TXNM Energy Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 4, 2023

There are 7 speakers on the call.

Operator

Good morning, and welcome to the PNM Resources Second Quarter 2023 Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. 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.

Speaker 1

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 This conference call and other supporting documents are available on our website at pnmresources.com. Joining me today are PNM Resources' Chairman and CEO, Pat Vincent Quon President and Chief Operating Officer, Don Terry And Senior Vice President, 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 19 95. We caution you that all of the forward looking statements are based upon current expectations and estimates and that PNM Resources assumes no obligation to update this information.

Speaker 1

For a detailed discussion of factors affecting PNM Resources results, please refer to our current and future annual reports on Form 10 ks, Quarterly reports on Form 10 Q as well as reports on Form 8 ks filed with the SEC. 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 today is also International Beer Day and White Wine Day, so we've given you some ideas on how to beat the heat tonight.

Speaker 1

I'm going to start on Slide 4 with our financial results and company updates. Ongoing earnings were $0.55 for the 2nd quarter compared to $0.57 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 Dawn to cover the operational highlights and key regulatory and legislative updates, let me cover a few strategic items.

Speaker 1

We extended our pending merger agreement with Avangrid to December 31 with the option for a further 3 month extension through March. The New Mexico Supreme Court weighed in on our request for remand in May, along with requests from other parties to supplement the record. The court denied all the requested motions and continued its appeal process of the commission decision by ordering oral arguments, Which were recently rescheduled from September 12 to September 15. You may remember we have requested the oral arguments as part of our briefings last Following oral argument, there is no time line 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.

Speaker 1

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 Caseback for modification. It would then be the commission's responsibility to determine what is necessary to remedy the order and set a schedule. The extension of the merger agreement should provide time to work through the court and commission processes. In our appeal on Four Corners, the court confirmed last month that we would need to file a proposed plan for the replacement resources In order to continue our plan to exit the plant early.

Speaker 1

As a reminder, we are a 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 refiling an abandonment case with the commission That would contain the specific replacement resources. Lastly, let me give an update on the sales process Our joint venture NMRD. The process announced in May is continuing with bids due during the Q3 and we still expect to close by the end of the year.

Speaker 1

With that, I will turn it over to Don.

Speaker 2

Thank you Pat and good morning everyone. I will start on slide 6 with operational highlights for the quarter at PNM. We are continuing our plans in New Mexico for a clean energy transition. New solar and storage resources have been coming online, providing energy to help us meet record level demand. Another 1300 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.

Speaker 2

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 we are looking at additional resources to meet future demand. Last year, PNM hit a new system peak for the first time since 2,003, and we topped that level with another new system peak in July of this year. In November of last year, we announced an RFP for resources with in service dates of 2026, 20272028 to meet the growing needs of our system. Transmission interconnection queues remain a challenge for new resources.

Speaker 2

The resources that will be selected are those who can meet the 2026 in service date by having transmission interconnections available are being situated where new transmission is not required. As a result, the resource available for 2026 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 $250,000,000 proposals that have moved beyond conceptual papers and are being considered for funding under the GRIP program.

Speaker 2

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. We'll 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 the customer impacts of our capital investments and utilize other funding opportunities can improve our ability to bring more benefits to our customers.

Speaker 2

On Slide 7, I will walk you through recent updates on key regulatory proceedings at PNM. Pat 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 The 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 will work around the hearings for our general rate case, which has a statutory time clock.

Speaker 2

We now expect a decision on the grid mod application in the first half of twenty twenty four. The shift in this timing for approval does not change the customer benefits and does not create significant changes to our capital spending plan. In 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 5 through 22nd, and we would expect a recommended decision from the hearing examiner In the November time frame, 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 riders, 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 T and D solution, this process has been docketed with testimony due during the Q3 and hearing scheduled for October. We see this as a good customer solution to alleviate congestion on our system and demonstrates new ways We can leverage technology to provide reliability, affordable service to our customers.

Speaker 2

Now turning to Texas on Slide 8. I will cover TNMP's recent operating highlights and key regulatory updates. 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 also reflects continued growth across Our service territory. T and M system peak has grown 25% over the last 5 years and this is net of our energy efficiency And support growth and reliability across our service territory. Our annual capital investments plans have more than doubled in the last 5 years From $200,000,000 to over $400,000,000 this year.

Speaker 2

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 are currently seeing. Looking forward, We already have one transmission expansion project in West Texas under review with the ERCOT Planning Group and are filing a second. Existing data centers in the area were 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.

Speaker 2

North Texas continues to be one of the hottest Housing markets in Texas and growth in the Gulf Coast is evident in new substations and supporting T and D infrastructure. New load in both areas is being studied by TNMP Planning Groups and we continue to receive inquiries from new and existing industrial and large In terms of regulatory updates, we reached a unanimous settlement with staff and interveners in our filing of our distribution and investment recovery known as DCRF and received commission approval of the settlement. This year was another year of constructive settlement for 98% of our requested amount, resulting in a $14,500,000 increase to be implemented September 1, recovering an incremental investment of $157,000,000 of rate base. On the transmission side, we've implemented updated rates under our first TCOS filing 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 $4,200,000 to recover an incremental 21.4 $1,000,000 in Capital Investments. Turning to Slide 9, I'll highlight some of the new bills from this year's Texas legislative session That impact our business.

Speaker 2

Grid reliability and resilience were a priority in this year's session and bills passed to provide TNMP the flexibility to further strengthen its infrastructure and allow for timely rate recovery. The bill with the largest near term financial impact to our business Is the DCRF legislation adding a second filing per year and shortening the timeframe for proceedings Similar to the TCOS 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 enough that we will not have a second DCRF 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 rule makings will be underway soon.

Speaker 2

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 event, Especially because our network is dispersed across the state. On the transmission side of the business, legislation was passed specific to West Texas Transmission Planning and 6 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 TCOS mechanism and this approved legislation will help projects move more efficiently to accommodate new load not only in West Texas But across TNMP, total employee compensation is another bill that will improve TNMP's ability to recover The expenses necessary to run its business and the damaged critical infrastructure bill helps to protect our investments in response to criminal events 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. The TCOS and DCRF riders, Along with this year's new legislation, we'll make it increasingly possible to earn close to our authorized return at TNMP Without a general rate case filing.

Speaker 2

With that, I will turn it over to Lisa.

Speaker 3

Thank you, Don, and good morning, everyone. I'll Start on Slide 11 with a summary of the year over year changes in 2nd quarter earnings. Earnings per share in the Q2 of 2023 were $0.55 compared to $0.57 in the Q2 of 2022. Weather in both states reduced EPS by $0.04 year over year. At PNM, higher transmission margins Increased our revenues and lower costs from our generation portfolio transition and gas plant outages in 2022 Also increased the bottom line compared to last year.

Speaker 3

TNMP had higher transmission and distribution investment recovery And increased customer usage from remote growth. The increase at both utilities was partially offset By expenses for depreciation, property tax and interest associated with our new rate base investments, Along with increases to our planned O and M spending, we are trending above our annual expectation for O and M and we'll make use of favorable weather opportunities in the second half of the year to bolster our system and enhance service for our customers. Higher interest rates, reduced earnings at the corporate segment, net of the hedges we 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 brought lower volumes.

Speaker 3

On a year to date basis, we continue to see a slower ramp up from some of our larger industrial customers, which has been partially offset by the residential and commercial classes that are ahead of our The end of June brought a significant change in temperatures, which quickly rose to the record high At TNMP, growth in the 2nd 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 as crypto mining customers scaled back Volumetric load grew in the 2nd quarter and nearly offset the decrease we saw in the Q1. 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 continue 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 Expansion by our larger existing customers and new industrial customer inquiries Has positively impacted our demand base load.

Speaker 3

We will review our guidance after Q3, but it's It's likely that our demand based growth in Texas will exceed our expectations for the year. In terms of weather, 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 Q2 was hotter than normal, So 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 Q1 were partially offset by the impact of milder New Mexico temperatures in the 2nd quarter.

Speaker 3

We have updated our quarterly earnings distribution to reflect our revised 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 We refinanced $500,000,000 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, Reducing our overall financial risk. We continue to have $1,000,000,000 of interest rate hedges in place this year through September with $850,000,000 for the remainder of the year and $600,000,000 in 2024. In terms of equity through our ATM program, We added another $50,000,000 of forward sales in the 2nd quarter, bringing our current total to just under $100,000,000 We will continue to look for opportunities to sell another $100,000,000 of equity for the remainder of the year through this program or other vehicles To reach our total plan of $200,000,000 With that, I will turn it back over to Pat.

Speaker 1

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. Our future will be directly impacted by the steps we take today to protect our environment and improve the lives Our 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.

Speaker 1

Alan, let's please open it up for questions.

Operator

We will now begin the question and answer session. At this time, we will pause momentarily to assemble our roster. Our first question comes from Ryan Levine of Citi. Go ahead.

Speaker 4

Good morning.

Speaker 1

Good morning, Ryan.

Speaker 4

Hi. Maybe to start off in terms of your the recent comment around Potential changes to 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 opportunity that you're evaluating currently? And any color as to What the process looks like from here?

Speaker 1

Sure. I'll let Lisa answer that one for you.

Speaker 3

Yes. And like I said in my script, Ryan, we will Take into account the recent legislation, look to see what we can do there. As you know, the legislation some of that Legislation needs rules around us and so we will work through that. We also will incorporate any timing changes Regarding our grid mod and any other updates that we see. And so that will be coming forth in Q3.

Speaker 4

Okay. So to the extent that some of those clarification timelines get delayed, should we expect a delay in when you'd Pull out your capital plan or do you feel pretty comfortable with the Q3 disclosure?

Speaker 3

We feel comfortable that we will have some updates in Q3.

Speaker 4

Okay. Maybe switching gears, in terms of the Four Corners From here, in terms of the legal language in the merger agreement, what obligations do you have Continue to pursue that exit and how does that frame or influence your path forward

Speaker 1

Well, I think, Ryan, the main thing that is pushing our path forward is our desire to do what's right for And to provide cut savings for our customers along with continuing to be carbon free. So that is what is guiding our analysis. The merger agreement said that we needed to have a make a regulatory filing and have a signed contract in place. Those two things are still in effect. So satisfied the merger agreement guiding is the customers.

Speaker 4

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 work forecast?

Speaker 1

When we look at our Ignite development, Ryan, We see a lot of data centers here in New Mexico and some manufacturing plants, the Inflation Reduction Act Incentives, I think we're starting to see that. And 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.

Speaker 4

Thank you for taking my questions.

Speaker 1

You just wanted me to

Operator

Our next question comes from Julien Dumoulin Smith of Bank of America. Go ahead.

Speaker 5

PGI Friday, guys. Thanks for the time as always. Appreciate

Speaker 1

it. 5 o'clock somewhere. Amen.

Speaker 5

So just to that end, speaking of being the end of the day, how about the end of the year? So just talking about this new December timeframe, what will you know in terms of that timeframe in terms of the transaction, right? Presumably, given The all the various pieces, I surmise that you may not necessarily have a new decision from The PRC by that time frame, but what will you know by the end of December in order to assess or reassess as it may be?

Speaker 1

Well, my crystal ball is a little cloudy when it comes to the Supreme Court, so we'll 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 specific about what the commission needs to do when the commission is done. Possible.

Speaker 1

I don't think it's probable. So I think we'll have a decision from the Supreme Court Telling the commission where the court believes it errored and telling it 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, the Supreme Court doesn't rule because, as you know, there's no set time frame.

Speaker 5

And without trying to be deterministic about this, are there any specific parameters that are a red line around the deal As it pertains to either the court outcome or B, the other dynamic around the rate case So in that time line, whether or not it's resolved entirely?

Speaker 1

I would think on the merger, I'll let Don talk about the Okay. Obviously, if the court upholds the commission, we and Avangrid 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.

Speaker 2

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 and the commission has to order by, I think, it's There will be a decision on the rate case by then.

Speaker 5

Right. So you should have pretty ample clarity on a lot of things. In fact, 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 rate case, is there potential for any settlement in this case? Or just has it been too long and too many different parties involved for that to be credibly considered at this point in time?

Speaker 2

On the rate case, we would never say never, but where we're at right now is we're preparing for the hearings that start next month and that's where our focus is at.

Speaker 5

All right. Fair enough. And then lastly, just in terms of the CapEx update, can you break down the specific piece? I know Ryan was just pushing on Can you break down the different buckets, A, in Texas B, just grid mod, what the different permutations might be and C, What is currently in your planning process in Texas as it pertains to generation resources? I imagine that could very well be a further aspect to your next CapEx update as it pertains to

Speaker 1

You are asking us what the upside to the upside is.

Speaker 5

Always. Come on.

Speaker 1

I know.

Speaker 5

You know one thing.

Speaker 1

I Let me answer that.

Speaker 3

So Julien, we said that we will provide an update in Q3, right? And so we will go through and look at What's available and what's appropriate to add to our capital budget, also incorporate any timing Associated with grid mod and any other updates. And so we'll just have to wait until Q3 to see what that CapEx

Speaker 2

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 are opportunities there, but as Lisa said, we'll address those in Q3.

Speaker 5

Awesome. All right, great. But with Q3, you'll have the just to clarify that on Texas, you'll have the visibility or ready to come Or there's something I know that the resiliency process itself is could take a little bit of time here too, right, at least for your

Speaker 3

questions. Yes. So we will review what the opportunities are and we will share that in the Q3

Speaker 5

Excellent.

Speaker 6

All

Speaker 5

right, guys. Thank you very much. Thank you, Julian. Enjoy it. Thanks.

Operator

Our next question comes from Jonathan Reeder of Wells Fargo. Go ahead.

Speaker 6

Hey, good morning team.

Speaker 1

Good morning, Jonathan.

Speaker 6

Just to follow-up a little bit on the rate case, what's your view of The intervener positions that have been filed and when would a settlement if one is to be reached need to be filed by?

Speaker 5

I mean, the positions of

Speaker 2

the interveners, 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, the 114 Megawatts we transferred out of, they even have some San Juan in there as well. So If you look at the overall briefings that they've provided and the testimony they've provided, it's primarily been focused in that area. On the settlement side, I would never say never. But as I said, Jonathan, we are focused on preparing and putting the best case

Speaker 6

When would you need to reach a settlement though in our REACH 1? Like does it need to be before the hearings? Or is that just kind of the preferred

Speaker 2

Ideally, you would like to before the hearings. But again, as I said, we're focused on preparing for that case. Okay.

Speaker 6

Would you say like are the parties motivated to reach a settlement? Or maybe ask another way, do you believe like the newly constituted PRC would honor settlement agreement whereas the prior PRC kind of had a reputation for modifying them?

Speaker 2

I'd probably be speaking for the commissioner, so I'd prefer not to hop into that. I think that they haven't been against settlement. They haven't taken the position that settlements are a bad thing at the commission, but we'll have to wait and see how this commission reacts as we move forward.

Speaker 6

Okay. But like past precedent, has that influenced, I guess, the parties, like, desire to reach a settlement? Or is that still something that you think parties are working towards?

Speaker 1

You know, 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 2 commissioners on this because Commissioner O'Connell, Chairman O'Connell recused himself because he had filed testimony with Western Research Advocates on some of the issues. So I think given all those factors and we have got some Turnover among the intervener staff themselves, it's kind of hard to make a conjecture on this one.

Speaker 6

Okay. All right. Shifting to the Four Corners, what has to happen, I guess, for you to refile the application? Like, Will the results of last November's RFP, I guess, shape the replacement resource plan, which you could then include? Yes.

Speaker 2

I mean, 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 realms of things, You'd want actual resources that you file in the next case. So you want as clean a case as you possibly can.

Speaker 6

Okay. And you said the results of that are expected here in the next few weeks?

Speaker 2

Our results, we issued those RFPs Earlier this year and they'll come in over the next couple of weeks. And then we'll like Pat said, the key element is you got to look at the And the timing of how it all aligns and we're going to do the right thing that makes sense for the customers.

Speaker 6

Okay. Okay. And then I guess can you talk a little bit about the planned 2026 resource filing? Is this something that I guess the PRC approves and actually lays out potential recovery of future generation additions and then like will it also indicate whether PNM is able to own any of this generation versus the prior PRC's preference for PNM just assigned PPAs?

Speaker 2

Yes. Jonathan, I'm not going to get ahead of our filing. Our filing will likely be in the next 2 or 3 week time periods. And so 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.

Speaker 2

So as we go through those screens, As we put these plans in front of the commission, that's our focus.

Speaker 1

And Justin, remember, this time around now, we have the commission we have an independent evaluator involved in it, which I quite frankly think it's very helpful, because they are a non biased, non partisan look. And so It does make sense for us to own some generation coming out of that and the independent evaluator agrees. I think we have a much better shot at getting that generation.

Speaker 6

Okay. But does the PRC ultimately approve this plan that you kind of file and lay out? Like is there

Speaker 5

a conclusion to it?

Speaker 6

Or is this just what you kind of propose? And then Going forward, you implement it as needed on like a piecemeal basis?

Speaker 2

We'll file it as an actual plan that seeks commission approval. So that will be the path. When we make the filing in the next 2 or 3 weeks, it will be asking for approval of These specific resources.

Speaker 6

Okay, great. No, I appreciate that clarity.

Speaker 1

Yes. It's not the IRP, which is what we filed for sport, yes.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Pat Vincent Callan for any closing remarks.

Speaker 1

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. We'll talk to you all soon.

Operator

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

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