Good morning, and welcome to PNM Resources 2020 earnings guidance conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0 after today's presentations. 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 conference 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; Chuck Eldred, our Executive Vice President and Chief Financial Officer; Don Tarry, 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 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.
Thanks, Lisa. Good morning, everyone. Thank you all for joining us today on our 2020 earnings guidance call. As a follow-up to our third quarter call, which was National Men Make Dinner Day, December 18th is National Bake Cookies Day. 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. Let's begin on slide four. In our release this morning, we announced that we are raising our 2019 ongoing EPS guidance to a range of $2.13-$2.16, as our hotter Q3 temperatures quickly turned into colder winter temperatures. We also announced 2020 guidance of $2.16-$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 five 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 six to eight weeks after hearings. That would put us into February, although the holidays may extend this timeframe. The commission has a deadline of April 1st for a decision in this case.
Meanwhile, intervener testimony on the replacement power side of things was filed last week, and those hearings are scheduled to begin on January 22nd. 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 Michelle Lujan Grisham, who I'm proud to say was recently recognized as Policymaker 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 filing, 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 the application of the Energy Transition Act, and the recommended decision determined that the law could apply in this case, even though it was filed two 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 first quarter 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 second quarter 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 Energy Rider in June. Our 2020 integrated resource plan is due by July 1st and will highlight our path to meet zero emissions by 2040. At TNMP, in addition to our two TCOS filings annually to recover transmission investments, we will make our first DCOS filing on the distribution side in April of 2020. We will keep you updated on those items throughout the year and then provide the docket numbers for each of the filings.
Finally, in November, voters in New Mexico will decide whether the commission moves from five elected members to three appointed members. With that, I'm going to turn it over to Chuck. First, Chuck, what's your favorite cookie?
My favorite cookie, and it can vary based on market conditions- but it's a chocolate chip with coconut and macadamia nut. I get these on Delta flights going from Albuquerque to Atlanta. They're great. Let me get back to the guidance, of course. Let me start off by introducing Don Tarry, 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. 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 seven. As Pat mentioned, we are increasing our 2019 guidance to a range of $2.13-$2.16 per share. Weather was positive in the third quarter, 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. While we've reinstated some of those previously held costs back into the operations, we are still seeing better results. We're moving the range up to reflect our target of $2.14. For 2020, our ongoing earnings guidance range is $2.16-$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 eight, 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 system's resources to fill any gaps between their overall energy needs and their dedicated renewable resources. In 2020, their energy usage 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 million of investment to the state beginning in 2020. You have seen earlier this month that Faneuil, a Virginia-based company that provides call center and other customer service functions, announced an expansion to Albuquerque, bringing 700 jobs and beginning operations in January. In the residential and commercial customer classes, we continue to see steady customer growth, 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 territory stemming from the strength of the Texas economy. The Texas Economic Development website features a listing of awards and accolades, everything from best state for business for the 15th consecutive year in 2019 by Chief Executive Group, all the way to U-Haul ranking Texas as number one growth state in America.
Our demand-based growth forecast in 2020 is 4%-5%, and we also continue to see customer growth. In our third quarter 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 to interconnect new plants and replacement of our AMI meters to be compatible with current network capabilities. We are rebuilding, replacing, and upgrading transmission stations across our service territory, and we are installing substations and upgrades to both distribution and transmission facilities to support growth.
Now let's turn to slide nine and cover the key earnings drivers for PNM. PNM is expected to increase from a midpoint of $1.64 in 2019 to $1.70 in 2020. In 2018 and 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 and FERC transmission formula rates. The renewable rider incorporates 50 megawatts of PNM-owned solar added to serve retail customers. The increase in FERC formula rate revenues reflects recovery of additional transmission investments. Of course, increased investments lead to depreciation expense and property taxes. Some key projects will come online in 2020 as well.
The BV2 transmission line will be completed in the fourth quarter, 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-2021. On the O&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 second quarter of 2020. Keep in mind that the filing would be based on a future test year and 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 2019 to a midpoint of $0.73 in 2020. 2019 EPS includes $0.04 of weather benefit, making the normalized year-over-year increase $0.07. In addition to our semiannual TCOS filings, we anticipate making our first DCOS filing in April of 2020 to begin recovery on distribution investments made over the last two 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-$0.20 in 2020. Load continues to increase revenues, the more significant impact of growth is the resulting investment recovered through the TCOS and DCOS 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 numbers 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 $1.23. We target the middle of the payout ratio range of 50%-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. Your favorite cookie?
It's peanut butter.
Wow, okay. Lots of options for you guys to bake for us. All right, before I open it up to Q&A, I'd like to take a moment to thank our teams here at PNM, TNMP, 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. 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. To ask a question, you may press star then one on your phone. If you are using a speakerphone, please pick up your headset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Greg Gordon of Evercore ISI.
Thanks. Good morning, guys.
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-tuned the outlook for 2020 from Q3 till now that changed as you look at all the underlying assumptions that's of note, or is it all just small changes?
Greg, this is Don. Yeah, it's just small changes compared to what we went over at the EEI and Q3 earnings call.
Okay, great. What are your thoughts on the San Juan abandonment securitization hearings as to date 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 1st, but then the replacement power hearings start January 22nd. Is it possible we get a decision before April 1st?
Greg, I'll sort of start in reverse order. Possible we get a decision before April 1st. The commission is taking this as rapidly as they can. April 1st is sort of the outlier in there. With the holiday in the normal six to eight weeks to get a recommended decision could be disrupted. We're in February now. For six to eight weeks, it might move to March. I wouldn't bet on anything before April 1st as 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. 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&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?
Yeah. In the PNM service territory, there is a significant amount of additional capital we could include related to reliability as well as hardening of our assets and so forth. Right now, we're focused on delivering on the current plan that we have.
Great. Have a happy holiday season.
Thank you, Greg.
Our next question comes from Julien Dumoulin-Smith of Bank of America Merrill Lynch.
Hi, good morning. This is Alex calling in for Julien.
Morning, Alex.
Good morning. Adding in, I also do love a good chocolate chip cookie, so I'm part of the majority here.
We'll share them with you if we get some.
Oh, fantastic. Can't wait. 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 EEI, we're planning to issue up to $590 million of equity between 2020 and 2023 to fund our capital growth as well as our acquisition of Western Spirit to issue in 2020. 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. 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's no deadline for the court to act on the petition. On Monday, the court issued an order that requested parties respond to the current petition by January 3rd. I would say January 3rd is the next data point where there will be some filings, and then we'll see from there.
Okay, thank you. 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&D or substation spending. Is there any other potential upside that we should be thinking about in the future that's not just T&D-related?
T&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.
All right. Thank you so much, and happy baking day.
Thank you. You too.
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. 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?
Yeah, Ali, just one data point. I mentioned that the hearing examiner said that the ETA applied in the case of the Renewable Portfolio Standard filing. That's a good data point. I think if the commission would oppose the hearing examiner's recommendation or does not approve, excuse me, approves the hearing examiner's recommendation, that's a very helpful data point. Yes, the San Juan shutdown 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. The plant itself does shut down.
Okay. Secondly, in either the hearings or other discussions from the commission, how seriously are they taking the carbon capture potential and then keeping the plant open? Is that being given any serious consideration at all?
I think, Ali, everybody is somehow hopeful. I think the newspaper today called it a Hollywood ending for San Juan. The cost issues around the technology are just pretty hard to overcome, even with the federal tax credit. The technology has been proven to work, but not at the scale of San Juan, and the cost is just insurmountable. I think everyone is looking at it because they're hopeful, but I think at the end of the day, the costs are just going to sink it.
Okay. 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. You're 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. 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 going to be the triggering event here?
It's optimizing the timing of those issuances and when they would issue. We have the Western Spirit transaction out there in July of 2021. Clearly, that's a data point. 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.
Thank you.
Thanks, Ali.
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 NMPRC has in the abandonment proceeding?
Paul, we just don't know. 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.
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.
Would 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, just to go back. There was no rationale given, understand that she is the chief justice, that she recused herself, and one of her duties is to go to the legislature and ask for budget money. 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. She didn't want to create any kind of conflict. Again, that's total speculation on our part. Yes, they picked a judge from Las Cruces to fill in for that.
Great. 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's oatmeal raisin, but around Christmas time, I definitely like some good snickerdoodles, so send those over.
Ooh. You're making me hungry, Jonathan.
I am actually hungry, so I shouldn't say that. 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's going to earn at it and Texas might be below, but I'm.
Jonathan, I'll refer you to the earnings power. We have them in there, kind of the midpoint of the earnings range for 2020. 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. PNM FERC, we expect to earn at the 7.5% due to the inherent lag associated with the timing of the formula rate.
Okay, it was the FERC that has the lag. Gotcha.
Yes.
Yeah.
Pat, the six to eight weeks from the end of the hearings, is that for the hearing examiner recommended decision or is that the final decision?
That's set for the hearing examiner, or excuse me, the commission. I'm having one of those mornings, Jonathan.
Hey, I have those every morning, so if you only have one, you're good. All right, that's the PRC's final decision is typically six to eight weeks from the end of the hearing.
Yes.
The recommended decision would be sometime in between.
Yes.
Is there some sort of prescribed timeframe between the recommended decision and the final decision that has to be 30 days or something?
No. If I was marking a day on my calendar, I'd mark April first.
Okay.
Yeah.
You mentioned the renewable docket, the hearing examiner determined the ETA was applicable. Does that make you more optimistic that, I guess, the conclusion in the ETA, or sorry, in the SJGS 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 law does apply.
Okay. Is it the same hearing examiner or different?
It's one of the two hearing examiners. Remember, there's two hearing examiners on the San Juan case, and the hearing examiner on the renewable case is one of those two hearing examiners. Yes.
Okay. That's good. 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 of the two, the 104 megawatts.
Jonathan, this is Don. The 104 of the 114 megawatts on January 15th, 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. We haven't made any decisions at this point.
Okay. Is that something that would just be a regulatory filing? Is it something you press release? I guess, when would we get the update what your preferred path is?
We would have to file a notice with the commission of what our decision is. It'd be around that timeframe, right around the January 15th timeframe.
Okay. All right. Thank you. Hope you guys have a great holiday.
You too, Jonathan.
Same to you, Jonathan.
Once again, if you have a question, please press star and then one. Our next question comes from Chris Ellinghaus of Siebert Williams Shank.
Hey, everybody. How are you?
Good, Chris. Good morning.
Good morning. I'm a little bit surprised by the reaction of the stock today. Your guidance range, your earnings power has been within this range for a couple of years now. 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 a buy. That might help us out a little bit. There's no issues that are reflected, as you just pointed out in our guidance. It looks like the market, the sector is down. I know there's a couple of analysts that put out notes this morning. Again, nothing new and unusual. I think it's just where the market is. Hopefully this guidance call will get absorbed well in the market. Investors will return back to be comfortable. We'll start seeing the stock move upwards again.
Okay, thanks. The DCOS, can you give us a little insight into how you see that process looking for next year?
Yes. Sure, Chris. That DCOS filing is pretty standard in Texas where you file that the first week of April. A couple elements that are a little bit different than the TCOS is the DCOS you can't be over earnings. In that April filing, you file your earnings monitoring report with the Texas Commission as well. A couple 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. After you file that, September 1st is when the rates would go into effect.
Okay. Just to be clear that you do have some small stub for a DCOS assumption in the guidance.
There is a DCOS assumption in the guidance, yes.
Okay, great. Chuck, by the way, the correct answer is chocolate chip.
Okay.
See, Chris, I think the reason our stock is reacting the way it is that the market doesn't like Chuck's choice of cookie.
I got the chocolate chip in there.
Yeah.
I can't.
This concludes our Q&A session. I would now like to turn the conference back over to Pat.
Thank you, Jordan. 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.
The conference is now concluded. Thank you for attending today's presentation. You can now disconnect.