Q3 2023 PNM Resources Inc Earnings Call
Yes.
[music].
Yes.
[music].
Good day and welcome to the PNM resources third quarter 2023 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 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 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 Investor Relations. Please go ahead.
Thank you, Dave and thank you everyone for joining us this morning for the PNM resources third 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 me today are PNM resources, Chairman and CEO, Todd <unk>, President and Chief operating Officer, Terry and senior Vice President and Chief Financial Officer, and Treasurer Lisa.
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.
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 Cranky co workers day, and yes, you can Google It. It is a real day now we are sure. None of you have any cranky coworkers or that none of you are one of those cranky co workers and none of us surely are but we're going to celebrate the day just to.
Okay.
I'm going to start on slide four with our financial results and strategic update ongoing earnings were $1 54 for the third quarter compared to $1 46 last year.
Summer temperatures, where hotter across new Mexico, and Texas and had a significant impact on earnings we are adjusting our guidance for the year to a range of $2 75.
Two $2 80 per share Lisa will walk through the details.
The new Mexico Supreme Court held oral arguments on our merger with Ovenbird on September 15th. This was the final step in the appeal process and there is no timeline for when the court will issue its decision and yes, we reprised Tom Petty because we agree that the waiting is the hardest part.
As a reminder, the court has two options to uphold the commission's decision or to vacate the order in remand. The case back to the commission. If there is a re man the commission will determine the next steps on how to respond to the court's order.
The merger agreement was previously extended through December with the option for a further three month extension through March.
Separately the sale of our joint venture in an R&D remains on track the renewable projects in this portfolio are attractive assets, even in the current challenging market and we are working to evaluate the bids we expect to close the sale in the late fourth quarter or early first quarter 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 at PNM.
New Mexico continues to announce new economic development wins, two of those announcements warranted national attention during the third quarter in August President <unk> visit at the site of a new facility that will manufacture wind towers and PNM service territory. Soon after maxion solar announced its plans for its first U S.
Based manufacturing facility, a three gigawatt plant in Albuquerque.
Investment is also expected to bring 800, new jobs to the area. We are also seeing continued announcements and inquiries for new businesses and expansions further increasing our system demand outlook.
In July <unk> had two consecutive days at a new all time system peak when cooling degree days for the month were almost 50% higher than the 20 year normal last year's New peak was the first for PNM in nearly a decade, we maintained reliability through the peak season and <unk>.
Both years, thanks to careful monitoring planning and system maintenance from our teams.
On the other side of the equation. We have also started the approval process to add new resources to our system.
After an RFP process began last year, we filed an application at the commission this week for resources needed in 2026.
These additions will align our planning reserves with industry standards and it will better position us as the state for additional economic development inquiries.
The filing proposes a 100 megawatt of solar through Ppas, and 250 megawatts of battery storage capacity through energy trends.
<unk> storage agreements, along with 60 megawatts of utility owned battery.
This is our first proposal for utility owned generation resources in some time and it carries several benefits for customers. In addition to being part of the least cost portfolio ownership of battery allows us to charge and discharge the batteries in our customers' best interest while maximizing our entire system. It also.
<unk> allows us to retain the battery upgrade components and extend the life of the battery versus paying to replace the batteries at the end of the contract term balancing this with energy storage agreements allows the utility to avoid the risk of operations and maintenance cost increased during the contract period, we see the mix of ownership and contract.
Resources, providing the best operate operational and customer value.
Each of the proposed solar and battery pilot projects leverage existing grid interconnections in order to be online in 2026.
We've asked the commission for approval of these resources by May and we will provide you with updates as the filing proceeds.
One year ago, our generation capacity has just reached 50% carbon free resources, adding these 2026 resources to our plans will move up to 75% carbon free and this doesn't include community solar resources, which are also expected in the coming years, our clean energy transition in new Mexico.
<unk> is moving rapidly turning to slide seven I'll cover our key regulatory proceedings with the New Mexico Commission.
And our PNM rate change filings hearings have been completed and we continue to expect a commission decision by the end of the year. The unanimous settlement of the San Juan rate credit removes this item from the rate case as we continue to transition our generation portfolio. The two remaining transitional issues in the case primarily relate.
Chip past decisions on four corners, and Palo Verde resources, and the recovery of amounts associated with those plants.
We are looking forward to resolving these issues as we move forward on our path to carbon free.
Our proposal for a 12 megawatt until megawatts of battery storage as a distribution solution is also under review at the Commission.
We received full support of our request from the intervening parties in this case.
If these batteries are approved we will look to take the same approach at our other distribution sites to relieve overloaded theaters and accommodate more renewable energy. The hearing examiner held hearings on October 12, and we expect a commission decision before the end of the year.
And our grid modernization filing we expect to file the requested cost benefit analysis to support the proposed investments in November many of the future rate design possibilities discussed by stakeholders in our current rate review required. These advanced metering technologies that are proposed in our grid modernization filing.
We expect a decision in the first half of 2024, we.
We have also been working with stakeholders and getting their input into our integrated resource plan that will be filed before the end of the year. While the RFP is not formally approved by the commission. It provides modeling results showing the most cost effective path forward for meeting system demands over the next 20 years.
The filing and subsequent commission discussion, who will provide some direction for the path ahead towards our carbon free goals before I turn to TNMP I quickly note that we have not made any new determinations on the future of our ownership in the four corners power plant, we continue to evaluate options for potential exit in RA.
Placement before our ownership contract expires in 2031 now turning to taxes on slide eight I'll cover Tnmp's recent operating highlights and key regulatory updates.
After setting a new system record in June.
<unk> exceeded this level twice at the end of July and then again in August the consistent growth in system demand at TNMP and legislative support for infrastructure investments prompted us to bring more projects to the forefront of our plan Lisa will walk through our revised capital plan through 2027, which.
This growth at TNMP, I mentioned last quarter that our annual capital investment plans at TNMP had more than doubled in the last five years from $200 million, so $400 million per year and now our five year plan shows this level increasing to $600 million per year as Texas continues to lead the nation in grow.
<unk>.
On the distribution side customer growth remains strong and the housing markets in our North, Texas and Gulf Coast Service territories are among the strongest in the country. For example, we have been working with a developer all year, who announced its plans. This month for a new 600 home community in our Gulf Coast Service territory.
<unk> has already begun and housing construction is expected to begin in 2025.
On the transmission side, our teams have worked to earn our reputation in the area for processing new request in a timely manner and are building additional inquires. In addition to our system demand one of our proposals for transmission expansion in West, Texas has been vetted by the ERCOT Regional planning group and should be considered by ERCOT Board.
<unk> later this year, we are seeing interconnection request increase each quarter and under new legislation ERCOT will be directed to develop rely a liability planned for the premium basin, which could result in additional investment opportunities as for a regulatory update we implemented new rates for both.
And in transmission capital recovery in September next year, we plan to make semiannual filings under both the T cost and DC RF mechanisms based on the new <unk> legislation.
All of our T&D capital investments qualify for recovery in this manner as the rules for new resilience legislation are finalized we could see additional recovery mechanisms put into place and would also submit a filing under those rules. We also received approval for Tnmp's annual energy efficiency program with a settlement for.
Recovery of $6 $6 million of program costs, which includes a $1 2 million bonus incentive for prior year achievement TNMP remains the fastest growing segment of our business with construction with the constructive regulatory environment to recover investments timely with that I'll turn it over to Lisa.
Thank you Don and good morning, everyone I'll start on slide 10, with a summary overview of the year over year changes in third quarter earnings earnings per share in the third quarter of 2023 were $1 54 compared to $1.46 in the third quarter of 2022.
Well there was a significant positive driver in both new Mexico, and Texas, adding 21 cents for the quarter.
Continued rate recovery of transmission and distribution investments at TNMP also added earnings.
The increase at both utilities was partially offset by planned O&M increases in expenses for depreciation property tax and interest associated with new rate base investments.
Sure earnings at corporate reflect higher interest rates year over year, partially mitigated by the hedges we've previously put in place.
On slide 11, I'll cover our load growth for both PNM and TNMP.
At PNM, whether it had the biggest impact on our sales volumes on the on a weather normalized basis, we continue to see residential and commercial classes ahead of our expectations, while the ramp up from some of our larger industrial customers remains behind schedule we have.
Our total load growth expectation for the year to be close to flat.
Net earnings impact of these changes remains very small.
At TNMP.
He has a new system peak, a few times over the quarter.
And not only because of hotter temperatures.
We have seen higher than expected demand baseload, both from crypto and other customers.
Weather normalized volumetric load has been below our expectations, particularly in the third quarter as customers began to see their bills from June and July and reduce their usage along with some reductions when ERCOT calls for conservation.
We have updated our expectations for the full year for both volumetric and demand Baseload we.
We expect TNMP volumetric load to come in between zero and 1%.
It wasn't a man base load is expected to come in between 12 and 13%.
Turning to slide 12, we have updated and rolled out our capital plan through 2027 for a total of $5 $9 billion.
At TNMP as Don mentioned, we are funding additional projects to support high demand on our system and provide an increased level of reliability and resiliency supported by Texas Legislature. This year.
In the North, Texas, and the Gulf Coast area, where our distribution low dislocated. This means replacing transformers substation trading up wood poles for steel and adding new circuits in theaters.
For transmission loads, which are in all three of our regions. This means adding new points of interconnection on higher voltage lines.
These investments have been prioritized to align with the new legislation, but they can be recovered under the existing key cause.
D C R F mechanism.
The new rule, making process may provide opportunities for additional recovery of costs and investments tied to resiliency plans.
As Tom pointed out.
<unk> capital spending is now growing to just over 600 million per year.
He announced capital needs are also growing to accommodate the new resources and customer expansion discussed earlier.
We have balanced the added capital with the impact on customer bills on the graph in yellow, we've called out the investments for own battery storage.
Battery investments will have to go through the CCN filing in order to be approved.
We also shifted our grid modernization plans back one year to reflect the shift in timing of the regulatory proceedings.
In the table at the bottom of the page we have provided the corresponding rate base for these investments.
TNMP rate base growth at 14, 5%.
N PNM FERC rate base grows at nine 7%. These two jurisdiction utilized rate mechanisms to provide more timely recovery.
Turning to slide 13, I'll provide an update on earnings guidance for the rest of the year and our long term growth, including our financing plans.
We are raising our earnings guidance for 2023 to a range of $2 75 to $2 80.
Higher transmission margins in the first part of the year combined with the hot summer temperatures in the third quarter increased earnings at both utilities.
These changes are partially offset by higher interest expense lower transmission margins in the second half of the year and lower fixed income performance in R&D commissioning Trust.
On the equity side, we completed another $100 million of forward sales under our ATM program during the third quarter fulfilling the $200 million of equity needs for this year we.
We plan to settle those forward sales contracts through the issuance of shares before year end.
The proceeds from the sale of it and the Mardi combined with the $200 million of equity this year.
And the 345 million of San Juan securitization bonds will help strengthen our balance sheet and position us for future growth.
As we look forward, we have assume on average approximately $100 million a year of equity to help fund growth in our capital investments.
As usual, we leave our financing options open and as market conditions change, we will consider other opportunities to optimize our funding.
We continue to have $850 million of interest rate hedges in place through the end of the year and $600 million hedges in 2024 to mitigate the impact of interest rates on our variable rate debt.
Looking forward, if we are financing the business on a standalone basis, we will look to issue more permanent financing for this debt.
Under these assumptions, we are comfortable extending our 5% growth target out to 2027, as we finance our rate base growth in the current market environment.
With that I'll turn it back over to Pat Thank you Lisa in.
In addition to cranky co workers day today is also global Champagne day, So before I open it up for questions and in the spirit of Champagne toasts I'd like to share some of our recent celebrations.
This summer the PNM resources Foundation celebrated 40 years of giving.
We just held our annual day of service and safety day at PNM, and TNMP and we hosted our largest annual customer assistance fare at PNM.
TNMP was named business of the month at one of its local chamber of Commerce PNM was awarded a sustainability initiative of the year from the business Intelligence group for our project to transfer critical water infrastructure at the San Juan coal plant to the Navajo nation. So to everyone involved at each of these efforts.
We raised the glass to you.
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 are 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.
Our first question comes from Ryan Levine with Citi. Please go ahead.
Good morning, everybody.
Good morning, Ryan.
And that.
So international in Champaign day or.
However, we still highlighted.
Yes, a couple of days, we were frankly coworkers day, Ryan they kind of go together okay great.
Great.
In terms of the financing plan. So you highlighted the $100 million of equity needs as part of your baseline plan.
Just to clarify that assumes it's exactly that.
Of the renewable portfolio.
And does that contemplate any income at all.
Potential capital in Texas beyond Whats outlined in your presentation today or can you give a little more color around what's embedded in that forecast.
Yeah. So we are looking to do a.
100 million on average for the next four years and that does not include what we're doing this year, which as you know the 200 million of them and we did have already done.
Don as well as the MMR D. The sales that we're expecting towards the end of the year or early next year.
Okay, and then regarding that sale.
Did you go away or extend the timeline from causing that from the fourth quarter to fourth quarter or early next year and is there any color you could maybe you can speak to as to why maybe the timeline slipping a little bit.
We have gone through the bid process and and our objective is towards the end of the year, but it can slip into the beginning of next year. We do have to go through a FERC filing.
Filing in that sale. So that May also take a little time and as you know, we don't know what's going to happen.
November 17th so we're taking that into account as well, we're lengthening our regulatory timelines.
Everything takes long runway effective so.
Okay, and then in terms of the hedge the interest rate hedge for 2024.
How is that structured.
What rate is it hedged that and does that hedge extend through the full calendar year or is that only partial year.
Or how that's positioned.
Yeah, Brian This is and we have a hedge.
$600 million in total the average price is around three and a half.
Percent and so and then it goes for the entire calendar year.
Okay.
<unk>.
Great I'll stop there. Thank you thanks Ryan.
The next question comes from Paul Zimbardo with Bank of America. Please go ahead.
Good morning, Paul.
At my Cranky Coworker Julian wanted to say Hi, I think you just said.
Now I'm totally is never a crazy Paul.
He is getting new measurements to give to liza to prepare for <unk>. So I made sure I got that.
Okay.
Okay.
Well. Thank you on the refresh I was just hoping you could drill it a little more on the new five year investment plan just are there opportunities.
<unk> to add more batteries into that outlook, whether like 2026, plus as well as renewable scale.
Yes.
Absolutely you know a couple of things that I mentioned was the 12 megawatt batteries to relieve the theater constraints and to kind of give you a feel of that six megawatts on each feeder.
Right now we have 18 theaters that are out that capacity. So there is always options there as we kind of look forward, though.
Speeders provide tremendous customer benefit and being able for the customer to connect a rooftop solar and right now theyre not able to because of those theater constraints. So those are options.
You know we've talked about our 2026 RFP. Obviously that's included in our capital plan.
We will have a 2027 RFP that were working through right now as well so that kind of pushes it out there so that element of it in Texas. There is always opportunities as we file our grid resilience, but those have to always be balanced with customer impacts and the overall financing that we would do.
Okay great.
Great understood there and.
Kind of at a high level could you help walk from that 10, 6% rate base CAGR to the 5% EPS CAGR and I know you have the equity in there, which probably takes about two 5% or so but it seems like there's some cushion or conservatism I don't know if thats additional regulatory lag.
Current cost or something else.
Yeah.
Good question.
So I would say.
Several things you have the you have a great regulatory construct in Texas, but it's still based on historical test year, and so you do have some regulatory lag and the same thing first we have a historical test year, and then Theres also timing of rate cases, and so and beyond.
That you have the holdco financing both from a debt and equity standpoint, So I think that those things are really what makes up the difference between the 10% rate base growth down to 5% earnings growth.
Okay, great. So nothing really different from the historical pattern, just regulatory lag and financing.
Correct.
Okay.
Great.
Thank you Tim I appreciate it.
Thank you. Thank you Paul.
Our next question comes from Jonathan Reeder with Wells Fargo Securities. Please go ahead.
Hey, good morning, Jim how are you.
Good morning, Jonathan.
Oh I was wondering if you could.
Can you expand on your understanding of that.
Supreme Court options, if they do remain the order back to the PRC.
They narrowly define what issues the PRC can address or fix or does the PRC automatically have card launch.
So I thought you were going to ask us where in our Halloween costumes today or not John but all our other headwinds and <unk>.
Answer your merger Supreme Court question, I think that's a given their Halloween costume. So thank you because we do have some holiday Hudson's on today.
So.
I wish we had an exact answer on what the Supreme Court can and can't do and if you listen to the oral arguments I think they were maybe even a little questioning what they can do but.
Our belief is that they they either remanded back where they don't and again, obviously, depending on what the order on Reman says that commission will get to determine their next step, but the commission should have wide latitude.
To determine what to reopen assuming the Supreme Court kind of gives them that says we remanded back.
To be fixed.
I know, that's a squishy answer, but it's a squishy process.
Okay. So I mean.
You do think the commission does have wide latitude you, even if I guess.
Yes, the order they have wide latitude obviously cant go outside of the order, but they have they have wide biology to address the order.
Okay.
Alright, yeah, it will be interesting to see.
How that comes out so then.
In terms of.
We agree.
[laughter] yeah.
That might be the understatement alright.
Yes.
So how should we be thinking about like weather normalized EPS for 23 of them if I'm understanding like slide 19 correctly.
Above normal weather year to date has been like 14 positive in new Mexico, and five in Texas. So if I subtract that 19 from kind of a new guidance midpoint of call. It $2 78, it would put full year 'twenty three weather normalized EPS of $2 59.
Which is actually below I think your initial 23 guidance range $2 60 to $2 75.
Is that fair or is that how we should be thinking of it.
Well we've had.
Weather in the third quarter, both in Texas, and New Mexico, but we're also when that happens. We also use that as an opportunity to do some extra extra maintenance at the utilities are theres been other offsets in terms of our nuclear decommissioning trusts.
As you know, we have 80% and asset allocation of 80% fixed income and so when the fixed income market is is it dragging that also has an impact and then we also have some interest ex bend exposure due to both timing of <unk>.
Equity as well as the AR securitization issuance that we're planning to do later this year.
As I said I would say the biggest thing is that we dynamically manage our O&M and so when we have the opportunity to give the folks in the field.
Some extra dollars.
Do that so that they can invest in the safety and reliability and resiliency of the system. So that's the biggest flex there. Okay. So again, we should think of as you kind of flexing that versa.
Yes.
And it's not performing as expected or something like that so correct correct that makes sense and then one.
Kind of following up to Paul's question, just trying to better understand what is or isn't in the new Capex plan. So the 60 megawatt utility on battery storage project. That's in there and that's represented by the yellow bars right.
That's correct, Okay, and then for the for lack of a better word the copycat projects of the 12 megawatt battery storage CCN thats not in there at this point it's.
It's not and they're just they're just the 12 megawatts is all of that's in there so.
Okay.
And then what about the potential transmission projects in Texas that you alluded to in your prepared remarks or any of those baked in.
Yes, they are all baked in.
Okay.
Okay are there like is there any way to kind of categorize in and what's in the budget like projects.
I guess, we should view, we're not locked in depending on maybe regulatory approval and stuff like that.
A certain amount of that at risk and I know you already kind of walk through the potential upside.
The 12 megawatt up even though it's completely unopposed is in there in the regulatory process, we would expect to get approval for that.
Texas those are strong projects that flow through so we don't see any issues in that arena grid Mod, we did move back one year, but we do expect to get grid Mod approved.
In the capital budget. So those are projects that are fluid.
But.
We have capabilities to deliver on them. So they all have high probability of being approved and then you know we always have other things we can slip in there if something.
Something doesn't get approved.
We've got the folks have lots of capital desires, So theres always enough to fill the pipeline.
Okay, great and anything that might slip out yes, you got other stuff that you think would flip back to you, but yes, okay, Dan <unk> and Jonathan we always balance out with customer impacts. So we're always looking at the combination of the boat.
That said there is always additional projects as we harden the systems, Yeah, and if you see in Texas, I mean, we have tremendous growth in Texas.
Particularly on the demand load side, and so that really.
The need for capital investment in Texas is strong and in particular, when you think about the legislative session with them their Brazilian fever, either coming along.
That's a good area for us to invest in.
Right right.
Right, Okay, well I appreciate you taking my questions and look forward to continue to.
We'll be there to take our Jonathan.
Our next question comes from Brandon Lee with Mizuho. Please go ahead.
Hi, Dan Thanks for taking my question most of my questions have been asked but just wondering.
So thanks for the disclosure on the $100 million of equity over the next few years, just wondering if theres any.
Alternative ways, you could raise equity in lieu of issuing it like a <unk>.
Selling noncore assets.
Something like that thanks.
You know.
Those are obviously alternatives, but we think issuing equity is the best way to do it we don't really have any noncore assets. We are obviously in the process of selling an M.
R&D.
Everything else is is core to our business and we'd like to continue to invest in our business and I'd, rather raise equity and invested in the business and get a return on it and then sell a piece of the business out.
Okay perfect. That's all I had thanks.
You.
Again, if you have a question. Please press Star then one.
At this time, we have no further questions. This concludes our question and answer session I would like to turn the conference over to Pat Vincent <unk> for any closing remarks. Thank.
Thank you Dave and thank you all for joining US. This morning, we are looking forward to seeing many of you at a couple of weeks at EI Intel that make sure you raise a toast tier cranky and non cranky coworkers. This evening and have a safe and happy Halloween. Thank you all.
The conference has concluded. Thank you for attending today's presentation you may now disconnect.