PNM Resources, Inc. (PNM) CEO Pat Vincent-Collawn on Q1 2022 Results - Earnings Call Transcript
PNM Resources, Inc. (NYSE:PNM) Q1 2022 Earnings Conference Call April 28, 2022 11:00 AM ET
Company Participants
Lisa Goodman - Director, Investor Relations
Pat Vincent-Collawn - Chairman, President and Chief Executive Officer
Don Tarry - Senior Vice President and Chief Financial Officer
Conference Call Participants
Paul Fremont - Mizuho
Operator
Good day and welcome to the PNM Resources First Quarter 2022 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Lisa Goodman, Director of Investor Relations. Please go ahead.
Lisa Goodman
Thank you, Vaishnavi and thank you everyone for joining us this morning for the PNM Resources first quarter 2022 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, President and CEO, Pat Vincent-Collawn and Don Tarry, our Senior Vice President and Chief Financial Officer.
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 the 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.
Pat Vincent-Collawn
Thank you, Lisa. Good morning, everyone. Before we get started, I would like everyone to join me in congratulating the newly promoted Lisa Goodman, our new Executive Director of Investor Relations and Shareholder Services. Congratulations, Lisa. It’s a surprise for her, too. So thank you all for joining us today on National Super Hero Day.
We have all heard the phrase that not all heroes wear capes, and around here that holds true for everyone in our offices and in the field who are holding strong to our values and doing the right thing for our customers and communities. Our successes are the result of each team member contributing to our strategy and goals, and I thank the team here at PNM Resources for making this a reality. On a wider note, it is also national Great Poetry Reading Day. So I have taken a stab at writing a haiku to summarize today’s call. So here we go. Numbers looking good, steadfast and exiting coal, merger continues. Okay. So it is definitely not great poetry, and it’s certainly not what Japan haiku master poets had in mind. So I will promise you to stick with my day job.
I’m going to start on Slide 4 with our financial results and company update. Ongoing earnings increased during the first quarter compared to last year coming in at $0.50. We are affirming our guidance for both 2022 and 2023 as we continue focusing on executing our business plans and delivering results. Don will cover the financials in more detail. Before I move into our regulatory update at PNM and TNMP, let me quickly touch on our proposed merger. Earlier this month, we filed our Brief-in-Chief with the New Mexico Supreme Court that makes our arguments on the items previously laid out in the statement of issues. We also requested the court hear oral argument. The next step will be for the New Mexico Public Regulation Commission to file their answer brief. Our final response brief will then be due in the first week of July, which will complete the briefing schedule. As a reminder, there is no statutory timeframe, and we continue to expect a 12- to 18-month process from our initial filing in January.
So now moving on to our regulatory updates. At TNMP, we received approval for our first 2022 semiannual transmission cost of service filing at the end of March, reflecting a $14.2 million annual increase. TNMP also made its annual filing for recovery of distribution investment in early April, and we expect to implement new rates associated with this filing in September. While these filings may seem fairly routine, our teams have consistently done a thorough job in making these filings to support the needed investments on our system, and we look forward to working with staff and other interveners for a successful outcome.
At PNM yesterday, the New Mexico Commission issued an order in our decoupling docket originally filed back in 2020. Parties to the docket disagreed on the changes made by the legislature in 2019 that we believe were intended to allow for a full revenue decoupling, and we asked the Commission to provide their interpretation through a petition for Declaratory Order. Despite opinions expressed by the Commission’s General Counsel, the Commission issued an order specifying that decoupling only applied to changes in customer usage tied to utility’s approved energy efficiency plans. We will be reviewing the order to evaluate our options, which do include an appeal to the New Mexico Supreme Court. And we are not backing down on our early exit of the Four Corners Power Plant and securitization of the undepreciated investments. Similar to the merger appeal, we have filed an appeal with the Supreme Court and filed our brief in March. The Commission will file an answer brief by May 12, and then we will have a response brief in early June. We have also requested oral arguments in this case. And as a reminder, there is no statutory clock for this appeal.
Turning to Slide 5, remember that the Four Corners appeal is part of our strategy to exit coal as we fully eliminate carbon emissions from our generation portfolio. This is a tremendous shift for our utility of our size that relied on coal for over half of our energy needs just 5 years ago. And this transition is about more than just environmental benefits, it is also designed to reduce cost to customers and to support the communities impacted by the exit from coal. This was the intent of New Mexico’s landmark legislation, the Energy Transition Act that takes a comprehensive approach on moving the state forward into the clean energy future.
As an owner and the operator of the San Juan coal plant, we recognized the significance of closing down such a major economic contributor for Northwest New Mexico and the surrounding area. We began talking about the closure of the plant back in 2017 and working with stakeholders in the region to provide increased support for economic development opportunities to people and the community at large ahead of the plant shutdown. Our own teams, their families and heritage are part of this transition, and we did not take any decisions lightly. We took steps to get funds to impacted workers early. PNM provides for the severances and assistance for any of our own workers, but securitization includes severance and job trading funding for the coal mine workers. We knew they would be the first to feel the impact. We had planned to pre-fund amounts in 2021, but this was held up by the appeal of our securitization approval. Once the Supreme Court upheld our approval in January of this year, we were able to move forward with getting these funds where they were intended even earlier as the Energy Transition Act had contemplated.
We have the same considerations for the Four Corners Power Plant, which is located in the same region. We own a much smaller share of the plant and are not the ultimate decision-maker on when the plant shuts down. Our filing included securitization of undepreciated investments as both a means to further reduce customer costs as we exit coal and also to support this community with economic development funds that can be put to use years before the plant shuts down. It doesn’t mean that our state’s or anyone’s energy transition comes without challenges. The constitutionality of the Energy Transition Act, particularly the portion governing recovery of undepreciated investment, was challenged first at the onset of the new law and then again through the appeal of securitization approval for San Juan. The New Mexico Supreme Court upheld the Energy Transition Act both times. The law is being challenged again with the Commission’s denial of our application to exit and securitize Four Corners under the Energy Transition Act as we have detailed in our arguments on our appeal.
Supply chain disruptions are also challenging the transition with delays in bringing the solar and storage PPAs online that would replace San Juan. We filed with the commission to extend one of the San Juan units for 3 months to provide sufficient reserve margin throughout our summer peak, and they responded that this planned extension did not require approval. The transition to lower cost resources will reduce costs for customers. This reduction will help to offset the bill impact from the recovery of new investments made since 2018 when our last rate review was completed. We had planned to file our next rate review in 2020, but delayed the recovery on our growing rate base, recognizing the impact of rate increase would have on our customers during the midst of a global pandemic. We made the same decision to refer – to defer recovery as the pandemic continued in 2021.
Then as part of our negotiations with parties in our merger filing, we agreed to further delay the filing until after December 1, 2022 again for the benefit of customers. We are now targeting the end of 2022 for a filing based on 2024 costs, reflecting the changes at San Juan. The commission has taken up a motion to look at separating the San Juan cost reductions from other rate updates, essentially asking us to continue delaying any new recovery while carving out the offsetting San Juan reduction. We do not think the law nor the facts and circumstances support the actions requested by this motion. Our plans to exit coal are right for our customers, our communities, our environment and our shareholders. These plans are also consistent with the goal of our ESG strategy.
Before I hand things over to Don, I want to touch on one recent ESG highlight. You can see on Slide 6, we worked over the past several months to develop a new PNM Pueblo Scholarship Endowment Fund, continuing our support for tribal communities and also our focus on education. Our hope is for this investment to provide opportunities to create economies that are aligned with Pueblo cultural values and traditions, leading to meaningful economic development in Pueblo communities. We want to see these communities thrive in ways that ensure the Pueblo way of life remains sustainable for generations to come. I am proud of our partnership with all Pueblo Council of Governors and the American Indian Graduate Center to bring this collaborative vision to reality and look forward to the first scholarships being awarded this year.
With that, I will turn it over to Don to walk through the financials.
Don Tarry
Thank you, Pat and good morning. I am going to pick up on Slide 8 with year-over-year results for the first quarter, where we saw an increase in each of our segments. PNM and TNMP each increased $0.08 over the first quarter of 2021. At PNM, the increase was largely driven by transmission margins. We continue to see higher network demand and new customers, including the Western Spirit contract that began in December of 2021. At TNMP, recovery of investments through our TCOS and DCOS rate mechanism was the primary driver. In both utility segments, we saw load growth and colder temperatures also contributed to increases and offset came from higher depreciation and property tax expense associated with new investments. At corporate, the refinancing of debt at a lower rate in May of last year provided year-over-year savings for the first quarter. These results are ahead of our expectations for the first quarter and provide a strong start to the year. I will talk about guidance for the full year in a moment.
First, let’s turn to Slide 9, and I will show what we are seeing in terms of load growth across our service territories. At PNM, growth in our industrial class is driving our increase, consistent with our assumptions and guidance. This is a result of continued economic development efforts in the state to attract new customers. Some of this growth is coming in a little slower than we expected as customers are experiencing a slower ramp up, although we still expect these load increases to materialize. Remember that these customers have the lowest rate per kilowatt hour and the slower ramp-up has a small impact on our financials.
New Mexico continues to invest in economic development and we continue to see benefits with announcements of companies moving in or expanding. During just the past month and a half, a bioscience company announced its plans to add 274 new employees. Northrop Grumman announced an expansion, and Universal Hydrogen was the big announcement with plans to invest over $250 million and hire at least 500 people over the next 7 years. The state’s Job Training Incentive Program has been making monthly announcements of grant awards and quarterly economic data has shown record levels of gross receipt taxes.
And into residential and commercial load, growth is in line with our expectations. Compared to the first quarter of last year, residential load is lower and commercial load is higher, which we expected as more individuals working from home last year have returned to offices. At TNMP growth from both volumetric and demand-based customers are in line with our guidance expectations. Volumetric load from residential customers is trending with customer growth. Demand-based load reflects growth from existing customers and also new customers as we continue to see steady levels of interconnections for both transmission and distribution in Texas. While oil prices have spiked, investments from the oil and gas industry has been more focused on new service to existing drilled wells as opposed to adding new drilling rigs. Remember that as these areas have grown in the past, many operations were served by generators until new service could catch up.
Turning to Slide 10, we are affirming our guidance for both 2022 and 2023. As I noted earlier, our results through Q1 came in higher than our expectations. This provides some additional comfort with our plans as we navigate an environment of higher inflation and interest rates this year. 2022 earnings guidance is affirmed at a range of $2.50 to $2.60, and 2023 earnings guidance is affirmed at a range of $2.60 to $2.75. We have updated our quarterly distribution to account for the first quarter results and our current expectations for the remainder of the year.
On Slide 11, we have included our capital investment plans, which support our earnings growth target of 5% through 2025. We have not made any changes since our February guidance call. As we monitor supply chain and other market developments, we may need to shift the timing of certain projects to allow our teams to work the most effectively. If these shifts have result in changes to our investment plans, our rate base expectations, we will provide those updates in future quarters. For now, we do not see a need to make any changes to these plans.
With that, I will turn the call back over to Pat.
Pat Vincent-Collawn
Thank you, Don. That wasn’t much in terms of poetry, but I will say, it did have its own flare. Vaishnavi, let’s open it up for questions, please.
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from Paul Fremont with Mizuho. Please go ahead.
Paul Fremont
Thank you very much. I guess my first question relates to the show cause and the argument for possible refunds. If the commission were to order either refunds for one unit or both units of San Juan, are you able to sort of quantify the impact of that on your income statement for this year?
Pat Vincent-Collawn
Good morning Paul, I was kind of hoping you have a haiku for us.
Paul Fremont
No. Sorry about that. Even though I work for a Japanese bank, not my strength.
Pat Vincent-Collawn
Alright. I will turn it over to Don for that call. Thanks.
Don Tarry
Good morning Paul. I wouldn’t want to get in front of or speculate what the commission might do. We did file testimony in that case, April 20th. So you could defer to the different questions that the interveners and others asked in that case. I will reiterate what Pat talked about a few minutes ago. We feel like we have a strong legal argument under the ETA and the financing order. And even under a protocol that the commission follows, which is called thesis of rate making. So, again, don’t want to get ahead of any kind of commission decision or the hearings, which will happen in May 22nd, 23rd timeframe.
Paul Fremont
Great. And then on the timing of your merger with Avangrid, any thoughts on what the timeframe would be for you to potentially consummate the transaction?
Pat Vincent-Collawn
So, Paul, we have talked about it. The Supreme Court doesn’t have any statutory time frame on the case. There are – as we have also discussed, there are ways for the commission to ask us to bring the case back. And those would not happen, I don’t think, until next year. So, it will be some time in the beginning of first half of next year.
Paul Fremont
So, the case was – your interpretation is, the case was not closed with the final NMPRC order in the merger proceeding.
Don Tarry
Yes, Paul, that’s exactly right. Moving into the Supreme Court allowed the record to stay in place, and so currently, the record is in place in front of the Supreme Court. So, the case has not been closed.
Pat Vincent-Collawn
The record in the stipulation.
Paul Fremont
Got it.
Pat Vincent-Collawn
And Avangrid is still continue to come out. We just support the community in big ways. We just kind of been where the key corporate sponsors of the United States Hispanic Chamber of Commerce first ever energy summit, we had a big Earth Day event. So, we are continuing on with their plans to actually to be able to kind of reintroduce Avangrid into the community now that we have moved. As Dr. Pasi said, we have moved past the pandemic stage into the endemic stage.
Paul Fremont
And then maybe last question for me. There was supposed to be an initial meeting of the committee to sort of select the new commissioners by July of this year. Is – can you give us any update as to where things stand on the selection process? And when you would think that the candidates would be selected for the committee?
Don Tarry
Yes. Paul, the committee actually gets organized in the July, August timeframe. I think kind of the process that you would look at is likely from there. I think by the end of September, early October, they would provide a list of minimum five potential commissioners to the Governor. And then before the end of the year, the Governor would make an announcement of which three she selected.
Pat Vincent-Collawn
And Paul, the primary elections here in early June and there is not much of a focus on anything here until the primaries get done. A lot of folks are facing primary challenges, so they are working to get through that.
Paul Fremont
Great. Thank you very much.
Pat Vincent-Collawn
Thank you, Paul.
Don Tarry
Thank you, Paul.
Operator
This concludes the question-and-answer session. I would like to turn the conference back over to Pat Vincent-Collawn, our CEO, for any closing remarks.
Pat Vincent-Collawn
Thank you again for joining us this morning and again, my congratulations to Lisa Goodman. We have really enjoyed seeing some of these face-to-face over the last few months, and we will continue to do so. Please be sure to celebrate the superheroes in your life, and you might want to take some time to enjoy some real poetry tonight. Stay safe, everyone.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.