PNM Resources, Inc.
Q3 2017 Earnings Call Transcript

Published: 27 Oct 2017

[Operator:]

Good morning, and welcome to the PNM Resources Third Quarter 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 Jimmie Blotter, Director of Investor Relations. Please go ahead.

[Jimmie Blotter:]

Thank you, Anita. And thank everyone for joining us this morning for the PNM Resources third quarter 2017 earnings 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 and Chuck Eldred, our Executive Vice President and Chief Financial Officer, as well as several other members of our executive management team. Before I turn the call over to Pat, I need to remind you that some of the information provided this morning should be considered forward-looking statements pursuant to the private securities litigation Reform Act of 1995. We caution you that all of the forward-looking statements are based upon current expectations and estimates, and that PNM Resources assumes no obligation to update this information. For a detailed discussion of factors affecting PNM Resources' results, please refer to our current and future Annual Reports on Form 10-K, quarterly reports on Form 10-Q, as well as reports on Form 8-K filed with the SEC. And with that, I will turn the call over to Pat.

[Pat Vincent-Collawn:]

Thank you, Jimmie. Good morning everyone and thank you for joining us today. As you all know it's nearly Halloween, which of course means that we've got some costume action going on for today's call. But I'm not going to tell you what our costumes are. However, throughout our prepared remarks we may have put in a few hints, got it. Okay. But if you guess correctly, you're going to have to visit us at the EEI. Let's begin on slide four with the financial results. Earnings for the third quarter of 2017 were $0.92 on a GAAP basis and $0.93 on an ongoing basis. These numbers represented an increase over the third quarter of 2016 primarily because of higher retail rates implemented last year at PNM to pay for our improvement in system. All right check in to the details of these results and our expectations for the full year in a few minutes. First, let's turn to slide five to walk through the details of our current regulatory agenda. In PNMs current generate rate case hearings on the settlement were completed in August and we're awaiting to the hearing examiners recommended decision. The current suspension period in this case is January 6, 2018, which means new rates could be effective as early as January. However, keep in mind that the commission hold these suspension period by two months earlier this year. That maintains their ability to extend the suspension period by two additional months, which could delay the implementation of new rates to March of 2018. We would expect to see a recommended decision from the hearing examiner in this case sometime in the coming weeks and the case then goes to the commission. Moving next to PNM's 2017 integrated resource plan that was filed in July, as was expected a number of parties filed protest to the player. The concerns expressed by parties range from the regional economic impact of the proposed shutdown of the San Juan generating station to the RFP process for replacement power resources. The hearing examiner in the case has required parties to file breach by December 8th and has indicated that she will subsequently present in order on the scope at any procedural scheduling. As a reminder PNM's plan presents the most cost-effective resource portfolio for our customers with the 20-year period. This coal free generation portfolio is based on the full closure of the San Juan generating station after the current coal apply and participation agreement expire in 2022 and an exit from participation in the four corners generating station when it's current coal supply agreement expires in 2031. Keep in mind that the IRP process does not involve the commission approval of the plan. Therefore in additions or retirement of generation resources would require commission approval to a separate filing. As a part of our BART settlement approved in December of 2015, PNM is still required to make a filing with the commission on the future of San Juan generating station by the end of 2018. In our proceeding to implement smart meters in New Mexico, hearings and the required supplemental filing were held earlier this week. The next step in this case is recommended decision by the hearing examiner and then we expect in order to comp before the commission sometime in the first quarter of 2018. Our case shows that the adoption of this technology provides a net financial benefit to customers and as we've seen in Texas, provides opportunities to increase system for liability. In the PNM renewable plans, filed in June of this year, hearings were completed in September, and we've received a hearing examiner's recommended decision earlier this month. As you know, this year's annual filings, identified resources that are required to meet New Mexico's 20% by 2020 renewable portfolio standard. The filing included 50 megawatts of utility owned solar, and the repowering of the New Mexico Wind Energy Center, where we currently have a PPA in place. In the recommended decision, the hearing examiner approved the wind repowering, but rejected the 50MegaWatts solar proposal on the grounds that our RFT process with unfair and uncompetitive. Because the proposal utilized PNM controlled sites, she recommended that the RFP process should start over and provide all bidder access to this same site including PPA bidders. We strongly disagree with this recommendation, as that would amount to an unlawful taking of our property. PNM has the right to self-build projects, and if there is a cost our performance advantage because of our site, this was obtained by risking shareholder capital. The recommendation to restart the RFPs, calls for a 90-day process, dimming our previous time period insufficient. Not only with our 31-day process consistent, with recent RFPs by other utilities, there is no evidence that a 90-day process would result in more bids than we've already received. The hearing examiner also recommended the disapproval of our proposal to amend our existing PPA for geothermal power. The amendment would reduce the price at escalation factors, in addition to extending the contract term. This PPA is necessary to meet the diversity of requirements of the renewable portfolio standard. We also disagreed with this recommendation. We will file our exceptions this afternoon, and responses to the exception are due by November 6th. We've asked the commission to allow us to present oral arguments in support of our exceptions. After that, the next step is for a draft order to be presented for consideration by the commission. A final order must be issued not later than November 28. We're hopeful that the commission will carefully consider our proposal as it provides benefits beyond the inclusion of solar, at the lowest cost, we've ever proposed. Our practice of developing sites, or PNM owned turnkey projects, benefits small local developers that do not have the financial ability to acquire and develop size. Our utilization of the five separate 10 megawatts sites in New Mexico, not only supports the local economy, but increases the operational performance of the panels. It's less likely clouds would cover all five sites at the same time. The geothermal operation, also supports the local economy with this location in Southwest New Mexico. While production from the facility is currently small, the owners intend to invest about $50 million to re-input the facility and substantially increase its output. But the facility serves as a great opportunity to support the advancement of geothermal technology, a promising resource of New Mexico without having customers, their operational risks. In the docket, opened by the New Mexico commission with the intension to simplify, and increase the transparency of rate cases. On initial workshop was held in September to discuss the party's positions on the solutions proposed in the docket, such as a standardized ROE methodology. As was evidence in the previously filed comments, parties do not necessarily agree on the proposed items, but continue to express a strong desire to move forward. Additional workshops have been scheduled for November 6th and November 7th. After the workshops are completed, it will be up to the commission to determine the next appropriate steps. In the Supreme Court appeal of certain items from an August 2015, general rate case, the court ruled in our favor on our request for oral arguments prior to renewing in decision. These oral arguments are scheduled from Monday, October 30. There is no statutory timeframe for the Supreme Court to rule on this case, and we do not expect a decision immediately after oral arguments. In addition, remember that any modification to the commission or regular decisions will be sent back to the commission before being implemented in rates. Now switching to TNMP, our second TCOS filing of the year was approved and implement in mid-September for an annual $4.7 million increase to rates. This reflects recovery of transmission investments add at a rate base through June of 2017. We plan to capture additional transmission investments made through year-end 2017 in one TCOS filing in early 2018 and that will be prior to the fillings of our general rate case. We are still on track to file the general rate case at TNMP in May of 2018 with the 2017 calendar year test period. Rates would then be expected to become effective during January of 2019. Remember that once we filed the general rate case in May, we are not able to make any additional TCOS fillings until the next general rate case, excuse me until the general rate case is resolved, so you won't see our typical second filling next year. With that, I'd like to turn it over to Rocket man Eldred for a detailed look at the numbers.

[Charles Eldred:]

Thank you, Pat and good morning, everyone. Let me start with walking you through the details of our quarterly results, provide some information on guidance and introduce our new capital forecast. Beginning on slide seven, as Pat indicted we had a strong quarter with ongoing earnings per share of $0.93 compared to $0.78 in quarter three of 2016. PNM was up $0.17, TNMP was flat and corporate another was $0.02. Moving to slide eight for the low details, on a year-to-date basis we are still tracking for load to be near the middle of PNMs guidance range. Overall, we see economic conditions in Albuquerque remain relatively stable. The Albuquerque metro area shows positive employment growth, but the rate contain is to be lower than the national average. We also see year-to-date customer growth at 0.7%. However any growth in the economy is been offset primarily bio successful energy efficiency programs as well as the presence of private solar systems this combination leads us to believe that we will stay with our guidance range for low growth in 2017 a flat to down 1%. At TNMP any volume metric revenue impacts from Hurricane Harvey have largely been offset by the strength of the economy. We continue to see businesses expand and people move in our service territory, resulted in customer growth of 1.3% for the quarter. As a result, load is tracking toward the upper the end of the guidance range for 2017. When we review the capital forecasts you will see that the economic growth support additional capital investments at TNMP. Now turning to slide nine for earnings drivers, at TNM $0.11 of the increase is related to the impact of the rate relief that was implemented on October the 1 of last year. Higher revenues under deferred transmission formula rates updated in June of each year and new third-party transmission contracts increased earnings by the quarter by $0.03 and year-to-date by $0.06. When we release guidance we had expected a $0.04 to $0.06 increase in guidance for the full year of 2017 related new third-party contracts. We are on track to exceed our expectations for transmission by a couple of facts. The cost savings that we implemented last year to align our business with the revenue we recovered in our last rate case contributed to $0.02 reduction in expenses compared with the third quarter of last year. If you look further down the list increases, you can see the impact of labor escalations and other general expenses going up. This results in a reduction to earnings of $0.03. Together these two-item result and O&M being $0.01 higher than the third quarter of last year. AFUDC increased earnings by $0.02 in the quarter compared to last year, while warmer summer temperatures and the hedged market price Palo Verde Unit 3 sales each increased earnings by a $0.01. Palo Verde Nuclear decommissioning trust gains continue to show the benefits of a strong stock market and increased earnings. Third quarter of $0.01 higher than third quarter of the last year and on a year-to-date basis we are up $0.02. Guidance for the year was for the NDT to be $0.05 lower than last year. while our NDT gains year-to-date have been coming better than originally expected, we do not expect fourth quarter to be as strong as it was last year. If you recall last year following, President Trump's election, the market showed significant improvement by year end and we were able to capture some of these games. We assumed that we will not have another significant catalyst like this before the end of the year. PNM has also benefit from interest expense savings that we expected in guidance as result of interest rate reductions related to boundary financings that occurred both last year and this year. As a result earnings increased by a $0.01. Load, which I've already discussed was that one penny compared to Q3 of 2016. The combination of depreciation and property tax expense increased $0.01 due to the continued investments in our system. The Navopache FERC generation contract was also $0.01 lower than Q3 of 2016 as expected. And moving to TNMP, EPS was $0.02 higher as a result of the increases in load that I discussed earlier. It's important to recognize an ambition to the strengthening economy about half of our load is represented by demand based customers. Consequently, this portion of the load was not significantly impacted by Hurricane Harvey. Rate relief from TCOS filings added another $0.01. Milder temperatures during the quarter reduced earnings by a $0.01. Depreciation and property tax expense reduced earnings by $0.01 as a result of the continued transmission and distribution investments supporting the growing load in our service territory. Finally, our corporate and other, we had $0.01 of additional interest expense this year at the holding company related primarily to rising short-term interest rates. As I mentioned last quarter, we have entered into a hedging agreement this year that fix the interest rate for portion of our floating rate debt limiting the future exposure to rising rates. Now turning to slide eleven, we are affirming our guidance range for 2017. Although, as we have discussed last quarter, we do expect to come in at the top of the range. As I mentioned earlier, transmission has been stronger than expected this year. NDT has benefited from the market conditions of the first nine months of the year, but we don't expect a strong of the performance in the fourth quarter as we saw at the end of the last year. We have needs for additional O&M spending of the fourth quarter focusing on areas like vegetation management and substation maintenance as well as on programs and improved customer service. During this year, the PNM resources foundation has been an integral part of our story. From Centennial grants to celebrate PNM's first 100 years to disaster relief to support those in Texas impacted by Hurricane Harvey, including our own employees. To make sure the foundation remains strong for the next 100 years, we expect to make an additional donation in fourth quarter. As a result, all these items we expect to come in at the top of the range for 2017. In December, we will issue guidance for 2018 and 2019 as well as an updated view of potential earnings power through 2021. Please save the date, as we're going to host the guidance leading at the New York Stock Exchange on December 8th. We also provide conference call on webcast access, if you're not able to join the meeting in person and will be sending invitations for the meeting next week. As a reminder, the board will also review the dividend in December and will announce their decision following the board meeting on December 1. Now turning to slide 12, today we're providing an updated capital forecast that results in a targeted consolidated 2017 to 2021 rate base compound, annual growth rate of 4.5% to 5.5%. The growth includes capital spending in the addition of Palo Verde unit 3 to rate base. The high end of the range assumes positive outcomes at the Supreme Court for the items under appeal from the 2015 rate case and the approval of the New Mexico commission of the AMI. From high level perspective we're confident that the strong growth in Texas is sustainable and supports a significant capital investment. PNM although the loan growth is lower, the capital allocation is focused on improving our system management as our generation portfolio evolves to producing clearing energy, going out our transmission network and overall reliability. It again where it looks like [indiscernible] capital forecast. The increase in investment brings there compound annual rate base growth up to 11.4% from 2017 to 2021. As I've already shared with you, the strong growth continues as a result we're allocating more capital to this business. Although, our service territory has spread throughout the state, we're fortunate to have growth forecast in all the areas that we serve. In West Texas, we have had 13 new large customer interconnection requests, resulting in a significant increase expected next year in that business. The Dallas-Fort Worth area continues to grow, with various companies relocate in their corporate headquarters, especially to the northern part of the area. This growth is affecting our service territory as the demand for housing and commercial businesses continues to increase. And in the Gulf course region, we continue to expect increases in low, due to new residential construction in industrial customer facility expansion projects. At PNM, the ongoing core T&D capital investments are projects that will accommodate growth, customer growth and strength of our system, by replacing aging infrastructure and modernizing equipment. These additional will maintain reliability and allow for increased visibility, greatest security and more robust data analytics, which should result in faster in more automated restorations of our systems. We also expect to have some sizable transmission expansion projects, that would be serving new third-party renewable development customers, more transmitting power to California. Overall, system benefits to customers in New Mexico. At PNM, we've added a new category of capital, which is been getting in 2021 and ramping up significantly in 2022, to track the investors that we expect to make as we proceed with our plans to become coal free. The San Juan replacement power shown on this slide is for flexible gas units to support the growing percentage of renewables that are on our systems. However, there is much more work to be done as we go through. The process to receive regulatory approval for San Juan, and identify the specific assets that will be used for replacements. We expect additional RFP, a later today for replacement resources. It will take us until next summer to analyze the proposal. We expect to refine our capital forecast for the replacement power following the outcome at the RFP, including the potential to use introduce storage in our resource portfolio. Finally, we've included the 50 megawatts of solar in 2018 and 2019, that were included in our renewable plant filing. These were resources are necessary in order to meet the states 20% by 2020 renewable portfolio standard. Pat described the hearing examiner's recommendation in this case. It's important to note that some of our environmental interveners also support their position in this testimony. We strongly disagree with recommendation and we're asking the commission to approve the project. There is customer value and justify benefit in the utility owning the solar system and particularly having a constructed by a local solar company. This permits us to provide the most energy at the lowest cost. Consequently, we've included the spend in the capital plans. I will note that our capital forecast does not include any dollars for AMI. If AMI is approved, approximately 95 million will be added to the forecast in 2018 to 2019. In addition, if you recall, we were permitted in our last rate filing to begin collecting higher depreciation rates. This allow us to - the cash recovery of our system investments and continue funding our growth. Overall, the rate base CAGR at PNM is expected to be 2% to 4% through 2021. Keep in mind, that some of the rate base growth comes from the 2018 addition of our interest in Palo Verde unit 3 to rate base. As we've already owned these assets there will be no cash required to funded. Dedicating Palo Verde 3, to the jurisdiction, further supports the clean energy transformation that we're undergoing, delivering consistently available carbon free energy to our customers in addition, it is earnings accretive. As a result, we're targeting 6% on going earnings growth from 2017 to 2021, using 2016 as the base year. In addition, we expect to provide the dividend growth over the same timeframe that is in line to slightly above the earnings growth. We will discuss this further, when we issue guidance in December. Turning to slide 13, I'll wrap up with the brief discussion on liquidity in upcoming debt refinancing. We continue to have strong liquidity available to us with managing the upcoming debt maturities. For sometimes now, our key objectives are including keeping appropriate credit metrics and maintaining solid investment ratings. So, it will be important for us to take a measured approach to fund the strong capital program that we laid out. As a result, we plan the use an aftermarket program beginning in 2020 providing the flexible, efficient and low-cost weight to issue equity as needed to balance cash structure. Overall, we are in good position to target 6% ongoing earnings growth through 2021, and fund the expenditures that are needed to transform our generation portfolio at PNM. Support the growth at the TNPM while maintaining solid investments grade ratings. We continue to be committed to no equity issuance through 2019. We look forward to connecting with many at EEI and again in December for our financial updates. That concludes my Rocket man comments for today. Thank you for your time and I'll turn it back over to Pat.

[Pat Vincent-Collawn:]

Thanks for those explosive comments, Chuck. Before I wrap up our prepared remarks, I want to share with you the remarkable response from our team after Hurricane Harvey. The incredible preparation and mobilization of our crews allowed us to bring back customers quickly after Harvey's first landfall and that again after heavy rain and severe flooding sidelined efforts and resulted in additional outages. Not only did our TNMP crews provide extraordinary restoration to our own customers and without any safety incidents a turnaround and headed to Florida right afterwards to aide in hurricane on our restoration efforts. The dedication of these crews is truly astonishing. We were also by the generosity of our employees to make donations to assist our employees that were impacted by the storm and donations to the Red-Cross relief efforts. I would like to thank our employees throughout our Texas operations and across the state line in New Mexico for truly serving as living example of our company values. As I discussed earlier, the fourth quarter should bring us recommended decision and commission orders on a couple of PNM's outstanding regulatory items. With EEI in November and our December guidance in New York, we will have opportunities to talk with you about any significant developments. We are looking forward to getting away from all of this fake news and talking about things like the actual tax plans which will be released on November 1st. Thank you again for joining us today. Operator, let's open it up for questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instruction}. The first question today comes from Greg Gordon with Evercore Partners. Please go ahead.

[Greg Gordon:]

Thanks, good morning guys. I am sorry if I am having a little bit of a brain breeze here, but you are pretty clear on what you think the aggregate growth rate and earnings is going to be and I appreciate that but why is the rate base CAGR in the Mexico despite the CapEx increase look likes it gone down 2% to 4% from a higher number prior to this update.

[Charles Eldred:]

Yes, Greg. I think part of this if you go back and if you were to look in the details of the capital for PNM for 2016, we had a number of generation capital investments. One of the peaking unit that we referred to that was like $51 million we had a 40 megawatts solar build and we have the power two leases. So, if you had the total dollars that we had in 2016 will at $206 million. So, that's really pushing up the 2016 number. So, if you were to - and you can slice this any way you want to in different ways, but I guess one way to look at it, if you were to look at 2016 to 2020 you be about 3.6% CAGR, but then if you look at 2017 to 2021 you roughly at a 2.3% and it bounces back up to 3.6% CAGR. So, I think it's really more influence by the numbers that add generations build we had in 2016, that makes a look little bit higher but if you look at where we are investing the money today it is more clearly into the T&D side of business for the next several years on its T&D expansion to support these third parties that are moving generation out to renewable generation out to California. And you can see on the slide, you can see on the PNM generation core that's come down and that begins to reflect us the lack of investing in and the closing San Juan and continued investment in Palo Verde and also a nuclear fuel. So, again, there is different ways to slice it up, we'll work with you on some of that detail, but the bottom-line is I think 2016 in the generation we had invested in that year is probably distorting that a little bit.

[Greg Gordon:]

Great, thank you. Couple of more questions, obviously the spending is gone up at PNP, do you think tremendous growth in taxes that's awesome and the spending is also up in Mexico. Your footnote yield that this $12 million, $59 million and $24 million of AMI spend in a number for 18 to 20 but that doesn't explain the full doubt you will lose at the some of the other things would have cause the increase looking the give us a little bit more detail.

[Charles Eldred:]

And you are referring to PNM again.

[Greg Gordon:]

Yes. PNM - there is no load growths, but the spending is up so just would like a better understanding of why.

[Charles Eldred:]

Yeah, Okay. So I go back to we have got about $167 million from 2017 to 2020 that is what we would referred to has been in transmission system expansion that's really supporting again the third party move in a renewable energy that's being built in the Mexico out the California. There is the lot of capital dollars that are related to good monetization which is about $95 million that's when 2018 to 2022; we have considerable manner in a lower $200 million every place in AG and infrastructure at PNM. So, I think a lot of that is relative to where we are putting our emphasis on the fact we don't have the load growth, but we have the need to invest in reliable generation.

[Greg Gordon:]

Then what's the rate recovery mechanism for the capital that's being used to facilitate exports.

[Charles Eldred:]

Well, we haven't really announced any rare cases; you need to saw as what are our plans are going forward?

[Greg Gordon:]

Yeah, because if that capital being built up of export power to California won't presume that - the New Mexico customers wouldn't pay that.

[Charles Eldred:]

Right, right and so there is an allocation between the sectors, so that's really driven out of the FERC side of the business.

[Pat Vincent-Collawn:]

And we have got formulated rate at FERC, so the FERC part goes on to formulated rates.

[Greg Gordon:]

Perfect, Okay, that explains that. I will move on. You guys have given that great slide on page 16 where you would look at your - you give us the sense of what's your aspirational earnings power could be?

[Charles Eldred:]

Right.

[Greg Gordon:]

Why hasn't that changed, if you have given the significant increase in your capital deployment opportunities? It just shouldn't be higher?

[Charles Eldred:]

Yeah, we haven't updated that, Greg, we really - the first half here is to get you the capital information and then in December when we do guidance we'll update that earnings potential all the way through 2021. So we are working through our plans, working through all the numbers but I am very comfortable targeting 6% earnings growth with additional Palo Verde 3 being added to the rate base. It brings you a little bit higher than CAGR that we are showing on the slide that we will give you the transparency in the detail that in December.

[Pat Vincent-Collawn:]

We will give you a reason to come see us in New York, Greg.

[Greg Gordon:]

Are you coming to see me, but same thing?

[Pat Vincent-Collawn:]

We just move to show off that.

[Greg Gordon:]

The final thing is - just to be clear, you said that the increase capital might require some equity but only post 19 and you can use that market program to that?

[Charles Eldred:]

That's correct. We haven't obviously not announcing any size or any plans it's really to give us the flexibility, the balance of cap structure based on the growth that we see and the needs for funding some small amounts of equity to drive into our capital structure is necessary for that growth. So, we are setting ourselves that for that flexibility in position sales to ensure that we can maintain solid investment grades with our credit metric objectives and also balance for capital structure to support the funding of that growth.

[Greg Gordon:]

But again, you don't think you need to start doing that to after 2019?

[Charles Eldred:]

No, No. Not in 2019 we are good, we all make that commitment and we don't see any need it all. It really is post 2019 gets in the 2021-2022 timeframe is when we start looking to that.

[Greg Gordon:]

Great, thank you guys.

[Charles Eldred:]

Okay, thank you.

[Operator:]

The next question comes from Insoo Kim with RBC Capital Markets. Please go ahead.

[Insoo Kim:]

Hey, guys. Good morning. May be starting up with the 6% EPS growth taken through 2021 that you guys mentioned, does that assumed on that renewable filing and the AMI of both approved?

[Charles Eldred:]

No, it is basically we have a target at the 6% growth, there is moving pieces here with the renewables which we still continue to put on our plans and as we indicative that the AMI is not included in our current capital and therefore it's not include in our earnings growth.

[Insoo Kim:]

Understood. And then when you said the dividend growth is going to be similar or slightly higher to that on a CAGR basis, I assume it could be a bit lumpy based on your earnings trajectory for the next couple years. And then just tied into that when you are thinking payout ratio again and in the past, there was kind of in that lower half of that 50 to 60 range it's been at the higher end just because of the earnings lumpiness. How do you guys think about that range moving forward?

[Charles Eldred:]

Yeah. We'll have our discussion with the board in December and then provide the some more transparency on the dividend after that meeting. The 50% to 60% as in the past is supported a good growth profile and good earnings profile for the company to reflect the lower payout ratio. And we'll continue down that path as long as we see the growth in the business. And at some point, certainly as we've said many times before where we see that becoming more normalized type of growth outlook for the business and we begin to move that payout ratio to a higher level. but we're not in position yet to really make those decisions. We feel stable with our growth profile right now.

[Insoo Kim:]

Got it. When I was looking at the TNMP low growth trends, again you guys are trending near that higher end of that 2% to 3% range for the year kind of like last year. But it seems like customer growth is trending below what you guys forecast. Could you help reconcile that to and kind a what you're seeing on the low type of site customer book growth not being as robust.

[Charles Eldred:]

Yeah, I think it's just where we are at this stage. We don't really see anything that's material and cause any concerns on our projections of customer growth. Again, a lot of that's demand driven and demand based. And that's a number of customers that we're adding in the west part of Texas. So that's a good portion of that allocation. Okay a little information to talk about some of that growth and by region. So if you were to think about West Texas for the next couple years, just as an example. the allocation that we have in the capital budget, we're getting upwards to 60% in 2018 and around 43% in 2019 and it tails off quite a bit but then North Texas begins to pick up in 2020. So it's not really the number of customers the demand more in West Texas is driving that right now, but we still see overall, each of those regions has its own load of growth story and continues to provide a level of comfort for us to continue to invest into T&D.

[Insoo Kim:]

Got it, okay. That's all I had. And I had a really, I did really a batch out trying to figure out what cost you guys were giving. So looking forward to finding actually. See you soon.

[Charles Eldred:]

We gave you answer. Can you throw a couple of ideas out there based on what we said?

[Insoo Kim:]

Well you did say about fake news, so I think that's one. But the other stuff I might not have listened closely, I am usually biased with these things.

[Charles Eldred:]

Well go back and look at the scripts so we're going to quiz you.

[Pat Vincent-Collawn:]

And so, we'll have to put those comments a little more.

[Charles Eldred:]

And Rocket man wasn't obvious either. We'll have to some find way there. We'll have some good pictures for you.

[Insoo Kim:]

Thank you. Bye.

[Operator:]

The next question comes from Ali Agha with SunTrust. Please go ahead.

[Ali Agha:]

Hey, good morning.

[Charles Eldred:]

Hey, Ali.

[Ali Agha:]

Hey. First question, Chuck I wanted to clarify you mentioned that number of items this year are going ahead or doing much better than you budgeted. The investment gains the transmission et cetera. And you kept at the high end of the range, you talked about expenses in the fourth quarter. If I heard it right, are you suggesting that you may have pull forward some expenses, I know there is the foundation separately that you're going to fund. But are there some expenses you're pulling forward from perhaps '18 to sort of keep you in the high end. Can you just clarify that point?

[Charles Eldred:]

These are expenses that we feel like we can we need to invest to maintain the vegetation management and some other aspects of what I mentioned in my readings. But it's not I would look at it as we're trying to move things around, we're just trying to make sure that we stay on top of the business. And we have an opportunity to find a little bit more in the foundation. So it is what it is and it's focusing on 2017.

[Ali Agha:]

Okay so, fair to say it's really the incremental funding for the foundation that perhaps you may not have budgeted originally that keeps you within the range otherwise.

[Charles Eldred:]

We had plans to fund the foundation we just didn't - we are just working through some of the details of that as we go through the fourth quarter.

[Pat Vincent-Collawn:]

Remember Ali, it's our 100th anniversary so with last time we made a big donation to the foundation was during the 30th anniversary the foundation and this is the 100th anniversary of the company, so we have been talking about that as part of our celebration.

[Ali Agha:]

I see, but just to be clear I guess the question is fair to say that you are probably trending above your plan through the nine months of the ear and that perhaps some extra expenses in the fourth quarter keep you at the high end otherwise you would have trended above the range is that a fair way to think about how you are trending through the year.

[Charles Eldred:]

Yeah Ali, you can calculate it based on what we are year-to-date and what we shown for earnings allocations in the fourth quarter and we just continue to be confident will be at the top end of the range.

[Ali Agha:]

Separately on the revised CapEx plan, so 4.5 to 5.5 percentage CAGR on rate base, 6 on EPS, does that assume an I improvement in earned ROEE that just with PV 3 flip or what rise the earnings CAGR to be north of your rate base CAGR.

[Charles Eldred:]

Well I mentioned that Palo Verde 3 is going into rate base obviously net asset is in our income statement depreciation costs that et cetera, so getting return on Palo Verde 3, moving to rate base will result in a higher EPS as supposed to where we have the capital CAGR and the 4.5 to 5.5 percent. So we are comfortable with the 6% as the target we are still working through the financial plans, the numbers, but I am comfortable where we are at this point.

[Ali Agha:]

Yeah, so I understood the 43 pushes up but for the rest of the unless are you assuming and earned ROE as well.

[Charles Eldred:]

No, we always assume that we're going to manage our business and get its earnings what was close to that allowed ROE, so we need to get a decision on that 2000 penny rate case that we have known for 2016 the rate case waiting for a decision on and we have the T&D rate case that we will filed at the end of in May historically test year 2016. So we always have an execution risk associated with our plans but in the earnings potential, that we show you in December it will again layout what the earnings profile the business looks like if we were to own or lab returns and then we will see what tour abilities our to execute on that plan.

[Ali Agha:]

Right and also to clarify in that 6% CAGR, are you assuming Supreme Court decision that comes out in your favor as well?

[Charles Eldred:]

Yeah, we'll just have to wait and see whether Supreme Court comes out and what those decisions are, but we have talked lot about what we feel relative to those appealable items and some of the prospectus that we have and at this point we're too close to be having oral arguments and decisions potentially could occur prior to the end of the year and then has to get to the commission So, at this point, I'd rather just say we'll wait and see what the outcomes are, but we will continue to focus the 6% target as our ongoing earnings growth.

[Ali Agha:]

Regardless of the Supreme Court decision.

[Charles Eldred:]

We have to wait and see where things come out, but I am comfortable with that target.

[Ali Agha:]

Last question and you talked little about that on the CapEx, but just again on a high-level basis, when you look at the CapEx profile you've laid out, roughly how much of that would-be CapEx that one would say is not locked in that has either opposition do it or would require commission and blessing et cetera how should we think about that?

[Charles Eldred:]

Well, as any plan over a five-year period we will have to have rate cases and we have already talked about TNMP there is likely possibility of rate case for PNM this does shift more to T&D type of investments which have been very pretty straight forward. We are always comfortable with our capital investments is being a prudent. So, regardless of how the commission comes to conclusions on their view towards some of the issues that we feel are inappropriate from our views of how we invest in the business. We think all of these capital is solid and very prudent, and necessary for our business.

[Ali Agha:]

And have you told us, when the next potential rate case, would be in New Mexico, after this one is finished?

[Charles Eldred:]

We haven't talked about that. But keep in mind, the rate case settlement that we have is no rate case due to 2020.

[Ali Agha:]

Oh! yeah. Got it. Thank you.

[Charles Eldred:]

Okay.

[Operator:]

The next question comes from Julien Dumoulin Smith, with Bank of America. Please go ahead.

[Unidentified Analyst:]

Hey guys, good morning, this is actually Nick [ph] for Julien. And I promise I'll keep it short to one question.

[Charles Eldred:]

Okay, I'm just scaring you, that's okay.

[Unidentified Analyst:]

Just on the AMI, I'm sorry if you touched on this already. But, you had hearing this week, could you provide any color on how those were in expectations ahead of the decision, obviously listed out your budget here?

[Pat Vincent-Collawn:]

Yeah, I think the issue that everyone is struggling to hear that make sense, it does provide a financial benefit to customers but when you do AMI, you end up losing meter readers. Although, when we did this in Texas, no one got light off, because it takes three years to do that, and all of the meter readers, found job, then actually the severance here and some job training and the Union is on Board. So, I think it's just that balance of doing something that could potentially cause job loss, unemployment rates a little high. So, all we try to say how hearing goes, but we should know soon.

[Charles Eldred:]

Nick just to remind you, because I know you guys are new to the coverage, we've said for months now, we were going to put AMI in the capital budget, till have certainly from the commission and the final orders. So, this is nothing new in our position here. We're very, very comfortable as that pointed out, of our record in our position of investing in AMI and we just want to have certainly for the commission, but we're not going to put in the capital budget until such time.

[Unidentified Analyst:]

Thanks a lot. And then just quick on TNMP CapEx, the $170 million, how much of that actually requires a TCOS filing, just given the GRC effects here.

[Charles Eldred:]

I don't think, we've actually announced any TCOS filing, but we will have a slight TCOS filing of first quarter of next year, that will provide some additional revenues for TNMP. But we don't have the details of that at this point.

[Unidentified Analyst:]

Got it, thanks.

[Charles Eldred:]

But, I'll try to provide that during the December guidance.

[Unidentified Analyst:]

Fair enough. Thank you.

[Pat Vincent-Collawn:]

Thank you.

[Operator:]

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

[Jonathan Reeder:]

Hey, checkout, I'm going to further kick the horse and just make sure I'm clear. The big - of PNM, T&D CapEx in 2019 and 2020, so that relates to the FERC projects to power out to California renewable, that's correct?

[Charles Eldred:]

Yes, that's correct.

[Jonathan Reeder:]

And in the prepared remark Pat, you've alluded to the timing for the hearing examiner recommended decision in the pending rate case. Can you kind of repeat that, and I guess what the rational is?

[Pat Vincent-Collawn:]

Yeah, the hearing examiner should give us a decision shortly on that. But you remember the commission took an - for an extra two months earlier in the process. And I think, they were thinking that they appropriately did not want to get jammed up and have to make a decision quickly, as especially if the settlement did not hang together, which it has so far. So, we would expect the decision very, very quickly any week now. We may even have it before EEI, but then the commission has time to consider that filing. Because, as you know, the commission is pretty busy right now. In a perfect world we get it before Christmas, and they want to put rates on January 6th. It just makes take them a little longer, because of everything going on in a holiday scheduled.

[Charles Eldred:]

And Jonathan, just as you recall, we talked about 2018 being a transition year, because it is a with this rate case, a pro rata at least a phased in approach to rates for 2018, with the full valuation in 2019. So, if they delay it, could be as much as $0.03, if they took the maximum amount. But we're anticipating that 2018 is a transition year, and we'll just have to focus on 2019.

[Pat Vincent-Collawn:]

So, the rates going sometimes, during January and March of next year.

[Charles Eldred:]

Do you want to talk about Notre Dame and Georgia, by any chance?

[Jonathan Reeder:]

Not so much tag game, but hoping both teams do well for the rest -

[Charles Eldred:]

Well, we are, Notre Dame is moving right up the charts, so it's not so bad at this point.

[Jonathan Reeder:]

Cautiously optimistic. It wasn't again, it is the best I guess game in terms of the shrink on our schedule supporting our ranking I think right now, even though we lost but…

[Charles Eldred:]

That's right. One point could have gone either way, but it was a great game to watch, that's for sure.

[Jonathan Reeder:]

Indeed. One last question if I could. I am not dressing up as a Notre Dan football for EEI just to let you know. Based on the updated PNM CapEx, how do you see the rates needing to increase in New Mexico assuming the dependent settlement is approved using that as the base?

[Charles Eldred:]

We've talked about what the rate increase was for this settlement which is around - that's a $63 million throughout revenue requirement, but the rate increase itself was around similar less than 10% on accumulative basis. So, going forward with the additional increase and depreciation we always try to be sensitive about the size of the rate increases and we did a great freeze out to 2020 timeframe and potentially if there was a rate increase in 2021, we'll try to keep that as reasonable as we can, but we have really announced anything beyond that.

[Jonathan Reeder:]

Are there I mean still just beginning to really try to manage that we're annual increases I think you've said before beginning on maybe mid-single-digit you think there is new plan certainly appears to that end?

[Charles Eldred:]

Yes, we know that's a sensitivity and you get much beyond that, that's very challenging but we think that's particularly and have multi-year staff that's a very reasonable expectation.

[Jonathan Reeder:]

Okay. Thanks. See you guys.

[Charles Eldred:]

Okay. We'll see you.

[Operator:]

The next question comes from Elizabeth Guynn with Mizuho Securities. Please go ahead.

[Paul Fremont:]

Hi, it's a Paul Fremont.

[Charles Eldred:]

Hi, Paul.

[Paul Fremont:]

Hi, the 6% compound annual growth rate I didn't attached what is - what's the base year for that growth?

[Charles Eldred:]

The 2017 to 2021 timeframe...

[Paul Fremont:]

Okay. So to the base year is essentially what you comment at the end of this year?

[Charles Eldred:]

No, 2016 I'm sorry 2016 is a base year and going from that 2017 to 2021, yes.

[Paul Fremont:]

So 2016 ending 2021.

[Charles Eldred:]

That's correct.

[Paul Fremont:]

Great. And then with respect to sort of funding CapEx post 19 was a combination of debt in equity, can you give us an idea would you be looking at like 50% equity 50% debt or have to sort of or can you give any guidance with respect to the level of…?

[Charles Eldred:]

Yes, we're still working through the details, but I wouldn't look at it is significant amount of equity. We're looking it as a way to rebalance the cap structure and be sure that as we see the growth opportunities we can need our credit metrics and used the TPNM program as a way to work that equity and as necessary. So, I just look at as a way to balancing the cap structure and being reasonable and how we fund the business and options that we have to work with. And we filed that, we'll put out three-year plan and an idea of what that side of the plan is but that doesn't mean we use all that equity to trying to give us also flexibility if we needed.

[Paul Fremont:]

Okay. And then maybe can we get, maybe a targeted level of FFO to debt that you guys would want to maintain on for rating agency purposes?

[Charles Eldred:]

The range is moving to 13 to 22 and again I think as you all know we're going former analyst credit analyst has an indication that there are lot of moving pieces are go into analyzing credit. But we know the range of moving and certainly have consistent feedback and communications with them and then very much aware of what our objectives are, and we want to be within the range of maintaining net investment grade rating.

[Paul Fremont:]

And then last question from me when I look at the renewable spend that is in your 2018 and 2019 CapEx numbers, how much of that is the solar investment?

[Charles Eldred:]

Yeah, the 18 and 19 is $73 million and that is the solar 50 megawatts solar investment.

[Paul Fremont:]

Okay. So that's all related to the solar none of that's related to some of the other things that you talked about?

[Charles Eldred:]

That's correct.

[Paul Fremont:]

Okay. I think that's it. Thank you very much.

[Pat Vincent-Collawn:]

You're going to keep going under alias now?

[Paul Fremont:]

Yes, as long as she is the one who fills out the registration to get us into the call, yes absolutely.

[Pat Vincent-Collawn:]

We'll call you Lizzy.

[Charles Eldred:]

Okay, Lizzy.

[Operator:]

So next question comes from Lasan Joong with Auvila Research Consulting. Please go ahead.

[Lasan Joong:]

Thank you. I just wanted to know if [indiscernible].

[Pat Vincent-Collawn:]

No comments.

[Lasan Joong:]

You sing?

[Charles Eldred:]

Do I what?

[Lasan Joong:]

Do you even know how to sing?

[Charles Eldred:]

No, I can't sing, but...

[Lasan Joong:]

You're going to go as Elton John.

[Charles Eldred:]

Well, you know what that's a theme song, so we'll have that in our meeting room, rocket man that's exactly You figure that one out.

[Lasan Joong:]

Just comes a tricky. I went through that big deal you report back in August and they said that of energy efficiency is largely over. But you mentioned it as one of the reasons why New Mexico is still going through kind of negative loan growth? Are there any other reasons why you see this trend continuing or do you see the Brazil coming at any point the near future, I mean GP is going in 3% which is better than what we've seen in the last eight, nine years or so. Can you give us a little light on if there are any green shoots coming up in New Mexico?

[Pat Vincent-Collawn:]

Yeah, I think one of the reasons we got hit it hard as we did with energy efficiency what the light bulb standards in the transition, especially to LEDs. Because LEDs got cheaper, a lot quicker than anyone thought they did. And on the residential side, in New Mexico our number one load is lighting, which is not always the case in the South West many places the number one load is air conditioning. So the lighting got us pretty quickly. I think a lot of what I would call the low hanging fruit in energy efficiency has been taken care off, what you're starting to see there now is the impact of standards kicking in. We don't have as much new construction here, but when you do start seeing the constructing, urgent standards are kicking, and commercial customers are also I think really focusing on energy efficiency the industrial always have in the commercials are starting to get this. I think energy efficiency is just a way of life here. In terms of the...

[Lasan Joong:]

But you don't see energy efficiency coming to kind of grinding halt?

[Pat Vincent-Collawn:]

I don't think coming to a grinding halt, I see the trend slowing down a little bit. So the slope with the line gets a little more - that gets better in our favor, but I don't see energy efficiency coming to a grinding halt. I also think we have a whole new generation folks, that are much more energy conscious than our generation and I think that's just part of the new vibe. Obviously, there are - if you look at way out of horizon, there is electrification, there is EV that kind of stuff, but that doesn't really impact us in this planning cycle here. But we're seeing he economy, we do are employing rate is not where we would like to be, but we're seeing some customer growth coming of 0.7 this year, to drive around town there is some construction and our economic development effort were seeing pretty strong pipeline. But I don't see us picking back up to the growth again that we had in 2007, 2008 here and I think what is kept New Mexico down a little bit from other utilities as all utilities are seeing. Our most utilities are seeing a decreasing use per customer, because then customer growth making it up. Our customer growth hasn't been strong.

[Lasan Joong:]

Okay. Last question, kind of picking off previous question, PNM hasn't seen a $0.20 fourth quarter since 2013 and you leave a $0.20 fourth quarter performance to get to $1.87 top under your guidance, that means it's about 42% decrease from last year. Given the number that you provided as to why it's not going to be as strong as last year, I can't figure out how to get to a trace - number. Any other additional information you can give us on kind a making it easy for maybe get to a 27-type number?

[Charles Eldred:]

Lasan as I mentioned, in the fourth quarter we're looking at trying to spend some additional money on vegetation management and system maintenance. So there is some additional cost in the fourth quarter that we planned on spending. And then as Pat pointed out, given the foundation of 100-year, Centennial that we have - that we have been planning to additional contribution to the foundation which will also go through earnings. So there is a little bit additional spending in the fourth quarter this year that different from last year. And so as a result of that that's probably you're missing on some of the numbers on fourth quarter.

[Lasan Joong:]

Yeah and just registration part of it. The foundation the donation part of it is what I'm kind of not touching on. Why --.

[Charles Eldred:]

So, four corner has an outage too in fourth quarter. And that's probably where you're not picking that up maybe as well.

[Lasan Joong:]

Okay. And that might be part of it. But certainly the foundation donation, will that be an extraordinary item?

[Charles Eldred:]

No, that's funded right through earnings.

[Lasan Joong:]

That's funded to Japanese. But would that be a net ongoing earnings issue?

[Charles Eldred:]

And we're consistent and that's how we done in the past. So it's important to us as to be very consistent to what we've done in the past.

[Lasan Joong:]

I got you. Okay. that's what I was missing also. Thank you very much.

[Charles Eldred:]

Okay, thank you.

[Pat Vincent-Collawn:]

Well, thank you everyone again for joining us this morning. We hope to see you all of you at EEI in just over a week so that you can see our Halloween guard. We hope you all have a safe and happy Halloween. Thank you.

[Operator:]

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.