TXNM Energy Inc (TXNM) 2017 Q3 法說會逐字稿

Good morning, and welcome to the PNM Resources Third Quarter Conference Call. (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.

Thank you, Anita, and thank you, 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.

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 the wait to visit us at EEI.

Let's begin on Slide 4 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. The numbers represent an increase over the third quarter of 2016, primarily because of higher retail rates implemented last year at PNM to pay for our improvements in system. I'll let Chuck get into the details of these results and our expectations for the full year in a few minutes.

First, let's turn to Slide 5 to walk through the details of our current regulatory agenda. In PNM's current general rate case, hearings on the settlement were completed in August, and we are awaiting the hearing examiner's recommended decision. The current suspension period in this case is January 6 of 2018, which means new rates could be effective as early as January.

However, keep in mind that the commission is to hold the suspension period by 2 months earlier this year. That maintains their ability to extend suspension period by 2 additional months, with 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 stand 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 plan. 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 briefs by December 8, and has indicated that she will subsequently present an order on the scope in any procedural scheduling.

As a reminder, PNM's plan presents the most cost-effective resource portfolio for our customers over 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 supply and participation agreements expire in 2022 and an exit from participation in the Four Corners generating station when its current coal supply agreement expires in 2031.

Keep in mind that the IRP process does not involve a commission approval of the plan. Therefore, any additions or retirements of generation resources would require commission approval through a separate filing.

As 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 preceding to implement smart meters in New Mexico, hearings on the required supplemental filings were held earlier this week. The next step in this case is a recommended decision by the hearing examiner and then we expect an order to come 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 systems reliability.

In the PNM renewable plan filed in June of this year, hearings were completed in September, and we received the hearing examiner's recommended decision earlier this month.

As you know, this year's annual filing identified resources that are required to meet New Mexico's 20% by 2020 renewable portfolio standard. The filing included 50 megawatts of utility on 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 50-megawatt solar proposals on the grounds that our RFP process was unfair and uncompetitive. Because the proposal utilized PNM controlled sites, she recommended that the RFP process should start over and provide all bidders access to the same sites, including PPA bidders. We strongly disagree with this recommendation as it would amount to an unlawful taking of our property.

PNM has the right to self-fill projects. And if there's a cost or performance advantage because of our size, this was obtained by risking shareholder capital. The recommendation to restart the RFPs calls for a 90-day process, deeming our previous time period insufficient. Not only was our 31-day process consistent with recent RFPs by other utilities, there was 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 and escalation factors in addition to extending the contract term. This PPA is necessary to meet the diversity requirement of the renewable portfolio standard. We also disagree with this recommendation.

We will file our exceptions this afternoon and responses to exceptions are due by November 6. We have 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 no later than November 28.

We are 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 for PNM-owned turnkey projects benefit small local developers that do not have the financial ability to acquire and develop sites. Our utilization of the 5 separate 10-megawatt 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 5 sites at the same time.

The geothermal operation also supports the local economy with its location in Southwest New Mexico. While production from the facility is currently small, the owners intend to invest about $50 million to reequip the facility and substantially increase its output. The facility serves as a great opportunity to support the advancement of geothermal technology, a promising resource of New Mexico without having customers bear operational risks.

In the docket opened by the New Mexico Commission with the intention to simplify and increase the transparency of rate cases, an 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 evidenced 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 6 and November 7. 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 our August 2015 general rate case, the court ruled in our favor on our request for oral arguments prior to rendering a decision. These oral arguments are scheduled for Monday, October 30th. There is no statutory time frame 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's renewal decision would be sent back to the commission before being implemented in rates.

Now switching over to TNMP. Our second TCOS filing of the year was approved and implemented in mid-September for an annual 4.7 million increase to rates. This reflects recovery of transmission investments added to rate base through June of 2017. We plan to capture additional transmission investments made through year end 2017 and one TCOS filing in early 2018, and that will be prior to the filing of our general rate case.

We are still on track to file a 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 file the general rate case in May, we are not able to make any additional TCOS filing until the next general rate case -- until the general rate case is resolved. So you won't see our typical second filing next year.

With that, I'd like to turn it over to Rocket Man, Eldred, for a detailed look at the numbers.

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 then introduce our new capital forecast.

Beginning on Slide 7. As Pat indicated, we had a strong quarter with ongoing earnings per share of $0.93 compared to $0.78 in quarter 3 of 2016. PNM was up $0.17, PNMP was flat and Corporate and Other was down $0.02.

Moving to Slide 8 for the low details. On a year-to-date basis, we are still tracking for load to be near the middle of PNM's guidance range. Overall, we see economic conditions in Albuquerque remain relatively stable. The Albuquerque metro area shows positive employment growth, but the rate continues 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 being offset primarily by our successful energy efficiency programs as well as the presence of private solar systems. This combination leads us to believe that we will stay within our guidance range for low growth in 2017 of flat to down 1%.

At TNMP, any volumetric 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, resulting in customer growth of 1.3% for the quarter. As a result, load is tracking towards the upper end of guidance range for 2017. When we review the capital forecast, you will see that the economic growth supports additional capital investments at TNMP.

Now turning to Slide 9 for our earnings drivers. At PNM, $0.11 of the increase is related to the impact of the rate relief that was implemented in October 1 of last year. Higher revenues under FERC transmission formula rates updated in June of each year and new third-party transmission contract increased earnings by the quarter by $0.03 and year-to-date by $0.06.

When we released 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 cents.

The cost savings that we implemented last year to align our business with the revenue we recovered in our last general rate case contributed to $0.02 reduction in expenses compared to the third quarter of last year.

If you look further down the list to O&M 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 2 items result in 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 of Palo Verde Unit 3 sales each increased earnings by $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 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 in 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 gains. We assume that we will not have another significant catalyst like this before the end of the year.

PNM has also benefited from interest expense savings that we expected in guidance as a result of interest rate reductions related to bond refinancings that occurred both last year and this year. As a result, earnings increased by $0.01.

Load, which I've already discussed, was down $0.01 compared to Q3 of 2016. The combination of depreciation and property tax expense increased $0.01 due to continued investments in our system.

The Navopache FERC generation contract was also $0.01 lower than Q3 of 2016 as expected.

Now moving to TNMP on Slide 10. EPS was $0.02 higher as result of the increases in load that I discussed earlier. It's important to recognize in addition 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 $0.01. Depreciation and property tax expense also reduced earnings by $0.01 as a result of the continued transmission and distribution investments supporting the growing load in our service territory.

Finally at 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 hedging agreements this year that fixed interest rate for a portion of our floating rate debt, limiting the future exposure to a rise in rates.

Now turning to Slide 11. 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 the first 9 months of the year, but we don't expect as strong of a performance in the fourth quarter as we saw at the end of the last year.

We have needs for additional O&M spending in the fourth quarter, focusing on areas like vegetation management and substation maintenance as well as on programs that improve 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 the 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 are going to host the guidance meeting at the New York Stock Exchange on December 8. We'll also provide conference call and webcast access if you're not able to join the meeting in person. And we'll 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 are providing an updated capital forecast that results in a targeted consolidated 2017 to 2021 rate-based compound annual growth rate of 4.5% to 5.5%. The growth includes capital spending and 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 AMI.

From a high-level perspective, we are confident that the strong growth in Texas is sustainable and supports the significant capital investments.

At PNM, although load growth is lower, the capital allocation is focused on improving our system management as our generation portfolio evolves to producing cleaner energy, building out our transmission network and overall reliability.

To begin with, let's look at PNM's capital forecast. The increase in investment brings their compound annual rate base growth up to 11.4% from 2017 to 2021. As I have already shared with you, the strong growth continues. As a result, we're allocating more capital to this business.

Although our service territory is spread throughout the state, we're fortunate to have growth forecast in all the areas that we serve. In West Texas, we've 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 relocating 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 continue to increase. And in the Golf course region, we continue to expect increases in load due to new residential construction and 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 additions will maintain reliability and allow for increased visibility, greater security and more robust data analytics, which should result in faster and more automated restorations of our system.

We also expect to have some sizable transmission expansion projects that will be serving new third-party renewable development customers who are transmitting power to California and overall system benefits to customers in New Mexico.

At PNM, we have added a new category of capital with spend beginning in 2021 and ramping up significantly in 2022 to track the investments 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 system. However, there's 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 replacement. We expect to issue an RFP later today for replacement resources. It will take us until next summer to analyze the proposals. We expect to refine our capital forecast for the replacement power following the outcome of the RFP, including the potential to use energy storage in our resource portfolio.

Finally, we have included the 50 megawatts of solar in 2018 and '19 that were included in our renewable plan filing. These resources are necessary in order to meet the state's 20% by 2020 renewable portfolio standard.

Pat described the hearing examiners' recommendation in this case. It's important to note that some of our environmental intervenors also support the decision in this testimony. We strongly disagree with the recommendation, and we're asking the commission to approve the project. There's customer value and justified benefit in the utility owning the solar system and particularly having it constructed by a local solar company. This permits us to provide the most reliable energy at the lowest cost. Consequently, we have 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 through 2019.

In addition, if you recall, we were permitted in our last rate filing to begin collecting higher depreciation rates. This allows us to expedite 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 have already owned this asset, there will be no cash required to fund it. Dedicating Palo Verde 3 to the jurisdiction further supports the clean energy transformation that we are undergoing, delivering consistently available carbon-free energy to our customers. In addition, it is earnings accretive. As a result, we're targeting 6% ongoing earnings growth from 2017 to 2021 using 2016 as the base year. In addition, we expect to provide the dividend growth over the same time frame 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 a brief discussion of our liquidity and upcoming debt refinancings. We continue to have strong liquidity available to us with managing upcoming debt maturities. For some time now, our key objectives included keeping appropriate credit metrics and maintaining solid investment-grade 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 to use an aftermarket program beginning in 2020, providing a flexible, efficient and low-cost way to issue equity as needed to balance our capital structure. Overall, we're 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 TNMP, while maintaining solid investment-grade ratings. We continue to be committed to no equity issuance through 2019. We look forward to connecting with many of you at EEI and again, in December for our financial update.

Pat, that concludes my Rocket Man comments for the day. Thank you for your time, and now I'll turn it back over to Pat.

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 then again, after heavy rain and severe flooding sidelined efforts that resulted in additional outages.

Not only did our TNMP crews provide extraordinary restoration work to our customers and without any safety incidents, they turned around and headed to Florida right afterwards to aid in Hurricane Irma restoration efforts. The dedication of these crews is truly astonishing. We were also amazed by the generosity of our employees to make donations to assist our employees that were impacted by the storm and donations to the rest (inaudible).

I'd like to thank our employees throughout our Texas operations and across the state line in New Mexico for truly serving as living examples of our company values.

As I discussed earlier, the fourth quarter should bring us recommended decisions and commission orders on a couple of PNM's outstanding regulatory items. With EEI in November and our December guidance in New York, we'll have opportunities to talk with you about any significant developments. We're looking forward to getting away from all of this fake news and talking about things like the actual tax plan that will be released on November 1.

Thank you, again, for joining us today. Operator, let's open it up for questions.

(Operator Instructions) The first question today comes from Greg Gordon with Evercore Partners.

So I'm sorry if I'm having a little bit of a brain freeze here, but you were pretty clear on what you think the aggregate growth rate in earnings is going to be and I appreciate that. But why is the rate base CAGR in New Mexico despite the CapEx increase look like it's gone down to 2% to 4% from a higher number prior to this update?

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 in 2016, we had a number of generation capital investments. One is the peaking unit that we referred to at La Luz. That was like $51 million. We had a 40-megawatt solar build, and we have the Palo Verde 2 leases. So I you add the total dollars that we had in 2016, it would be up $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'd be at about a 3.6% CAGR. But then if you look at 2017 to 2021, you're roughly at a 2.3%, and then it bounces back up to 3.6% CAGR. So I think it's really more influenced by the numbers that, that generation build we had in 2016 that makes it look a little bit higher. But if you look at where we're investing the money today, it is more clearly into the T&D side of the business for the first -- for the next several years on this 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 comes down and that begins to reflect this -- the lack of investing in the closing of San Juan and the continued investment in Palo Verde and also on nuclear fuel. So again, there's different ways to slice it up higher. We'll work with you on some of that detail, but the bottom line is I think 2016 and the generation we had invested in that year is probably distorting that a little bit.

Great. A couple more questions. Obviously, the spending has gone up at TNMP. You've got tremendous growth in Texas, and that's awesome, and the spending is also up in Mexico. Your footnote here that there's $12 million, $59 million and $24 million of AMI spend in the numbers for '18 through '20, but that doesn't explain the full delta. You alluded to some of the other things that have caused the increase, but can you give us a little bit more detail?

And you're referring to PNM again?

Yes, PNM, New Mexico. So clearly, there's no low growth, but the spending is up. So I just would like a better understanding of why.

Yes, okay. So it goes back to -- we've got about $167 million from 2017 through 2020. That is what we would refer to as PNM transmission system expansion. That's really supporting, again, the third-party movement of renewable energy that's being built in New Mexico out to California. There's a lot of capital dollars that are related to grid modernization, which is about $95 million. That's from 2018 to 2022. We have a considerable amount. A little over $200 million of replacing aging infrastructure at PNM. So I think a lot of that stuff is relative to where we're putting emphasis on the fact we don't have the load growth that we have -- the need to invest in reliable generation.

And what's the rate recovery mechanism for the capital that's being used to facilitate exports?

While we haven't really announced any rate cases. You mean, as far as what our plans are going forward?

Yes, because if that capital is being built to help export power to California, would we presume that we are being charged, but new Mexico customers wouldn't pay that.

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

We've got -- as you know, we've got formula rates at FERC. So the FERC part goes under the formula rates.

Perfect. Okay. That explains that. I'll move on. You guys gave that great slide on Page 16, where you look at your -- you gave us a sense of what your aspirational earnings power could be.

Right.

Why hasn't that changed if you've got -- given the significant increase in your capital deployment opportunities? So shouldn't it be higher?

Yes, we haven't updated that, Greg. We really -- the first step here is to get you the capital the information. And in December, when we do guidance, we'll update that earnings potential all the way through 2021. So we're working through our plans, working through all the numbers, but I'm very comfortable targeting 6% earnings growth with the addition of Palo Verde Unit 3 being added to rate base. And it brings you a little bit higher than the CAGR that we're showing on the slide, but we'll give you the transparency and the detail of that in December.

We'll give you a reason to come and see us in New York, Greg.

Well, you're coming to see me, but same thing.

All right. When you guys come down see us, but yes. Okay. We just want you to show up.

And then the final thing is -- just to be clear, you said that the increased capital might require some equity issuance, but only post-'19 and you could use -- use an at-the-market program to do that?

That's correct. We haven't, obviously, not announcing any size or any plans. It's really to give us the flexibility to balance the cap structure based on the growth that we see and the needs for funding some small amounts of equity to dribble into our capital structure is necessary for that growth. So we're setting ourselves up for that flexibility and positioning ourselves to make sure that we can maintain solid investment-grades, meet our credit metric objectives and also balance our capital structure to support the funding of that growth.

But again, you don't think you need to start doing that till after '19?

No, no. Nothing in '19. We're good. So we've already made that commitment and we don't see any need at all. It really is post-2019 gets into '20, '21, '22 time frame is when we'd start looking at that.

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

Maybe starting off with the 6% EPS growth CAGR through 2021 that you guys mentioned. Does that assume that the renewables filing and the AMI are both approved?

No. Basically, we have targeted the 6% growth. There's moving pieces here with the renewables, which we still continue to put in our plans and as we've indicated that the AMI is not included in our current capital. Therefore, it's not included in our earnings growth.

Understood. And then when you said 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 of years. And then just in -- tied in with that, when you're talking -- when you're thinking payout ratio again, I know in the past it was kind of in that lower half of that 50% to 60% range. It's been at higher end just because of the earnings lumpiness. How do you guys think about that range moving forward?

Yes. We'll have our (inaudible) provide some more transparency on the dividend after that meeting. But we're -- the 50% to 60%, as in the past, has supported against growth profile and a 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, when we see that become a more -- by more normalized type of growth outlook for the business then we begin to move that payout ratio to a higher level. But we're not in a position yet to really make those decisions. We feel comfortable with our growth profile right now.

Understood. Got it. And then when I was looking at that 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 consumer growth is trending below what you guys forecasted. Could you help reconcile the two and kind of what you're seeing on the low side despite consumer growth that being as robust?

Yes. It's just -- I think it's just where we are at this stage. We don't really see anything that's material causing any concerns on our projections of customer growth. Again, a lot of it is demand-driven and demand-based, and it's a number of customers that we're adding in the West part of Texas. So that's a good portion of that allocation. I've got 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 of 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 in North Texas, it begins to pick up in 2020. So it's not really the number of customers. It's really the demand more in West Texas that's driving that right now. But we still see overall, each of those regions has its own little growth story and continues to provide a level of comfort for us to continue to invest into TNMP.

Got it. Okay. That's all I had, and I had a really -- I did a really bad job trying to figure out what costume hints you guys were giving. So looking forward to finding at EEI.

Oh, come on. We gave you an answer. Now can you draw a couple ideas out there based on what we said?

Well, you did say fake news. So I think that's one. But the other stuff, I -- I don't know. I might not have been listening as closely. I'm usually bad with these things.

Well, go back and look at the scripts. So we're going to quiz you when we see you at EEI.

We'll have to put-in those comments a little more.

And Rocket Man wasn't an obvious clue either, was it? We'll have some fun with it.

We'll pick at the audience too.

We'll have some good pictures for you.

The next question comes from Ali Agha with SunTrust.

First question, Chuck, I wanted to clarify, you mentioned that the number of items this year are going ahead or doing much better than you budgeted the investment gains, the transmission, et cetera, and yet 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 pull forward some expenses? I know that the foundation separately that you're going to fund, but are there some expenses your pulling forward from perhaps '18 to sort of keep you in the high end? Can you just clarify that point?

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 fund a little bit more in the foundation. So it is what it is, and it's focusing on 2017.

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...

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

It's -- remember, Ali, it's our 100th anniversary. So last time we made a big donation to the foundation was during the 30th anniversary of the foundation and then it's the 100th anniversary of the company. So we've been talking about that as part of our celebration.

I see. But just to be clear, I guess the question is, it's fair to say that you're probably trending above your plan through the 9 months of the year 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're trending through the year?

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

Yes. Separately, on the revised CapEx plan, so 4.5% to 5.5% CAGR on rate base, 6% on EPS. Does that assume an improvement in earned ROE? Is that just a PV3 flip? Or what drives the earnings CAGR to be north of your rate-based CAGR?

Well, I mentioned that Palo Verde 3 going into rate base, obviously, that asset is in our income statement, depreciation cost, debt, et cetera. So getting return on Palo Verde 3 moving to rate base will result in a higher EPS as opposed to where we have the capital CAGR at the 4.5% to 5.5%. So yes, we're comfortable with the 6% as the target. We're still working through the financial plans, the numbers, but I'm comfortable where we are at this point.

Yes. So I understood the Palo Verde 3 pushout. But for the rest of the business, are you assuming an improvement in earned ROE as well?

We always assume that we're going to manage our business and get earnings as close to that allowed ROE. So we need to get a decision on the 2000 -- pending rate case that we have now for 2016, the rate case that we're waiting for a decision on and we have the TNMP rate case that we'll file at the end of -- in May using, historically, test year 2016. So we always have execution risk associated with our plans, but in the earnings potential that we show you in December, it will, again, lay out what the earnings profile of the business looks like if we were to earn our allowed returns, and then we'll see where -- what our abilities are to execute on that plan.

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

We'll just have to wait and see when the Supreme Court comes out and what those decisions are, but we've talked a lot about what we feel relative to those appealable items and some of the perspectives that we have. And at this point, we're too close to having oral arguments and decisions potentially could occur prior to the end of the year and then it 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'll continue to focus the 6% target as our ongoing earnings growth.

Regardless of the Supreme Court decision?

We'll just have to wait and see where things come out, but I'm comfortable with that target.

Just last question, and you talked a little bit 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 to it or would require commission blessing, et cetera? How should we think about that?

Well, we -- as any plan over a 5-year period year, we will have to have rate cases, and we've already talked about TNMP. There's likely a possibility rate case for PNM. This does shift more to T&D type of investments, which have been pretty straightforward. We're always comfortable with our capital investments as being 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 this capital is solid and very prudent and necessary for our business.

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

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

The next question comes from Julien Dumoulin-Smith with Bank of America.

This is actually Nick Campanella on for Julien, and I promise I'll keep it short to one question. Just on the AMI, I'm sorry if you touched on this is already, but you had some hearings this week. Could you provide any color on how those went and expectations ahead of the decision? Obviously, you left it out of your budget here.

Yes, I think the issue that everyone is struggling with here is it makes 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 laid off because it takes 3 years to do it and all of the meter readers found jobs and actually we've agreed to a severance here and some job-training and union is onboard. So I think it's just that balance of doing something that could potentially cause job loss when our unemployment rate is a little high. So always hard to say how our hearing goes, but we should know soon.

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

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

I don't think we've actually announced any TCOS filing, but we will have a slight TCOS filing 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. I'll try to provide that during the December guidance.

The next question comes from Jonathan Reeder with Wells Fargo.

I'm going to further kick the horse and just make sure I'm clear, the big slugs of PNM, T&D, CapEx in '19 and '20, so that relates to the FERC projects to wheel the power out to California, the renewable. Is that correct?

Yes, that's correct.

Okay. And in the prepared remarks, Pat, you, I think, alluded to the timing for the hearing examiner recommended decision with the pending rate case. Can you kind of repeat that? And I guess, what the rationale is?

Yes. The hearing examiner should give us a decision shortly on that. As you remember, the commission took an extra -- asked an extra 2 months earlier in the process. I think they were thinking that they appropriately did not want to get jammed up and have to make a decision quickly, especially if the settlement did not hang together, which it had so far. So we would expect the decision very, very quickly, actually 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 be able to put rates in on January 6. It just may take them a little longer because of everything going on and the holiday schedule.

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 or at least a phased-in approach to rates for '18 with a full valuation in 2019. So if they delay it, could be as much as $0.03 if they took the maximum out. But we're anticipating that '18 is a transition year, and we'll just have to focus on 2019.

So the rates, it's sometime between January and March of next year.

Yes, yes. You want to talk about Notre Dame and Georgia by any chance?

Not so much that game, but hoping both teams do well through the rest of the season.

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

Cautiously optimistic. Yes, it was a great game. It's the best, I guess, game in terms of the strength on our schedule supporting our ranking, I think, right now even though we lost. Even though we lost, but...

That's all right. Well, 1 point. It could have gone either way, but it was a great game to watch. That's for sure.

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

Yes, we've talked about what the rate increase was for this settlement, which is around -- that's a $63 million revenue requirement. But the rate increase itself was around somewhere less than 10% on a cumulative basis. So going forward, with the additional increase in depreciation, we always try to be sensitive about the size of the rate increases, and we did a great freezeout to 2020 time frame and then potentially if there was a rate increase in 2021, we'll try to keep that as reasonable as we can. But we haven't really announced anything beyond that.

All right. But I mean still just sticking to really try to manage it where annual increases, I think you've said before may be mid-single digit. Do you think this new plan certainly adheres to that end?

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

The next question comes from Elizabeth Guynn with Mizuho Securities.

It's Paul Fremont. The 6% compound annual growth rate, I didn't catch what is -- what's the base here for that growth?

The 2017 to 2021 time frame that I mentioned about?

Okay. So the base here is essentially where you come in at the end of this year?

No, 2016. I'm sorry. 2016 is the base year and going from that, 2017 to '21, yes.

So it's 2016, ending 2021?

That's correct. That's correct.

Great. And then with respect to sort of funding CapEx post-'19 with the combination of debt and equity, can you give us an idea, would you be looking at like 50% equity, 50% debt or, Pat, sort of -- or can you give any guidance with respect to the level of...

Yes, we're still working through the details, but I wouldn't look at it as a significant amount of equity. We're looking at it as a way to rebalance the cap structure and be sure that as we see the growth opportunities, we can meet our credit metrics and use the ATM program as a way to work that equity in as necessary. So I just look at it as a way of balancing the cap structure and being reasonable in how we fund the business, and an option that we have to work with. And when we fill that, we'll put out 3-year plan in an idea of what that size of the plan is, but that doesn't mean we'll use all that equity. Just trying to give ourselves the flexibility, if we need it.

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

The range at Moody's is 13 to 22. And again, as you well know, being a former analyst -- credit analyst, it has an indication that there's a lot of moving pieces that go into analyzing credit. But we know the range of Moody's and certainly, have consistent feedback and communications with them and they're very much aware of what our objectives are, and we want to be within the range of maintaining that investment-grade rating.

And then last question for me. When I look at the renewable spend that is in your '18 and '19 CapEx numbers, how much of that is the solar investment?

Yes. The '18 and '19 is $73 million, and that is the solar, 50-megawatt solar investment.

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

Yes, that's correct.

Paul, are you going to -- keep going under an alias now?

Yes, because as long as she's the one who fills out the registration to get us into the phone call. Yes, absolutely.

The next question comes from Lasan Johong with Auvila Research Consulting.

Just a couple quick -- quickies. I mentioned the big deal you reported back in August. And they said that energy efficiency is largely over. But you mentioned it as one of the reasons why New Mexico is still going to kind of a negative loan growth. Are there any other reasons why you see this trend continuing? Or do you see the growth will to come in at any point in your future? I mean, GDP is growing at 3%, which is better than what we've seen in the last 8, 9 years? So can you give us a little light on it? Is there any green shoots coming up in New Mexico?

Yes, I think, Lasan, one of the reasons why we get hit as hard as we did with energy efficiency was the light bulb standards and 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 #1 load is lighting, which is not always the case in the southwest. In many places, the #1 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 of. What you're starting to see though now is the impact of codes and standards kicking in. We don't have as much new construction here, but when you do start seeing the construction growing, codes and standards are kicking in and commercial customers are also I think really focusing on energy efficiency. The industrials always have and the commercials are starting to get there. So I think energy efficiency is just a way of life here. In terms of the economy and our -- I'm sorry?

But you don't see energy efficiency coming to kind of a grinding halt in the near future?

I don't see it coming to a grinding halt. I see the trends slowing down a little bit. So the slope of the line gets a little more -- it 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 of folks that are much more energy conscious than our generation is. And I think that, that's just part of the new vibe. Obviously, there are --if you look at the way out of the horizon, there's electrification, there's EV, that kind of stuff, but that doesn't really impact us in this planning cycle here. But we are seeing the economy. We do -- our unemployment rate is not where we'd like it to be, but we are seeing some customer growth coming. We're at 0.7 this year. If you drive around town, there's some construction going on and our economic development efforts, we're seeing a 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 has kept New Mexico down a little bit from other utilities is all utilities are seeing -- or most utilities are seeing a decrease in use per customer, but they're seeing customer growth making it up. Our customer growth hasn't been as strong.

Okay. Last question kind of picking off a previous question. PNM hasn't seen a $0.20 fourth quarter since 2013. And you need $0.20 full quarter performance to get to $1.87, you talked under your guidance. That means it's about a 42% decrease from last year. Given the numbers that you provided as to why is that going to be a strong as last year, I can't figure out how to get to a $0.20 type number. Any other additional information you can give us that would kind of make it easy for me to get to a $0.20 number?

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

Yes -- no. I get the vegetation part of it. The foundation donation part of it is what I'm kind of not kind of clicking on. Why would that property...?

Yes, so as the Four Corners has an outage, too, in fourth quarter, and that's probably where you're not picking that up maybe as well.

Okay. That might be part of it, but certainly the foundation donation, wouldn't that be an extraordinary item?

No, no, no. That's funded right through earnings.

That's funded through GAAP earnings, yes. But would that be -- that wouldn't be a net ongoing earnings issue, would it?

No, and we have to be -- but we're consistent, and that's how we've done in the past. So important to us is to be very consistent to what we've done in the past. So...

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

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