Good morning, and welcome to PNM Resource 2020 Earnings Guidance Conference Call. All participants will be in listen only mode. I would now like to turn the conference over to Lisa Goodman. Please go ahead.
Thank you, Jordan, and thank you everyone for joining us this morning for the PNM Resources 2020 earnings guidance 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 Collin Chuck Eldris, our Executive Vice President and Chief Financial Officer Don Terry, our Vice President, Controller and Treasurer 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 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.
Thanks, Lisa, and good morning, everyone. Thank you all for joining us today on our 2020 earnings guidance call. As a follow-up to our Q3 call, which was National Men Make Dinner Day, December 18 is National Bake Cookies Day. So if you're asking any questions at the end of today's call, be prepared to tell us what kind
of cookies you are making.
In case any of you are wondering, my favorite cookies are chocolate chip, so feel free to make those and send them to the office. So let's begin on Slide 4. In our release this morning, we announced that we are raising our 2019 ongoing EPS guidance to a range of $2.13 to 2.16 dollars as our hotter Q3 temperatures quickly turned into colder winter temperatures. We also announced 2020 guidance of $2.16 to $2.26 per share. Don will walk through the details on those items in a few minutes.
Earlier this month, our board increased the dividend on our common stock by $0.07 to 1.23 This marks our 10th consecutive increase since 2012 and moves our payout ratio to 56% of earnings based on the midpoint of 2020 guidance. I'd like to highlight a few regulatory items on Slide 5 and talk about a few items to be expecting next year. Hearings for our San Juan abandonment and securitization filing are scheduled to wrap up tomorrow. We feel that our case has been represented well by our witnesses and that there weren't any surprises. We typically expect a recommended decision about 6 to 8 weeks after hearings, so that would put us into February, although the holidays may extend this timeframe.
The commission has a deadline of April 1 for a decision in this case. Meanwhile, intervenor testimony on the replacement power side of things was filed last week and those hearings are scheduled to begin on January 22. We continue to support our recommended scenario that balances the associated costs, environmental impacts, reliability and economic considerations for the San Juan community. We also continue to fully expect the Energy Transition Act to apply to both parts of our filing. New Mexico Governor, Lujan Grisham, who I'm proud to say was recently recognized as Policy Maker of the Year by Utility DIVE, jointly positioned the New Mexico Supreme Court to direct the commission to apply the rule to our San Juan filings.
The President of the Navajo Nation and several legislators, including the Speaker of the House, are joint petitioners. There has been progress on the other PNM filings in front of the commission. In our renewable filings, the hearing examiner issued a recommended decision to approve our plan for meeting the renewable portfolio standard, including our 140 Megawatt wind purchase contract. It's worth noting that there was a debate during this case about Energy Transition Act and the recommended decision determined that the law could apply in this case even though it was filed 2 weeks before the law's effective date. The next step will be for the commission to consider the recommended decision and issue a final order.
In our filing for PNM Solar Direct, the voluntary solar program available to municipalities, tribal governments and large customers. Hearings began in November, but were put on hold in January due to the hearing examiner's health and other schedule commitments. We expect a decision in the Q1 of next year. Thinking ahead to the rest of 2020, there are some other noteworthy items on our agenda. We have talked about plans to file a PNM general rate review in the Q2 that would be based on a future test year.
We will make our annual filings for the FERC formula rate true up and the PNM renewable rider in June. Our 2020 integrated resource plan is due by July 1 and will highlight our path to meet 0 emissions by 2,040. At TNMP, in addition to our 2 TCOS filings annually to recover transmission investments, we will make our first filings. And then finally, in November, voters in New Mexico will decide whether the commission moves from 5 elected members to 3 appointed members. So with that, I'm going to turn it over to Chuck.
But first, Chuck, what's your favorite cookie?
So my favorite cookie, and it can vary based on market conditions, but it's a chocolate chip with coconut and macadamia nut. And I get these on Delta flights going from Albuquerque to Atlanta. So, but they're great. So let me get back to the guidance, of course. Let me start off by introducing Don Terry, our Vice President, Controller and Treasurer.
Don has been with PNM Resources for 23 years. He's served in a variety of financial roles over his period of time and also led our customer service and business technology service groups. He knows our company very well and many of you have talked with him in investor conferences and analyst days. So I'm going to turn it over to Don to walk you through the details of the guidance.
Thanks, Chuck. Let's start on Slide 7. As Pat mentioned, we are increasing our 2019 guidance to a range of $2.13 to $2.16 per share. Weather was positive in the 3rd quarter, so we've eased up on some of the cost reductions we had put in place after the extremely mild second quarter. We've moved right from a warm fall to a colder winter almost overnight and we've seen the benefit of that in our earnings.
So while we've reinstated some of those previously held costs back into operations, we are still seeing better results. So we're moving the range up to reflect our target of $2.14 For 2020, our ongoing earnings guidance range is $2.16 to $2.26 per share with a midpoint of $2.21 All of the detailed drivers walking from 2019 to 2020 are included in the appendix, but I'll go through the key points for each segment. Turning to Slide 8, I'll cover our load expectations for PNM and TNMP. At PNM, we are expecting to see increases in our customer counts and overall usage. Our data center load is scheduled to ramp up significantly in 2020, driving the overall increase in load.
The data center leans on our systems resources to fill any gaps between their overall energy needs and their dedicated renewable resources. In 2020, their energy use is expected to grow beyond current dedicated resource levels until new renewable resources come online. Higher revenues will be collected for these increases on our system. We continue to see inquiries from new data centers and high-tech manufacturing centers. Just last week, Kairos Power announced that they will bring $100,000,000 of investment to the state beginning in 2020.
You have seen earlier this month that Off, a Virginia based company that provides call center and other customer service functions, announced an expansion to Albuquerque, 700 jobs and beginning operations in January. In the residential and commercial customer classes, we continue to see steady customer growth, but these impacts are offset by energy efficiency efforts that are being implemented by commercial customers. At TNMP, we continue to see growth across our service stemming from the strength of the Texas economy. The Texas Economic Development website features a listing of awards and accolades, everything from best date for business for the 15th consecutive year in 2019 by Chief Executive Group, all the way to U Haul ranking Texas as number 1 growth state in America. Our demand based growth forecast in 2020 is 4% to 5% and we also continue to see customer growth.
In our Q3 earnings call, we increased the amount of capital investments in our plan to support this level of growth while focusing on reliability. We've included a slide in the appendix to give you a better idea of where our investments are being made in our service territory and also some of the key projects in 2020. In addition to upgrades planned for this upcoming year in West Texas that support continued growth in that area, we have transmission line upgrades in the Gulf Coast are rebuilding, replacing and upgrading transmission stations across our service territory and we are installing substations and upgrades both distribution and transmission facilities to support growth. Now let's turn to Slide 9 and cover the key earnings drivers for PNM. PNM is expected to increase from a midpoint of $1.64 in 20.19 to $1.70 in 20 20.
In 2018 2019, PNM earnings included phase in of retail rates based on a 2018 test year. In 2020, we do not have any changes to retail rates, but we have increased revenues for load growth through our rate recovery of our renewable rider incorporates 50 megawatts of PNM owned solar added to serve retail customers. The increase in FERC formula rate revenues reflect recovery of additional transmission investments. Of course, increased investments leads to depreciation expense and property taxes. Some key projects will come online in 2020 as well.
The BB2 transmission line will be completed in the Q4 and construction will begin on the portion of our system that will connect to the Western Spirit transmission line that is expected to be in service in mid-twenty 21. On the O and M front, planned outage costs will decrease substantially as San Juan completed its last planned outage in 2019 in anticipation of its retirement. Partially offsetting this will be an increase in non outage costs as 2020 costs will return to normal levels compared to reductions implemented in 2019. We mentioned last call that we were delaying our next general rate case filing until the Q2 of 2020. Keep in mind that the filing would be based on a future test year that would not have an impact on 2020 earnings.
Now turning to TNMP on Slide 10. TNMP earnings are expected to increase from approximately $0.70 in 20.19 to a midpoint of $0.73 in 20 20. 2019 EPS includes $0.04 of weather benefit, making the normalized year over year increase 0 point 0 $7 $7 In addition to our semi annual TCOS filings, we anticipate making our first investments made over the last 2 years as our current rates are based on a test year ending in 2017. In total, rate recovery through the TCOS and DCOS mechanism is expected to increase earnings by $0.15 to $0.20 in 2020. Load continues to increase revenues, but the more significant impact of growth is the resulting investment recovered through the TCOS and decos mechanism.
As we continue to make those investments, the expense associated with them will also increase in 2020. Depreciation, property taxes and interest expense. We anticipate issuing new long term debt during the year to maintain our capital structure of 45% equity and 55% debt. Slide 11 shows the earnings power view for 2020 based on the guidance midpoint of $2.21 At PNM, we expect to come in just under our allowed return for the year due to the low growth and lower outage costs. Earnings from the FERC portion of our business will increase in 2020 with the annual formula rate increase.
As a reminder, the FERC formula rate increase begins in June of each year, creating an inherent drag on current year earned returns. As a result of this inherent lag, we expect a 7.5% return in 2020. At TNMP, the utilization of the TCOS and DCOS mechanism should help us achieve our allowed return in 2020 on an average rate base. No changes have been made to the 2021 through 2023 rate base or EPS number since our last presentation. I'll wrap up with dividends on Slide 12.
As Pat mentioned, the Board increased our common dividend by 6% earlier this month to 1 point target the middle of the payout ratio range of 50% to 60% and this puts us at 56% payout on the 2020 earnings guidance midpoint of $2.21 Going forward, we continue to expect dividend growth to be in alignment with earnings growth to maintain the midpoint of the targeted payout range. Pat, I'll turn the call back to you. Thank you.
Thanks, Don. And your favorite cookie?
It's peanut butter.
Okay. Lots of options for you guys to bake for us. All right. So before I open it up to Q and A, I'd like to take a moment to thank our teams here at PNM, PNMP and at corporate for their work during this year. We wouldn't be where we are without them.
As you heard today, we have some great things in store for 2020 and I'm excited to celebrate our accomplishments and successes with everyone here working so hard to achieve them. Jordan, let's open it up for questions.
Thank you. We will now begin the question and answer session. Our first question comes from Greg Gordon of Evercore ISI.
Thanks. Good morning, guys.
Good morning,
Greg. Looking forward to seeing you in a few weeks in Scottsdale. It doesn't look like there are any really significant or substantial changes as I look at the Q3 slide deck where you gave the earnings power slide and as it's updated today, it doesn't look like there's any really dramatic changes in the outlook for any of the segments. Is there anything in particular that as you fine tune the outlook for 2020 from Q3 till now that changed as we as you look at all the underlying assumptions that's of note or is it all just small changes?
Greg, this is Don. Yes, it's just small changes compared to what we went over at EEI and Q3 earnings call.
Okay, great.
What are your thoughts on
the San Juan abandonment securitization hearings as today in terms of what you've heard in testimony from all the different parties. I think they end tomorrow and you have a decision expected by April 1, but then the replacement power hearing start January 22. Is it possible we get a decision before April 1?
Greg, I'll sort of start in reverse order. Possible we get a decision before April 1. The commission is taking this as rapidly as they can. But April 1 is sort of the outlier in there. With the holiday in the normal 6 to 8 weeks to get a recommended decision, could be disrupted.
So we're in February now for 6 to 8 weeks, it might move to March. So I wouldn't bet on anything before April 1 is a sort of a long way of getting there. We've been pleased so far with the hearings. We think all of our witnesses did a very good job defending our case and we just kind of have to wait and see, but we're real pleased with the progress so far.
Great. And then when we met with you at EEI, you talked about in part just given the economic activity in New Mexico, I think, opportunities for potentially more T and D and substation CapEx spending as you look out over the forecast horizon? At what point might you, in the normal course of conversing with us, have a sense of whether that's, A, feasible and B, give us those numbers?
Yes. In the PNM service territory, there is right now, we're focused on delivering on the current plan that we have.
Our next question comes from Julien Dumoulin Smith of Bank of America Merrill Lynch.
Hi, good morning. This is Alex calling in for Julien.
Good morning, Alex.
Good morning. Adding in, I also do love a good chocolate chip cookie. So part of the majority here.
We'll share them with you if we get some.
Fantastic. Can't wait. So my first question, I know we talked a little bit about it at EEI as well. I was wondering if you could provide any more firm details around the equity financing. I know in the slides it still says, the ATM program or the block sale, but it more or less seemed after the EEI meeting that perhaps the ATM is not the most efficient way.
I guess any commentary on type firming up the total amount and timeline or milestones to look for?
Good morning. Yes, as we discussed at EI, we're planning to issue up to $590,000,000 of equity between 2020 2023 to fund our capital growth as well as our acquisition of Westpac to issue in 2020, but it would fit within the guidance range of $2.16 $2.26 You'll note we haven't changed any of the modeling assumptions that you mentioned, but we will update the earnings power with this.
Okay. Thank you. And then I also wanted to check-in on the regulatory updates around securitization in New Mexico. What is the next data point we should be looking for from the Supreme Court following the governor's vocal support?
Well, the next data point is that there is no deadline for the court to act on the petition. But on Monday, the court issued an order that requested parties respond to the current petition by January 3. So I would say January 3 is the next data point where there will be some filings and then we'll see from there.
Okay. Thank you. And last question from me. I know Greg just previously asked a little bit about the potential increase in CapEx in the future, whether it's related to T and D or substation spending. Is there any other potential upside that we should be thinking about in the future that's not just T and D related?
T and D would be the primary focus and the replacement power that we already have included in our capital budget as we look forward into the future.
Our next question comes from Ali Agha of SunTrust.
First question, Pat, I know you all are fairly confident, very confident in fact that the ETA certainly applies to San Juan and obviously would go to court if something negative were to come out of the commission. But just to be clear, if for whatever reason the ETA is denied for this, Does the San Juan retirement and replacement go forward regardless or ETA obviously is the linchpin in there?
Yes, Ali, I mean, just one data point in the I mentioned that the hearing examiner said that the ETA applied in the case of the renewable portfolio standard filing and that's a good data point. I think if the commission would oppose the hearing examiner's recommendation or does not approves the hearing examiner's recommendation. That's a very helpful data point. But yes, the San Juan shut down and replacement power would still go forward. Remember securitization is really just a way to pay for the abandonment of San Juan that saves our customers a substantial amount of money, but the plant itself does shut down.
Okay. And then secondly, in the either the hearings or other discussions from the commission, what's your how seriously are they taking the carbon capture potential and keeping the plant open? Is that being given any serious consideration at all?
Well, I think Ali, everybody is somehow hopeful. I think the newspaper today called it a Hollywood ending for San Juan. But the cost issues around the technology are just pretty hard to overcome even with the federal tax credits. The technology has been proven to work, but not at the scale of San Juan and the cost is just insurmountable. So I think everyone is looking at it because they're hopeful.
Okay. And
Okay. And then my last question, Chuck, back at EEI, coming back to the financing, the impression at least I got from our meeting was that at that time you were thinking that the mandatory convert for a variety of reasons seemed like the more attractive option than an equity forward and you were probably leaning more towards that. Just wondering if your thoughts have changed or is that still the way you're currently thinking about this?
Ali, this is Don. We're still evaluating what the right instrument is to utilize.
Okay. And Don, what would be the trigger mechanism that from a timing perspective causes you to then come to market? Is it market conditions? Is it updated financials? What's sort of going to be the triggering event here?
It's optimizing the timing of those issuances and when they would issue. I mean, we have the Western Spirits, Western Spirit transaction out there in July of 2021. Clearly, that's a data point and then just optimizing within our own plan, ensuring our balance sheet metrics stay where they need to be as well as fund the capital growth that is out
there. Our next question comes from Paul Fremont of Mizuho Securities USA.
Thank you. I guess my first question is, are you expecting the court to issue a decision prior to the April 1 deadline that the NNPRC has in the abandonment proceeding?
Paul, we just don't know. We there is no deadline for them to act and they could act quickly if they choose and they can take a while if they choose. We just have no line of sight into that.
And then I guess it's my understanding that one of the justices recused themselves. What was the rationale for that decision?
There was no explanation given.
But somebody, I guess a judge that's not on the Supreme Court then gets chosen to take their place or is that how it works?
Well, Paul, this is going back. There was no rationale given, but understand that she is the Chief Justice and she recused herself. And one of her duties is to go to the legislature and ask for budget money. And so this is total speculation. She just may have felt that she didn't want to create any conflict of interest.
Obviously, the judges are all very ethical people. So she didn't want to create any kind of conflict. And again, that's total speculation on our part. And yes, they picked a judge from Las Cruces to fill in for
that. Great. And I think that's it. Thank you very much.
Thank you, Paul. Looking forward to the cookies from you. Absolutely.
Our next question comes from Jonathan Reeder of Wells Fargo.
Hey, Pat. My favorite is oatmeal raisin, but around Christmas time, I definitely like some good snickerdoodles.
You're making me hungry, Jonathan.
I am actually hungry. So I should think about it. It kind of went a little fast, but can you reiterate what the expected earned ROEs in 2020 are? I think you might have said New Mexico is going to earn out and Texas might be below, but
Yes. And Jonathan, I'll refer you to the earnings power. We have them in there kind of the midpoint of the earnings range for 2020. So PNM Retail, we expect to earn right there at its ROE at 9.5. We expect TNMP to earn at 9.65 right at its allowed ROE.
And PNM FERC, we expect to earn at the 7.5, due to the inherent lag associated with the timing of the formula rate.
Okay. So
it was the FERC that has the lag. Got you. Yes. And then Pat, the 6 to 8 weeks from the end of the hearings, is that for the hearing examiner recommended decision or is that final decision?
That's set for the hearing examiner or excuse me, the commission. I'm having one of those mornings, Jonathan.
I have this every morning. So if you only have one, you're good. So that's the PRC's final decision that's typically from the end of this and the recommended decision would be sometime in between. Yes. Is there some sort of like prescribed timeframe between the recommended decision and the final decision that has to be like 30 days or something?
No. And I would if I was marking a day on my calendar, I'd mark April 1.
Okay.
And then you mentioned
the renewable docket here in January to determine ETA was applicable. So does that make you more optimistic that I guess the conclusion in the ETA or sorry in the SGA and S docket could be similar? Is it the same hearing examiner or different hearing examiners and everything?
It gives us more optimism, right? Things can change. Hearing examiners and commissions can take different positions, but it does give us more optimism that the lock does apply.
Okay. Is it the same hearing examiner or different?
It's one of the 2 hearing examiners. Remember there's 2 hearing examiners on the San Juan case and the hearing examiner on the renewable case is one of those 2 hearing examiners. So
yes. Okay.
So that's good.
And then lastly, can you update on
the potential repurchase of the Palo Verde leases? I think you have to indicate by mid January about the larger the 2, the 104 megawatts.
Yes, Jonathan, this is Don. Yes, the 104 of the 114 Megawatts on January 15, we have to decide whether we're going to return them or keep them and then go through a purchase process. We're still in that analysis right now. I would point that we do need the megawatts out there. So if we do return them, then we will have to replace those megawatts, but we haven't made any decisions at this point.
Okay. And then is that something that would just be a regulatory filing? Is it something you press release? How like I guess when would we kind of get the update what your preferred path is?
We would have to file a notice with the commission of what our decision is. So it would be around that time frame, right around the January 15 time frame.
Our next question comes from Chris Ellinghaus of Seibert, Williams and Schenck.
Hey, everybody. How are you?
Good, Chris. Good morning.
Good morning.
I'm a little bit surprised by the reaction of the stock today. I mean, your guidance range, your earnings power has been within this range for a couple of years now. So really no major changes like Greg was sort of suggesting. Are you aware of any investors that had higher expectations that would lead to the reaction today?
Chris, this is Chuck. We're waiting for your note to change from a sell to buy and that might help us out a little bit. But there's no issues that are reflected as you just pointed out in our guidance and it looks like the market of the sector is down. I noticed a couple of analysts had put out notes this morning. Again, nothing new and unusual.
So I think this is just where the market is. But hopefully this guidance call will get absorbed well in the market and investors will return back to be comfortable and we'll start seeing the stock move upwards again.
Okay, thanks. The decos, can you give us a little insight into how you see that process looking for next year?
Yes, sure, Chris. So that DCOS filing is pretty standard in Texas where you file that 1st week of April. And a couple of elements that are a little bit different than the DCOS is the cost you can't be over earnings. So in that April filing, you file your earnings monitoring report with the Texas Commission as well. A couple of other differences that go into the DCOS is they do update for your ADIT and that DCOS filing can only be done once a year and it can only be done during that period of time.
And then after you file that, September 1 is when the rates would go into effect.
Okay. So just to be clear that you do have some small stub for a de cost assumption in the guidance?
There is a de cost assumption in the guidance, yes.
Okay, great. And Chuck, by the way, the correct answer is chocolate chip.
Okay.
See, and Chris, I think the reason our stock is reacting the way it is, is that the market doesn't like Chuck's choice of cookie.
This concludes our Q and A session. I would now like to turn the conference back over to Pat.
Thank you, Jordan, and thank you all for joining us this morning. We are eagerly awaiting the boxes of cookies coming our way. Have a happy and safe holiday season and we look forward to seeing you all in 2020.