Good morning, and welcome to the PNM Resources fourth quarter 2022 conference call. All participants will be in a listen-only mode. Should you need any assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there'll be an opportunity to ask questions. To ask a question, you may press star, then one your telephone keypad. To withdraw your question, please press star then two. Please note that this event is being recorded. I would now like to turn the conference over to Lisa Goodman, Executive Director of Investor Relations. Please go ahead.
Thank you, Joe, and thank you everyone for joining us this morning for the PNM Resources fourth 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 and CEO, Pat Vincent-Collawn, President and Chief Operating Officer, Don Tarry, and Senior Vice President, Chief Financial Officer, and Treasurer, Lisa Eden. Before I turn the call over to Pat, I need to remind you that some of the information provided this morning should be considered forward-looking statements pursuant to the Private Securities Litigation Reform Act of 1995. We caution you that all of the forward-looking statements are based upon current expectations and estimates, and that PNM Resources assumes no obligation to update this information.
For a detailed discussion of factors affecting PNM Resources results, please refer to our current and future annual reports on Form 10-K, quarterly reports on Form 10-Q, as well as reports on Form 8-K filed with the SEC. I will turn the call over to Pat.
Thank you, Lisa Goodman. Good morning, everyone, and thank you for joining us today on this beautiful, sunny New Mexico Friday morning. Today is the day we celebrate some of our favorite people. It is World Bartender Day, and I'm just gonna leave it at that. 2022 was a year full of successes as we stayed committed to moving forward and executing on our business plan, or, as one might say, taking care of business. Today, we will cover our year-end results for 2022, provide an update on our pending merger with AVANGRID, review operational highlights, and share more details on our earnings guidance for 2023. slide four, I'll start with our financial results. We finished the year with ongoing earnings of $2.69, just above our expectations for the year.
For 2023, we are narrowing our guidance range to $2.65-$2.75. In December, our board increased the common dividend to $1.47 per share on an annual basis. Lisa will walk through each of these numbers in more detail. Next, an update on our pending merger. The case remains on appeal with the New Mexico Supreme Court. Over the last month, we have been pleased to see the Commission post notice of 3 closed sessions with the case on the agenda. We do not yet have any information available. In New Mexico, the newly appointed commission took their seats in January and were confirmed by the New Mexico Senate earlier this month. We have already seen their experience and expertise on display, and we are looking forward to working together to achieve New Mexico's carbon-free energy future.
In December, PNM filed its 2024 rate change as planned. Our last case was filed in 2016 with a 2018 test year. We deferred our plans to file earlier because it was not the right thing to do during the pandemic, and we remain committed to the stay-out agreement we made with our parties during the merger negotiations. We moved forward with funding needed infrastructure projects, and now, in an environment of rising costs, we are able to propose a 2024 bill impact of less than 1%, partially because of our exit from the San Juan Generating Station. Don will talk about more details of the case and the schedule leading up to an expected decision before the end of the year.
In Texas, we made our first Transmission Cost of Service filing for 2023 in January, reflecting another strong year of investments in Texas to support growing customer demand. In a year of supply chain and labor challenges, our teams planned ahead and remained agile while expanding our system and interconnecting energy storage systems, chemical plants, crypto mines, and data centers. Before I turn it over to Don, I will cover our ESG highlights for the year on slide five. The retirement of the San Juan Generating Station is our top environmental achievement in 2022. More than half of our resource portfolio is now carbon-free, with additional renewable and storage resources slated for 2023. However, our accomplishments stretch far beyond this plant. We continue to add more electric vehicles to our fleet.
We continue to work to expand customer energy efficiency programs, collaborate with industry experts to address physical climate risk, and partner with stakeholders to bring awareness to environmental concerns impacting our communities. We developed a greenhouse gas emissions inventory for Scope 1, 2, and 3 emissions to address the evolving disclosure needs of investors and other stakeholders. We also implemented an environmental justice geographic mapping and screening tool to better identify and prioritize communities most in need of investment. We continue to work towards fostering a diverse workforce representative of the communities we serve. In 2022, our percentage of minorities and women increased to 53% and 28% respectively. Equity and inclusion are key to building and sustaining diversity at all levels of the organization. We are continuously monitoring our approach for our desired results.
One of the biggest priorities for our teams was to support the employees at San Juan through the plant closure and to ensure these team members left with dignity, pride, and resources for their future. We provided career counseling and transition training, benefit reviews, and retirement planning. We are happy that approximately 20% of these plant employees are still working for the company in various roles. Ultimately, half the employees in the last years of the plant received severance payment at around 75% of those were also retirement eligible. Through the Energy Transition Act, we also funded severance and job training for employees of the Associated Coal Mine. It was a challenging year in the labor market, we took extra steps to take care of our team members and to ensure that our teams had the necessary resources to continue supporting customers.
We also turned our eyes toward the future and created a statewide business coalition to expand internship programs offered through our local colleges. We already have some of these interns joining the company full-time or continuing their internships in 2023. These are students who recognize the challenges and opportunities created by the transition to clean energy in New Mexico, and they want to be a part of our solution. At the same time, we continue to expand upon our educational support for the Native American population in the state, funding an endowment specific to Pueblo students looking to continue their education at the next level. Both of these programs serve to strengthen New Mexico's future workforce, and they also provide a fresh perspective and contribute to the diversity of thought.
We know that the future challenges in our industry will require new ways of thinking and look forward to what these students can contribute. With that, I will turn it over to Don.
Thank you, Pat. Good morning, everyone. I'll start on slide seven with our load growth by service area with PNM first. Load grew at 2.9% in the fourth quarter compared to the prior year, with growth coming from all customer classes. For most of 2022, we saw residential and commercial load grow above our expectations. While industrial customer expansions were delayed by supply chain and related market issues, we expect the growth we saw in the fourth quarter to continue into 2023 between 2%-3%. We're still seeing the results of New Mexico's economic development efforts through our customer expansions. We also see government and tribal projects that are less impacted by market-wide economics. At TNMP, load growth in 2022 exceeded expectations for both volumetric and demand-based load, plus the added growth from crypto mining customers entering the market.
These customers are mostly in our West Texas service territory, providing some economic diversity to the region. Each of those areas support a mix of business operations and growing residential and commercial communities surrounding the nearby larger cities. For 2023, volumetric growth is expected at 2%-3%, consistent with the full-year results of 2022. Demand-based growth is expected at 3.5%-4.5% above the 2022 levels. Turning to slide 8. I'll cover the ways we've been taking care of business at PNM and making progress on our strategic objectives. The transformation of our generation portfolio has been front and center.
We have plans to exit coal and reach carbon-free electricity by 2040, five years ahead of the New Mexico mandate. The closure of San Juan Generating Station this year was a significant step in achieving these goals, reducing the amount of coal in our portfolio and advancing us to 55% carbon-free capacity. Our next big step is exit of our ownership stake in Four Corners Power Plant and completely eliminate coal generation from our portfolio, which we are still pursuing for the end of 2024. As you can see in the pie charts, we are replacing these resources with renewable and battery storage. After working through the 2022 delays from PPA developers, we expect 350 megawatts of solar and 170 megawatts of battery storage coming online in 2023.
At that point, over half of our resource portfolio will be renewables and storage. With our continued ownership of Palo Verde, we will hit 61% carbon-free capacity. These changes provide significant benefits for the environment and our communities, and also financial benefits for customers, which I'll cover in a minute. Another key to successful transition towards a carbon-free portfolio is T&D infrastructure. Investments in our grid provide the foundation for serving the growing demand on PNM system and maintaining reliability. The peak demand on our system has been growing at a faster rate than our total load, and we hit a new system peak in 2022, our first since 2013. Our focus has been on strengthening the infrastructure that directly serves customers. Substations and lines are being reconfigured to accommodate new customers, along with customer-owned resources.
We are building the system to be more resilient and reduce outage restoration time. Other T&D investments at PNM relate to grid modernization projects. We filed our comprehensive grid modernization plan to implement smart meters and other projects that will lay the groundwork for future improvements and provide our customers with more resilient grid. When we look ahead, we see the need for expansion of our system. Our change in generation resources means the transmission capacity tied to existing plants can be used for the replacement options. As the resource needs grow beyond these replacements, new transmission capacity will be needed to facilitate additional resources across the state. Turning to slide nine. I'll walk you through the key regulatory proceedings tied to these investments. As Pat mentioned, in December, we filed our first PNM rate review in six years.
PNM customers already benefit from having lower bills than much of the country, and we work to balance the need for investments in our system with the impacts on customers. The Energy Transition Act was designed to facilitate the transition to clean energy while reducing costs to customers, and this rate filing shows that it is working as intended. The filing is a 2024 future test year, so it rolls forward our rate base for the full 6 years and incorporates current cost trends. The retirement of San Juan and the return of the Palo Verde leases reduces the requested recovery in base rates and also reduces the cost recovered through our fuel clause as replacement resources come online. Securitization provides for lower financing costs as we make this transition.
All in, the proposed bill impact in 2024 is limited to 0.9% or $0.75 per month for the average residential customer. The procedural schedule in this case calls for intervener testimony, Our settlement filing by May 12 and hearing scheduled in June. The schedule for our grid modernization filing includes hearings scheduled in March. Remember that we have asked for approval of our project plan by July 1 of this year, but we delayed our requested implementation date of the rate rider until September 1 so that it would not be added to summer bills this summer when usage is typically higher. We also prioritized low-income customers and communities in our filing. These are the customers most in need of tools to manage their usage and bills, and it also makes sense to bring improvements to these areas first.
In March, the New Mexico Supreme Court has scheduled oral arguments in our proposed exit from Four Corners Power Plant. In December 2021, the commission rejected our filing to exit our ownership share of the plant and securitize our undepreciated investments. The briefing schedule was completed in 2022, and we are looking forward to the oral arguments for a further opportunity to present our case. Turning our attention to TNMP on slide 10. Our focus has been to maintain investment levels to keep up with the pace of growth. The rate base doubled over the course of 5 years with another strong year of investments planned for 2023. The needs range from serving new residential subdivisions to connecting new chemical plants. The regulatory environment in Texas continues to support these investment levels.
We have made use of semiannual transmission recovery filings along with annual distribution recovery filings. In January, we made our first transmission filing for 2023, requesting over $150 million of projects cleared by December of last year. We would expect recovery to be approved and implemented by March of this year. With that, I'll turn it over to Lisa to cover the numbers in more depth.
Thank you, Don, and good morning, everyone. I'll start on slide 12 with a summary of the changes in 2022 earnings compared to 2021. Earnings per share from $2.45 in 2021 to $2.69 in 2022, as we have also been taking care of business on the financial side. The key drivers are consistent with the items we've discussed throughout the year. Usage was up at both PNM and TNMP due to both load growth and weather, particularly at TNMP, as cryptocurrency miners entered the market in West Texas. Recovery of investments through the TCOS and DCOS mechanisms was also a significant increase to EPS at TNMP. At PNM, higher transmission demand and market prices increased earnings along with the addition of the Western Spirit contract.
These increases served to offset expenses at the utility for depreciation, property tax and interest associated with our rate base investments, along with increases to our planned O&M spending. Market losses on our decommissioning trust dampened the earnings growth at PNM. We took actions in 2022 with fund managers to ensure alignment with our portfolio objectives. To be clear, the decommissioning trust, along with our pension plans, remain well funded despite the challenging market conditions in 2022. We don't anticipate making any cash contributions to these trusts in the near future. Earnings at our corporate segment are driven by holding company debt. In 2022, higher interest rates reduced EPS. Turning to slide 13, I'll cover our expectations and key drivers for 2023 guidance.
As Pat mentioned, we have narrowed our guidance range to $2.65-$2.75 per share. Given the growth we've seen in Texas and New Mexico in 2022, we brought up the bottom end of the range to $2.65. In terms of our load, our guidance assumes a return to more normal weather conditions, which is partially offset by load growth at both PNM and TNMP. At PNM, cost reductions from the retirement of the San Juan Generating Station and return of the Palo Verde leases, net of replacement power costs, offsets depreciation, property tax, and interest expenses associated with new investments. At TNMP, rate recovery through the TCOS and DCOS S riders cover cost increases associated with new investments as we continue to expand our systems for increasing demand and economic growth.
At PNM, we don't expect the realized market losses on our decommissioning and reclamation trust to repeat in 2023. At corporate, we have assumed higher interest expense to reflect the current interest rate environment, including $850 million of swaps we entered into last year to mitigate our exposure until we reduce our variable debt levels, either through a successful merger or putting more permanent financing in place. We continue to assume we add up to $200 million of equity in 2023, which would have a dilution impact on EPS at each of our segments shown in the appendix slides. Our full guidance range accounts for various timing assumptions with a potential impact of up to $0.08 for the year, translating into a $0.04 impact to the guidance midpoint.
Slide 14 shows our continued plan for capital spending through 2025 and the associated rate base growth. This investment plan continues to be focused on T&D infrastructure and meeting the growing needs of customers across New Mexico and Texas and includes our proposed grid modernization plan at PNM. Rate base growth at 8% from 2020 to 2025, with strong growth coming from both PNM FERC and TNMP. At PNM, investments in infrastructure support retail customer growth and replace the rate base that is removed as we transition out of coal. We've been able to defer rate increases for our customers while continuing to earn our authorized returns. FERC investments have grown rapidly with the addition of the Western Spirit project at the end of 2021. Our other transmission investments are recovered timely through the annual formula rate update.
TNMP grows at 17% over the period as infrastructure is added to support reliability in our growing service territory. The transmission and distribution riders provide timely recovery of these investments without the general rate case. The details of our spending beyond 2025 will be provided later this year, we're comfortable we can continue our growth target of 5%. Slide 15 shows our growth target and historical achievements. The midpoint of our 2023 guidance achieves our previous targets for growth and reaches a 10-year growth rate of 6.7%. We are on track to meet our current target of 5% growth for 2020 through 2025. Growth isn't linear every year because of factors like weather, timing of regulatory filings, or market conditions, we remain focused on the long-term view.
Our 8% rate base growth over the period is partially offset by the assumed equity in 2022. This maintains our investment-grade credit metrics and places us in a good position moving forward. We are confident in our ability to continue targeting 5% growth. I'll wrap up on slide 16 with our dividend. We look to grow dividend consistent with earnings, targeting the midpoint of 50%-60% payout ratio. In December, the board of directors raised our annual dividend to $1.47, a 5.8% increase with a payout ratio of 54% of our 2023 guidance midpoint. Our board typically addresses the annual dividend in December when finalizing our financial plans for the following year. Meanwhile, we will continue to pay dividends until the close of our merger. With that, I'll turn it back over to Pat.
Thank you, Lisa. Before I open it up for questions, I would like to thank our team members in New Mexico and Texas for the great work they did in 2022 and continue to do in 2023 to take care of each other, our customers, our communities, and the environment. With that, Joe, let's open it up for questions.
We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pre-pressing the keys. To withdraw your question, please press star then two. At this time, we will pause just momentarily to assemble our roster. Our first question here will come from Paul Zimbardo with Bank of America. Please go ahead.
Hi. Good morning, team.
Morning, Paul.
Morning, Paul.
Good morning.
Hi. Thank you all. the first one, I saw the comment about the additional equity, potentially in the second half of 2023. Could you give what was the 2022 FFO to debt and just expectations there for 2023?
Yeah, Paul. We always target our between 13% and 16%. The FFO to debt in 2022 was just around 14%.
Okay, great. Secondarily, thank you for the background on the trust performance. I know you mentioned some actions you took with the fund managers in 2022. Could you explain what are the assumptions that you embed in the performance for 2023? I think it's like a $0.15-$0.19 improvement. I didn't know if that's just kind of a reversal or you assume higher returns or some sort of mix.
Yeah, Paul. 2022 was really a bad year. We're, 75%, fixed income and 25%, equity in that MDT trust. We don't expect the same market conditions in 2022 going into 2023.
Okay. Correct me if I'm wrong, I think if it's just kind of flat market conditions, wouldn't that just be like an unchanged year-over-year? Like I was just confused about the improvement.
Yeah. If you remember regarding our MDT. When we have realized gains or losses in the MDT trust, it will flow through the income statement and the unrealized will not be part of the ongoing. As a result, last year we had a lot of realized losses because the fixed income manager in particular changed their portfolio, so they realized losses during the year. We don't anticipate that to happen next year.
Okay. No, that's very helpful. Thank you. Last quickly, if I may. Do you have any additional interest rate hedges for 2024?
No, we don't, Paul. We do plan to issue, like we said before, up to $200 million of equity. We're also looking to do securitization at the end of the year. Our variable rate debt exposure will be a lot different in 2024.
Yes. Great. Thank you all very much and have a nice weekend.
Thank you. You too.
Thank you.
Our next question will come from Ryan Levine with Citi. Please go ahead.
Good morning.
Good morning, Ryan.
Good morning, Ryan.
Good morning, everyone. Just had a general question in terms of the pending merger application. Under what scenarios would you have to refile the application entirely?
You know, Ryan, you know, right now it's with the Supreme Court. I would note that the Commission has had some hearings in private confidential hearings that we've noticed. We don't know the details of those at this point. Not sure exactly what would trigger a refiling, so.
Okay. Any color around, dividend policy in the interim, pending the potential application being executed on, are there any ongoing conversations around any dividend changes?
I think as Lisa said, the board does the dividend in December. They just increased it last December. They would not be doing that again until December. We anticipate the merger would close before then. They wouldn't deal with it this December.
Okay. Thanks for the clarification.
Okay. Thanks.
Thanks, Ryan.
Our next question will come from Jonathan Reeder with Wells Fargo. Please go ahead.
Hey, good morning. If you could just expand a little maybe on the last question. Like, can you just discuss your latest thoughts in terms of, you know, how the merger approval process potentially gets going again, you know, and what the PRC's timeline to reach a new final order might be? I know you just kind of indicated you certainly expect it before December. You know, do you need to first pool the appeal of the PRC's, you know, decision that's currently pending at the Supreme Court? If so, do you have plans to do that?
You know, Jonathan, right now we need to wait to see what the commission has done in their sessions, if anything. Right now we're in a holding pattern, looking forward to hearing about their deliberations and any outcomes. That will determine what next steps are.
In what form are we gonna hear that from the PRC? Like, I mean, are they required or scheduled to, you know, give some sort of update? Like...
No. I mean, they have, if you've listened to the open meetings, they have reported on the fact that they have had closed sessions and deliberated on the following on matters and in particular on the merger case that commissioner, excuse me, Chairman O'Connell has recused himself, and they have deliberated on that. That is all we have heard. I would assume at some point in time they would report out on an open meeting. There is no timetable for them to do that.
Okay. I guess, how do you guys handle it from your end with the, you know, merger agreement expiring here in April, if, you know, you haven't heard anything from the commission and, you know, you haven't pooled your appeal? Like, what should we expect in terms of that?
Yeah. The board's gonna consider all the merger and potential merger extension items in due course. I'm not gonna speculate now on what happens in that April timeframe.
Okay. Then I guess just given the passage of time and everything, you know, are there additional concessions that might need to be made? Do you think, you know, all the prior signatories to this settlement, you know, are still on board with the deal? You know, should we expect you to file, like, a new settlement agreement that at least, you know, encapsulates the commitment, you know, that AVANGRID made after the last settlement was filed?
You know, I think it's a couple things. We have not heard that any of the interveners are not on board. We have not been actively talking to them about this. We've been talking about the rate case and grid mod with them. I'm not gonna speculate on a new application until we hear what the commission has to say. I mean, that's really what we need to hear from or what we need to hear before we decide next steps.
Okay. I guess from the standalone growth perspective, I guess I was a little confused on slide 15. Is the 5% long-term growth target, is that off the midpoint of the 2023 guidance, you know, $2.70? Is it, you know, like a 5-year target? Are you just kind of reiterating the 5% through 2025 off the 20 base?
Jonathan, we're very pleased with this slide. You see 6.7% CAGR from 2013 to 2023. What we have said is that we're comfortable with our growth target of 5%. We've set out the growth target of 2020 to 2025. We will provide details later in the year, but at this point, we're comfortable with the 5% growth.
Just the 5% growth through 2025 or extending beyond there?
We are comfortable with the 20%-25%. As we look forward, 5% is, we are comfortable with that growth target.
Okay.
Jonathan, if you look at our capital slide, we haven't updated our capital past 2025. When we do that, if we end up doing that, then we would go further on those numbers. Right now, 2025 is the furthest we have for our projections.
Okay. Last for me, expanding on, you know, the already discussed financing needs in the non-merger scenario, can you talk a little more about how you would address, you know, the $1 billion outstanding under the term loan? Is it just, you know, long-term debt, a combination of, you know, debt and equity beyond the $200 million already contemplated in guidance, you know, or, you know, perhaps do you take the strategy that seems to be popular right now and issue, convertible?
Jonathan. What we've said is that we will put permanent financing in place. We have talked about our equity needs for this year, beyond 2023, we haven't exactly defined what that's going to look like. Of course, that will be something that we will do later in the year.
Okay. All right, great. Thank you for taking my questions.
Thank you.
Thank you.
Have a great weekend.
Our next question will come from Anthony Crowdell with Mizuho. Please go ahead.
Hey, good morning. Thanks for the update on World Bartender Day today. I really appreciate it.
You're welcome. Just tip well, Anthony. I know you will.
Absolutely. I just have one quick one, and I apologize if you've already addressed it. It's on slide 13, kind of where Jonathan was headed. You mentioned non-merger scenario, potentially for $200 million of equity. What if, and it may be just splitting too many hairs here, but what if the merger, the approval process is still going on by the time we get to end of 2023? Would the company still do the equity or that's equity needed only if the deal was voted down? I also appreciate if you don't want to discuss it because the deal is still pending.
We really can't answer that one right now because it requires a whole bunch of discussions with the board and AVANGRID, whether the appeal is still going on. We'll update you on that one next time when we have some more clarity.
Perfect. Thanks so much. I'll go to the bartender now. Thanks.
Okay.
Again, if you have a question, you may press star then one to join the queue. Our next question here will come from Tim Winter with Gabelli Funds. Please go ahead.
Good morning and congrats on a good year.
Thank you. Good morning, Tim.
I was just hoping for some more clarification on the interplay of the merger application between the Supreme Court and the Commission. what I understand is you would need to pull the appeal with the Supreme Court to get the Commission moving on your merger application. The second part of that would be what if the Supreme Court remanded it back to the Commission, let's just say today. What would be the next process? Finally, with one commissioner recusing himself, do you need both of them to approve it, or how does that work?
I'll start with the last. Yes, you need with one commissioner recusing himself, you need 2 of the 2. If you get 1 and 1, it's a tie and it fails. That's one thing. Next question is the Supreme Court remanding it back today. They haven't held arguments, they haven't briefed, they haven't done anything. The odds of that happening are, counsel's looking at me, none. I shouldn't say none. Slim to none. But what we would need to do is before the Commission can consider it again, it's now in the Supreme Court, we would have to ask with the Commission for it to come back, and the Supreme Court would have to consider that case.
We would need both parties, or I should say all parties to ask for it back from the Court.
Okay, that wouldn't just be your decision. It's more than that.
Yeah. Correct. It is more than that.
Okay. Okay. Okay. Do you have any, you know, any thoughts on, you know, extending the merger agreement or how long this is gonna play out?
You know, no, Tim, we're just gonna wait. Like I said, the board will consider everything in due course. There's really no reason for them to think about it now because it's only in February. We'll see what happens between now and then. They will, they'll decide then.
Okay, thank you.
You're welcome.
This concludes our question and answer session. I'd like to turn the conference back over to Pat Vincent-Collawn for any closing remarks.
Thank you, Joe. Again, thank you all for joining us this morning. As I've said multiple times, tip your bartender well, and please take a taxi home. Stay safe.
The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.