TXNM Energy Inc (TXNM) 2023 Q1 法說會逐字稿

Good day, and welcome to the PNM Resources First Quarter 2023 Conference Call. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Lisa Goodman. Please go ahead.

Thank you, Jason, and thank you, everyone, for joining us this morning for the PNM Resources First Quarter 2023 Earnings Call. Please note that the presentation for 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-Collawn, President and Chief Operating Officer, Don Tarry; 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. We caution you that all of the forward-looking statements are based upon current expectations and estimates and that PNM Resources assumes no obligation to update this information. For a detailed discussion of factors affecting PNM Resources' results, please refer to our current and future annual reports on Form 10-K, 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 National Astronaut Day. And National Astronaut Day is a special day here for us at PNM Resources, one of our Board of Directors, Sid Gutierrez, is the first U.S. born Hispanic astronaut in the first Hispanic space mission Commander, he commanded the space shuttle Endeavor. So I'm going to start on Slide 4 this morning with our financial results and company updates.

Ongoing earnings increased during the first quarter compared to last year coming in at $0.55. We are affirming our guidance for 2023 with a continued focus on managing our stand-alone business. Lisa will cover the financials in more detail. For strategic updates, let me start with our merger with AVANGRID. On March 8, the New Mexico Public Regulation Commission joined the companies in requesting the New Mexico Supreme Court to dismiss and remand the case back to the commission. The court call for responses to our motion by April 7. There is no deadline for the court to respond to our motion for remand as the supreme saying, you can't hurry love.

If our motion is granted, the cases returned to the commission's jurisdiction. The companies would then need to file a motion for reconsideration to request the commission take up the case and establish a procedural schedule. This process could include input from other intervening parties in the case and assignment of a hearing examiner or it could be managed at the commission level.

Last month, we agreed with AVANGRID to the 3-month extension included in our merger agreement. This additional time should provide clarity on the path forward and an expected time frame for further regulatory proceedings. You may also have seen from AEP that we have begun a sales process for our 50-50 joint venture, New Mexico Renewable Development or NMRD. This has not been a significant contributor of earnings within our Corporate and Other segment, but we have built an attractive portfolio of unregulated renewable assets, and the sale proceeds will provide funding for our regulated investments.

With that, I'm going to turn it over to Don.

Thank you, Pat, and good morning, everyone. I'll start on Slide 6 with our load growth by service area. PNM, low grew at 1.4% in the first quarter compared to the prior year. residential and commercial customers provided the growth this quarter, while our annual estimate continues to include and expect it albeit slower ramp-up from some of our larger industrial customers.

New Mexico has experienced colder-than-normal temperatures in the first quarter, which were similar to the level of degree days experienced in the first quarter of 2022. At TNMP, we continue to see demand-based growth from crypto mining customers that entered the market in the second half of 2022. We will continue to see these type of double-digit percentages year-over-year until we reach a comparable period in the third quarter. Otherwise, the first quarter is typically a low volume quarter in Texas, and we continue to expect growth this year across each part of our service territory. Milder temperatures in the first quarter of 2023 reduced customer usage compared to colder-than-normal temperatures in the first quarter of 2022.

Now turning to Slide 7. I will cover a couple of our operational highlights for the quarter. This month is typically when things start to heat up for the summer and this year. We are bringing on new resources at PNM to help meet our summer load needs. The Arroyo Energy project is our first large-scale battery storage facility and is one of the projects coming online this year, following the retirement of the San Juan generating station. The 150-megawatt storage facility will be available in May with another 20-megawatt facility following soon after. These batteries are connected to 350 megawatts of solar that will also come online this year. And we expect our generation capacity to reach 62% carbon-free at the end of this year. Next year, we plan to add another 500 megawatts of solar paired with 400 megawatts of battery storage, the final projects that were approved to replace San Juan along with our expired Palo Verde lease capacity, we are well on our way to meeting our goals for a clean energy transition, along with New Mexico's renewal portfolio standards and carbon-free mandates.

In New Mexico, because of the Energy Transition Act, we are able to do this while keeping customer rates affordable even during a period of high inflation. You can see this in our current rate review, which I'll talk more about in a few minutes. This week, we filed with the New Mexico Commission to add 12 megawatts of utility-owned battery storage at 2 existing PNM-owned solar facilities. At each of these locations, our current distribution feeders are overloaded from solar production. In the past, this would have required adding a new feeder or performing more costly upgrades to the feeders. We are proposing an alternative option to install 6 megawatts of battery capacity connected to our distribution system at each site. This matches the lowest cost option for solving the overloaded feeders, plus it provides the benefits of adding battery storage capacity to our system. The battery accommodates more renewable energy, supporting our clean energy transition and it also supports enhanced reliability and resilience. This alternative is one way that we are using available technology to provide new cost-efficient T&D solutions to meet evolving grid needs and reach our carbon-free goals. These proposed batteries are already part of our capital plan. We've asked for the commission decision before the end of the year and expect the facilities to be operational in June of next year.

I also wanted to talk about our announced sale of NMRD. The 50-50 joint partnership was created in 2017 to allow us to compete in nonregulated space to provide renewable resources in New Mexico. Over the last 6 years, we've built a portfolio of 135 megawatts of contracted renewables with another 50 megawatts coming online this summer, along with other development opportunities. These renewable projects will continue to operate in New Mexico and support the state's clean energy goals. This portfolio is attractive in today's market. And with the increased investment needed to support our regulated utilities, it makes sense to sell this portfolio and put the funds to work on the regulated side. We would expect to close the transaction by the end of the year.

On Slide 8, I'll walk you through recent updates on their key regulatory proceedings at PNM and TNMP. The New Mexico Supreme Court heard oral arguments at the end of March on our proposed abandonment and securitization of the 4 Corners plant. We also completed hearings on our grid modernization application with the New Mexico Commission in March. As a reminder, we requested approval of our project plans by July, but delayed the timing of our requested recovery until September after the peak summer season. We anticipate the hearing examiner issuing a recommended decision in the coming months and a final order from the commission in the third quarter.

And lastly, at PNM, the hearings for our 2024 rate change were rescheduled from June to September. The overall suspension period had previously been expanded to the typical 13 months and we anticipate the hearings would be moved accordingly. We continue to expect to implement new rates in January of 2024 with the projected impact to customer bills of less than 1%. The Western energy imbalance market continues to be a program providing substantial cost reductions to customers, the annual savings to customers from EIM in 2022 totaled $35 million, and the first quarter of 2023 has already provided another $22 million of customer benefits. These savings flow through to customers, along with the clean energy transition are keeping our rates reasonable and affordable.

At TNMP, we expect to receive approval from our first 2023 transmission recovery filing this month to recover an increased $150 million of rate base -- we filed our annual distribution recovery filing at the beginning of April for another $157 million of rate base and expect rates to be implemented in September. We typically make our second transmission filing in July and also expect these rates to be implemented in September.

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 of the year-over-year changes in the first quarter earnings. Earnings per share in the first quarter of 2023 were $0.55 compared to $0.50 in the first quarter of 2022. At PNM transmission margins continued to reflect higher system demand and higher market power prices seen during Q1, particularly in the colder months of January and February.

Lower costs from our generation portfolio changes offset the regulatory lag associated with new investments over the last several years that are not yet in rates. TNMP also increased from higher transmission and distribution investment recovery. Usage was up at both PNM and TNMP due to load growth. As Don mentioned, at PNM, residential and commercial load drove our increase and weather for the quarter was similar to last year.

At TNMP, higher load growth due to crypto mining customers was mostly offset by milder temperatures. These increases were partially offset by expenses at the utilities for depreciation, property tax and interest associated with our new rate base investments, along with increases to our planned O&M spending. Market performance on our decommissioning trust also reduced earnings in the first quarter compared to last year, in addition to higher interest rates at corporate.

Turning to Slide 11, 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. Higher earnings in the first quarter were largely driven by the increase in transmission margins, which can fluctuate with market demand. We have also provided an updated quarterly earnings distribution, reflecting our expectations for the rest of the year.

We entered into additional interest rate hedges for 2023 to lock in more favorable rates when yields fell in March. We added $150 million of swaps through September 2023 and now have a total of $1 billion hedged through this period. We have also added swaps to 2024 for a total of $600 million to further reduce our variable interest rate exposure. We also took the next step to be able to issue equity later this year by entering into forward sales agreements under our ATM program. We can settle these agreements later this year by issuing stock or we can have the option for cash settlements without the issuance of shares.

The current forward sales agreements reflect approximately $50 million of equity, equating to about 1 million shares. We will not see any dilution impact on EPS until those shares are actually issued later in the year. We have the ability to sell another $150 million under the ATM program to meet our equity needs for 2023 or we could consider accessing the market through more traditional needs. Overall, we remain in a good financial position to support growing capital investment needs and navigate the current interest rate environment to support our targeted 5% earnings growth.

With that, I'll turn it back over to Pat.

Thanks, Lisa. Before I open it up for questions, I'd like to recognize our teams in New Mexico and Texas who are moving our utilities forward every day, completing projects to bring service to new and expanding customers repairing equipment after spring wind forms, preparing for summer peak season and bringing new programs to customers. Thank you all for everything you do. Jason, let's please open it up for questions.

(Operator Instructions) Our first question comes from Anthony Crowdell from Mizuho.

Well, played with the hold music. Can Harry Love and also the Supreme Court. It didn't go unnoticed. But if I could just add 2 quick questions, Pat. One is I think the extension right now for the transaction is until July 20. And so obviously, it depends on when the Supreme Court remands the case back. But if you thought of the bookends of once the case gets remanded back, the time that I could take if maybe there was a process that involved no hearings or was the quickest approval and then something that maybe was more extended with hearing to something. What do those look like from a calendar perspective?

Anthony, right now, we're just focused on getting it back and then seeing what the commission does because they can do this with -- at their level alone without standing into the hearing examiner. So we're just going to wait and see what happens when we get it back from the supreme.

But then if I could keep and maybe reword the question, do you believe that the current extension of the July 20 date is achievable right now from where you stand?

We're going to wait until we get it back from the Supreme I'm not even going to the reward my answer.

And then if I take another shot of the question, which just when you talk about a nonmerger scenario, can I think of a nonmerger scenario and a delayed approval of the same thing, meaning if the transaction is still viable, but it's maybe extended -- like at what point would you make the decision to do the equity in 2023?

Since I've used my witty repartee this morning, I'm going to let Don Tarry answer that.

We're focused on continuing to manage the business like it's a stand-alone business, and we'll continue to operate it that way and continue to fund it that way too. So what we put out there is $200 million by the end of the year, and we've executed on $50 million of that. And we'll continue to look at those opportunities as they exist. But again, we're focused on managing and delivering the results that you would expect us to.

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

I'm surprised, Anthony referenced the whole music instead of a (inaudible) Friday here. But with that said, let me try this again. Let me hit a little bit more stage subject here. Just on NMRD here. Obviously, AEP talked about it as well. What's the current book value of that just where it stands today? And what's your sense of time line? And then related to that, as you talked about in your prepared remarks about issuing stock, is there any limitation within the pending deal on doing so? And any commentary about time line to pursuing that given the asset sale here first.

Well, Julian, before I turn it over to Don, I thought you'd like National Astronaut Day because that is like the only place you have not been is out of space. Yes. So okay, you can come down here and buy a ticket on Virgin Galactic. So Don, go ahead.

Julien, on NMRD, currently, we have an equity value of $100 million on those assets. And I would tell you, we would expect a gain on that based on what our anticipation in the market would be. We would expect it to close likely by the end of the year.

And then considering where that comes out, that would probably drive your timing for any future equity needs. I mean maybe you can speak to that a little bit, just the timing there. And then any consideration here in the deal?

We would look at -- like I mentioned, when we kind of walked through it, we look at it to fund our -- some of our capital program as we look forward past 2023 and into 2024 and beyond. So I think that's the way to think about it's a great mechanism to be able to monetize and be able to utilize it in the regulated side of the business.

And speaking of the renewable investments that you guys have this fairly modestly sized, I think it was 12 megawatts you said that you're pursuing on the battery side. But that seems like it would be owned by you all. Can you talk about -- sorry, go forward.

No, Julien, it is. It's utility-owned. It's on the distribution side of the business. It really helps us accomplish several different non-wire type opportunity that helps us for grid resilience, helps us to the solar saturation that exists, helps us to overcome some of that as well, too. And then it's capacity when you need it.

Indeed, in fact, if I can, I mean, to what extent is this 12 megawatts perhaps a leading indicator of having a broader strategy there in having that with that owned within utility infrastructure and rate base, especially considering a lot of the changes on the regulatory.

We would see this as kind of a pilot program. There's other feeders that run into the same problem. We prioritize the feeders that had the biggest challenges and so forth. So we would see this as an opportunity as a non-wire solution to both provide capacity to our grid at a cost that's reasonable to customers on a going-forward basis. So yes, we'll continue to explore that.

And then if I can close on that, look, I understand there's not much you want to say about July 20, et cetera, and my code tried. But just vis-a-vis your expectations on rehearing and processed, right, emphasis on network process. Anything that you would offer up, I mean, I suppose the several different permutations that could materialize here. But to the extent of which that there is some sort of we -- I use the word rehearing again, but you put -- you interject how you see this playing itself out to the extent to which -- or how you see it being remanded.

Yes. So I think, Julien, the first step in the process is it's at the Supreme Court right now. And we need to wait for their decision. And I think that's their decision is not based on any time line. And I think that's what alludes to Pat's trying to answer that book in question. I think once it comes back, it remanded from the Supreme Court, we would expect those proceedings, and we don't want to get in front of the commission. We would expect those proceedings to be developed by the commission. And we would expect input on new process from all the different parties in that case. And so it will work its way through.

And the same dynamic exists for the 4 quarters as well, right? That's just out there pending, and there's no real ability to talk about that in tandem.

Yes. We had oral arguments this quarter and 4 Corners. And now it's in the Supreme Court's area, and we will wait for their ruling. And there is no timetable on their ruling it as well.

Our next question comes from Ryan Levine from Citi.

I guess in terms of the asset sales strategy, why now? And maybe more strategically, are there any other assets within your portfolio that could be monetized to offset capital equity issuances in a no-deal scenario as a possibility?

On NMRD, it's a joint venture. And so both parties found AEP, as you heard yesterday and us as well is a great opportunity to monetize those and invest in our regulated side of the business. So when you're in a JV, it's a partnership. And so you both under the decision the same way and monetizing 100% of the JV is a lot better than monetizing 50% of the JV for partners. So I think that kind of answers that question.

I think when those are gone, really, what we have is we have a regulated business, one in Texas and one in New Mexico, and both of them are operating quite well. So we don't see us monetizing any assets though there. I mean that's core to our business.

In recognizing it's core of the business, there's been a lot of other kind of minority regulated utility sales in the marketplace. Is that something that you're would consider as a way to help fund growth on a go-forward basis if the court can commission move against you?

Right now, we're in a merger agreement with AVANGRID and that's what we're focused on getting done. So that's where we're going in.

And then back to the core business. In terms of the low growth forecast, you highlight the crypto demand. How material is that for '23 earnings or 24 outlook? And how much better are you positioned on that front relative to maybe plans?

So Ryan, this is Lisa. We are -- in terms of low growth at TNMP, we really are within our guidance range that we put forth before. And as you know, going forward on the ‘24 crypto is a large load. But from an earnings impact, it's a much smaller impact. And then remember, in the DCRF filing, you do update for load.

Our next question comes from Jonathan Reeder from Wells Fargo.

A lot of my questions have already answered, but I just want to be clear. The planned sale of NMRD it doesn't displace then any of the $200 million of equity needs at ‘23, but rather just helps fund needs in '24 and beyond. Is that accurate?

Yes, Jonathan. Our objective is still issue up to $200 million this year even with the sale.

Just wondering, Pat, do you have any insight as to why the Supreme Court remain request is taking so long? I mean, it kind of seemed fairly straightforward, to be honest, but does it have anything to do with new energy economies exparte complaint?

No. I think it has more to do with the fact that the court really wants to focus on due process and making sure there's thoughtful in considering this. I mean if you look at where they have criticized the commission, it is about due process. And I don't know if you saw the El Paso case that came back this week, but they really criticized the commission for a lack of due process. So I think they want to make sure that they carefully consider everybody's filings and think about when they remanded back, do they remanded back under a specific statute, et cetera, et cetera. So I think they recognize that the new energy economy is in general (inaudible)

Sorry, you cut out there at the end of what…

I think that the court recognizes that the new energy economy is just noise.

And then to try to take another bite at the apple that others have any sense like once the PRC hopefully has it back in its hands, like how long it would take for them to maybe issue at least the procedural schedule?

That's what I'll answer. I think they'll probably issue a procedural schedule relatively quickly to get things started, right? You have to -- with the court issues the remand have to wait 15 days. But I think the procedural schedule will come quickly.

And then I guess, based on having that schedule in hand, hopefully by the July 20 kind of date, that's what the Board will kind of look like when they consider whether or not to extend it further.

(inaudible) Jonathan, our mergers.

The next question comes from Paul Fremont from Mizuho (sic) [Ladenburg].

I just thought maybe you were going to break some news on our call.

No, it's Ladenburg. Real quick question on NMRD. Is there an EBITDA number that you can share with us that you realized in 2022?

We haven't put out EBITDA number. There is net income associated with this and it's $1.5 million. So it's about $0.01 to the bottom line, Paul.

And then I would add to you, Paul, that there's 6 development sites as well that have opportunities as well, too. So it's kind of a whole package deal. So it's the sites that are currently, those that are under development, and then there are some development sites as well.

And last year, earnings did not reflect the additional 50 megawatts that's coming on this summer as well.

And then the other question that I have is that you had previously had a settlement agreement in place in the merger proceedings in '22, if the Supreme Court were to remand the case back to the commission, would you seek to try and put a settlement agreement in place?

Paul, we're not going to comment on that until we get it back in the court.

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

Thank you, Jason, and thank you all for joining us this morning. And please, as you have your Cinco de Mayo margarita server, be safe. Talk to soon. Bye.

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