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Edited Transcript of PNM earnings conference call or presentation 7-May-19 3:00pm GMT

Q1 2019 PNM Resources Inc Earnings Call

Albuquerque May 16, 2019 (Thomson StreetEvents) -- Edited Transcript of PNM Resources Inc earnings conference call or presentation Tuesday, May 7, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles N. Eldred

PNM Resources, Inc. - Executive VP & CFO

* Jimmie Blotter

PNM Resources, Inc. - Assistant Treasurer and Director of IR & Shareholder Services

* Patricia K. Vincent-Collawn

PNM Resources, Inc. - Chairman, President & CEO

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Conference Call Participants

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* Ali Agha

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Andrew Levi

ExodusPoint Capital Management, LP - Portfolio Manager

* Gregory Harmon Gordon

Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research

* Julien Patrick Dumoulin-Smith

BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research

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Presentation

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Operator [1]

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Good morning, and welcome to the PNM Resources First Quarter 2019 Earnings 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.

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Jimmie Blotter, PNM Resources, Inc. - Assistant Treasurer and Director of IR & Shareholder Services [2]

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Thank you, Andrea. And thank you, everyone, for joining us this morning for the PNM Resources First Quarter 2019 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'll turn it over to Pat for our call.

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Patricia K. Vincent-Collawn, PNM Resources, Inc. - Chairman, President & CEO [3]

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Thank you, Jimmie. And good morning, everyone. Thank you for joining us today for our first quarter earnings call. Let's begin on Slide 4 with the financial results and some company updates.

Our GAAP earnings per share in the first quarter of 2019 reflect earnings of $0.23 compared to $0.19 in the first quarter of 2018. Ongoing earnings per share are $0.13 compared to $0.21 in the first quarter of last year. During the first quarter, load growth and weather in New Mexico, once again contributed to increased earnings at PNM and, as a result, we have raised the top end of our guidance range for 2019 to reflect increased expectations. Our guidance for 2019 is now $2.10 to $2.20. Chuck will provide further details on the financials in a few minutes.

The key highlights for the first quarter was the New Mexico legislative session. This year's session produced a solid energy policy for the state that was led by the Governor and the legislature. The Energy Transition Act passed through the Senate and the House, and the Governors signed it into law on March 22. The new legislation is effective June 14, 2019. One of the key components of the bill was to allow for securitization, which helps make the transition to clean energy, more affordable for customers.

Another key component is the renewable standard set forth. 40% renewables by 2025, 50% by 2030, and 80% by 2040 and then 100% carbon-free resources by 2045. Our previous Integrated Resource Plan brought us to over 70% emissions-free by 2032, that challenged us to solve the remaining 30% by 2045.

As we've gone back to consider scenarios that would meet this requirement, we believe the changes can lend themselves to an earlier achievement date and have set a company goal to be emissions free by 2040, 5 years earlier than the Energy Transition Act. We are identifying different paths to achieve this goal and plan to continue the collaborative efforts that were integral in the passing of a new legislation to determine the right resource path for the next 20 years.

The Energy Transition Act also contain some guidance on how to choose replacement power. For example, the bill states that preference is to be given to locating the resources in the San Juan area and replacing the property tax base in that school district. The bill also states that the utility should have the discretion to control, operate and maintain energy storage systems. We will take all the components of the bill into account as we prepare our filing for the abandonment of San Juan and replacement power alternatives, which I'll talk more about in a minute.

Looking out to next year, our Integrated Resource Plan required by July 1 of 2020 will contemplate scenarios for our long-term resource plans for the next 20 years that will align with our goal of producing 0 emissions by 2040. The Bill also provides needed assistance to workers in the San Juan area communities. We have been committed to supporting our employees and their families in this part of our state for many years, and our commitment will not end with the retirement of the plant. Outside of the assistance provided through the Energy Transition Act, we have made plans to work with nonprofit agencies in the community to ensure that services are available to provide the training and assistance needed to move forward.

Another significant piece of legislation that passed this session was a joint resolution to change the New Mexico Public Regulation Commission from its current makeup of 5 elected commissioners to 3 appointed commissioners beginning in 2023. The resolution also narrows the mandatory responsibilities of the commission to focus on utilities and other public service companies as determined by the legislature. It states that candidates for nomination would need to meet certain requirements around education or experience.

The bipartisan resolution was introduced by the Senate majority and minority leaders and was passed through the Senate and House with a combined vote of 95 to 13, demonstrating strong bipartisan support for these legislative changes. 3 of the 5 current commissioners have endorsed the changes as well. Because the change requires an amendment to the state constitution, the next step is for the resolution to go on the ballot in the 2020 General Election. A simple majority is required to pass the bill.

A more recent highlight was the announcement last week of an acquisition of the Western Spirit transmission line. While New Mexico had incredible potential for solar and wind energy, the transmission system must be developed to deploy these resources and move the energy to where it is needed. This has been a goal of the New Mexico Renewable Energy Transmission Authority, or RETA, for several years, and we are happy to support their efforts along with the Governor's goal to make New Mexico a clean energy leader. RETA and Pattern Development have been developing the line, and PNM has agreed to acquire it after its completion. This acquisition fulfilled PNM's obligation to provide transmission service for the renewable generation facilities and will provide additional capacity on our grid, improving resiliency and overall reliability of our system. The acquisition also aligns with the incremental capital growth opportunities that we have presented. Of course, the transaction is subject to the necessary regulatory approvals, and this week, we will be making a filing at FERC for an incremental rate tariff by which Pattern Development will pay for the use of the line. A filing at the New Mexico Public Regulation Commission will also be made related to this acquisition.

Now turning to Slide 5. I will walk through recent updates to the regulatory agenda and other filings to expect in the coming months. Regarding the San Juan compliance filings, the New Mexico Supreme Court issued a temporary stay of the commission's order for an abandonment filing on March 1 and requested that parties file responses to the appeal of the commission order by March 19. The Supreme Court has not taken further actions following these responses. We plan to file for abandonment along with securitization of undepreciated costs and CNNs for replacement power by the end of June.

I mentioned on last quarter's call that we are encouraged by what we are seeing across the industry in terms of breakthroughs for energy storage and pricing for renewable resources. We are confident in our ability to maintain cost-effective, reliable and, ultimately, emissions-free energy for our customers. Our June filing will include the lease cost plans for replacing the energy needs currently served by San Juan, but we'll also consider alternatives based on the preferences included in the Energy Transition Act and resources that work towards meeting the future RPF standards.

And our filing on the Western Energy Imbalance Market, the commission issued an order allowing for the creation of a regulatory asset to recover the costs necessary to participate in the markets that will be considered in a future general-rate case.

We joined with other parties to ask the commission for clarification of how the benefits of market participation would be evaluated when cost recovery is considered in the future-rate case. The commission verified that quarterly reports from the California ISO may be used to quantify the benefits, providing us the confidence to invest in the market for the benefit of our customers. We are moving forward with our original plans to enter the Imbalance Market in April of 2021 and begin providing those expected savings to customers as soon as possible.

We also made a filing with the commission last week to rehear the case on the BB2 Transmission Project. This filing is for a transmission networks service upgrade, and while commission's order approved the CCN to construct a line, it directly assigned certain cost to Facebook instead of across the full network of customers that received the benefit of the upgrade. The rehearing will provide commission the opportunity to reconsider their order regarding cost allocation of the project and recognize that the upgrade increases overall system reliability, supports more renewable energy additions, and most importantly, provide the financial benefit to customers without directly assigning costs to one customer. The commission has, until May 19, to act on our request.

I want to point out that we will have our upcoming renewable plans filing at PNM to request an update to rate under our renewable rider. In this year's plan, we expect to request recovery for 140 megawatts purchased power agreements for wind power that is necessary to meet the requirements of our existing RPS standard, and it will rely on the BB2 line to deliver power to our customers. We will provide an update on this filing along with our June abandonment filing during our second quarter earnings call.

Over at TNMP, after we implemented rates in January from our general rate case approved in December, we filed for a $14.3 million key cost increase that was approved and implemented at the end of March. This filing was larger than our typical TCOS filing because we had to delay our request for recovery at transmission-rate base during our general rate review in 2018. We now expect to follow our usual pattern of twice yearly filings, with the second TCOS filing in the fall.

And with that, I will turn it over to Chuck for a detailed look at the numbers.

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Charles N. Eldred, PNM Resources, Inc. - Executive VP & CFO [4]

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Thank you, Pat. And good morning, everyone. And thank you for joining us. Beginning on Slide 7 with a recap of first quarter earnings results. Our guidance for Q1 2019 was $0.08 to $0.09 of ongoing earnings per share, we came in at $0.13. PNM's earnings were up $0.02 compared to the first quarter of 2018. As planned, the second phase of our retail rate increase was implemented in January and we continue to see year-over-year interest savings from debt refinancing. These increases were offset by expected increases in O&M costs to support low growth that picked up in 2018 and to maintain reliability, along with higher depreciation and property taxes from capital investments.

Load growth was 1.2% higher than Q1 of last year. This was also higher than our expectations for the quarter. Weather was colder for the first quarter 2019, with heating degree days 11% higher than normal at PNM. This led to a $0.03 increase to earnings when compared to Q1 of 2018. We also had a shift in our plan outage schedule. Four Corners accelerated its planned outages from second quarter to first quarter. To accommodate Four Corners being down, we moved the longer San Juan Unit 4 outage to start in the second quarter. This shifts most of our outage costs that were expected in the first quarter to the second quarter. We have revised our quarterly distribution earnings in the appendix to account for this movement.

TNMP is down $0.07 for the quarter compared to 2018. This was an expected to result of the new rates implemented in January. Our rate recovery was rebalanced between the wholesale transmission and retail distribution operations and changes to rate design moved more of our recovery to volumetric-based rates from demand-based rates. While the rate increase in TCOS recovery will result in an overall increase for the year, more earnings will be pushed into the higher volume quarters of Q2 and Q3. For example, the base rate increase included an increased depreciation rates that raises TNMP's expense ratably throughout the year. While the offset in recovery comes largely through volumetric rates that are heavier in Q2 and Q3.

We also did not have our typical second TCOS filing in 2018 to recover transmission investments because we are unable to file during our general rate review. As a result, we have higher depreciation and property tax expenses from these investments in Q1, without an offsetting increase in revenues. As Pat mentioned earlier, our January TCOS filing of $14.3 million was approved near the end of March. So we'll begin seeing recovery of these investments in Q2.

Corporate and Other was down $0.03 for the quarter. This was largely due to the early repayment of the Westmoreland loan in May of last year, along with a higher fixed interest rate on the $300 million of senior unsecured notes that we entered into in March of 2018.

Now turning to Slide 8 for our load information. As I mentioned, PNM load grew at a 1.2% in the first quarter. Residential and commercial volumetric loads remain strong and continue to be in line with our annual guidance for the year. The growth that was above our expectations was driven by higher industrial usage, which includes the Facebook data center that made the news with its first of 6 expected buildings coming online.

Looking forward, we continue to see positive indicators in the New Mexico economy and are increasing our load growth expectations and earnings guidance for this year as a result. We have raised our industrial load expectations for the year, which brings our total load guidance for the year to a range of 0.5% to 1.5%, from 0.3% to 1%.

Turning to TNMP, with the first quarter being a low-volume quarter, small changes had a larger impact on the growth percentage. As we've seen before, volumetric-load growth is negative in the first quarter this year, but the annual expectation remains positive. In the business, we continue to see increases in new customer request and unprecedented levels of transmission interconnection requests, both are trending considerably higher so far in 2019 than they were in 2018. We're also seeing an increase in residential and small commercial meter additions. As a result, we remain confident in our expectations for the full year.

Now turning to Slide 9. In February, we raised the lower end of our guidance by $0.02 to reflect the reduced downside risks associated with the stronger weather that PNM experienced in the first 2 months of the year. As we look out to the remainder of the year, we see more upside potential associated with our increased load expectations and are raising the top end of our guidance to $2.20. That brings our new guidance range to $2.10 to $2.20, and we're confident in our ability to achieve the midpoint. PNM's range was also raised to account for this increase, along with further expected interest savings for short-term debt and is now at $1.63 to $1.70. The loss in Corporate and Other has been increased due to higher debt balances, some onetime miscellaneous corporate expenses and a lower anticipated effective tax rate, resulted in lower tax benefits on our consolidated tax distribution.

Moving to Slide 10 for our capital plan. First, I want to point out that 2021 PNM transmission expansion categories reflect that the further realization of our incremental growth opportunities with the planned acquisition of the Western Spirit transmission line. This represents an investment of $285 million in 2021. We have also added $40 million of T&D capital at PNM in 2022 as we continue to review our capital prioritizations to support reliability and our growth in our system and the replacement of aging infrastructure. This brings our total rate base investment plan for 2019 to 2022 to $2.6 billion from $2.3 billion, and this level of investment supports our earnings growth target over the same period of 5% to 6%.

As noted on the slide, we expect additions to our investment plan for San Juan replacement power as we transform PNM's generation portfolio, which will be funded with securitization proceeds. After the San Juan abandonment filing is made in June, we will begin to reflect the additions for the replacement power investments on this chart. We expect the filing to be made near the end of June. After the filing is made, we will post information on our website related to our capital plans and potential earnings power.

Now turning to Slide 11. We have updated the potential earnings power to include the Western Spirit transmission acquisition, which reflects a $0.16 increase in the PNM FERC line. The new base for PNM Resources is $2.39 to $2.50. We are clearly on track to meet our earnings growth target of 5% to 6%. This is prior to earnings from either the Supreme Court appeal or San Juan replacement power. We'd also consolidated the financings of our growth into the equity financing plans line. Initially, our plans are to issue up to $150 million of common equity from 2020 to 2022 through our previously announced ATM program. The earnings power slide assumes $50 million in 2020 and ramps up to a maximum of $150 million in 2022. Furthermore, we include an additional equity-issuance model, in the form of a mandatory convertible security of $250 million in mid-2021. This includes the funding for the Western Spirit transmission project. No firm decisions have been finalized on the mandatory convertible security versus other financing structures, but to capture the possibility, it's included in the earnings power. The timing of the equity financing plans will be optimized to support the company's credit objectives.

Finally, as we realize our growth opportunities through 2022 and move forward to 2023, our financing plans reflect our commitment to maintaining our investment-grade credit metrics for PNM Resources and our utilities. To meet this plan, we continue to maintain the current regulatory cap structures of the operating entities. On a consolidated basis, we are targeting 16% FFO-to-debt ratio and holding company debt levels that are less than 20% of our consolidated debt.

Now I'll turn it back over to Pat. Thank you.

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Patricia K. Vincent-Collawn, PNM Resources, Inc. - Chairman, President & CEO [5]

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Thanks, Chuck. We remain focused on executing our plans to transition PNM's generation portfolio to carbon-free resources by 2040. The Energy Transition Act has established an energy policy in New Mexico, with clear goals and directions for the future to increase renewables and infrastructure investments. We hear that direction and accept the challenge.

In Texas, we're committed to supporting growth by strengthening our system to provide reliable service that meets the needs of our customers. While meeting this growth, our TNMP team has also earned EPA recognition for the fourth consecutive year as an ENERGY STAR Partner of the Year for the energy efficiency programs, and they were also selected for a Sustained Excellence award, meaning that the achievements continue to surpass those in prior years. And that was the second consecutive year they won the award.

We still have plenty of work to do, but achievements like this show that we're on the right path. Andrea, let's please open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Greg Gordon of Evercore ISI.

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Gregory Harmon Gordon, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research [2]

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Did you guys take advantage of National Comic Book Day this weekend?

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Patricia K. Vincent-Collawn, PNM Resources, Inc. - Chairman, President & CEO [3]

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Actually, when I was Downtown, I saw a bunch of people running around in comic book outfits. So that was my extent of celebration.

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Charles N. Eldred, PNM Resources, Inc. - Executive VP & CFO [4]

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But we're not in costume to do that so...

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Gregory Harmon Gordon, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research [5]

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(inaudible) so we figured that it's the -- some of the special days we have over the course of year, so I thought...

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Patricia K. Vincent-Collawn, PNM Resources, Inc. - Chairman, President & CEO [6]

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I know, we couldn't find a good day for today, so we're boring.

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Gregory Harmon Gordon, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research [7]

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Definitely not boring. My question is, I guess, with regards to the timing or pace of change in terms of the -- at the regulatory commission, could you just review what we have to look forward to in terms of milestones to get to the point where that would be an executed change in the structure of the commission?

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Patricia K. Vincent-Collawn, PNM Resources, Inc. - Chairman, President & CEO [8]

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Sure. The resolution goes on the ballot in the next general election in 2020, and it just needs a simple majority to pass. And then the changes will phase in. So that by January 1, 2023, it will be the 3 appointed commissioners, no more than 2 from 1 party, and the legislature plans to set some pretty extensive education and experience requirements. Now legislature still needs to put together the enabling legislation for that. They could either do it in 2021 after the legislation is passed or their current thinking is to put that legislation into place next year in 2020 before the constitutional amendment is on the ballot. So that way, they'll give voters a way to see what the education is, what the experience is and the selection process because they want to prove that there will be a very robust selection committee and process so that it won't just be sort of, I won't say random, but less robust appointments. So that's where we are looking forward now and the business community and obviously, the environmental community are both very supportive of moving to that appointed commission.

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Gregory Harmon Gordon, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Power & Utilities Research [9]

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And second question. If I look at your last disclosure with regard to potential upside CapEx versus what you've been able to execute, in the Q4 deck you had, $350 million in '21, $100 million in '22. For a total $400 million, you've executed on $285 million. I mean should we think about the incremental CapEx that might be needed to meet the state's goals with regard to the environment transition as being in the ballpark of that? Or could it just be significantly higher or lower or over a different time frame, depending on how your resource planning comes out? And then as a sub-question to that, because this is being financed with the securitization proceeds, should we see that as accretive to rate base and earnings? Or should we see that as a replacement from the -- for the earnings that -- or the economic contribution that would have otherwise come from the plant that you're retiring?

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Charles N. Eldred, PNM Resources, Inc. - Executive VP & CFO [10]

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Yes, Greg. To your point, we've -- out of that $150 million, we've invested $580 million between the PNM and TNMP customer growth aspects of the capital. And then also the Western Spirit transmission investment. The additional capital will be driven by the decisions around the replacement power. Certainly, we feel strongly that as we go through the RFP process, there will be some opportunities for ownership that should be justified for the values that we can create for serving customers with the changes in our load profile and the expectations to meet the new Energy Transition Act. And anything additional that we feel is maybe lacking from replacement power, then we'll go back to look at other capital in our prioritization pipeline, if you will, of other opportunities to see if we need to fill any gaps. So we are focusing on the 5% to 6% growth through 2022. We're comfortable that we're on track to do that. And we feel like with the replacement power, it will clearly provide an opportunity. But in the event that we fall slightly short there, then we'll look at other capital that we have in our prioritization bucket, so to speak, to add some additional growth.

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Operator [11]

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Our next question comes from Julien Dumoulin-Smith of Bank of America Merrill Lynch.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [12]

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Curious though, if you can elaborate a little bit here on some of the excitement around the generation. So I just wanted to understand, in a preview to June here, how many megawatts are we talking about here? I know the legislation was fairly prescriptive, I know that there's replacement opportunity that's pretty fairly prescribed. How do think about that? And in terms of the cost I mean there's nothing necessarily that would shift this away from what you would otherwise expect for the cost of peaker's type solution, right?

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Charles N. Eldred, PNM Resources, Inc. - Executive VP & CFO [13]

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Yes. So Julien, it's about 450 megawatts of replacement power. And we don't want to get our -- we're not at a point yet to give a lot of details as to what we think around the actual replacement power will be, but we have said in other discussions that we feel a need for this additional peaking units that would allow for support and reliability of our system. And that can certainly could be some assets that are built up in the San Juan area. And then there will be accommodations, some renewable generation, could be both, either solar or wind. And then the additional piece could be battery storage. But we're going through a very robust RFP process. We want to make sure that we have justified all aspects of what we think is the most affordable and reliable replacement resources. And then when we come out with the abandonment filing in June, and then we will update the earnings power in the capitals slides to reflect that.

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Patricia K. Vincent-Collawn, PNM Resources, Inc. - Chairman, President & CEO [14]

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And Julian, one of the reasons for that is that we'll pull alternatives out, right? Because there's more than one way to get to where we want to go. There's a lease cost, putting the resources up at San Juan to fulfill the tax base, there's using batteries instead of gas. So we're going to have multiple scenarios so that the state can have that collective dialogue on where they want to go.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [15]

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Okay. Fair enough. And the a couple hundred million dollars, was it -- that was really a placeholder, right? That was -- kind of reflects the...

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Charles N. Eldred, PNM Resources, Inc. - Executive VP & CFO [16]

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It's a placeholder to indicate that we do feel like there'll be some replacement resources that will be justified for ownership. And so certainly that was the intent when we identified the replacement power possibilities.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [17]

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And let me come back to this, both in terms of this immediate RFP, but also broadly in terms of PPAs or otherwise to meet the higher RPS, how do you think about build on transfer opportunities and just being able to compete, given the challenges of having solar and rate base here?

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Charles N. Eldred, PNM Resources, Inc. - Executive VP & CFO [18]

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We really feel replacement power on the peaking capacity of what's needed to provide some of the -- just the support of the Imbalance Market that we can be very competitive and will be very competitive. So we're very open to a procurement process to ensure that the decisions made around procurement are best serving customer needs and also the other stakeholders, shareholders, et cetera as we think about what's the greatest value of what is necessary to make decisions around affordability and reliability to include the ownership and as well as a possibility for PPA. So we're just going to let the process work itself through. But we're comfortable that we, as Pat pointed out, there will be several options, but certainly, we think ownership does create some additional value that PPAs don't bring.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [19]

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And then that ownership route, if we see a PPA headline there, does that necessarily preclude to build on transfer opportunity in your mind? Just to be more clear about that?

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Charles N. Eldred, PNM Resources, Inc. - Executive VP & CFO [20]

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No.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [21]

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Okay. Excellent. And solar and rate base something you could do from just a structuring perspective?

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Charles N. Eldred, PNM Resources, Inc. - Executive VP & CFO [22]

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Well, again, it depends. We have the JV that certainly has the capability of bidding on solar to make it competitive to third-party solar opportunities. So we'd just let the (inaudible) process work itself through, and then we'll make decisions around what we think is the right combination of replacement power.

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Julien Patrick Dumoulin-Smith, BofA Merrill Lynch, Research Division - Director and Head of the US Power, Utilities & Alternative Energy Equity Research [23]

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Got it. And the transmission line, there's no incremental opportunity beyond the $285 million, like off that initial route?

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Charles N. Eldred, PNM Resources, Inc. - Executive VP & CFO [24]

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Not initially. We think that will cover what's necessary for meeting the needs of Pattern, and certainly, we continue to strengthen our own system with the BB2 line. And overall, the net effect of reading value for a stronger infrastructure continues to be a focus, but that's currently what we have identified as the opportunities.

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Operator [25]

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(Operator Instructions) And our next question will come from Ali Agha of SunTrust.

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Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [26]

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First question, Chuck, I just wanted to be clear. When I look at the financing plan you laid out this time around as part of the earnings power versus what you've given us on the fourth quarter, there is significantly higher amount of equity, I guess the mandatory convert has come into the equation. Can you just explain what's driving that in the sense that the total amount still looks to be similar to what you were talking about previously when you talked about growth plans? So why more equity now than what you had previously shared with us?

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Charles N. Eldred, PNM Resources, Inc. - Executive VP & CFO [27]

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Well, again, we do keep adding the growth opportunities, that you're familiar with, into our capital plan. And so we're just making sure that as we think through financing the business, that we maintain a strong credit focus of ensuring that we don't go over the 20% consolidated debt at the holding company, and we maintain a target of 15% FFO to debt. And so in the financing plans are really reflective of what we think is appropriate to meet those types of requirements in that '22, '23 time frame.

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Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [28]

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Okay. And then also, I believe the earnings power that you had given us that -- with the year-end numbers included some assumptions on the replacement plan. So when you put it all together, the real bottom line earnings power for the whole period was much higher than what you're sharing with us today. So when you do format that placement plan with your filings, and update the earnings power slide, do we roughly end up at the same level that we were at year-end? Or are you now ahead of that, given the transmission and other growth initiatives?

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Charles N. Eldred, PNM Resources, Inc. - Executive VP & CFO [29]

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No. We're right on track to what we think is reflective of what the original expectation was with growth opportunities. And we were a little bit higher on the FERC side for the Western Spirit transmission line. We certainly, as you pointed out, the earnings power potential slide does not include any replacement power. So there's certainly upside when we begin to think about the possibilities there. And everything else in the TNMP and in other aspects of the business reflect the additional capital we've put in for the growth expectations in Texas. So I think we're clearly on the track of meeting the objective of 5% to 6% earnings growth with the added capital and the additional possibilities with the replacement power or other types of capital that we have in our prioritization pipeline.

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Ali Agha, SunTrust Robinson Humphrey, Inc., Research Division - MD [30]

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Okay. Last question. In the past, you folks have talked about the importance of scale in the Utility business. And the fact that on a stand-alone basis, perhaps, PNM doesn't have that scale, but as we're still increasing the CapEx plans and so on, what's your thinking about that? And might you still be interested in growing beyond organic growth as you're looking at the optimal scale for this company?

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Charles N. Eldred, PNM Resources, Inc. - Executive VP & CFO [31]

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Well, we continue to focus on our plan that we've laid out in the expectations set within the earnings power, potential of the business. Our capital plan, meeting credit metric objectives, what we think is affordable for potential rate increases that we will file during this period of time. First one being in December of this year, effective in 2021. So that's plenty for us to continue to do. And if that represents organic growth and opportunities that we think supports the transition to a different portfolio in New Mexico. And as we've said before, if there's other third parties interested in the company in a different way and involving M&A, then certainly, we would always take that to the board for consideration. But we've got our hands full right now of what we've got to do, and we continue to focus on that and execute to deliver the results that we have set in these expectations.

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Operator [32]

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Our next question comes from Andrew Levi of ExodusPoint.

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Andrew Levi, ExodusPoint Capital Management, LP - Portfolio Manager [33]

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Just a clarification on the financing. I understand what's being issued. Just on the potential capital of CapEx upside, does the financing kind of include potential capital upsizing? Or would that be incremental or not?

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Charles N. Eldred, PNM Resources, Inc. - Executive VP & CFO [34]

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No. The financing plan includes what we have currently identified in our earnings power expectations to meet the capital growth that we've laid out in the plan. And keep in mind, replacement power will be handled through securitization if there's replacement of resources, and we'll finance it through that mechanism. So that's not really reflective in the plan. So at this point, what you have in the earnings power is what we think is the financing plan to meet the capital growth that we have identified.

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Andrew Levi, ExodusPoint Capital Management, LP - Portfolio Manager [35]

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Okay. And then just back on the financing. So is it up to these amounts or these are the amounts?

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Charles N. Eldred, PNM Resources, Inc. - Executive VP & CFO [36]

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No. They are up to these amounts because it gives us, as we all know, timing of financings, circumstances around, where we think we want to execute for supporting the cap structures of the operating companies and the credit metrics that I talked about. So that particular category could have some movement on timing and even size based on what we think is appropriate for the business. But for the benefit of showing there is potential, we just made some basic assumptions that you can work with Lisa and Jimmie on, to get a better understanding of what's built into the numbers. But certainly there are some flexibilities to how we think about optimizing the financing plans within the business as we go forward.

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Operator [37]

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This concludes our question-and-answer session. I would like to turn the conference back over to Pat Vincent-Collawn for any closing remarks.

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Patricia K. Vincent-Collawn, PNM Resources, Inc. - Chairman, President & CEO [38]

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Thank you, Andrea. And thank you all for joining us this morning. We look forward to talking to you on our next quarter earnings call and have a wonderful rest of your week.

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Operator [39]

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