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PNM Resources Inc  (NYSE:PNM)
Q3 2018 Earnings Conference Call
Nov. 06, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the PNM Resources Third Quarter Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Jimmie Blotter, Director of Investor Relations. Please go ahead.

Jimmie Blotter -- Director of Investor Relations

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.

Patricia K. Collawn -- Chairman, President and CEO

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 four 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 be the new US 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 announced plans to build a new facility in Albuquerque and add almost 100 new jobs. A New Mexico start-up 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 five 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 are in 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 three new projects with more than 1,100 construction jobs and 425 permanent jobs in Albuquerque.

On other positive developments, last week, TNMP filed a unanimous settlement in TNMP's general rate review. The settlement calls for an increase to base rates of $10 million compared to our filed request of $25.9 million. Changes to ROE, capital structure and cost of debt comprise 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. The case is scheduled to come 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 accept the plan as compliant with the IRP rule. This could make it on to the agenda before the end of 2018 or carry into 2019 with 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.

Charles Eldred -- Executive Vice President and Chief Financial Officer

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 five. 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 (ph) in the range driven by increasing load expectations. Offsetting this is corporate, which will experience some additional interest expense due to the increasing interest rates.

Now turning to slide six for third quarter results. As Pat indicated, ongoing earnings per share are strong at $1.08. 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 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 additional O&M expenses in the second half of this year. At PNM, O&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.

TNMP is up $0.02 versus Q3 of last year. Drivers include continued strong load, TCOS filings that have been implemented since last year, and AFUDC. These are partially offset by an increase in depreciation and property tax expense. Finally, corporate and other was down $0.05 primarily for increased interest expense and a reduction of the interest income that resulted from the early repayment of the Westmoreland loan in May. When Westmoreland paid off the remaining $50 million 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 seven 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 announces, we are seeing the impact in our employment growth numbers. Albuquerque has been lagging the nation for a while now. In July and August of this year, we saw significant upticks that are resulting in Albuquerque closing the gap with the total US numbers. Based on the various wins that we see in the state, we expect the unemployment (ph) growth to continue. Texas continues to lead in energy production ranking number one 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 -- through quarter three 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 and we're also seeing some of the 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&D facility opened in Louisville 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 account (ph) 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 0.5% compared to 2018 and the customer account expectations are moving up from 0.5% to a range of 0.8% to 1% for both 2018 and 2019. At TNMP, our volumetric year-to-date load shows 3.2% 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 eight 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 million (ph) more in the business through 2022 and as that customer continues to -- demand continues to grow, we'll continue to fund the business in the future. We've also refined -- reforecasted spending at PNM. We have moved the dollars associated with San Juan replacement power to our opportunities for incremental growth slide that I will cover later in this discussion and we have made other adjustments at PNM to both generation and T&D to reflect our current plans.

In the T&D area, we are focused on ways to strengthen our reliability. One noteworthy item is our system protection upgrade plan, which is already under way. This investment is upgrading and modernizing PNM'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% joint venture that we have with AAP 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 million in 2019 and $580 million in 2020. Although the chart investment is 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 nine, we have updated our potential earnings power through 2021 to reflect the revised guidance changes in 2018 and 2019, as well as a new investment plan and TNMP's rate case settlement that was filed last week. 2018 and 2019 each reflect the midpoint guidance of those years. In 2020 and 2021 at P&M no significant changes were made. Earnings potential for PNM compounded 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% (ph). This growth also reflects the expected refinancing of our $172 million 9.5% debt in April 2019. We've also made slight adjustments to our corporate and other expectations. This brings total potential earnings power for 2021 to $2.21 to $2.33, without the Supreme Court items. Using the midpoint of $2.27, potential compound annual growth would be about 5%. These growth rates are now calculated in the revised $1.97 in 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.

Patricia K. Collawn -- Chairman, President and CEO

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're at the tipping point for an 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 three 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 and any 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 renewable standards, we've seen third 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 second in the United States for solar potential and sixth for land-based wind energy potential. We are supportive of discussions in New Mexico to integrate more renewables and we'll make the necessary enhancements 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 looking ahead to the potential exit in 2031 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 two sizable gas peaking plants as replacement power. We issued and all source 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 standard, a clean energy standard or other policies to define a sustainable energy future. This is truly a pivotal point for New Mexico and we are advocating for the transition to cleaner energy resources. Securitization is the most economical way to achieve this transition and we look toward 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.

Chuck Eldred -- Executive Vice President and Chief Financial Officer

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 are 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 for substation infrastructure, which contains all the electric grids transformation and protective elements, the average age for 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 automated meters that will help to define how and when the commission wants to proceed with modernization in New Mexico.

New Mexico wind and solar potential supports our opportunities for transmission and renewable energy expansion. Whether we're building renewables ourselves either at PNM or through our joint venture, our investing in the transmission system to support third party renewable development, we are confident that the opportunities to invest are real. We also made a filing in August to join the Energy Imbalance 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 go earnings up to $0.56. Included 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 midpoint 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 that PNM Resources provides to our shareholders. I'll now turn it back over to Pat.

Patricia K. Collawn -- Chairman, President and CEO

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're 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.

Questions and Answers:

Operator

(Operator Instructions) The first question comes from Anthony Crowdell of KeyBanc.

Anthony Crowdell -- KeyBanc Capital Markets -- Analyst

Good morning.

Patricia K. Collawn -- Chairman, President and CEO

Morning, Anthony.

Anthony Crowdell -- KeyBanc Capital Markets -- Analyst

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.

Charles Eldred -- Executive Vice President and Chief Financial Officer

Now we grouped it together and just call Lisa and she will break it back down to the buckets you are probably more familiar with. We just lumped it together.

Anthony Crowdell -- KeyBanc Capital Markets -- Analyst

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

Patricia K. Collawn -- Chairman, President and CEO

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

Anthony Crowdell -- KeyBanc Capital Markets -- Analyst

Okay and (multiple speakers) any driver behind on your earnings potential slide is the driver higher interest cost on the rise in parent expenses on slide nine?

Charles Eldred -- Executive Vice President and Chief Financial Officer

Yes, in the corporate and others segment it's really the driver is the rise in interest expenses 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 (inaudible) which comes due $300 million in 2021 and we have some hedges that roll off in 2021, $150 million (ph). So we haven't (ph) Anthony pursued optimizing the cap structure and some of the things we might consider doing so at this point reflects what we know and the fact of these maturities and equity contributions will be made to fund the capital growth of the businesses.

Anthony Crowdell -- KeyBanc Capital Markets -- Analyst

I apologize, are you resuming equity issuances in 2020 or 2021 or you haven't disclosed that yet?

Charles Eldred -- Executive Vice President and Chief Financial Officer

Now, 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 and the ATM program.

Anthony Crowdell -- KeyBanc Capital Markets -- Analyst

Got it and I guess then, curious historically, you've always given that great slide, slide eight, 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 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 (ph) on incremental growth and just curious why they don't get put on the traditional slide eight?

Charles Eldred -- Executive Vice President and Chief Financial Officer

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 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 (ph) 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 investing in TNMPs 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 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 opportunities for investment into T&D at PNM. So this is all about prioritization, the timing, and how we allocate capital base uncertainty, 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.

Anthony Crowdell -- KeyBanc Capital Markets -- Analyst

Great and I promise last question, any update on the Supreme Court hearing?

Charles Eldred -- Executive Vice President and Chief Financial Officer

Same update as last time.

Patricia K. Collawn -- Chairman, President and CEO

We check that website every day. They post new cases and nothing yet.

Anthony Crowdell -- KeyBanc Capital Markets -- Analyst

Great, thanks for taking my questions and I'll see you at EEI.

Patricia K. Collawn -- Chairman, President and CEO

Thanks Anthony.

Operator

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

Nicholas Campanella -- Bank of America Merrill Lynch -- Analyst

Hi, it's Nick Campanella on for Julian.

Patricia K. Collawn -- Chairman, President and CEO

Morning, Nick.

Nicholas Campanella -- Bank of America Merrill Lynch -- Analyst

Good morning. Just wanted to make sure I heard you right on the refi of the 9.5% note (ph) at TNMP, is that contemplated in the $0.71 for your 2020 earnings potential?

Charles Eldred -- Executive Vice President and Chief Financial Officer

Yes and if you go back in the appendix, we have a footnote in the earnings potential slide that reference this $0.04 on a full-year for that refinancing.

Nicholas Campanella -- Bank of America Merrill Lynch -- Analyst

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?

Charles Eldred -- Executive Vice President and Chief Financial Officer

Well, it's really more incremental to that growth opportunity. So if we're successful with 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.

Nicholas Campanella -- Bank of America Merrill Lynch -- Analyst

Thank you.

Patricia K. Collawn -- Chairman, President and CEO

Thanks, Nick.

Operator

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

Paul Fremont -- Mizuho Securities USA -- Analyst

Thank you very much. I guess on slide nine, 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 on the (multiple speakers).

Charles Eldred -- Executive Vice President and Chief Financial Officer

So, Paul, if you go to that slide nine, 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 is 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 of PNM and TNMP to support the rebalancing of the 50:50 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 costs associated with that and some additional equity contributions for TNMP's growth capital as well. So all in all, the drag is really reflective of higher interest rates and the amount of debt that we have to make the equity contributions down to the operating companies.

Paul Fremont -- Mizuho Securities USA -- Analyst

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, which I assume you'll pursue with the legislature, right?

Patricia K. Collawn -- Chairman, President and CEO

Paul, we've actually worked with a very broad group of stakeholders, not only other interveners -- excuse me, 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 build, it's not our build, it is being drafted and worked through and so we've got some pretty broad support on that, it can take a wide variety of forms, I think is going 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.

Paul Fremont -- Mizuho Securities USA -- Analyst

And how long is the legislative session?

Patricia K. Collawn -- Chairman, President and CEO

It is 60 days this year.

Paul Fremont -- Mizuho Securities USA -- Analyst

Okay and I guess, it looks as if you are 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?

Charles Eldred -- Executive Vice President and Chief Financial Officer

Yes, so, keep in mind for PMN 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 through to New Mexico. So certainly 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 operation side. So we made some adjustments to show the increase in load improvements within PNM, but also offsetting some of that -- 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 differently about the outlook for 2019.

Paul Fremont -- Mizuho Securities USA -- Analyst

Great, thank you.

Patricia K. Collawn -- Chairman, President and CEO

Thanks, Paul.

Operator

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

Ali Agha -- SunTrust Robinson Humphrey -- Analyst

Thank you. Good morning.

Patricia K. Collawn -- Chairman, President and CEO

Good morning, Ali.

Ali Agha -- SunTrust Robinson Humphrey -- Analyst

First question, Pat or Chuck, wanted to get a little insight into your thinking on the TNP (ph) settlement. You agreed to a lower ROE and were not able to get the equity component higher as you were planning. So was there a fear that if this goes to litigation that the outcome could be even worse. Just wanted to get a sense of your thinking there on the settlement?

Patricia K. Collawn -- Chairman, President and CEO

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 (ph) 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 little bit about the equity.

Charles Eldred -- Executive Vice President and Chief Financial Officer

Yes, I mean, and you could -- we could tell through the negotiations and you think about the ROE recommendations at staff at 9.4%, the interveners at 9.1%, the equity ratios were a heavy push toward 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% (ph) 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 at the end of the day, we achieved the best results that we could have regardless of litigation or any other approach.

Patricia K. Collawn -- Chairman, President and CEO

When you think about it, SPS has got a 9.5 (ph) coming up on the 12.7 (ph) open meeting agenda and they are vertically integrated, which usually typically has a higher ROE. So we're very happy with that ROE we got.

Ali Agha -- SunTrust Robinson Humphrey -- Analyst

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?

Charles Eldred -- Executive Vice President and Chief Financial Officer

Yes, you need up to is 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 maintaining confidentiality and planning to how we want to allocate capital across the business in order to achieve the objectives. So we're comfortable that the 5% to 6% growth expectation is reasonable and we'll continue to focus our plan to execute toward that. And we'll update the capital is begin to see the certainty around what we understand is the prioritization needs as we look at each business.

Ali Agha -- SunTrust Robinson Humphrey -- Analyst

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 would prevent you from spending all of that amount?

Patricia K. Collawn -- Chairman, President and CEO

We always worry about affordability, Ali, but if you look at that our affordability is still very, very good here and there is some retirement, some generation. So you'll be with securitization, you 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 very, very likely.

Ali Agha -- SunTrust Robinson Humphrey -- Analyst

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?

Charles Eldred -- Executive Vice President and Chief Financial Officer

Well, I think again the securitization bill that we 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 and 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 is spent for and then other opportunities, the third party transmission and as well as the other business investment in infrastructure will come into play.

Patricia K. Collawn -- Chairman, President and CEO

(multiple speakers) session begins on the 15th of January and ends on 16th of March. So that's kind of the time frame for that.

Ali Agha -- SunTrust Robinson Humphrey -- Analyst

I see and lastly, Pat, when is the next time at the earliest you can file a New Mexico rate case?

Charles Eldred -- Executive Vice President and Chief Financial Officer

We talked about into 2019 with effective (ph) 2021 -- January 2021.

Ali Agha -- SunTrust Robinson Humphrey -- Analyst

I got you.

Patricia K. Collawn -- Chairman, President and CEO

Thank you, Ali.

Operator

(Operator Instructions) The next question comes from the line of Lasan Johong of Auvila Research Consulting.

Lasan Johong -- Auvila Research Consulting -- Analyst

Hello --

Patricia K. Collawn -- Chairman, President and CEO

Good morning.

Lasan Johong -- Auvila Research Consulting -- Analyst

Congratulations this election day.

Patricia K. Collawn -- Chairman, President and CEO

Thank you.

Lasan Johong -- Auvila Research Consulting -- Analyst

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?

Patricia K. Collawn -- Chairman, President and CEO

No, we are looking at joining the Energy Imbalance 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're not looking at an independent transmission company at this time.

Lasan Johong -- Auvila Research Consulting -- Analyst

Sounds like it might be a good opportunity though. All right, Pat, it sounds like you're kind of moving toward abandoning to (ph) gas plants as replacement power and moving more toward a combination of renewables and storage, did I hear that right?

Patricia K. Collawn -- Chairman, President and CEO

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.

Lasan Johong -- Auvila Research Consulting -- Analyst

So maybe two smaller (ph) gas plants and add more renewables than you had envisioned before or are you saying that you are going to keep those two bigger gas plants?

Charles Eldred -- Executive Vice President and Chief Financial Officer

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 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 seven or eight different smaller units representing close to a couple of hundred megawatts would probably be more likely than any two large peaking units we had previously indicated.

Lasan Johong -- Auvila Research Consulting -- Analyst

Okay, but it doesn't mean that you're going to add renewables to replace more power?

Unidentified Speaker --

Oh, there would be a combination of gas peaking units and potentially renewables as well as -- and energy storage also.

Patricia K. Collawn -- Chairman, President and CEO

And we were 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.

Lasan Johong -- Auvila Research Consulting -- Analyst

But you don't know what that split is going to be?

Charles Eldred -- Executive Vice President and Chief Financial Officer

We're in an RFP process --

Patricia K. Collawn -- Chairman, President and CEO

We're not at liberty to say.

Lasan Johong -- Auvila Research Consulting -- Analyst

I understand. Thank you.

Patricia K. Collawn -- Chairman, President and CEO

Thank you, Lasan.

Operator

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

Patricia K. Collawn -- Chairman, President and CEO

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.

Operator

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

Duration: 46 minutes

Call participants:

Jimmie Blotter -- Director of Investor Relations

Patricia K. Collawn -- Chairman, President and CEO

Charles Eldred -- Executive Vice President and Chief Financial Officer

Chuck Eldred -- Executive Vice President and Chief Financial Officer

Anthony Crowdell -- KeyBanc Capital Markets -- Analyst

Nicholas Campanella -- Bank of America Merrill Lynch -- Analyst

Paul Fremont -- Mizuho Securities USA -- Analyst

Ali Agha -- SunTrust Robinson Humphrey -- Analyst

Lasan Johong -- Auvila Research Consulting -- Analyst

Unidentified Speaker --

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