year and these issuances will be included in future rate filings.

Most of our variable rate debt is associated with the term loan at our holding company that is planned to be transferred to Avon's right under the terms of the merger agreement.

In the meantime, we have taken steps to mitigate the impact of rising short term interest rates.

We now have $850 million hedged fixing the variable rate portion of our debt at an average rate of three 5% through 2023.

Beyond 2023, we're focused on investing in the business, while being mindful of customer impact and maintaining investment grade credit metrics across our business.

Over a longer term horizon, we would look to optimize our financing need based on current market conditions as we have done in the past.

As I've indicated before we intend to implement an ATM program before the year end and you will see that filing come across shortly so that we have another tool available to meet future equity needs.

Turning to slide 15, I will wrap up with our forward looking guidance.

We're raising our guidance for 2022 based on the strength of earnings year to date and are projecting earnings per share in the range of $2 60.

63.

To $2 68.

For 2023, we are maintaining our range of $2 10.

<unk> to $2 75.

We continue to expect strong growth at the utilities with load growth and rate recovery, driven by FERC transmission and TNMP.

And we will see somehow offset by higher interest rates.

We plan to provide our typical segment level details and EPS drivers as part of our year end call in February .

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

We're continuing to target to 5% growth rate from 2020 to 2025 and our annual guidance shows that we are on track to achieve this target.

We will continue to monitor changes in our environment and look for ways to offset impacts to customers and maintain our long term objective with that I'll turn it back over to Pat.

Thank you Lisa before I open it up for questions and please make sure you save some questions for us at <unk> I'd like to thank our crews in Texas, who made their way to Florida to assist in the restoration efforts. After hurricane in this type of assistance exemplifies the best of our company and the best of our industry as our partners.

Get together to help customers.

Let's open it up for questions.

Thank you very much we will now begin the question and answer session.

I ask a question you May press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.

If at any time no questions have 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.

Our first question comes from Ryan Levine from Citi. Brian . Please go ahead.

Thank you.

The 2023 guidance that was maintained can you walk us through what the impact was from the higher interest rates that we're hedged that you highlighted in terms of the impact that was offset by other factors.

Sure. Good morning, Ryan, it's kind of we have leased to answer that yeah, Hi, Ryan good to talk to you. Yeah. So we have hedged $850 million of our variable rate debt through 2023 at three 5% and we will have our normal year end guidance call year end call.

In February and so at that time, we will provide detailed drivers and EPS drivers Ryan.

Okay, and then load growth was very strong for the for your outlook for 'twenty two.

You mentioned crypto demand are you seeing any drop off in that demand into the fourth quarter and into next year.

Yes.

Good morning, Ryan how are you doing today.

No we haven't I mean, we continue to see it here at about that level.

As we take into consideration in 2023, we look at all factors associated with that I think one of the key things is our core demand growth continues at that two five to three 5% in the cryptos on top of that so.

Okay and then last question for me in terms of the equity issuance that you highlighted the pending filing of an ATM do you anticipate utilizing any of that ahead of any decision around the pending merger.

Yeah, Ryan like we've said, we have identified up to 200 million of equity needs.

By the end of 2023, and <unk> and like I said before we've put an ATM in place to make sure that we have ample of tools in the toolbox and we will just look at the next year and we just want to make sure with the ATM program that we have the flexibility.

Okay. Thanks for taking my questions look forward to seeing you at EI.

Thanks Ryan.

Our.

Next question comes from Jonathan Reeder from Wells Fargo.

Jonathan Please go ahead.

Hey, good morning team.

Jonathan.

Good morning.

<unk> it looks like you know above normal weather year to date has been 11 favorable.

Should we be thinking that you know whether its what really drives the midpoint to midpoint 22 guidance increase whereas you know the higher non weather related demand is offsetting the interest expense headwind.

I think thats a good way to look at it I mean, I think the core business I think there's a couple of things Jonathan I think clearly we saw the benefits of weather resolve those are firm transmission business. So with the constraints in the west provide benefits in that arena as well.

Then yes, those things are the strong utility performance, both at TNMP and PNM have helped to offset some of that corporate debt interest.

Okay. So then when we look at that kind of 23 that weather.

If it goes away you know in other words youre kind of them. The starting point is back in the middle of that original 'twenty two guidance range, perhaps and then your normal growth and that I guess the interest headwind again is offset by that core business strength and that's how you youre able to kind of maintain the 23 range.

Yeah.

So we always look at whether when we prepare our guidance range Hum to normal weather right and so that's where we that's where we had anticipated in 2023 and so we feel very comfortable with the range that we are have provided in 2023, we did have some upside on weather this year.

And so of course, you're going to see the growth being a little lower between 2022 and 2023 as a result.

Alright, Okay, and then on the grid Mod application can you remind us about the rate rider requests like is there a precedent for a grid mod rider in the state or is this you know.

Novel request, but yes, it's actually interesting.

Jonathan It's actually included in the legislation. So it provides that avenue to be able to file under a rider.

Okay. So assuming the commission upholds the legislation might be there.

Good question in new Mexico, but hopefully that'll be that'll.

You know I guess, a little better if.

When the New Commission.

Yes.

Yeah, Jonathan this will be heard in March the timeframe will be the earnings and decision next year under a new condition.

Okay, and then is there any update on the appeal by the like I think it was a women's indigenous group or maybe both the women than an indigenous groups.

The Supreme Court regarding the constitutionality of that constitutional amendment to move to the appointed Commission.

Yeah, Ryan no. There has isn't really any update on that but the attorney General has filed and spoken out that they believe that the appeal is is it's not based on anything so that that is not on the list of things that we worry about.

Okay. What is on the list that you worry about it.

Well you know I worry that my General counsel is going to now try to eat all of my Halloween Candy.

So.

Hopefully you got some reviews PC is not not the peanut butter.

Absolutely no race easier Jonathan So if you if you wanted the nicety I agree with.

Or you can bring me either way.

Okay Walgreens most city.

Okay. Thanks, Jonathan Thanks, Jonathan.

Let me remind you if you would like to pose a question. Please press Star then one.

Our next question comes from Julien Dumoulin Smith.

From Bank of America.

Julien. Please go ahead.

Thank you operator, good morning team. Thank you guys for the opportunity.

Good update here. So just a couple of things just to tick through again I can't promise them that I've taken through all the questions here, but.

Maybe to take it from the top here the the grid Mod seems to have been reflected through the capex.

Seems like average rate base didn't see it tick up for 'twenty, three and hence why there's no change in the 'twenty three guidance or at least it's not material enough to change the range, especially against the interest rate dynamics you spoke about earlier or is that kind of a fair way to characterize that.

That's a fair way of characterizing Julien.

Yes.

Got it excellent. Thank you and then related here can you talk about financing just again I know you guys are going to come up with this later, but you alluded to the ATM you had some equity needs in the plan.

Or the legacy plan I'll I'll call it that you've updated your capex and rate base through 25 here.

8% CAGR versus 7.7 earlier is there incremental equity to fund that or just is it still kind of ballpark. The same again, obviously embedded in that to make it explicit how do you think about a M T.

Other factors that may play into it as well right again. This is more of a cash flow question versus the earlier equity needs.

Yeah, and so we're still keeping the same equity needs and that we had the defined before Julien So we have up to $200 million.

Through 2023 and beyond that we will optimize our financing plans based on on market conditions, and we're really focused on reaching that.

Our earnings growth target of 5%.

Excellent Okay, great. Thank you and then maybe if I can just in terms of the rate case timing the grid Mod filing and then ultimately the backdrop of another bite at the Apple of the deal. If you will can you talk about sort of a parallel process here, especially between the rate case and in the deal I mean.

Just how do you think about that timeline.

Both the filing in and and ongoing.

Resolution prosecution of both both effort or all three efforts here as they come through some fruition here in 'twenty three each of them.

Yeah Julien.

The grid Mod schedule is already set so that was in there and that will proceed along the normal.

Administrative proceedings with the commission the rate case will be filed as we said.

This year in December it will go on the normal schedule, where it gets suspended in hearing set et cetera et cetera. So that doesn't mean that we'll go after the grid mod filing in terms of when the commission tiers, it and as we said in the merger agreement or excuse me in the in the.

Our settlement with the Intervenors, we wouldn't tolerate case until December of this year. So we need to file a case, we haven't filed went for a long time. So those two go on a normal path and then the.

The merger.

If the commission decides they'd like to hear it again and bring it back to the Supreme Court, that's kind of on their timetable. If it goes through the court process is a little longer so I think that the one that we don't know exactly when the schedule will be yet as the merger, but that would not get in the way of either the grid mod or the rate case in <unk>.

The rate case, or the grid mod wouldn't get away of having the merger.

<unk> heard them.

Early in the year so.

Got it alright, excellent and then I presume for at least at the time being I noted western resource adequacy is a hot button subject across all states.

No updates here from that and or IRA.

Juxtaposed here as well at least thus far right again, obviously, there's a lot moving perhaps behind the scenes here, but more formally to reflect some of the.

The needs and the cost coming down.

The team continues to work on resource advocacy and is making good progress we will have more of an update when we do our year end call in terms of the IR Ray will it help you know yes. The issue is the rules haven't been written yet and as you know well with treasury.

The Devil's in the detail so in until we see the final rules, we won't we won't aren't going to plug that in yet, but I think people have underestimated what a game changer that bill will be so.

Right.

So maybe what again here it will be for your service territory and the opportunities it affords.

Your customers specifically.

Our climate in general that I'm, sorry that wasn't a particular statement about ourself.

<unk> always got a Jack.

Totally absolutely.

[laughter] alright, there we go that's a deal reese's pieces is well see that.

Julia Thanks Julien.

Yes.

Jeff.

And this concludes our question and answer session.

I'd like to turn the conference back over to PNM CEO , Pat Vincent colon.

For some closing remarks, thank you.

Thank you Melissa and thank you again all of you for joining US. This morning, we look forward to meeting with many of you at the EI Financial Conference until then if you haven't voted already please do so stay safe and always love your lawyer.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect have a good day.