Good day, and welcome to the PNM Resources Third Quarter Conference Call and Webcast. All participants will be in listen only mode. After today's presentation, there will be opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Jamie Blotter, Director of Investor Relations.
Please go ahead.
Thank you, Jasmine, and thank you, everyone, for joining us this morning for the PNM Resources' 3rd quarter 2018 earnings conference call. Please note that the presentation for this 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 CFO 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 on current expectations and estimates and that PNM Resources assumes no obligation to update this information.
Form 10 ks, quarterly reports on Form 10 Q as well as reports on Form 8 ks filed with the SEC. And with that, I will turn the call over to Pat.
Thank you, Jimmy. Good morning, everyone. It's a beautiful, sunny New Mexico Day for our Q3 earnings call. Let's begin on Slide 4 with the financial results and some company updates. Our GAAP earnings per share in the Q3 of 2018 are $1.09 compared to $0.92 in the Q3 of 2017.
Ongoing earnings per share are $1.08 compared to $0.93 in the Q3 of last year. Again, this quarter, we saw strong increases in customer usage attributed to both load growth and increased cooling degree days in New Mexico. As a result, we are narrowing our earnings guidance to the upper end of the previous range for 2018 as we are now expecting $1.95 to $1.98 We are affirming our consolidating earnings guidance for 2019, although our segment results reflect an improving load outlook at PNM. Last quarter, we noted that we were starting to see the results of New Mexico's economic development efforts show up in our load growth numbers and we increased our load guidance for the year. These positive results have continued this quarter and we have adjusted 2019 expectations upward to reflect these results and some recent economic development announcements that existing film studio and bring $1,000,000,000 in production to New Mexico over the next 10 years, creating up to 1,000 productions jobs annually.
This site is the first purchase of a studio complex for Netflix in North America and it is intended to be the new food and food and beverage distributor headquartered in Fort Worth has announced plans to build a new facility in Albuquerque and add almost 100 new jobs. A New Mexico startup that uses proprietary ceramic glass to make semiconductor chips announced that they are expanding to a new facility and growing their science and technology employee base from 16 to 150 over the next 5 years. The City of Albuquerque also announced last week that they are requesting proposals for a mixed use project in downtown that would include an entertainment venue. These announcements are examples of the activities we are seeing in New Mexico that are leading to our increased load assumptions and our addition to the wins that we have announced earlier this year, such as TaskUs, a company who provides outsourced customer service strategies is expanding to Albuquerque and creating 700 new jobs. A 200 room hotel just outside of Albuquerque opened in July, and a commercial developer is adding 3 new projects with more than 11 last week TNMP filed a unanimous settlement in TNMP's general rate review.
The settlement calls for an increase to base rates of $10,000,000 compared to our filed request of $25,900,000 Changes to ROE, capital structure and cost of debt comprised the majority of this difference. The settlement reflects a 9.65 return on equity, a 45% equity structure and a 6.4% cost of debt. Before the PUCT by the end of the year allowing for rates to be implemented in January of 2019. The settlement reflects approval of the company's proposed depreciation rates, which preserves our cash flows that are important to future growth in Texas. We've talked about this case providing a rebalancing and reset between the transmission and distribution businesses.
And as we move forward from the case, we are preparing to increase the amount of investment in our service territory to support the sustained growth levels we've been experiencing. On the New Mexico regulatory front, we received a recommended decision on October 26 that would accept the integrated resource plan that we filed in 2017. The recommendation will now go before the commission for consideration to the plan as compliant with the IRP rule. This could make it onto the agenda before the end of 2018 or carry into 2019 when the newly elected commissioners will be in office. And remember, as we've said before, any retirements or additions to our resources must still be approved through a separate process.
Still, this recommendation is a positive step as we make plans to transform our generation portfolio. With that, I'll turn it over to Chuck for a detailed look at this quarter's numbers.
Thank you, Pat. Good morning to everyone and thank you for joining us. Let's start with the revised guidance that Pat mentioned on Slide 5. 2018 is turning out to be a strong year and we have narrowed our previous guidance range to be $1.95 to $1.98 for this year. Increased improvement in load in addition to strength and cooling degree days drove our results into the upper end of our previous range.
For 2019 guidance, we have kept the total range intact, but we have seen some shifting between PNM and Corporate and Other segments. PNM is slightly higher in the range driven by increasing load expectations. Offsetting this is corporate, which will experience some additional interest expense due to increasing interest rates. Now turning to Slide 6 for 3rd quarter results. As Pat indicated, ongoing earnings per share are strong at $1.08 PNM's earnings were up $0.18 We have several items that were in our guidance for the year that impacted earnings such as the combined effects of the retail rate phase in, changes in tax rates and the generation portfolio changes that included bringing Palo Verde Unit 3 into rate base, improvements in our interest expense depreciation and property tax increases from our capital investments.
Load was strong again this quarter and weather was also favorable at PNM with cooling degree days at 5% higher than normal and 2% higher than the prior year. Earnings from the 3rd party transmission customers and our annual formula rate true up were also coming in at the top end of our range. As I mentioned last quarter, we anticipated having some additional O and M expenses in the second half of this year. At PNM, O and M was $0.04 higher compared to Q3 of 2017. This includes various items such as vegetation management and routine maintenance at our plants as well as some additional work on our distribution system in response to storm related outages.
Tennepe is up $0.02 versus Q3 of last year. Drivers include continued strong load, TCOS filings Finally, corporate and other was down $ Finally, corporate and other was down $0.05 primarily for increased interest expense and a reduction of the interest income that resulted from the earlier repayment of the Westmoreland loan in May. When Westmoreland paid off the remaining $50,000,000 of their loan, we were also able to pay down our loan that supported the financing of the coal mine, reducing our debt level. Now turning to Slide 7 for our load information. Pat walked us through several economic wins in New Mexico at the start of our call.
After a number of quarters of these types of announcements, we are seeing the impact in our employment growth numbers. Albuquerque has been lagging the nation for a while now. July August of this year, we saw significant upticks that resulted in Albuquerque closing the gap with the total U. S. Numbers.
Based on the various wins that we see in the state, we expect the unemployment growth to continue. Texas continues to lead in energy production, ranking number 1 in both crude oil and natural gas production. At TNMP, we continue to see this growth in the Permian Basin. New large customer service requests continued to come in during Q3 at a similar pace to the first half of the year. We also continue to see other proposed load additions throughout our service area, including petroleum refiners in the Gulf Coast.
We have dedicated more capital to TNMP to serve the customer demand and we expect to continue doing this to ensure that the needs of our customers are being met in our service area. In both New Mexico and Texas, we have several future opportunities. We're also seeing some of their previously announced economic development projects come to fruition. For example, the new Presbyterian Hospital in Santa Fe opened about a month ago and a major Mary Kay manufacturing R and D facility opened in Lewisville last week. We're now seeing the results of these facilities and others showing up in our load projections.
Turning to our results. PNM is showing positive load growth of 1.1% for the quarter, bringing our year to date average up to 0.4%, which is in the upper end of the increased load guidance we issued last quarter. In addition, our customer count is up close to 1% compared to last year. For PNM, we are increasing the 2019 load growth numbers and customer account expectations. We now have load up 0.3% to 0 point 5% compared to 2018 and the customer count expectations are moving up from 0.5% to a range of 0.8% to 1% for both 2018 2019.
At TNMP, our value metric year to date load shows 3.2 percent growth, which is just over the upper end of our 2018 guidance range. Demand based load from our large industrial customer continues to be strong with 6.4% growth year to date, which is within the guidance range that we revised last quarter. Now turning to Slide 8 for an update on our investment plan. We told you last quarter that we would update our capital plans. We are continuing to invest more capital dollars into the growing Texas business.
We now plan to spend $175,000,000 more in the business through 2022 and as the customer continues to demand continues to grow, we'll continue to fund the business in the future. We have also refined the reforecasted spending of PNM. We have moved the dollars associated with San Juan replacement power opportunities for an incremental growth slide that I will cover later in this discussion. And we have made other adjustments at PNM to both Generation and T and D to reflect our current plans. In the T and D area, we are focused on ways to strengthen our reliability.
One noteworthy item is our system protection upgrade plan, which is already underway. This investment is upgrading T and M's entire transmission protection system to provide long term service and the reliability while mitigating operational risk. We've also reflected our investment plans for our 50 percent joint venture that we have with AEP to deliver flexible renewable options for our customers. Between our completed and planned projects, we have a total of 134 megawatts of solar today. Our income from the JV covers the cost of debt for the activities and is slightly earnings accretive with about $0.01 of earnings representing the potential earnings power in 2021.
Going forward, we expect those earnings to become a little more accretive getting up to about $0.02 in 2022 and beyond. Our investment plans now total more than $600,000,000 in 20.19 $580,000,000 in 20 20. Although the chart investments trending down beginning in 2021, we also know that we have several incremental growth opportunities that we will comment on shortly. Now turning to Slide 9. We have updated our potential earnings power through 21 to reflect the revised guidance changes in 2018 2019 as well as a new investment plan in TNMP's rate case that was filed last week.
2018 2019 each reflect the midpoint guidance of those years. In 2020 2021 at PNM, no significant changes were made. Potential earnings potential for PNM compound, our earnings growth rate for 2018 to 2021 is 4% to 5%. At TNMP, we reflect the settlement ROE of 9.65% and the targeted rate base growth of about 17%. After reflecting both the rate case settlement and the revised investment plans, we show TNMP's potential compound annual earnings growth at about 7%.
This growth also reflects refinancing of our $172,000,000 9.5 percent Debt in April 2019. Also made slight adjustments to our corporate and other expectations. This brings total potential earnings power for 2021 to $2.21 to 2 $0.33 without the Supreme Court items. Using the midpoint of $2.27 potential compound annual growth would be about 5%. These growth rates are now calculating the revised $1.97 midpoint of this year's guidance rather than the previous $1.87 that was used for 2018 estimates.
Now back to Pat to introduce the incremental growth opportunities we see in the future.
Thanks Chuck. Continuing on Slide 10, we're going to talk you through the growth opportunities that we see in the future. These are items that are incremental to the capital investment plans and potential earnings power that Chuck just reviewed. We believe that we are seeing evidence of New Mexico's economic development focus starting to gain traction. We are finding creative ways to work with customers to deliver energy in a way that they need it.
And we also believe we are at the tipping point for an energy transformation in New Mexico and Texas continues to be strong. If we turn now to Slide 11, our opportunities for incremental growth can be categorized into 3 areas. New customer load and infrastructure investments, transmission and renewable energy expansion in New Mexico and generation portfolio transformation. New customer a continuation of the load trends we have been seeing and our corresponding investments to support this growth. As Chuck noted earlier, we have continued to allocate additional capital to Texas to ensure that their infrastructure accommodates their continued strong economy.
In New Mexico, we are talking with customers that are considering moving or expanding in our service area. We are partnering with them to understand the timing of their growth specific renewable growth and we are providing solutions to meet those goals. Our current infrastructure is also ready for replacement and modernization As load profiles and the generation resource mix evolve, as well as how our customers view their usage of energy and their ability to make choices in how and when they use it, our grid will need to be more responsive and more adaptable. We are prepared to revisit AMI as this is a proven technology with benefits to customers. As the New Mexico Commission has asked, we will be filing for a pilot program in our next energy efficiency filing in 2020.
We are poised to engage with our stakeholders to understand their needs and provide solutions that work for New Mexico. Transmission and renewable energy expansion in New Mexico is the second area of growth that we see. As states across the West have increased standards, we've seen 3rd parties look to capitalize on the abundance of wind in New Mexico and the need for new transmission capacity on our system to move that energy. New Mexico has been ranked 2nd in the United States for solar potential and 6th for land based wind energy to our grid to accommodate those resources. Finally, as we work through the process of our potential retirement of the San Juan generating station and also look ahead to the potential exit in 2,031 from the Four Corners power plant, we look for opportunities to help New Mexico make its mark as a leader in renewable energy.
We have previously noted that our integrated resource plan included the construction of 2 sizable gas peaking plants as replacement power. We issued an AllSource RFP however and the bids that we received contained a variety of solutions. We also expect that advances in energy storage will make this a technology that we can begin to integrate into our system to further utilize renewable energy resources and continue to transform our resource mix. We have been collaborating with legislative stakeholders on energy related issues ahead of the 2019 legislative session that kicks off in January. These could include increases to the renewable portfolio are advocating for the transition to cleaner energy resources.
Securitization is the most economical way to achieve this transition and we look towards the legislature to allow for this financing alternative before we file for the abandonment of San Juan in the spring. I'm going to turn things over to Chuck now, who will walk through the financial impacts of these exciting opportunities.
Thanks, Pat. And turning to Slide 12. The blue bars on this slide represent 2018 to 2022 investment plan that we previously discussed. However, our future plan indicates potential incremental growth of $950,000,000 over the time horizon. New customer load and infrastructure investment in in Texas and New Mexico could be up to $300,000,000 Transmission and Renewable Energy expansion in New Mexico has a $250,000,000 potential and the generation portfolio transformation could be up to $400,000,000 The reason we're not including these opportunities in our investment plan is largely due to confidentiality and timing.
These projects represent early stage plans to partner with both new and existing customers to meet their goals for growth and to ensure that their needs for renewable energy are met. This also covers opportunities to replace aging infrastructure as load comes to our system and new capital is necessary to maintain system reliability requirements. At TNMP, our investments have been driven by growth that we've had over the past several years. At PNM, our focus is on replacing the aging infrastructure. At PNM, the average age of our transmission line infrastructure is over 50 years and the overhead distribution line portion is over 45 years.
Likewise, substation infrastructure, which contains all the electric grids transformation and protective elements, the average age for the equipment is 40 years. Many of these assets are reaching their planned life cycles and are approaching the timeframe to be refreshed. We will also be doing much more in future years as we apply new technology and further bolster our delivery assets in order to improve our service reliability, enable flexibility for future customer growth and ultimately should over time help to control operating and maintenance cost. We also plan to do a pilot program for the automated meters that will help to redefine
define
our opportunities for transmission and renewable energy expansion. Whether we're building renewables ourselves, either at PNM or through our joint venture or investing in the transition system to support 3rd party renewable development, we are confident that the opportunities to invest are real. We also made a filing in August to join the energy and balanced market. This would enable greater integration of our renewable energy and lower customer cost, a hearing is scheduled in front of the commission next month. As we consider seeking approval for the abandonment of San Juan and what the replacement power needs are.
The finalization of the RFP process will define the mix of gas, renewables and battery storage that will be proposed. Furthermore, the outcome of the securitization legislation addressing the undepreciated cost of San Juan and the low cost financing will also help finalize plans for the generation portfolio transformation. We have significant capital plans over the upcoming years and we will prioritize these considering the needs across the system. Now turning to Slide 13. Here you can see the potential earnings power of these incremental growth opportunities.
I've already talked about the potential rate base amounts. Together, these represent potential to grow earnings up to $0.56 Including in these amounts are replacement resources for San Juan, so we need to consider that reduction to rate base. We'd also expect to finance the growth with a balanced mix of debt and equity, ensuring that we maintain strong investment grade credit ratings. After those considerations, we view these incremental growth opportunities as adding up to $0.22 to our 2022 potential earnings power. This results in 5% to 6% earnings growth target through 2022.
Using the increased base of $1.97 which is the new mid point of the 2018 guidance. Clearly, we believe that the incremental growth, the prioritization of capital allocations and the related timing presents the opportunity to execute an investment plan that enhances the value And now I'll turn it back over to Pat.
Thanks Chuck. Just a quick reminder, since we have previously given 2019 earnings guidance and affirmed it today, we do not have plans for a December event to specific to earnings guidance this year. Our board will address the dividend in December and we will let you know of any changes. We continue to target a payout ratio on the dividend of 50% to 60%. In terms of our plans, we believe that these are the right steps to take for our customers and our latest customer satisfaction scores indicate that our customers think we are moving in the right direction.
As we share our message with customers about how our plans benefit them and their communities, we look forward to seeing the positive feedback continue. Thank you again for joining us today. Operator, let's open it up for questions.
We will now begin the question and answer session. The first question comes from Anthony Crowdell of KeyBanc.
Good morning. Good morning, Anthony.
Hey, Anthony. Hey, Anthony.
Just quickly a couple of housekeeping items. On utility PNM utility, on one of the slides you gave, the driver was, I believe, dollars 0.22 and that was a combination of a bunch of things. I guess I'm on Slide 18, retail phase. And previously you broke that up into different buckets. Are you guys prepared to break it up now or you just grouping that together?
No, we grouped it together and just call Lisa and she'll break it back down into the buckets you're
The
The date of the Board meeting, it is the last or excuse me, the 1st Thursday in December.
Okay. And any driver behind on your earnings potential slide, is the driver higher interest cost on the rise in parent expenses on Slide 9? Corporate and other segment has grown?
Yes. The corporate and other segment, it's really the drivers, the rise in interest expenses you mentioned. And if you go back out into 2021, you would see that we're actually making considerable amount of corporate contributions, capital equity contributions down to recapitalize PNM and also TNMP to balance their cap structures. And then we have a refinancing of our suns, which comes due $300,000,000 in 2021 and we have some hedges that roll off in 20 $1,150,000,000 So we haven't, Anthony, pursued optimizing the cap structure and some of the things that we might consider doing. So at this point, what we know and the fact that these maturities and equity contributions will be made to fund the capital growth of the businesses.
And I apologize, are you assuming equity issuances in 2020 or 2021 or you haven't disclosed that yet?
No, we put it on the earnings power slides. In 2021, you would see in the earnings power that we have roughly $50,000,000 to up to $150,000,000 of equity that would be off of a ATM program. And so you can see that on the earnings power slide on the ATM program.
Got it. And I guess then curious, historically you've always given that great slide, Slide 8 with all of those colors And you've now removed stuff and include that in considering incremental opportunities. Is the reason you're pulling that off is that less certain because in the beginning of the call there were a lot of positives of growth and Netflix is moving there, Mary Kay is moving there, all these things, but yet you've pulled out additional generation resources and sit down on incremental growth. And just curious why they don't get put on the traditional Slide
8? Yes. So the way to look at that is if you go back to the last capital forecast slide that you have seen before today, you would have seen the replacement power generation that we had put in there for 2021 2022. And if you pull that out and you would add back And that's a large amount of increases that we have for TNMP. So you can go And that's a large amount of increases that we have for TNMP.
So you can go back and make the comparisons of what previously was under $200,000,000 for TNMP. Now we're running over $200,000,000 for investing in TNMP's growth. So the point I was making on the opportunities for incremental capital really has a lot to do with how we prioritize and allocate capital. That's going to be driven by the results of securitization and more certainty about what the replacement power is in San Juan. And then from that, we'll begin to understand the allocation of the capital for replacement power.
Then we'll take a look at what the transmission opportunities we have with 3rd parties that will be driven by renewables and opportunities that we are currently in negotiations with that are real. And the same time, we have the core business, which we will continue to address the growth capital and opportunities we have with the growth in Texas, but also as I commented earlier about the aging infrastructure and the opportunity for investment into T and D at PNM. So this is all about prioritization, the timing and how we allocate capital based on certainty, but we don't want to get ahead of our commission, don't want to get ahead of our plans, but we are comfortable that we have adequate capital and adequate opportunities to sufficiently support a 5% to 6% growth rate between 2018 2022.
Great. And a promise last question. Any update on the Supreme Court hearing?
Same update as last time. No, we
check that website every day. They post new cases and nothing yet.
Great. Thanks for taking my questions. I'll see you at EEI.
Thanks,
Anthony. Next question comes from the line of Julien Dumoulin Smith of Bank of America Merrill Lynch.
Hey, it's Nick Campanella on for Julien.
Good morning, Nick. Hi, Nick.
Morning. I just wanted to make sure I heard you right on the refi of the 9.5% note at TNMP. Is that contemplated in the $0.71 for your 2020 earnings potential?
Yes. And if you go back in the appendix, we have a footnote in the earnings potential slide that referenced is $0.04 on a full year for that refinancing.
Got it. Okay. And then just in terms of equity funding relative to the upside that you outlined, I saw and I'm sorry if you touched on it already. I know you said $0.15 of dilution from both debt and equity. Can that be covered the equity portion of that?
Can that be covered in the current ATM that you have available? And can you remind us of the magnitude of that?
Well, it's really more incremental to that growth opportunity. So if we're successful with really financing up to $630,000,000 of new rate based growth and investment, then we would balance the mix of equity and debt to ensure that we have the proper investment grade ratings that we currently hold. So it could be a mix of common equity, could be some mandatory converts and then some debt, but it's all incremental to what we currently have in our forecast.
Thank you.
Thanks Nick. Next question comes from the line of Paul Fremont of Mizuho Securities USA.
Thank you very much. I guess on Slide 9, if I look at the potential earnings power for 2020 2021, the high end has come down somewhat. What would be sort of the explanation for the potential earnings power numbers changing from the
Q1? Yes.
So Paul, if you go to that Slide 9, you would see that if you started with 2020, we'd be at midpoint would be 220 in 2020 and midpoint would be 230 in 2021. So there's a slight increase at TNMP to reflect what we just talked about. And then the really the offset, the negative is the corporate and other category where we reduced by 0.03 $3 in 2020 and by $0.05 in 2021. And as I mentioned, that's really reflective of the significant amount of capital we're putting into the both businesses at PNM and TNMP to support the rebalancing of the fifty-fifty cap structure before we file rate case in 2021 that would reflect in the amount of debt we hold at the corporate and other and the interest cost associated with that and some additional equity contributions for TNMP's growth capital as well. So all in all, the drag is really reflected of higher interest rates and the amount of debt that we have to make the equity contributions down to the operating companies.
And then on securitization, have you spoken to the other intervener parties? And do you have support from other intervener parties for a securitization proposal and which I assume you'll pursue with the legislature, right?
Yes. Paul, we've actually worked with a very broad group of stakeholders, not only other intervenors excuse me, intervenors in the case, but the folks up in the Farmington area, our environmental groups, staffers from both potential governor candidates, the legislature. And right now, there's a bill, it's not our bill, it's being drafted and work through. And so we've got some pretty broad support on that. It can take a wide variety of forms.
I think there's going to be a lot of energy related bills up at the legislature this year. So we'll have a little more clarity after today when we know who our governor is and who's in the House and the Senate. But it's an ongoing process that's going well.
And how long is the legislative session?
It is 60 days this year.
Okay.
And I guess, it looks as if you're raising sort of the sales growth outlook based on what you've seen so far this year. Do you see sort of the ability for that to move up further based on what you're seeing in terms of industrial sales growth or I guess on a longer term basis, do you see the potential for that to continue to come up?
Yes. So keep in mind for PNM, the industrial load is only about 12%. So it is not a significant driver, but we do we are seeing some very serious opportunities for additional data centers that could come to New Mexico. So certainly there this is not reflective of any of that type of opportunity. Normally what we see is the commercial and the residential, but mostly commercial starting to show some signs of improvement.
We'll revisit that when we do the call in February to see whether or not we feel any differently about load. But as the load has increased, we're also seeing some opportunities that we need to spend some additional dollars within PNM and TNMP on the operations side. So we made some adjustments to show the increase in load improvements within PNM, but also offsetting some of that with some additional operation expenses that we have planned as well. So we're not changing the guidance for 2019, but we'll take a very careful look at that in February to see if we think
Next
Next question comes from the line of Ali Agha of SunTrust.
Thank you. Good morning.
Good morning, Ali. Good morning.
First question, Pat or Jack, wanted to get a little insight into your thinking on the TNP settlement. You agreed to a lower ROE and were not able to get the equity component higher as you were planning. So was that a fair that if this goes through litigation that the outcome could be even worse? Just wanted to get a sense of your thinking there on the settlement.
No, I'll start talking about the ROE. When you look at the ROE, it's pretty it's actually better than some of the ones that have been coming out in Texas lately and for a T and D company that's a pretty good ROE. So we knew that we weren't going to get what we asked for. So I think that that was a fair settlement. And I'll let Chuck talk a little bit about the equity.
Yes. I mean, we could tell through the negotiations and you think about the RA recommendations out of staff at 9.4%, the interveners at 9.1%, the equity ratios were a heavy push towards sixty-forty for T and D companies. It was clear for us to bring all the parties to a unanimous agreement that sixty-forty was the best cap structure and a 9.6 probably was where we were more likely to come out and we were successful to hold out a little bit longer and push harder to maintain the 45 percent equity and get another 5 basis points to the 9.65%. So I don't think litigation would have helped us any. I think it was clearly of some very effective negotiations and the parties that were involved to reach an agreement and we felt at the end of the day, we achieved the best results that we could have regardless of litigation, any other approach.
If you
think about it, SPS has got a 9.5 coming up on the twelveseven open meeting agenda and they're vertically integrated, which usually typically has a higher ROE. So we're very happy with that ROE we got.
Got it. And then secondly, also wanted to be clear, when we think about the long term 5% to 6% growth rate target, To achieve that, if I heard you right, you need those incremental CapEx opportunities to materialize and be firmed up. Is that right?
Yes. You need up to is the $950,000,000 So you can do the math and get some variation into the amount of capital that would be reflective of rate base growth and the earnings potential that we'd have to drive the 5% to 6%. But again, these projects are all very realistic and it's just a matter of maintaining confidentiality and planning to how we want to allocate capital across the business in order to achieve the objective. So we're comfortable that the 5% to 6% growth expectation is reasonable and we'll continue to focus our plan to execute towards that. And we'll update the capital as we begin to see the certainty around what we understand is the prioritization needs as we look at each business.
And when you think about some constraints that could push against putting all of that capital to work, customer affordability, customer rates, how big of a constraint do you see that or what could be some of the other constraints that will prevent you from spending all of that amount?
We always worry about affordability, Ali. But if you look at that, our affordability is still very, very good here. And there's some retirements of generation. So you'll be with securitization, you'll really be filling the generation void with that. Much of the transmission is built to export renewables.
So that goes to those customers. Remember the tax reform took our rates down to customers. So we need to be careful in our planning and work. But as Chuck said, there's a lot of good momentum out there and a lot of real prospects out there, which we just unfortunately can't talk about that gives us the confidence that that capital is like very, very likely.
Okay. And last question, from the outside looking in as we are tracking this, any particular milestones we should keep an eye on that triggers the firming up of this incremental capital? How should we be tracking this?
Well, I think, again, the securitization, Bill, that we will be running through the next session, certainly, we'll begin to lay the groundwork of how we think about potential replacement power possibility, as Pat mentioned, the increases in RPS in the State of New Mexico and continue as we see the growth opportunities both in Texas and addressing, as I mentioned earlier, the aging infrastructure needs in PNM. So I would just focus more on the securitization in that bill because once we begin to see that, it will begin to help us gain a greater certainty as to where we allocate capital and for what it's stand for and then other opportunities, the 3rd party transmission and as well as the other business investment infrastructure will come into play.
Our legislation session begins on the 15th January and ends on the 16th March. So that's kind of the timeframe for that.
I see. And lastly, Pat, when is the next time at the earliest you can file a New Mexico rate case?
Yes. We talked about in end of 2019 with effective 2021 January 20 21.
Got you. Thank you very much.
Thank you, Ali.
And the next question comes from the line of Lisanne Johong of Avela Research Consulting.
Hello. Good morning. Congratulations. It's Election Day. Thank you.
Independent transmission, is that a possibility for you guys to take advantage of like the 100% deduction on the investment that you make in the 1st year?
No. We are looking at joining the energy and balance market. And that's really I think as far as we'll go right now. There's a lot of transmission opportunities that we could build within the utility and within FERC jurisdiction, but we are not looking at an independent transmission company at this time.
Sounds like it might be a good opportunity though. All right. Pat, it sounds like you're kind of moving towards abandoning to the 2 gas plants as replacement power and moving more towards a combination of renewables and storage. Did I hear that right?
No. I think there might be some different technology solutions in what we're talking about when we look at what we get in the IRP, but we still believe that we are going to need some gas to support all the renewables on the system and to make sure that we can meet the load curve that we have.
So maybe 2 smaller gas plants and add more renewables than you had envisioned before or are you saying that you're going to keep those 2 bigger gas plants?
No, I think what we had previously talked in our earnings about 2 large gas peaking units that represented the replacement power at San Juan. So we're beginning to see as the low profile changes, more renewables comes onto the system, then we need the smaller peaking units that are able to quick start in order to balance the system with all the renewable energy on it. So a number of say 7 or 8 different smaller units representing close to a couple of 100 megawatts would probably be more likely than any 2 large peaking units we had previously indicated.
Okay. But this doesn't mean that you're going to add renewables to replace that more power?
There will be a combination of gas peaking units and potentially renewables as well as in energy storage also.
And we're just talking about shifting within the pocket of resources that make more sense for the way we operate our system and the amount of renewables that we could potentially have on the system.
But you don't know what that's going to be?
No, we're in an RFP process. Process is
not at liberty to say, yes.
I understand. Thank you.
Thank you, Lassane.
This concludes our question and answer session. I would like to turn the conference back over to Pat Vincent Colon for any closing remarks.
Thank you. And thank you all for joining us this morning. We look forward to visiting with many of you at EEI next week, and I'm sure many of you have already voted, but you haven't. Please take the time to vote on this very important day, Election Day. Thank you all.
Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.