Good morning, and welcome to the PNM Resources Second Quarter 1 2019 Conference Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference conference over to Jimmy Blotter, Director of Investor Relations. Please go ahead, ma'am.
Thank you, Nancy, and thank you, everyone, for joining us this morning for the PNM Resources Q2 2019 conference call. Please note that the presentation for this conference call and other supporting documents are available on our website at pnmresourcesdot com. Joining me today are PNM Resources' Chairman, President and CEO, Pat Vincent Cowan and Chuck Eldridge, our Executive Vice President and Chief Financial Officer as well as several other members of our executive management team. 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 ks, quarterly reports on Form 10 Q as well as reports on Form 8 ks filed with the SEC. And with that, I will turn the call over to Pat.
Thank you, Jimmy, and good morning, everyone. Thank you for joining us today for our Q2 earnings call and for National Ice Cream Sandwich Day. So let's begin on Slide 4. Our GAAP earnings per share in the 2nd quarter of 2019 reflect a loss of $0.95 compared to earnings of $0.48 in the Q2 of 2018. This was driven by the $104,000,000 after tax write off of items that were under appeal with the New Mexico Supreme Court following the order confirming their disallowance from rate base.
Ongoing earnings per share are 0.3 $7 compared to $0.53 in the Q2 of last year. We reported in July that weather during the Q2 in New Mexico was the mildest in 20 years, significantly impacting our financial results. We are affirming our revised guidance of $2.05 to $2.11 that incorporates these results. Chuck will provide further details on the financials in a few minutes. After the newly passed Energy Transition Act became effective in June, we filed our consolidated application on July 1 to request approvals for the abandonment, securitization and replacement power for the San Juan generating station.
So let's turn to Slide 5 for the details on the filing. The application requests the abandonment of San Juan after the participation agreements and coal supply contracts end in June of 2022 and it requests the issuance of $361,000,000 of energy transition bonds. The lower financing costs of these bonds provide a financial benefit to customers. The Energy Transition Act also benefits other stakeholders that are impacted by the transition out of coal. The total amount to be securitized by the bonds includes significant dollars and resources to assist the employees affected by the transition out of coal and the surrounding community that has relied on the coal plant in their economy for so long.
As for the replacement power, we filed multiple scenarios based on the interest shared by the parties during the legislative and we are continuing discussions with those parties to share the results from the models prepared by our team and those of 3rd party experts. In our modeling, we look to balance environmental impacts with the cost to customers and the reliability of our system. Our recommended replacement plan saves customers money, reduces emission, provides for investment that generates property tax revenues in the San Juan Area School District and responsibly integrates new battery storage technology to maintain reliability on our system. It is also consistent with our goal of 100 percent emissions free energy by 2,040. The commission bifurcated the filing and took its authorized time extensions providing for a 9 month schedule for abandonment and securitization and up to 15 months for replacement power approvals.
The hearing examiner set a schedule that has hearings on abandonment and securitization in December. For replacement power, the schedule accommodates an earlier consideration of the proposed PPAs with hearings in December and then hearings on the remaining replacement power in March of 2020. We will provide updates on this case as it progresses throughout the year. Before I turn it over to Chuck, let me walk through some other regulatory updates for both PNM and TNMP. At PNM, the New Mexico Commission decided to hear oral arguments on the remand of our 2015 general rate review from the New Mexico Supreme Court.
The Supreme Court order was clear and that the commission's order should be revisited only to remove the piece that disallowed recovery for any future decommissioning costs. Commission has communicated that it intends to review the transcripts of the oral arguments and the Supreme Court court order prior to taking further action. Moving on to the BB2 transmission project, the commission granted the CCN for this project while deferring the associated On the Western Spirit transmission line, FERC approved the incremental rate on July 9. Approval of the acquisition is required from both the New Mexico Commission and FERC, and we expect those decisions in the Q4 of this year. At the end of May, we also filed for approval of our voluntary solar subscription program that is available to municipalities, tribal governments, and large customers.
We partnered with the city of Albuquerque in Northern New Mexico. Walmart is also supporting the program, signing on to take any capacity not committed by other local or tribal governments. We requested approval from the commission by November of 2019. I noted last quarter that PNM would file its annual renewable plan to request an update to rates under our renewable rider. The plan includes 140 Megawatt PPA for wind power that is necessary to meet the 20% by 20 20 renewable portfolio standard.
This wind power would rely on the BB2 transmission line to deliver it to our customers. Hearings have been proposed for November and we would expect a decision in the Q1 of next year. At TNMP, we filed for our 2nd TCOS increase for 2019 on July 3rd and it reflected a $22,000,000 increase in transmission rate base. The request reflects $3,300,000 of annual revenues expect to be effective in September of this year. With that, I'll turn it over to Chuck for a detailed look at the numbers.
Thank you, Pat, and good morning, everyone. It's also a happy International Beer Day. I'll begin this morning on Slide 8 with a recap of earnings and guidance. We issued a release in July discussing the impacts of weather in the Q2. Our earnings for the quarter of $0.37 are consistent with that information.
As expected, PNM was significantly lower than Q2 2018. While all the drivers are included in the appendix, the primary item to note is that the weather and load are down a combined $0.15 from Q2 of last year. For TNMP, the drivers fully offset each other for the Q2 of 2019 versus 2018. Corporate and other was down a penny compared to the Q2 of 2018. As a result of the weather impacts at PNM, we revised guidance for the year.
To address the earnings impact of the Q2, we're able to implement mitigating plans for the remainder of the year. Our budgets are developed with flexibility and prioritize in a way that allow us to align our costs with revenues. Of course, the size of this impact was significant. So we're also offsetting this by managing the timing of when vacancies are filled as well as lowering our results based incentive compensation expense. We also saw strong market performance in our NDT resulting in realized gains.
For 2019, we expect to have ongoing earnings per share of $2.05 to $2.11 targeting the midpoint of $2.08 We have updated our quarterly EPS distribution for the 3rd Q4 expectations. We do not expect any of these items to impact 2020. Now turning to Slide 9 for our load information. In our guidance range, PNM was the primary driver and you can see why we look at the degree days. PDM's cooling degree days were 37% lower than normal and 53% lower than the Q2 of 2018.
While we work to isolate the effects of weather, extreme periods will always have a distortion between load and weather. As we move into July, we quickly saw return to normal summer temperatures in New Mexico. TNMP has also had weather in the Q2 that was milder than the prior year, but it was roughly in line with normal. Moving to load. We believe that these results are representative of the distortion between weather and load and are not an indication of changes to the underlying economic situation.
We continue to see announcements of businesses either moving into the state or expanding in both the private and public sectors adding jobs. Following the announcement of Netflix coming into Mexico last year, there have been several other job announcements that are in our service territory. For example, NBCUniversal announced in June, they're planning to also launch a 10 year venture in Albuquerque. Sandia National Laboratories announced in May that it plans to hire 1900 employees by the end of the year. And Intel announced it plans to add over 300 jobs.
There may be some timing shifts in our load as some of this growth comes online in the second half of the year. At TNMP, our customers continue to exhibit strong demand with new service requests continuing to come in at an accelerated pace compared to last in the prior year. Changes in the timing of some of the interconnections expected this year have shifted from the first half of the year, but are expecting to bring these customers online when they finish construction in the second half of this year or early next year. We may see results for the year in the lower range of load guidance at both PNM and TNMP as a result of these timing delays. However, we have factored this into our updated guidance range and a targeted midpoint of 208.
Now turning to Slide 10. As Pat discussed, we made our San Juan filing on July 1. In our capital plan, we include the investments related to the recommended replacement power scenario. This represents a $298,000,000 investment with $278,000,000 in generation and $20,000,000 in transmission. In 2023, we have included amounts related to our remaining leases of Palo Verde.
As these leases expire, we'll need to either purchase the leases to secure the capacity long term or we'll need to consider the replacement capacity. This will be evaluated in the 2020 IRP process that started in July. This brings our total capital plan to $3,600,000,000 from 20 19 to 2023 and it represent rate based compound annual growth of 9.3% over the period. I'll wrap up with our earnings power slide on Page 11. The 2019 numbers shown reflect the revision of our guidance midpoint.
Years 2020 through 2023 include the updates made in July to incorporate the recommended plan for replacement power in mid-twenty 22. In 2022, we have a half year of the San Juan rate base included before its retirement and a half a year of replacement power. 2023 shows the full year impact of these changes. Proceeds with securitization will fund the replacement power, so no new additional financing is needed. I want to note that as the replacement power is built in 2020 2021, we'll need additional interim financing that will offset any earnings from AFUDC.
When the energy transition bonds are issued in 2022, we'll be able to use those funds to pay off the interim financing for the replacement power. Over the course of this plan, we continue to target 16% FFO to debt ratio and holding company debt levels that are less than 20% of our consolidated debt. Growth at PNM and TNMP reflect our investment and the associated financing plans. We continue to be on track with our targeted growth range of 5 percent to 6% through 2023. That concludes my remarks and back to you, Pat.
Cheers.
Thank you, Chuck. Before I begin questions, I want to make note of the collaboration and commitment from multiple stakeholders towards a common goal that led to the passage of the Energy Transition Act. The process for our San Juan filing is no different. To keep the spirit of collaboration moving forward, PNM filed 4 scenarios for replacement power. We did this in acknowledgment of the competing interests was started by the ETA.
As part of that process, we have already held 2 community meetings, a specific session for parties running their own resource models, meetings with the Navajo Nation President and Legislative Committee, along with a special session for our own employees. In these meetings, we listened to concerns, shared data and considered alternatives. So far, more than 523 people have participated in these meetings and we only expect that number to grow. This certainly isn't the easy way to do things as it takes incredible effort from our team and from the other parties, but this is too important to get wrong. So thank you to everyone here at PNM Resources and all around New Mexico for committing
your time
and energy to this transition. With that, operator, let's open it up for questions.
And the first question comes from Greg Gordon with Evercore. Please go ahead, sir.
Hey, good morning.
Good morning. Good morning.
I don't know if I can drink a beer while I'm eating my ice cream sandwich, but I think I'll give it a try.
Give it a try.
Truck is
doing it, so.
Well, okay. There's safety in numbers then. There has been a little bit of confusion given reports sort of what the NMPRC is doing with regard to the bifurcation of the case and some statements that have been made by commissioners with regard to the timing of these approvals and perhaps some dissonance in the expectation of what may happen in these bifurcated proceedings. So can you talk about your perspective on what flexibility the PRC has under the legislation to approve the securitization, not approve securitization, if they have flexibility to approve a different amount, and then, the flexibility they have under the law with regard to finding the least cost or most balanced option ultimately for the replacement power?
Yes, Greg. I mean, we're very confident in our legal petition legal position that the ETA, including securitizations applies to our filing. And I think you saw that yesterday, Commissioner Fishman responded to Resource Advocates motion and moved up the date to get some responses back to August 9 because they know this is an important issue. So all of Western Resource Advocates, the environmentalists also believe that we have a good position on this. And if you look at the law for the securitizations, it's really a checklist of things that the commission has to do.
So we are very confident in our position and I'm glad to see that the commission is moving up the determination of that because it is important as we move through this process.
And then with regard to the different the 4 different options you presented, how under the law or under pre existing PRC precedents or standards, are they sort of mandated to go about making that decision?
Well, if you look at sort of pre existing and precedent, you would take what's kind of called the least cost plan, but it also can take into account the environment and system reliability. And that's the scenario 1 that we presented. The law also shows a preference for resources up in San Juan. And that was the 2nd scenario that we filed. And then the 3rd and the 4th, we filed in response to some of the stakeholders' interests.
So the commission, I think, has the latitude to pick among those different scenarios as long as it does, maintains reliability. The commission does not necessarily have to pick that least cost plan because there is that flexibility for them to take into account the environment and then the law, the ETA gives them the flexibility put resources up in San Juan School District.
Okay, clear. Thank you. Have a good day.
Thank you. Enjoy the rest of your beer and ice cream sandwich.
The next question comes from Julien Dumoulin Smith from Bank of America. Please go ahead.
Hi, good afternoon. This is Alex Morgan calling in for Julien. My first question, I know you mentioned a few things for cost cutting expectations in 2019, mostly about the not filling vacancies and potentially lower bonus compensation. I was wondering if we should be thinking about any other cost cutting metrics as well for this year?
No, I think that's really as I mentioned, our plans are very flexible to align our revenues against the expenses in the business. As we think about the circumstance that happened in Q2 that gave us sufficient time to prioritize our budgets and use that flexibility to lay out a plan that we think and confident that we can execute. But it was significant, as I mentioned, that we changing guidance, we just don't have enough to cover the entire $0.15 without making the guidance change. But with the changes and the focus on $208,000,000 and the mitigating plans we put in place, we're confident we're back on track where we should be.
Okay. Thank you so much. And I was hoping that you could I know you discussed a little bit the additional equity or no need of that because of it more or less offsetting AFUDC. Could you just talk a little bit more about the financing plan as the replacement power comes back online for San Juan and then using the bonds to pay off the interim financing?
Yes. So if you reference the earnings power slide that we have in the appendix, it gives you some detailed notes of the financing plans, which include some equity financing that the business would plan about $50,000,000 in 20 $20,000,000 and $100,000,000 issued in 2021. And then we have a $300,000,000 mandatory convert beginning in mid-twenty 21. So that's the underlying basic assumptions about our financing plans. But also the proceeds we get out of securitization, those bonds will be used to pay off some interim financings that we have for the replacement power as we begin to pursue whatever decision comes out of the commission and our ability to make those investments.
Our next question comes from Ali Agha from SunTrust. Please go ahead.
Thank you. Good morning.
Good morning, Ali.
Good morning. First question, Pat and Chuck, I just wanted to be also a little more clear on the securitization aspect of the financing in the legislation. What's your sense, again, given some reports that the commission doesn't seem to be giving a very clear indication on where they stand on securitization. There's some talk that they're trying to take a timeline that starts before the legislation was passed, so that somehow securitization doesn't come into play. Can you just give a sense of what you're seeing or hearing from the commission, I guess Part 1 and Part 2?
I understand your point that the legal and ultimately and ultimately get the right decision, but there's time lost during that process. So just wanted to get a little more perspective on what you're thinking.
Charlie, and obviously we have not talked to the commissioners directly because this is a pending case. And I won't speculate on what was in the newspaper
because I don't know anything more
than what was there. But I think we're very confident of our legal petition and our legal position. And I think as you saw, Commissioner Fishman yesterday issued an order that asked for responses due on this matter by August 9, right? So that moves up the uncertainty about it. And we can still go to the important and we would rather have that sooner or later.
So we see Commissioner Fishman's move as a good move. And if we don't get it soon, we will definitely consider going to Supreme Court with some of our other supporters of the ETA.
And so by moving this up to August 9, does that give you a timeline on do they expect to have a decision that very day or when would you expect them to clear this up?
No, we wouldn't expect the decision that very day and they didn't set a date for a decision, but it's moved it up significantly because for example, the hearing examiner have right now in their schedule, it would be August 23rd that we have filings and responses due on October 18th. So they've moved the responses up. Let's see my math goes 2 months. So we would expect to have a decision relatively soon after that because everybody understands that we need to have clarity as we move along and we would rather have the decision sooner rather than later, because if it doesn't, if it says that it doesn't cover the act, we will obviously go to the Supreme Court on that.
Right. And my second question, Pat, remind us, what's the timing for the next rate case filing in New Mexico? And given that you'll file that and then you will have another rate increase for the replacement power, How are you thinking about sort of back to back rate increases and the implications in New Mexico?
Yes, Oli, this is Chuck. We certainly have we've indicated before our plans are to file something in December. That's currently our plan, but we'll continue to monitor that based on the progress and the focus that we have on this current pending case with abandonment. And we want to make sure that the resources and dedication and focus on that execution is really where our priority is. And in assessment to that, then we'll really determine the final plans for issuing filing a new rate case.
So again, that's our current plan, but we'll consider it based on what we see as the progress in the process we go through abandonment
filing. I see. And to be clear, Chuck, there could be a scenario that instead of 2 cases, you kind of roll it all into 1 as part of the abandonment filing?
Well, it's too early to say what we might do and how we might think of it. I mean securitization itself will lend itself to a certain amount of rate proceedings that are required to support the EPA. And then beyond that, it's just a reflection of what our normal rate case needs are. And we'll just deal with that as we begin to see the process and to Pat's point in a more clear way, then we'll make the determination of what the appropriate filing should be.
Thank you.
Our next question comes from Paul Fremont from Mizuho Securities USA. Please go ahead.
Thanks. Pardon me for being confused with the NMPRC, but I had thought that Commissioner Vicente Aguilar had dismissed the Western Resources petition. So how does the Fishman order that was put out yesterday, does that represent a change in the commission's position? Or is the original petition still rejected?
No, what happened, Paul, was WRA filed an interlocutory appeal after it was denied by Commissioner Vincent Thiago Lars. So this was the 2nd filing by Western Resources Advocates that Commissioner Fishman is responding to.
So does that mean that the commission is going to essentially respond here? Or could they still come out with the same sort of response that Commissioner Vicente Aguilar came out with basically just rejecting the appeal?
Well, what they did was they responded differently, right, and said that they're going to hear get responses on this on August 9. Now they can respond differently than Commissioner Vincente Aguilar did. So what Commissioner Fishman said is, no, this is important. We got to hear this and we want responses due on August 9. So they could respond differently to what Commissioner Vincent de Agoullar did.
Okay. And then in my understanding then from what you said is if you get a definite or if there's a definite no then out of the commission and they reject it again, then WRA or yourself would then be free to go to the courts, is that?
That is correct.
Okay. I think that's it. Thank you very much.
You're welcome, Paul.
This concludes our question and answer session. I would now like to turn the conference back over to Ms. Pat Vincent Collawn for any closing remarks.
Thank you, and thank you all again for joining us this morning. I hope you enjoy the rest of your summer and whether you choose to celebrate National Ice Cream Sandwich Day or International Beer Day or both, please celebrate safely. Thanks. Bye bye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Enjoy the rest of your day.