Q2 2023 PNM Resources Inc Earnings Call
Okay.
Good morning, and welcome to the PNM resources second quarter 2023 conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one.
One on your Touchtone phone. Please note. This event is being recorded I would like now to turn the conference over to Lisa Goodman Executive Director of Investor Relations. Please go ahead.
Thank you Alan and thank you everyone for joining us this morning for the PNM resources second quarter 2023 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 <unk>.
President and Chief operating Officer, Dan, Terry and senior Vice President and Chief Financial Officer, and Treasurer, Lisa Eden.
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 week.
We caution you that all 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 as we head into another heat wave across most of new Mexico and Texas.
But there is also international beer day, and White one day. So we've given you some ideas on how to beat the heat Tonight.
I'm going to start on slide four with our financial results and company update.
Ongoing earnings were <unk> 55 for the second quarter compared to 57 last year. We are also affirming our guidance for 2023, Lisa will walk you through the details later in the call.
Before I hand things over to Dan to cover the operational highlights and key regulatory and legislative updates, let me cover a few strategic items.
We extended our pending merger agreement with Avon grid to December 31, with the option for a further three month extension through March.
The new Mexico Supreme Court weighed in on our request for Reman in May along with requests from other parties to supplement the record.
The court denied all of their requested motions and continued its appeal process of the commission decision by ordering oral arguments, which were recently rescheduled from September 12th two September 15th.
You May remember, we have requested the oral arguments as part of our briefings last year.
Following oral argument there is no timeline or indication of when the court will issue its decision.
We are confident in our legal arguments in the appeal the commission's improper handling of the proceedings and weighing of the benefits and we continue to believe the existing case record supports approval of the agreement.
We are also still confident the merger is the right decision for our long term strategy and our customers employees and communities.
If the court agrees with us on the appeal they would remand the case back for modification.
That'd be the commissions responsibility to determine what is necessary to remedy the order and set schedule.
The extension of the merger agreement should provide time to work through the court and commission processes.
And our appeal on four corners. The court confirmed last month that we would need to file a proposed plan for the replacement replacement resources in order to continue our plan to exit the plant early.
As a reminder, we are 13% minority owner in the four corners plant with only 200 megawatts.
We remain committed to fully exiting coal and removing carbon from our resource portfolio.
We are focused on the best interest of our customers and are working on next steps, which could include refining and abandonment case with the commission that would contain the specific replacement resources.
Lastly, let me give an update on the sales process of our joint venture and an R&D. The process announced in May is continuing with bids due during the third quarter and we still expect to close by the end of the year with that I'll turn it over to Don Thank you Pat and good morning, everyone.
I'll start on slide six with operational highlights for the quarter at PNM. We are continuing our plans in new Mexico for our clean energy transition, new solar and storage resources have been coming online providing energy to help us meet record level demand, we're expecting 410 megawatts of solar and storage to be.
We added during the third quarter, reflecting a big shift in our system. This will bring our resource portfolio capacity to 60% carbon free.
We also expect another 13 100 megawatts of solar and storage resources that were previously approved to come online by the end of 2024, which will take us above 70% carbon free.
The recent Supreme Court decision on four corners may have felt like a setback, but we remain steadfast in our goal to fully eliminate carbon from our resource portfolio and we are moving in that direction quickly.
System demands are growing and.
And we are looking at additional resources to meet future demand last year PNM hit a new system peak for the first time since 2000, 2003, and we talked that level with another new system peak in July of this year.
In November of last year, we announced an RFP for resources within service dates of 2026, 2027, and 2028 to meet the growing needs of our system.
Transmission interconnection queues remain a challenge for new resources, the resources that will be selected or those who can meet the 2026 in service date by having transmission interconnection connections available are being situated where new transmission is not required as a result, the resource available for 2010.
Six will primarily be battery storage, leveraging existing interconnections or substations, we expect to make a filing in the coming weeks for these resources.
Meanwhile, on the transmission and distribution side of the business, we continue to invest in reliability and resilience and look forward to solutions to integrate more intermittent resources on our grid.
We are also pursuing federal funding opportunities under the infrastructure investment and jobs Act for specific projects to benefit our customers.
We have $250 million proposals that have moved beyond conceptual papers and are being considered for funding under the grip program.
We are also a partner in a smaller project that has already received approval under the arrows program.
It is a partnership to use artificial intelligence powered platform on our grid real time to manage distributed energy resources will.
We will use findings from this pilot to maximize renewable resources on our grid going forward. We will continue to explore federal funding opportunities to benefit customers as we look to maximize the benefits of the clean energy transition, we have an abundance of projects in the wings as we continually balance that customer impacts of our.
Capital investments and utilize other funding opportunities can improve our ability to bring more benefits to our customers on.
On slide seven I will walk through recent updates on key regulatory proceedings at PNM.
<unk> has already covered our updates on the merger and four corners exit in our grid modernization application. The commission has asked for us to supplement the record with a cost benefit analysis for our filed investments.
We plan on submitting the analysis in early November the hearing examiner has indicated the remainder of the procedural schedule for wharf around the hearings for our general rate case, which has a statutory time clock. We now expect a decision on the grid Mod application in the first half of 2020 for the shift in this time.
For approval does not change the customer benefits and does not create significant changes to our capital spending plan.
And our general rate case staff and Intervenor testimony was filed at the end of June and our rebuttal testimony was filed last week hearings on the case are scheduled for September 5th through the 22nd and we would expect a recommended decision from the hearing examiner in the November timeframe with the final order.
From the commission in December and rates implemented in January the customer Bill impact from the rate change in 2024, coupled with changes in our fuel clause and other writers continues to be less than 1% for the average residential customer.
Last quarter I talked about our filing for 12 megawatts of battery storage at existing Substations as an innovative <unk> solution. This process has been dockets with testimony due during the third quarter and hearings scheduled for October we see this as a good customer solution to alleviate congestion on our system.
And it's distributed.
Demonstrates new ways, we can leverage technology to provide reliability affordable service to our customers.
Now turning to taxes on slide eight.
Ill cover Tnmp's recent operating highlights and key regulatory updates <unk>.
TNMP hit a new system peak again this year at the end of June with even higher peaks reached in July temperatures are definitely a factor, but each year's new peak that also reflects continued growth across our service territory.
<unk> system peak has grown 25% over the last five years and this is net of our energy efficiency programs that just received energy star's highest recognition again. This year, we are growing our teams in capital spending in Texas to match and support growth and reliability across our service territory are annual.
Capital investments plans have more than doubled in the last five years from 200 million to over $400 million. This year, we are seeing growth in all three regions of our service territory, North Central Texas, The Gulf Coast, and West, Texas, Lisa will talk more about the load impacts. We're currently seeing looked.
Forward, we already have one transmission expansion project in West, Texas under review with the ERCOT planning groups and our filing a second <unk>.
Existing data centers in the area, where given clearance to ramp their loads at the end of the second quarter and have communicated plans to expand their facilities. We are also seeing an increase in medium sized transmission requests from oil and gas load North Texas continues to be one of the hottest housing markets in Texas and growth in the Gulf co.
Cost is evident and new Substations and supporting T&D infrastructure, new load in both areas is being studied by PNM TNMP planning groups and we continue to receive inquiries from new and existing industrial and large load customers.
In terms of regulatory updates, we reached a unanimous settlement with staff and intervenors in our filing of our distribution investment recovery known as D. CRF.
And received commission approval of the settlement. This year was another year of constructive settlement for 98% of our requested amount, resulting in a $14 5 million dollar increase to be implemented September one recovering and incremental investments of $157 million of rate base.
On the transmission side, we've implemented updated rates under our first T cost filings for 2023 in May and we have made our second filing in July with rates expected to take effect in September we've requested an annual increase of $4 2 million to recover an incremental 21 4 million.
Capital investments turning to slide nine I'll highlight some of the new builds from this year's Texas Legislative session that impact our business grid reliability and resilience, where our priority in this year's session and bills passed to provide TNMP the flexibility to further strengthen its infrastructure and allow for time.
<unk> rate recovery, the bill with the largest near term financial impact to our business is the Dci RF legislation, adding a second filing per year and shortening the timeframe for proceedings similar to the T cost filings on the transmission side.
We are having stronger than expected load at TNMP This year, which Lisa will talk more about and this means our returns are strong strong enough that we will not have a second <unk> filing. This year, we will look for benefits of this legislation impact to affect our bottom line in 2024.
Also on the distribution side of the business system resilience and temporary mobile generation bills were passed and commission rulemaking will be underway soon temporary mobile generation will play an important role in each region of our service territory assisting TNMP in restoring power to distribution customers after a significant.
<unk> event, especially because our network is dispersed across the state on the transmission side of the business legislation was passed specific to west, Texas training transmission planning six months, CCN deadlines, which will help us move beyond the current projects that have resulted from sustained load growth and assist in getting ahead.
Of higher demand projects in the future. These transmission projects are generally recovered through the T cost mechanism and this approved legislation will help on projects move more efficiently to accommodate new load not only of west, Texas, but across TNMP totally employee compensation is another bill that will improve.
<unk> ability to recover the expenses necessary to run its business and the damage critical infrastructure Bill helps to protect our investments in response to criminal events across the country.
As we develop our business plans for next year and beyond we will look to prioritize investments aligned with these measures that improve the quality of service for our customers and future customers.
T cost in DC RF riders, along with this year's new legislation will make it increasingly possible to earn close to our authorized return at TNMP without a general rate case filing with that I will turn it over to Lisa. Thank.
Thank you Don and good morning, everyone I'll start on slide 11, with a summary of the year over year changes in second quarter earnings earning.
Earnings per share in the second quarter of 2023, or <unk> 55, compared to <unk> 57.
The second quarter of 2022.
Weather in both states reduced EPS by <unk> <unk> year over year at PNM higher transmission margins increased our revenues and lower costs from our generation portfolio transition and gas plant outages in 2020 to also increase the bottom line compared to last year.
TNMP had higher transmission and distribution investment recovery and increased customer usage from the load growth that.
The increase at both utilities, which partially offset by expenses for depreciation property tax and interest associated with our new rate base investments along with increases to our planned O&M spending.
We're trending above our annual expectation for O&M and will make use of favorable weather opportunities in the second half of the year to bolster our system and enhance service to our customer.
Higher interest rates reduced earnings at the corporate segment net of the hedges we've previously put in place.
On slide 12, I'll cover our load growth for both PNM and TNMP.
At PNM, the shoulder months and milder temperatures.
Lower volumes on a year to date basis, we continued to see a slower ramp up from some of our larger industrial customers, which has been partially offset by the residential and commercial classes. They are ahead of our expectations.
At the end of June brought the significant change in temperatures, which quickly rose to the record highs seen in July and led to multiple new system peaks.
We continue to see strong inquiries stemming from economic development efforts at the state level further supporting our plans for increased system demand and additional resources needed on our system.
At TNMP growth in the second quarter was more than enough to outweigh the impact of milder weather year over year.
As Don mentioned, we hit a new all time system peak in June and then again in July even ex crypto mining customers scaled back their usage.
Volumetric load grew in the second quarter and nearly offset the decrease we saw in the first quarter.
The strong housing markets and growth in subdivisions that Don mentioned are largely seen through our volumetric load.
Demand based load reflects the ramp up of crypto mining customers throughout last year. We continued to see growth from this segment of the business and we are also seeing continued demand based growth from other customers in all three regions of our service territory.
Expansion by our larger existing customers and new industrial customer inquiries has positively impacted our demand based load.
We will review our guidance after Q3, but it's likely that our demand base growth in Texas will exceed our expectations for the year.
In terms of whether when looking at the entire quarter Tnmp's degree days were pretty close to normal and didn't have a significant impact on tnmp's earnings this quarter.
Last year, the second quarter was hotter than normal, but there is a decrease in EPS year over year related to weather.
Turning to slide 13, I'll provide an update on our assumptions for the rest of the year.
We are affirming our 2023 guidance range of $2 65.
To $2 75.
Our increased results in the first quarter were partially offset by the impact of milder in new Mexico temperatures in the second quarter.
We have updated our quarterly earnings distribution to reflect our revised assumptions.
July temperatures indicate we will likely be in the top half of the guidance range. This year and we will reevaluate our expectations based on Q3 results at our next earnings call.
We will also provide an update to our capital plan to incorporate investments associated with the recently implemented legislation in Texas, any timing shifts and grid modernization investments and any other updates.
We refinanced $500 million of our holding company term loan in June extending the maturity out another year to June of 2026.
In addition to spreading out our maturity dates we increased the diversification of our lenders.
Seeing our overall financial risk.
We continue to have $1 billion of interest rate hedges in place this year through September with $850 million for the remainder of the year $600 million in 2024.
In terms of equity through our ATM program, we added another $50 million of forward sales in the second quarter, bringing our current total to just under $100 million.
We will continue to look for opportunities to sell another $100 million of equity for the remainder of the year through this program or other vehicles to reach our total plan of $200 million.
With that I'll turn it back over to Pat Thank.
Thank you Lisa before I open it up for questions I want to give a special thanks to all of our teams across Texas, and New Mexico, who have been focused on maintaining reliability and supporting our customers. During this extraordinary heat wave across the southwest.
These types of weather events are a reminder, that our investment plans for clean energy and for reliability and resilience of the grid are critical to our future will be directly impacted by the steps we take today to protect our environment and improve the lives of our customers and communities are.
Annual sustainability report published today talks more about our commitments and reports on the progress towards our goals you can find the report on our website Alan Let's please 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 are using a speakerphone. Please pick up your handset before pressing the keys 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 of Citi Go ahead.
Good morning.
Morning, Ryan maybe just.
Hey, maybe to start off in terms of your recent comment around potential changes to our capital program to be announced with the next quarter release on the heels of the favorable Texas legislation can you give any color as to what's the scope and the opportunity that you're evaluating currently.
And any color as to what the process looks like from here.
Sure I'll, let Rob <unk> to answer that one for you yeah and like I said in my script right, we will take into account the.
Since legislation look to see where we can do there as you know the legislation some of that legislation needs rules around it and so we will work through that we also.
Incorporate any timing changes regarding in our grid mod and any other updates that we see and so that will be coming forth in Q3.
Okay. So to the extent that some of the little clarification timelines get delayed should we expect.
And when you pull out your capital plan or do you feel pretty comfortable with the Q3.
Closure.
We feel comfortable that we will have some updates in Q3.
Okay.
Switching gears in terms of the four corners process from here.
In terms of the legal language in the merger agreement what obligations you have to continue to pursue pursue the that exit.
And how does that frame or influence to your path forward to the many portion of the year.
I I didn't write it the main thing that is.
Pushing our path forward is our desire to do what's right for our customers and to provide cost savings for our customers along with continuing to be carbon free. So that is what is guiding our analysis.
Roger agreement said that we needed to have to make a regulatory filing and have a signed contract in place. Those two things are still in effect.
Satisfied the merger agreement guiding as the customers.
Okay, and then last question in terms of load forecast from here clearly AI is topical.
Are you seeing any of that load materializing in your service territory or do you see any upside to your forecast.
You know when we look at our economic development Ryan.
We see a lot of data centers here in new Mexico, and some manufacturing plants.
Our place and reduction Act incentives I think we're starting to see that in in Texas, We see crypto, we haven't seen anything specific to AI, but we do have in both territories healthy very healthy economic development pipelines.
Thank you for taking my questions you have or you just wanted me to not be the only CEO that didn't say AI on an earnings call. Thank you for that.
Thanks Ryan.
Our next question comes from Julien Dumoulin Smith of Bank of America go ahead.
Okay.
TGI Friday guys. Thanks for the time.
I appreciate it.
Somewhere.
Hi, Matt.
[laughter] so.
Just to that speaking of being the end of the day, how about the end of the year.
Just talking about this new December timeframe, what will you know in terms of that timeframe in terms of the transaction rate, presumably given the all the various pieces.
I surmise that you may not necessarily have a new decision from the PRC by that timeframe, but what will you know by the end of December in order to SaaS or reassessed as it may be.
Well my Crystal ball is a little cloudy when it comes to the Supreme Court just several just stipulate that.
We're pretty confident that we should have a decision from the Supreme Court.
Before the end of the year I mean.
In a perfect World, we have a decision from the Supreme Court, It's very let's think about what the commission needs to do and the commission has done.
Possible.
Don't think it's probable so I think we'll have a decision from the Supreme Court, telling the commission, where the port believes it aired and telling you what it needs to do to fix that that's where I think we're going to be at the end of December .
Now it's possible again Supreme Court doesn't rule, because as you know theres no theres no set timeframe.
Got it and without trying to be determined is thinking about this are there any specific parameters that are a red line around the deal per se.
As it pertains to either the court outcome.
Or b the other dynamic around the rate case itself and that timeline.
Whether whether or not it's resolved entirely.
Well I would think on emerge I'll, let Don talk about the rate case, obviously, if that if the court upholds the commission.
We haven't got are going to have to think about what our chances would be when that happens.
But I can't think of any scenario of any red line that they would put in there that would be an issue so and on the rate case, we should have a decision by the end of the year. I mean hearings are in September expect a recommended decision in November .
The commission has to order by I think it's around January 3rd or fourth.
There will be a decision on the right rate case by then.
Alright, so you should have pretty ample clarity on a lot of things.
To that end, if you can elaborate a little bit I mean.
Considering that the deal is not necessarily overlapping with the timeline for the true for the rate case is there potential for any kind of settlement in this case or just hasnt been too long and too many different parties involved for that to be.
Credibly considered at this point in time.
And then on the rate case, we would never say never but we're at right now as we're preparing for the hearings that start next month, and that's where our focus is that so.
Alright fair enough and then lastly, just in terms of the Capex update can you break down the specific because I know I know Ryan was just pushing on this but can you break down the different buckets a in Texas.
The grid Mod, what the different permutations like B and C.
What the what is currently in your planning process in Texas as it pertains to generation resources.
And that could very well be a further.
Aspect to your next Capex update as it pertains to the Texas law.
If I hear you right.
Asking us what the upside to the upside is.
Oh come on.
No one thing.
Ill, let Lisa answer that so Julien we said that we will provide an update in Q3 right and so we will go through and look at the.
What's available and what's appropriate to.
As for our capital budget also incorporate any timing associated with grid mod and any other updates.
So we'll just have to wait until Q3 to see what that Capex plan looks like and I would add to what Lisa said, we do see the legislation being extremely positive in Texas as we look to continue to create resilience in the grid. So there there are opportunities there, but as Lisa said, we'll address those in in Q3.
Awesome Alright, great.
Yes, just to clarify that on taxes, you'll have the visibility or ready to come forward with something I know that you had.
The resiliency process itself as I.
Could take a little bit of time here too right.
These per year.
So we will.
Both of you.
What what's the opportunity.
Communities are a little chair of that into Q3 call.
Excellent alright, guys. Thank you very much.
Thank you Julia enjoy it.
Thanks.
Once again, if you have a question. Please press Star then one.
Our next question comes from Jonathan Reeder of Wells Fargo go ahead.
Hey, good morning team.
Good morning, Jonathan.
Just to follow up a little bit on the rate case, what's your view of the.
Intervenor positions that.
That had been filed and when would a settlement if one has to be reached need to be filed but.
You know I mean, the positions of the intervenors they seem to be heavily focused on really our transition out of our generation resources. So I mean, whether it's four corners, the Palo Verde lease for 114 megawatts, we transferred out of they even have some San Juan in there as well so that if you look at the overall briefing that they provided.
And the testing where they provide has primarily been focused in in that area.
On the settlement side I would never say never but as I said, Jonathan we're focused on preparing and putting the best case for that we have in September so.
When would you need to reach a settlement and our reach one like does it need to be before the hearings or is that just kind of the preferred date.
Great.
Ideally you would like to before the hearings, but again as I said, where we're focused on preparing for that case.
Okay.
Would you say are the parties motivated to reach a settlement.
Maybe asked another way do you believe like the newly constituted PRC would honor settlement agreement, whereas the prior PRC.
Had a reputation for modifying them.
You know I'd, probably be speaking for the commissioners, so I'd prefer not to hop into that I think that.
It hasn't been against settlements they haven't taken the position that settlements or a bad thing at the commission.
But we'll have to wait and see how this commission reacts as we move forward. So.
Okay, but like past president of that influence I guess, the parties like desire to reach a settlement or.
You know that.
That still something that you think parties.
Are working towards.
John It's just hard to say because we haven't seen this commission make any major decisions right, yet and remember we only have two commissioners on this because commissioner O'connell terminal upon over accused himself because he had Bob.
Testimony with western resource advocates on some of the issues. So I think given all of those factors and we've got some turnover among the intervenor staff themselves, it's kind of hard to Tim.
A conjecture on this one.
Okay.
Alright shifting to the four corners, what has to happen I guess for you to re file the application like.
The results of last November's RFP.
Shaped the replacement resource plan, which you did that include.
Yes.
From the Supreme Court ruling it's clear that we have to file actual resources and the timeliness of that as I mentioned, we have a multiple set of Rfps ongoing right. Now 26, 27 and 28. So as you kind of look at those those realm of things.
One actual resources that you.
File in the next case. So you want is clean the cases, we possibly can.
Okay.
The results of that.
Our expected here in the next few weeks.
Our results. So we issued those rfps earlier this year and they'll come in over the next couple of weeks and then well like Pat said that the key element is you've got to look at the customer benefits and the timing of how it all lines and we're going to do the right thing that makes sense for the customers.
Okay. Okay, and then I guess can you talk a little bit about.
The planned 2026 resource filing this is something that I guess, the PRC approves and actually you know.
As you know a potential recovery of future generation additions and then will it also indicate whether.
N M is able to own any of this generation versus the prior prc's preference for PNM just to sign Ppas.
Yeah, Jonathan I'm not going to get ahead of our filing our father will likely be in the next two or three week time period and so I.
I think that will kind of lay out the direction again, when we go through our RFP process. We're looking at the deliverability of the resources and what's cost beneficial to customers and that's the screen that always we always have to go through and it's the right thing to do so as we go through those screens as we put these plans in front of the commission, that's our focus and doesn't remember.
This time around now we have the commission.
Have an independent evaluate are involved in it which I quite frankly, I think is very helpful.
Because they are a non biased nonpartisan look and so if it does make sense for us to own some generation coming out of that and the independent evaluate or inquiries I think we have a much better shot.
And getting that generation.
Okay, but does the PRC ultimately approve this plan that you've kind of bile and lay that lay out like is there a conclusion to it or is this just.
What you kind of proposed and then you know going forward you you implemented.
No.
As needed on a piecemeal basis, we'll file it as an actual plan that seeks commission approval, so that would be the path when we make the filing in the next two or three weeks it'll be asking for approval of these specific resources.
Okay perfect.
Appreciate that clarity.
Yeah.
ERP, which is what we file for sport yeah.
Okay great.
This concludes our question and answer session I would like to turn the conference back over to Pat Vincent <unk> for any closing remarks.
Thank you Alan and again, thank you all for joining US. This morning, please stay safe and cool and keep out of those heat waves will talk to you all soon.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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