Good day, and welcome to the PNM Resources Third Quarter Conference Call and Webcast. [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, Jasmine, and thank you, everyone, for joining us this morning for the PNM Resources Third Quarter 2018 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 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 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. It's a beautiful, sunny New Mexico day. Thank you for joining us on election day for our Third Quarter Earnings Call. Let's begin on Slide 4 with the financial results and some company updates. Our GAAP earnings per share in the third quarter of 2018 are $1.09 compared to $0.92 in the third quarter of 2017. Ongoing earnings per share are $1.08 compared to $0.93 in the third quarter 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 consolidated 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 factor into our assumptions for 2019. In October, Netflix announced plans to purchase an existing film studio and bring $1 billion in production to New Mexico over the next 10 years, creating up to 1,000 production jobs annually. This site is the first purchase of a studio complex for Netflix in North America and it is intended to the new U.S. production hub for its roster of TV shows and movies. We have also seen several smaller wins. For example, Ben E. Keith, a food and beverage distributor headquartered in Fort Worth, has…

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 in 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 increase in load expectations. Offsetting this is corporate, which will experience some additional interest expense due to increasing interest rates. Now turning to Slide 6 for third quarter results. As Pat indicated, ongoing earnings per share is strong at $1.08. PNM's earnings were up $1 -- excuse me. PNM 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 and 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 third-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 addition O&M expenses in the second half of this year. At PNM, O&M was $0.04 higher compared to Q3 of 2017. This…

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 our customers to deliver energy in the way that they need it, and we also believe we are at the tipping point for energy transformation in New Mexico. And Texas continues to be strong. 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 load and infrastructure investments is 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 in any specific renewable growth, and we are providing solutions to meet those goals. Our current infrastructure is also ready for replacement and modernization as the 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…

Thanks, Pat, and turning to Slide 12. The blue bars on this slide represent 2018 to 2022 investment plans that we previously discussed. However, our future plan indicates potential incremental growth of $950 million over the time horizon. New customer load and infrastructure investment in Texas and New Mexico could be up to $300 million. Transmission and renewable energy expansion in New Mexico has a $250 million potential and the generation portfolio transformation could be up to $400 million. 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, and 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, for substation infrastructure, which contains all the electric grid's 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 time frame 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…

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 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 plants 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.

[Operator Instructions]. The first question comes from Anthony Crowdell of KeyBanc.

Just quickly a couple of housekeeping items. On the utility, PNM utility, on one of the slides you give, the driver was, I believe, $0.22, and that was a combination of a bunch of things. I guess I'm on Slide 18, retail phase-in. 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 to the buckets that you're probably more familiar with. We just lumped it together.

Got it. Do you provide the date of the Board meeting where the dividend will be addressed?

The date of the board meeting, it is the last -- or excuse me, the first Thursday in December. December 6.

Okay. Any driver behind -- on your earnings potential slide, is the driver higher interest cost on rising parent expenses on Slide 9? Corporate and Others segment has grown.

Yes, in the Corporate and Others segment, it's really the drivers, the rising interest expense, as 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 sons which comes due, $300 million in 2021. And we have some hedges that roll off in 2021, $150 million. So we have, Anthony, pursued optimizing the cap structure in some of the things we might consider doing. So at this point, reflects 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 slide. So in 2021, you would see in the earnings power that we have roughly $50 million to up to $150 million of equity that would be off of an ATM program. And so you can see that on the earnings power slide under 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 and considering incremental opportunities. Is the reason you're pulling that off is that it's less certain because -- in the beginning of the call, there are 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 took down incremental growth. And just curious why they don't get put on the traditional Slide 8.

Yes. So the way to look at is that 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 and 2022. And if you pull that out and you would add back the capital without the growth opportunities, we're actually increasing the amount of capital to $229 million from 2018 to 2022, 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 million for TNMP, now we're running over $200 million for investment 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 third parties that will be driven by renewables and opportunities that we are currently in negotiations with that are real. At the same time, we have the core business, which we'll 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&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 and 2022.

Okay, great. And I promise, last question. Any update on the Supreme Court hearing?

Thing updated last time.

No, we check that website every day. They post new cases, and nothing yet.

Next question comes from the line of Julien Dumoulin-Smith of Bank of America Merrill Lynch.

It's Nick Campanella on for Julien. Just want 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, you have a footnote in the earnings potential slide that reference, it's $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 the, really, financing up to $630 million of new rate base 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, it could be some mandatory converts and then some debt. But it's all incremental to what we currently have in our forecast.

Next question comes from the line of Paul Fremont of Mizuho Securities USA.

I guess on Slide 9, if I look at the potential earnings power for '20 and '21, the high end has come down somewhat. What would be sort of the explanation for the potential earnings power numbers changing from the second quarter?

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 $2.20 in 2020, and midpoint would be $2.30 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 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 50-50 cap structure before we file a rate case in 2021, that would reflect to -- 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, either 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 will pursue with the legislature, right?

Yes, Paul, we've actually worked with a very broad group of stakeholders, not only other interveners in the case, but the folks up in 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, that's being drafted and worked through. And so we've got some pretty broad support of 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 Industrial load, it's 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 through to 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 operations 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 differently about the outlook for 2019.

Next question comes from the line of Ali Agha of SunTrust.

First question, Pat or Chuck, wanted to get a little insight into your thinking on the TNMP settlement. You agreed to a lower ROE and were not able to get the equity component higher as you were planning. So was that 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, Ali, 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&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, you could -- we could tell through the negotiations, and you think about the RA accommodations out of staff at 9.4%, the interveners at 9.1%, the equity ratios were a heavy push towards 60-40 for T&D companies, it was clear for us to bring all the parties to a unanimous agreement that 60-40 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% 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 a matter of some very effective negotiations and the parties that were involved to reach an agreement. And we felt that at the end of the day, we achieved the best results that we could have, regardless of litigation or any other approach.

If you think about it, SPS has got a 9.5% coming off the 12/7 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'd need those incremental CapEx opportunities to materialize and be firmed up. Is that right?

Yes, you need up to the $950 million, 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 the 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, it's still very, very good here. And there's some retirement of some generation, so you'll be -- with the securitization, you'll really be filing 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 best 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 will be running through the next session, certainly, will 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 spent for. And then other opportunities, the third-party transmission and as well as the other business investment and infrastructure will come into play.

Our legislation session begins on the 15th of January and ends on the 16th of 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 end of 2019, with the effective of 2021, January 2021.

[Operator Instructions]. And the next question comes from the line of Lasan Johong of Auvila Research Consulting.

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 first 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 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 two smaller gas plants and add more renewables than you hadn't envisioned before? Or are you saying that you're going to keep those two bigger gas plants?

No, I think what we had previously talked in our earnings about two large gas peaking units that represented the replacement power at San Juan. So we're beginning to see, as the load profile changes, more renewables comes on to the system, then we need the smaller picking units that are able to quickstart 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 hundred megawatts would probably be more likely than any 2 large peaking units we had previously indicated.

Okay. But does that mean that you're going to add renewables to replace more power?

There would be a combination of gas peaking units and potentially renewables as well and energy storage also.

And we're just talking about shifting within the bucket 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 split's going to be.

No, we're in an RFP process.right...

Process. We're not at liberty to say, yes.

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

Thank you. 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 if you haven't, please take the time to vote on this very important day, Election Day. Thank you all.

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