Good day, and welcome to the PNM Resources First Quarter 2020 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Lisa Goodman. Please go ahead.

Thank you, Jason, and thank you everyone for joining us this morning for the PNM Resources First Quarter 2020 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, Executive Vice President of Corporate Development and Finance; and Don Tarry, our Senior Vice President and Chief Financial Officer. Before I turn the call over to Pat, I need to remind you that some of the information provided this morning should be considered forward-looking statements pursuant to the Private Securities Litigation Reform Act of 1995. We caution you that all of the forward-looking statements are based upon current expectations and estimates and 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.

Thank you, Lisa. Good morning everyone, and thank you for joining us today. Our socially distance skeleton crew today the tier is safe and healthy, and we sincerely hope that that is the case for you, your teams and your loved ones. I know, it's unusual for me to start on such a serious note, but these are certainly unusual times. One thing, I've been told is that it helps to get some normalcy to hold on to any sense of routine. So in that spirit, we're holding our previously scheduled earnings call today, even though we provided our earnings results earlier this month to provide transparency on COVID-19 impacts in the first quarter. Today is May 1st, which is obviously May Day, but I've also prepared a list of things that might help you out if you're continuing to stay at home in May. I know a lot of you have been cooking some more, so I have some menu planning options for you. May is National Barbecue month, National Egg month, Hamburger month, Salad month, Salsa month and Strawberry month. If I were you, I'd spread it out and not try all those things in one meal. So that is about the only thing that's going to be similar to our usual earnings call this morning. Nothing has changed in the earnings results that we reported on April 13. Our typical earnings slides are in the appendix, but we aren't planning to cover those today. You can reach out to Lisa with any questions. I know she enjoys hearing from you all. Instead today, we will provide you with an update on the COVID-19 impacts that, we've seen across our service territory, what we're doing to help manage those impacts for our customers, our communities and our company…

Thank you, Pat and good morning, everyone. I'll get started on slide 8 with a reminder of the scenario analysis that we introduced back in March. We're looking at COVID-19 through three different stages based on how long the environment lasts and the level of impacts that we're seeing. So starting with stage one is where we currently are. We certainly see some changes in load patterns across our customer class as stay-at-home orders and other restrictions are in place. We're not experiencing any significant workforce disruptions due to absenteeism nor any disruptions in our supply chain needed to keep our projects plans in place. In stage two, we analyze the business under the assumption that the impacts of stage one continue to trend into the summer months of June and July, when the largest portion of our earnings are generated by higher customer usage and also seasonal rates in New Mexico. And of course in stage three, we assume that after strict state restrictions are lifted the economy does not return to a normal level and we are left with very slow recovery resulting in reduced usage across both our utilities. In this stage, we believe that we could also see changes in our capital plans stemming from disruptions to our supply chain. Now let's turn to slide 10. In March, we provided transparency into scenario analysis. In mid-April, we came out early with our Q1 results and March load trends associated with COVID-19. Now that we're ending April, our first full month under COVID-19 restrictions, we're providing you with more recent trends and updates in our analysis. We are lined up with some virtual investor conferences in early June so expect to be back in another month with the continued updates into what we are seeing in our…

Thanks, Chuck and good morning, everyone. I'll pick up on Slide 14, with a discussion on how we are thinking about earnings guidance for this year. We are affirming our guidance range of $2.16 to $2.26 per share based on the current state guidelines and the COVID-19 stage one impacts that we have assumed. On the left-hand side, you will see the monthly EPS impacts that we expect for changes in load from COVID-19. While we started to see some offsetting trends in how our different customer classes use energy in March, the net impacts only reflect part of the month and were not significant to first quarter earnings. April was the first full month under the stay-at-home orders in New Mexico and Texas. And we begin to see a better picture of low trends. At PNM, overall load is coming in lower while at TNMP we are seeing increase in volumetric load that largely offsets decreases from demand-based customers. Based on these trends, we would expect to see a $0.04 impact over April and May. On the right-hand side you can see some of the offsetting impacts that give us some comfort within the guidance range at this stage. We've been able to take advantage of lower interest rates in the market and overall reduced financing costs. We also had a relatively normal weather in the first quarter and we have begun to experience some warmer days in both New Mexico and Texas in April, which will also help to offset the load impacts. We've been able to hold our O&M costs flat through this period and built contingency plans to work from as we move throughout the year. As we think about moving into Stage two, the expected EPS impact for load are bigger because customers use more…

Thanks Don. Before I open it up for questions, I want to again thank all of our team members here at PNM Resources, PNM and TNMP for the resilience and dedication that they have shown through all of us. There will be brighter days ahead and we'll get through all of these challenges and come out even stronger. There will certainly be some lasting impacts and changes to the way we work, but eventually we will return to our offices, stores, restaurants and bars. So, Jason, let's open it up for questions.

Thank you. [Operator Instructions] The first question comes from Julien Dumoulin-Smith of Bank of America. Please go ahead.

Hi. Good morning team. I hope you are all doing well.

Good morning, Julien. Hopefully you are too.

Thank you. Indeed. So if I can start out what's the history of the Commission with respect to decoupling? Can you give us a little bit of context as to the background for filing for decoupling at present? And then subsequently kind of from the same line how do you think about this fitting into a wider eventual rate case there as been well?

Yes. And Julien, I'll give you a little history here and then I'll let Don talk about decoupling. When the Efficient Use of Energy Act was passed and then amended, it called for the use of decoupling to help encourage us to promote energy efficiency and conservation and it actually had language in there specifically saying that we couldn't have an ROE deduct for that. And so that's the basis on which we're looking at it. And we've talked about decoupling before with the Commission, but we've never really had with staff. We've never really had any evidence of load loss, because there was a little bit after the financial crisis and then we grew again. And now we have the situation. Staff had always said well let's see some load loss. So it's kind of the background of it. And the gas company has a modified decoupling here. So they do have experience with it. So, we have Don sort of talk to you about how this fits in with a wider rate filing.

Yes. Good morning, Julien. We're still in the process of developing a filing as we talked about and we will file that at the end of May. But to give you kind of a little bit of an example, I mean, as Pat alluded the legislation does provide that the Commission not reduce ROE for decoupling which is a good thing. To kind of give you a feel of impact as this flows through and kind of give you an example, we would seek approval to happen by January 1. If you've kind of think a little bit about the rate case, that approval would have happened and rates would have gone into effect the midyear of 2021. And a little bit of feeling of how it work is, if you look back at our 2015 rate case, which was our last fully litigated cost of service, we've seen a decrease in our use per customer on the residential front from there to now of about 4% to 5%. And this is driven by energy efficiency and rooftop solar. So if you kind of try to get a model or mindset to this and you kind of look at that decline, that would be about a $2 to $3 impact per our month per our residential customers. And so if you take our 470,000 customers you'd look at a range of decoupling in the range of about $11 million to $17 million just looking at how that shifted due to use per customer since 2015.

Got it. If I can follow-up a little bit, how do you think about this? You've always pretty been very thoughtful and a leader in providing disclosure across the industry frankly. But how do you think about decoupling in 2021 relative to the different stages that you could see a load loss in 2020 here, i.e. to what extent would that help roll back some of the more acute impacts that you could see in 2020 and limit them from being ongoing impact? How would you frame that if you will given the time line for limitation next year? And some great impact.

I think Julien, and if I don't answer your question please let me know is that, obviously, the decoupling in 2021 doesn't do anything for us in 2020 and we will work to manage if we have impacts in terms of O&M cuts. I can tell you Chuck is doing his part. His expense report for April was only $36.99. So we are set for the rest of the year in cost reductions. But it would allow us to keep investing as we go forward and to keep our capital plans up and recover what we are putting in our system just, because of the way that fixed and variable costs are set as Don said. And we are still seeing a fair amount of construction here. So we will still have new customers coming online but it will protect us against that what I think is a permanent decrease in use per customer that started long before COVID-19 just given stronger buildings and codes and better appliances and energy efficiency programs. Is that what you're looking for?

Yes. I mean, some level of confidence on earned returns in 2021 as well. The converse of that right? So as bad as it could get in 2020 Stage II, Stage III, you could see some of that roll back in 2021 based on these new rates under a decoupling mechanism potentially. Again the exact details pending.

Yeah. And Julien, kind of, walk through a little bit on earned returns and EPS. We haven't come up with guidance or came out with guidance for 2021 yet. We usually do that in December. But again as you think of the frame of reference, you would think if decoupling is approved and goes into place in January, the rate case would have came in, in midyear. There's some benefits as you look at the timing of those elements associated with it, so…

Got it. Super quick last question if I can. There's, obviously, been a lot of noise about your replacement power dockets pending. What's your confidence as it stands right now that say by October, we get clarity about your ownership piece in whatever is to be done? And I'll leave it as broadly as that.

Okay. Julien, we're very confident about getting that decision. One could argue for looking at the portfolio as a whole, which is what the commissioners decided they wanted to do or pulling those two PPAs out. But from where we sit a PNM perspective, looking at it as a whole makes a lot of sense. The hearing examiners have talked about having that second piece out in June, which -- but now that will also include those PPAs. And that gives the commission plenty of time to take a look at that portfolio. And one of the things that we were pleased about in the commission's discussion, is that they were talking about potentially reopening and rebidding the case and that would have harmed our ability to get those replacement power in on time. And they decided not to do that. And so we think that is a very good sign that they're going to look at the portfolio or the different portfolios that we have submitted as we submitted multiple portfolios and decide on one of those in the appropriate time frame. I think they just wanted to look at the whole picture at one point in time as opposed to bifurcating it.

Excellent. Thank you.

Thank you, Julien.

The next question comes from Durgesh Chopra from Evercore ISI. Please go ahead.

Hey, good morning team. I want to compliment you the detail on TNMP is just super. Thanks for putting that out there. Can I just ask you and I appreciate the peak charge and minimal impact to revenue, but in terms of just the demand trends, can you quantify what are you seeing in terms of demand drag or demand destruction in West Texas and the Gulf Coast areas?

Sure, and good morning Durgesh. I'll have Don take that one for you.

Yeah. So our demand categories in West Texas are large demand customers. We call them our primary customers and we've seen no demand decreases there. In fact they're continuing to produce well and load continues to go up. Our demand continues to go up in those. It's really been those small commercial type demand customers and that's been in that range that we quantified at about 5%. That's being offset by factors associated with -- on the residential side. So we've seen a pretty direct offset between the residential and the smaller demand.

And I think ERCOT set a record peak this last week.

Got it. Thank you. And then maybe, can I ask you in terms of, obviously, if you get into Stages II or III here and it looks like the rate case might get delayed. How are you thinking about the impacts on your credit metrics? And if you've had any conversations with the credit agencies, would love any color from those conversations.

Yeah, Durgesh we're not filing the rate case. We're moving to the decoupling mechanism that we've talked a little bit about. We have ongoing discussions with the rating agencies and walk them through our financial metrics. We just completed a significant amount of financings that lifted our liquidity or positions us well that Chuck alluded to on our liquidity. So we're in good shape from that perspective.

Okay. Thanks guys. That’s all I had. Thank you.

Thank you.

The next question comes from Paul Fremont from Mizuho. Please go ahead.

Good morning, Paul.

Morning. During the NMPRC, sort of, deliberation on your bifurcation request, I mean, it sounded like they were giving more weight to the Energy Transition Act requirement that replacement resources be built in the San Juan District. So if we, sort of, rule out the gasified coal as being really expensive, really environmentally unfriendly and also not necessarily financeable, wouldn't that imply the only alternative that would fit that scenario would be your Scenario 2, which is to build essentially all gas? So wouldn't the alternative potentially result in more rate base and more investment for the company?

So Paul I think from their discussion, it sounded like they were describing a scenario I would say similar to Scenario 2. There could be some tweaks on it and maybe a little more solar up there. But, yes, I think our take of the discussion is that they were putting more weight while the Energy Transition Act's up to, and that there's a preference for I think what I heard the three commissioners expressing was a strong preference for.

Okay. And then, assuming that the modified WRA proposal were to be adopted, what would be the effect on your capital spend and also sort of on your rate base?

The modified WRA proposal that has more gas and some more solar, Don?

Yeah. So, I think it -- modified proposal decreases a couple of units of LM6000s. So I think the way to think about those LM6000s is there are about 25 million per LM6000 related to that. So I mean that would kind of be the balance. You'd see the adjustment. As Chuck alluded to, that we always balance customer rates with additional transmission and distribution projects that we could -- we can align as well to fill the gap associated with that that they're there ready to go.

And then, I guess the last question is sort of confusing with earnings power charts that the sort of the distribution of the numbers and the numbers keep changing from quarter-to-quarter. Can you sort of discuss that at all? Like in 2022, it looks like the numbers are down a little bit. The relationship between corporate and the financing are completely different than the chart that you put out sort of at the fourth quarter.

Paul, maybe -- this is Chuck. It might be better just to talk at least...

Take that off-line? That's fine.

Yeah. Because it's -- we're reconciling some numbers, and that we want to be sure we're clear on what you're looking at and how we can get to an understanding. So let's just take that off-line. And then if there's anything...

No problem, no problem.

Appreciate. Okay. And also I want to add too that in scenario two, you talked about the rate base piece of it just checking the numbers here. It does have the all-gas scenario 440 megawatts of gas versus the combination of gas and battery storage. The scenario one that we recommended is a $298 million rate base add and then the all-gas in one location of 440 megawatts of gas is $304 million. So it's still very close, because the battery storage costs are higher. So I think it doesn't have a whole lot of difference in the standpoint of rate base. I don't want to give any perspectives that they had a rate base is going to be that significant if they go down that path.

Got it. Okay. Thank you.

Thanks Paul. Lisa needs the company. So give her a call.

Okay.

The next question comes from Jonathan Reeder from Wells Fargo. Please go ahead.

Hey, all. Most of my have been answered, but I just wanted to clarify a couple of things. Are the monthly impacts in the Stage 2 and three on slide 14, is that an assumption of full stay-at-home order?

Jon, can you -- it's Pat. Good morning. You broke up kind of on the last part. Would you repeat your last sentence?

Yes. I just wanted to -- full stay-at-home order in the Stage 2 and 3 monthly impacts on slide 14?

Sure. So you're asking if the full stay-at-home orders are in scenarios two and three.

In scenarios two and three, yeah, the sensitivity slide 14. Is that assuming a full stay-at-home order?

Jonathan, good morning. For stage two, it would assume a full stay-at-home order and stage three would assume that we go more into a recession mode and businesses are slow to open all the way through the end of the year.

And stage three also kind of envisions a second wave. I mean we all know I think we're going to have a little bit of an uptick in cases when it opens but stage three would envision the fact that it's a significant uptick in cases.

Okay. Yeah. So I mean obviously now with Texas doing a partial reopening and New Mexico talking about it, it seems like you're kind of ahead of anything contemplated in like a stage two scenario?

Yeah. And I think the Governor here is doing a slow reopening. She's reopening the greater parts of the state faster. Unfortunately, a concentration of the cases here in New Mexico are in the Northwest corner where the nation and some of the pueblos and the tribe is. And I think as Don mentioned, we've still been doing construction here. And when I go out for a drive, there's a lot of construction going on here. So I think when we open again and people can move into those spaces, it will be very helpful for us. So...

Okay. And then, the other thing just the modified load impact assumption relative to the original expectations, essentially the higher commercial reductions in New Mexico essentially being offset by the Texas land-based load not being down as much. I mean it kind of sounds like those two almost trade-off from what you're originally thinking.

Yeah. So Texas came down aligned on the residential side in Texas. So we see almost a direct offset in Texas between residential and commercial. On the PNM side, on the New Mexico side, we did see an increase of about 5% up to 15%, total 15% on the small commercial and commercial sector. And our residential state is at 5% in New Mexico. That's what we're seeing in April.

Okay. But the net-net impact to like consolidated PNM. It's a little bit of a headwind overall, but not much?

Yes. It's aligned with the numbers that we have on 14 Jonathan. So...

Yeah. Okay. All right. Great. Thanks so for the additional data. I appreciate it.

Thanks, Jonathan.

[Operator Instructions] The next question comes from Paul Patterson from Glenrock Associates. Please go ahead.

Hey, good morning.

Good morning, Paul.

So, just, I wanted to follow up on Paul Fremont's questions with respect to CapEx. Just on the -- how much of this might be economically sensitive, I guess? And how do you see the economy being impacted? I know its early days and it's unprecedented, so I take it with a grain of salt, but just sort of a sense as to what you guys are feeling there on the ground in terms of the economic outlook. And just, if you could, sort of, remind us sort of what the sensitivity CapEx might be -- that might be economically sensitive, if you follow me.

Yes. And, Paul, our CapEx really isn't economically sensitive. The replacement power is mostly for the nice flexible resources, the renewable resources and the stuff that replaces San Juan. And the day San Juan goes out of rate base and the new resources coming in, customers see a decrease in the bills, because we're securitizing San Juan. Our construction here in New Mexico is for new customers and there is still economic development going on out here. There's some projects that have started that just haven't been announced. And replacing of aging infrastructure here and building some of that transmission. And in Texas, as Don said, most of our capital there is because of ERCOT and its reliability. The last time I was out in -- for this, I started with the Commission in Texas, they encourage us to keep building and doing that because they want to make sure that when customers come, they've got it ready. And then as Don said, a lot of it in West Texas is folks that want to electrify. So it's really not sensitive to the economy.

Okay, great. And then, with respect to -- I know you guys are looking for deferrals and everything, but with respect to like your experience so far on sort of re-urgence and stuff, could you give us a little bit of a flavor with respect to customer -- which is for the commercial and residential deal-paying activities so far?

Yes. So, I mean, we're no disconnect at this point in New Mexico. Again, you alluded to it and we talked about it. We filed with the Commission with all the other utilities, the publicly held utilities in the state, to be able to defer those costs as well as other costs associated with it. And listening to the Commission hearing, they seem very receptive to that because what that allows is flexible payment arrangements as we work with customers. And our customer service group is outreaching on a daily basis to align folks up with payments. We have seen an increase in our -- in the utility we break it down to 30, 60, 90 and you don't write off until 120, because you have the ability to turn off. And a lot of times folks will pay during that window. So we have seen an increase associated with that, which we expected. And it's in line with our assumptions that we've been monitoring. And we've talked a little bit about, if it goes to stage one and stage two, we'd see $0.01 impact for stage one and another $0.01 impact for stage two. So that kind of gives you a feel of how we're monitoring and working through the bad debt.

So just in general, how many like residential customers or what percentage would you say have now -- are not paying their bills that were as opposed to what the normal rate would be? Can you give us a flavor for that?

I don't have that number on me. We've seen it go up and my guess would be 5% or 6% would be the kind of the range that we would see. And again, I mean, the good thing about working in the utility and why utilities have such low bad debt is, they'll eventually -- once we're able to migrate into being able to disconnect, folks will get it working towards making payment arrangements and make their payments. And, historically, in New Mexico we've had very low bad debt. To give you a feel our bad debt ranges every year in total about $3 million, which is about 0.3% of our total revenues. And that's because you have the ability to be able to work with the customers. Eventually, they will pay as you move to disconnect.

And, Paul, the Commission discussion around the tracker and setting it up as a regulatory asset was very positive, because I think the Commission sees that not only is strengthening the utilities' financing, but giving us even more flexibility to work with our customers. So it was -- while they haven't acted yet, it was a very good discussion.

Great. Good to hear. Thanks so much.

Thank you.

There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Pat Vincent-Collawn for any closing remarks.

Thank you, Jason, and thank you all again for joining us this morning. Please stay healthy and safe and we look forward to the time when we can see you all in person again. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.