PNM Resources' (PNM) CEO Pat Vincent-Collawn on Q2 2016 Results - Earnings Call Transcript

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PNM Resources, Inc. (NYSE:PNM)

Q2 2016 Results Earnings Conference Call

August 09, 2016 11:00 AM ET

Executives

Jimmie Blotter - IR

Pat Vincent-Collawn - Chairman, President and CEO

Chuck Eldred - EVP and CFO

Analysts

Insoo Kim - RBC Capital Markets

Ali Agha - SunTrust Robinson Humphrey

Paul Patterson - Glenrock Associates

Anthony Crowdell - Jefferies

Lasan Johong - Auvila Research Consulting

Brian Russo - Ladenburg Thalmann

John Barta - KeyBanc

Bill Appicelli - Nexus

Operator

Good morning and welcome to the PNM Resources Second Quarter Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Jimmie Blotter, Ms. Blotter. Please go ahead.

Jimmie Blotter

Thank you, Keith. And thank you everyone for joining us this morning for the PNM Resources second quarter 2016 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 Chief Financial Officer, as well as several other members of our executive management team.

Before I turn the call over to Pat, I need to remind you that some of the information provided this morning should be considered forward-looking statements pursuant to the Private Securities Litigation Reform Act of 1995. We caution you that all of the forward-looking statements are based upon current expectations and estimates and that PNM Resources assumes no obligation to update this information. For a detailed discussion of factors affecting PNM Resources’ results, please refer to our current and future annual reports on Form 10-K, quarterly reports on Form 10-Q, as well as reports on Form 8-K, filed with the SEC.

And with that, I will turn the call over to Pat.

Pat Vincent-Collawn

Thank you, Jimmie, and good morning everyone. I hope your morning is as beautiful as our sunny New Mexico morning is here. Thank you for joining us this morning to discuss this Company’s second quarter results and the hearing examiner’s recommended decision in the New Mexico rate case. We will begin on slide four.

As expected, second quarter earnings were lower than last year. Consolidated ongoing earnings were $0.40 per diluted share compared with $0.44 per diluted share in the second quarter of 2015. In addition, we have narrowed our 2016 consolidated ongoing earnings guidance to a $1.55 to a $1.65 per diluted share to reflect the financial impact of the procedural delays on 2016 earnings. In the PNM general rate case, the recommended decision would grant $41.3 million of our requested $121.5 million non-fuel increase and is based on a 9.575% ROE. Many of the intervening parties in this case expressed strong oppositions to several of our investments in rate base including the purchase of previously leased capacity at the Palo Verde nuclear generating station and the installation of balance draft equipment at San Juan. We strongly disagree with those positions and believe the case record shows that these investments were not only prudent but quite simply were the right thing to do for our customers.

August 17th is the deadline to file exceptions and we plan to file strong exceptions that emphasize the importance of recovering our investments. August 25th is the deadline for reply to the exceptions. The recommended decision must still go before the Commission for a final decision before rate can be implemented, and this schedule permits the Commission to reach a decision before the current suspension period ends on August 31st. At this point, we continue to anticipate implementation of new rate by September 1st. Chuck will talk in more detail about the financial details of the recommended decision. Let’s move onto slide five for a regulatory update.

Since I’ve already given the update on the rate case, let’s move to the San Juan generating station natural gas-fired plant CCN. In April, PNM filed with the New Mexico Commission requesting a CCN for the $87 million 80 megawatt gas-fired peaker at the San Juan site. That process is now moving ahead, and a hearing at the Commission is scheduled for November 7th. Our goal is to have the facility on line by June 2018 before the summer peak season.

Last Friday, we filed to suspend PNM advanced meter infrastructure proceeding. We have requested the suspension to provide time to evaluate the pending rate case outcome and determine if the Company needs to reprioritize its capital spending to ensure that our balance sheet and credit ratings remain strong. After we receive the final order on the rate case, we can determine whether we proceed with the [indiscernible] filing or withdraw it.

As of June, FERC accepted PNM’s remaining compliance filing in the FERC’s formula transmission rate case, and this docket is now closed. Under the formula rate, we will file annually to update rates in June based on the most recently filed FERC financials with a 10% return on equity. Our first annual update was effective this year on June 1, reflecting an increase of $1.3 million. TNMP made its latest TCOS filing on July 19th. We anticipate the new rates will go into effect in September and will increase revenues by approximately $1.8 million annually.

Now, I will turn it over to Chuck Eldred, our Chief Financial Officer for a more detailed look at the numbers.

Chuck Eldred

Thank you, Pat and good morning everyone. Beginning on slide seven, we had an ongoing earnings of $0.40 for the second quarter of 2016 compared to $0.44 in second quarter of 2015. PNM was down $0.05, TNMP was down $0.02 and Corporate and Other was up $0.03. The earnings drivers for the second quarter of 2016 versus the second quarter of last year are available to you in the appendix. Majority of the drivers are in line with the expectations that were established when we issued guidance for this year. However, there is one item at PNM that is new. We received interest income from the IRS that resulted in an increase in ongoing EPS of $0.02 during the second quarter of 2016.

Now, moving to slide eight to review load information for the quarter. Load at PNM was down 0.4% compared to the second quarter of 2015 and 0.7% year-to-date, in line with our guidance for the year of flat to down 2%. While the second quarter shows significant changes in residential and commercial, on a year-to-date basis, these customer classes are normalized and are showing that there were some tiny differences between the first and second quarter of this year. As expected, industrial is down about 7% for both second quarter and year-to-date.

We are getting some traction with the state’s economic development efforts. For example, Safelite AutoGlass is opening an insurance claims and support center that is expected to employ more than 900 people in Rio Rancho. We are also seeing expansions in current businesses, particularly in healthcare. Presbyterian Rust Medical Center has opened their second medical tower; they’ve also been expanding their clinic openings and planning to build a new hospital in Santa Fe next year. As a result of these and other efforts in the area, the employment growth in Albuquerque continued its upward trend at 1.3%. For the month of June 2016 compared to June of 2015, Albuquerque had employment growth of 1.6%, even customer growth also continues to be higher than forecast at 0.7%.

TNMP continues to perform well. Volumetric load was up 6.2% in second quarter of this year compared to last year. As you recall, in the first quarter, this comparison was negative 1.6%. On a year-to-date basis, these metrics blend to show 2.6% growth year-over-year, which is in line with our guidance of 2% to 3% growth for 2016. Demand-based load is also up 2.8% for the second quarter and 2.2% on a year-to-date basis.

We continue to see growth in the Texas economy. Although it’s been muted by the continued low oil price environment, the employment growth, particularly in Dallas continues to increase. For example, Mary Kay recently announced they are planning to build a $100 million state-of-the-art manufacturing and R&D facility in Lewisville. We also continue to receive request for additional capacity to serve petroleum processing facilities in our service territory. These factors result in a number of our end numbers being up 1.5% compared to the forecast of 1%.

On slide nine, we revised our 2016 ongoing earnings guidance last week to $1.55 to $1.65. PNM now is expected to be at $1.08 to $1.16, which reflects the delays in the rate case. We expect PNM’s load for the year to come in near the midpoint of the guidance range or down 1% compared to last year. Although we’re still waiting on the final Commission order, we’re already working hard to achieve results within the guidance range. TNMP’s range has been narrowed to reflect their business results for the first half of the year. We now expect it to be at $0.50 to $0.51. Corporate and other guidance has been updated, primarily to recognize the financing that have been put in place earlier this year with Westmoreland, which is expected to be up a total $0.05 compared to last year.

Turning to slide 10, let’s review the hearing examiner’s recommendation decision in PNM general rate case. I’d like to iterate that we communicated before, we’re disappointed with the hearing examiner’s recommendation. It does not provide for the balanced treatment of needed resources for our customers and shareholders. Depending on the Commission’s final order, we may have to pursue a direct appeal to the Mexico Supreme Court. The key elements of the hearing examiner’s August 4th recommended decision are listed here. The recommendation included an ROE of 9.575% compared to our requested 10.5%. The hearing examiner also recommended that we’re not to be allowed to recover two significant capital investments, the Palo Verde 2 assets that were previously leased and our investment in balanced draft equipment which was required by our San Juan air permit. The recommendation does support our request for CWIP, the pre-paid pension asset and supports our requested depreciation rate increase. However, it recommends against the collection of Palo Verde lease and property tax expense. We see no basis for this as we have been collecting these expenses since we entered into the leases in the mid-80s. The only change that has occurred is the extension of the releases which caused the payment to be cut in half, resulting in savings of our customers of approximately $17 million per year through 2022.

The next steps in the rate case will be for the parties to file their exceptions and reply to exceptions before the Commission decides the case. We plan to issue a press release or an 8-K when the Commission issues their order. After we have this information, we will update our potential earnings power through 2019. We remain committed to managing our business and recovering our capital investments, resulting in a balanced outcome for both customers and shareholders.

Thank you for time this morning, and I’ll turn the call back over to Pat.

Pat Vincent-Collawn

Thanks Chuck. It’s unfortunate that the hearing examiner has issued a recommendation that may ultimately threaten our ability to provide reliable, affordable and carbon-free power to our customers while maintaining a strong balance sheet and credit metrics.

I’d like to wrap up my comments with something that which we’re very proud. PNM set an all-time Company high for overall satisfaction in the April-May J.D. Power residential customer satisfaction study. In addition, almost all the components that comprise the score including power quality and reliability, corporate citizenship and communications continued to grow. These results show that our employees’ unrelenting focus on the customer experience is resonating.

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

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question comes from Insoo Kim with RBC Capital Markets.

Insoo Kim

Just regarding the rate case, the Commission does side mostly with the HE’s recommendation and you do so seek legal action. Are you planning to include all three of those items that you need to balanced draft and the extension of the leases into that litigation?

Chuck Eldred

Insoo, it’s a recommended decision hold and of course we’re very focused right now in following the exceptions and try to see if we can get the Commission to reconsider the recommendations and the hearing examiner to address those significant capital items that you mentioned. In the event that the Commission does vote not to pursue correcting those items and doesn’t allow the PV leases or Palo Verde purchase price as well as the balance draft, then we will definitely pursue aggressively our legal options including the appeal to the Supreme Court.

Insoo Kim

And then, at the Commission level, if it does not approve for recovery, do you -- is there a potential for you to I guess reapply for recovery of this in the next rate case for 2018?

Chuck Eldred

The hearing examiner provided the possibility of considering that, and we’ll just have to wait and see what the recommended decision or what the actual final order is of the Commission. But again, we really think the important focus at this point is to file the exceptions and pursue our legal options and focus on the next rate case, which includes capital items that we have invested that we’ll place in this forward test here and don’t really want to carry over items that really should be addressed in this rate case.

Insoo Kim

And then, turning away from that, could you provide a little bit of color on except for proceeding going on in the Commission regarding the PNM’s proposal to propose renewable generation for Facebook’s potential new data center? I know it’s going to be between Utah and New Mexico, I was just reading some documentation in the press release.

Pat Vincent-Collawn

Yes. Insoo, the hearing is today; it’s going on right now. And beyond that, we have no further comments.

Insoo Kim

Okay. And then, in terms of the proposed generation from what I read is that 90 megawatts of wind as well as 90 megawatts of solar proposed or is that more of a hypothetical calculation?

Chuck Eldred

Well, the filing really reflects 30 megawatts, which is supporting the data center which Facebook would proposed to build in the event they pursue it here in the New Mexico. And then there is certainly growth beyond that 30 megawatt capacity that goes into potential expansion of facility and growth over time. But the filing itself addresses the 30 megawatts that they require.

Insoo Kim

Okay. And then sorry, I don’t know if you clarified, is that both, is that just solar or is that a combination of wind and solar?

Chuck Eldred

Solar and rack purchase.

Insoo Kim

Got it. And do you know what the expected timeline on a final decision on all this would be?

Pat Vincent-Collawn

I don’t know what our Commission would vote on it; we would have an order coming up on the 12th and the Commission would vote on it after that. I do not know what Facebook’s timing will be.

Operator

Thank you. And the next question comes from Ali Agha with SunTrust Robinson Humphrey.

Ali Agha

First question, Chuck that $0.02 of interest income from the IRS, was that a onetime item or should we assume that continues going forward?

Chuck Eldred

It was a onetime item.

Ali Agha

Okay. And then also [Multiple Speakers]

Chuck Eldred

So, I’d like to think that IRS would give us a refund every year with that, but we can’t expect it.

Ali Agha

Okay. And then, you talked about the interest you get on the Westmoreland loan. Net-net, your corporate number was actually positive for the quarter. Is that something to think about in terms of -- on an annualized basis, can we multiply this quarter by four or are there other costs that come in to keep that overall still slightly negative?

Chuck Eldred

There is -- certainly the incorporate in the Westmoreland financing in the Corporate and Other is something we’ll be providing in guidance that we didn’t include this last year but it’s roughly around $0.04 is what you can expect over the next few years if you were to think about it on a going forward basis.

Ali Agha

And then coming to the -- where we stand on the rate case, so the outcome from this rate case, will that have bearing on both the timing -- it certainly could have betting on the size but on the timing of the next filing, are you still planning a filing in December?

Pat Vincent-Collawn

Absolutely, we’re still planning on filing this December, Ali.

Ali Agha

And so that won’t change regardless of what happens here?

Pat Vincent-Collawn

That’s correct.

Ali Agha

Okay. And assuming that the Commission does keep that ROE at that level that is being recommended here, does this decision, as proposed, give you enough of levy or tools to actually own that ROE or could there be challenges as well based on some of the other disallowances?

Chuck Eldred

Well, wait and see what the recommended decision is but as we’ve always said and continue to say, we remain very-focused on earning the allowed return granted by the Commission. So, we will remain focused on executing our business plans and earn that allowed return.

Ali Agha

And last question, as you mentioned, I mean, the disallowance of the PV 2 moving from leased to rate base, that should not impact the potential move of the PV 3 to rate base as part of the San Juan retrofit, should it, or is that a read through that causes you concern the way the hearing examiner’s thinking about these nuclear units?

Chuck Eldred

Two separate issues and we have the approval on the Palo Verde 3, as you well know in the BART’s settlement which includes a lot of different factors associated with that settlement and approval by the Commission. So, we look at it as two isolated separate decisions relating to this rate case.

Operator

Thank you. And the next question comes from Paul Patterson with Glenrock Associates.

Paul Patterson

So, just quick on the tax issue that gave you $0.02 in the quarter; could you elaborate a little bit more on that?

Chuck Eldred

This goes back I think in 2004 to 2008 in some of the refunds that we were owed by the IRS and the interest income that was calculated against those refunds, and we were able to file evidence and facts to show that the interest income calculation on those refunds should have been higher. And so as a result of that, we were successful and the IRS granted us the additional amounts through interest income and we booked that this year to represent the $0.02.

Paul Patterson

Okay. And then on the smart meter decision and obviously your happiness with the ALJ or hearing examiner’s proposed decision. How should we think about CapEx in general or other things like, I think you guys had expected above average dividend growth et cetera? It sounds like this proposal is something that you guys are quite concerned about. And I was just wondering if you could elaborate a little bit more about how we should think about what you guys might do in light of the potential of this becoming adopted by the Commission?

Chuck Eldred

The CapEx that we have in the appendix and what we have in our business plan that you see in the presentation today, does not include AMI. And so, what we’re pointing out is we remain focused and committed to execute our plan that we have in place and continue to file for the exceptions and try to see if we can get some of these items corrected by the Commission. But, we want to make sure that we don’t add additional capital and provide some additional pressure on our balance sheet. As you know, we are well committed to our credit in making sure that we maintain a solid balance sheet and get credit metrics for the Company. And so, we will focus at this point in making sure we execute on our current capital plan and need additional capital, we’ll just have to make a determination based on the final outcome of the Commission.

Pat Vincent-Collawn

And when you think about the AMI, we didn’t ask to withdraw the application; it was a temporary suspension. And until we can evaluate the outcome of this rate case, and if the outcome of this rate case turns out favorably, we will just get right back on track again with the AMI. But we really want to have the optionality on that AMI because as Chuck said, it’s not in the current capital forecast.

Paul Patterson

Right, I guess what I am wondering though is, is it just limited to AMI and we don’t -- in another words, is it just limited to that because when one looks at this, and it’s not just the hearing examiner, it looks to me like it’s some of the other parties whatever basically sort of are challenging what you guys have done sort of 2020 hindsight kind of approach or whatever, second guessing. And I am just wondering whether or not that if this were to be adopted, this kind of methodology that the hearing examiner is proposing, does that give you pause in terms of how you go about additional ways to serve your customers? Because clearly they are challenging, sort of they are retroactively kind of challenging what you’ve paid for things and what have you. And how do we think about that in the context of -- I mean, is it just limited to the smart meter? In other words, you’re suspending that, we’ll see what happens to the rate case and that sort of the book ends that we’re talking about or is there a greater risk to other potential investments you might make or timing of investments you might make?

Pat Vincent-Collawn

Yes, I think, Paul, when you look at the three items that were just allowed in this case, two were associated with Palo Verde, the leases and then putting it in rate base, and the balanced draft. Those are very specific things, one goes into San Juan and the other is nuclear. No T&D capital was touched in this case; we got full recovery of T&D capital; as Chuck said, we got the CWIP. So, I think this is a very specific issue about two very specific assets. So, it doesn’t give me a cause to worry about other things, but we do want to suspend the AMI just to take a look because we want to make sure -- as you know we’re very protective of our balance sheet and our credit ratings. So, we just want that extra time to make sure we’re still going to be okay. And like I said, I think you can generalize the hearing examiner’s decision on Palo Verde and balanced draft to the rest of the capital spend, given that you didn’t touch anything else.

Operator

Thank you. And the next question comes from Anthony Crowdell with Jefferies.

Anthony Crowdell

Just a couple of questions. What’s the date were you expecting order in the current New Mexico proceeding?

Pat Vincent-Collawn

Well, Anthony, right now, it’s set for the 31st that they could do it.

Anthony Crowdell

If there was an extension when would we -- when would that come out that the Commission is going to extend an additional 30 days?

Pat Vincent-Collawn

Probably Wednesday.

Anthony Crowdell

Wednesday, tomorrow Wednesday.

Pat Vincent-Collawn

No, the following Wednesday. They have their open meetings on Wednesday. So, it’s going to happen, it’s going to happen on Wednesday, probably not tomorrow because the agenda for tomorrow is out, and it’s not on tomorrow’s agenda. And the agendas for Wednesday come out usually late Friday.

Anthony Crowdell

Okay, great. Now, any El Paso proceeding in New Mexico, something I’ve never seen before in rate cases, a general counsel had issued some recommendations on ROE. Is that something we could expect also in this case or was there something unique in that El Paso case that would not cause to happen in this proceeding?

Pat Vincent-Collawn

Anthony, you never know; we would not expect it to happen. And I think if you look at our El Paso’s ROE and our ROE, our ROE is higher but it’s not significantly higher than El Paso’s. So, I suspect, since they’ve already gone through that, probably not. But could it happen? Yes.

Anthony Crowdell

Okay. I just wanted to jump on Paul Patterson’s question before me. With the CapEx, and if you do get a decision that’s really not that balanced, how quickly can PNM change their CapEx plans in New Mexico?

Chuck Eldred

Anthony, I think to Pat’s point, is that this is more about how we think about prioritizing our capital with the objective to serving our customers and meeting reliability and making sure that we do everything we can to run this business well as you would expect this to. What we really talk about is AMI and some capital that could be potentially reprioritized against the other capital where we would be focused on reliability and investing in the business to maintain that objective for our customer. So, the current capital we have in the budget that you see in the appendix remains our focus. We update that every year around December timeframe we give guidance and certainly we’ll prioritize capital according to what the needs are for the business and to focus again on the customer priorities of serving their needs. And so, at this point, we’re just focusing on AMI, it’s something that we don’t have to prioritize immediately. We’ll reconsider that once we know the final decision and then make a determination if it fits into our plans going forward.

Anthony Crowdell

Okay. And second to last question I have is if this recommendation was adopted, there is an appeal process, just the timing of how that works and do they just deny the entire rate increase? Let’s say it was adopted but you don’t get the -- there is a slight rate increase that the hearing examiner did recommend; does the whole thing just turn, get I guess stayed in the Company now, is it current rates until decision is issued?

Pat Vincent-Collawn

No, Anthony, if you make the assumption that the decision would stand with the Commission, the rates that the Commission authorized would automatically go into effect, and then we would appeal our items to the Supreme Court right away. But the amounts that are already allowed by the Commission would go ahead and go into rates.

Anthony Crowdell

And is there a normal, an average of when Supreme Court acts on this appeal, is it weeks, months or years?

Pat Vincent-Collawn

There is no statutory clause for the Supreme Court and the folks -- the lawyers have gone back and looked at it, and it’s probably about 12 to 18 months that it would take to get it done.

Anthony Crowdell

Okay. And last question, and it’s probably also an iteration of these previous questions is, you had reaffirmed that the Company does plan on filling another rate case in December, was talking about changing CapEx plans. Do you think recommendation like this poisons the well for like balanced treatment for the utility in New Mexico?

Pat Vincent-Collawn

No, I think that this is real specific to these three items. And while we were very disappointed with those, the balance of the decision I think is relatively constructive. If you look at rate design for example, while we didn’t get the coupling, we got a small increase in our fixed charge; the hearing examiner approved the economic development tariff; and we had recommended some banding of increases to start getting rates back to parity and she didn’t take our exact banding but she took some pretty good banding. So, I think it’s just really related to three specific things here.

Anthony Crowdell

But, you could understand from an investor’s point of view, although you’re looking as a three items, they are three rather larger items.

Pat Vincent-Collawn

Absolutely, and I don’t mean to minimize the fact because these are very large items and we really believe that the decision is not the right one, and we’re going to fight it. What I am just trying to say is, I don’t take the decision on those three items and project it on to other spending of other utilities, not only PNM but the other utilities in New Mexico.

Anthony Crowdell

Great. I’ll jump back in the queue, I have one more, so I’ll just jump back. Thanks for taking the questions.

Pat Vincent-Collawn

Thanks Anthony.

Operator

Thank you. And next question comes from Lasan Johong with Auvila Research Consulting.

Lasan Johong

Good morning. How are you?

Pat Vincent-Collawn

Good morning, Lasan. Good. How are you?

Lasan Johong

Good. Thank you. Does this have, or should I say that the credit agency commented on the preliminary decision?

Chuck Eldred

Lasan, no, they haven’t. Of course, we keep them well-informed; they are very informed of the hearing examiner’s recommendation. And they will take that information and discuss it internally. I think in general, they’re surprised and discouraged with the regulatory treatment regarding the rate case and they -- it seems like they probably be won’t take any action if any at all until after the final order is issued.

Lasan Johong

So, they haven’t indicated any directional change?

Chuck Eldred

No, they haven’t.

Lasan Johong

I see. Are you concerned about it?

Chuck Eldred

Well, we’re concerned just to what Pat pointed out is not recovering capital that we know is prudent and made under decisions at the time that we’re very supportive to meeting our customer needs and their generation supply, particularly nuclear going forward in future years. So, we’re disappointed in that regard. We’re very focused on our credit and that’s why for example, we delay the pursuing to AMI to make sure that we understand clearly what the final order is and how we interpret that information relative to our balance sheet and our strength going forward, but we remain committed to our capital budget we have in our plan today. And we’ll just be very careful of how we think about investing the business to ensure that we maintain solid credit metrics and a good balance sheet, as we think through the business and as a result of this final order.

Lasan Johong

Okay. Off the topic kind of a more macro question in Texas, as you know, NEE bought Oncor; do you see any kind of changes in how things are -- in a big picture way, how things might change for TNMP with this new development?

Pat Vincent-Collawn

No, I think it’s business as usual for TNMP over in Texas.

Lasan Johong

Okay, great. Thank you very much.

Operator

Thank you. And the next question comes from Brian Russo with Ladenburg Thalmann.

Brian Russo

What are some of the other levers that you have to kind of maintain your current credit profile if the hearing examiner’s recommendation is taken by the Commission?

Chuck Eldred

Brian, our credit metrics have been strong and solid using the FFO to debt metric as a major of the strength in our credit. So, I would view that we have some cushion in those credit metrics and how the rating agencies have graded the Company at this point. And I think the concern is that we’re beginning to lose some of that cushion and losing some of that margin we’d have for the maintaining the credit profile that we have prior to this decision being made. We’ll continue to focus on our capital and our spend and the next rate case and ensure that we can execute on our plans, and keep the rating agency informed as we do periodically to ensure they understand what our expectations are. I do know the numbers that they were working with and what their expectations were on the rate case. And I think we have a good clear communication and very transparent open dialogue, and we’re comfortable where we are. We’re just disappointed in the regulatory recommendation on its rate case with particularly the items that we’ve already discussed. And I think as Pat pointed out, we see that being more isolated issues that need to be addressed, hopefully by this commission in their final order or if we have to through the appeal process with the Supreme Court. And then, we’ll focus on the next rate case and our ability to execute on that plan as well.

Brian Russo

Got it. And then, just to clarify, where did the $0.02 of positive EPS in that tax item; is that in corporate?

Chuck Eldred

Yes, it’s in PNM; yes, PNM.

Brian Russo

Good, at the corporate level. So, the $0.03 to $0.02 drag that you are now assuming…

Chuck Eldred

It’s actually PNM, it’s not in Corporate and Others, it’s PNM.

Brian Russo

Okay, got it. So, the decline in the corporate drag that’s all part of the new coal contract and the loan on that and interest?

Chuck Eldred

That’s correct. Yes.

Brian Russo

So, the $0.02 to $0.03 drag that’s kind of the new base for Corporate and Other when we look forward?

Chuck Eldred

We haven’t really -- we haven’t updated the Corporate and Other in regards to the earnings power slide but certainly in the guidance it’s factored in for this year.

Brian Russo

Got it. And I’m just curious, is this -- is the hearing examiner in the rate case, is this a different hearing examiner than the one that was involved in the forward test year docket and then the one that was involved in the San Juan environmental compliance docket?

Pat Vincent-Collawn

It was a different hearing -- can we talk this morning, Brain, so it was a different hearing examiner in San Juan.

Brian Russo

Okay. But this hearing examiner was one…

Chuck Eldred

Same one for the forward test year.

Pat Vincent-Collawn

It was the same one for forward test year.

Brian Russo

Got it. Okay, thank you very much.

Operator

Thank you. And the next question comes from John Barta with KeyBanc.

John Barta

Just to clarify, so, if you had to go the litigation route and hypothetically that takes 12 to 18 months, so then, you wouldn’t be allowed to put those items in the GRC as well come December?

Chuck Eldred

Yes, the hearing examiner indicated we could if wanted to pursue that but if that decision hold, we will focus more on the appeal process and the information and the record that was discussed and provided during this rate case. So, our expectation would be to address this now and not try to carry this as issue going forward.

John Barta

Okay. But, I mean, so, you could litigate it and then put it in the next GRC as well, if you wanted to?

Chuck Eldred

The hearing examiner gave the option to consider that, but again, our focus is going to address on how we can best pursue the appeal and address the issue relative to this rate case and focus on an next rate case with -- point is not to pursue those if we don’t feel it’s appropriate.

John Barta

Okay. And then, just in the general sense, the next rate case that’s really just tearing up expenses, potentially the peaker and then the rate design or decoupling?

Pat Vincent-Collawn

It would be the fully forecasted test year, now that we have that decision, so it would be fully forecasted. And then, it also has Palo Verde 3 and San Juan, the settlement that we came to would be part of that and then, it’s truing up and then whatever rate design, things that we would decide to carry forward.

John Barta

Okay. Thank you.

Pat Vincent-Collawn

You’re welcome.

Operator

Thank you. And the next question comes from Bill Appicelli with Nexus

Bill Appicelli

Hi good morning.

Pat Vincent-Collawn

Good morning, Bill.

Chuck Eldred

Hi Bill.

Bill Appicelli

Just following up on a question that Insoo asked earlier on this potential investment with Facebook. I mean, I guess, could you just elaborate on the structure of this; this is something that’s outside of rate base or can you just maybe elaborate on how the structure of ownership would work?

Chuck Eldred

Yes, if you actually look at the Q that shows you a description on what this structure looks like and gives you some feedback on that. It’s on page 69 of the Q that we filed this morning. So, I would suggest to take a look at that. And if there is questions, you can follow-up with IR. We really don’t have a lot of comments because it is on a hearing today, and we’ve just -- what we’ve disclosed I think very adequately covers your question in the Q, if you don’t mind.

Bill Appicelli

Okay, all right. That’s fine. Thank you very much.

Chuck Eldred

Thank you.

Pat Vincent-Collawn

Thanks Bill.

Operator

[Operator Instructions] And the next question is a follow-up from Anthony Crowdell with Jefferies.

Anthony Crowdell

Chuck, I’ll just look at the Q.

Chuck Eldred

Anthony, you used up your time, I am sorry.

Anthony Crowdell

I have, I’ll just look at the Q. I am good. Thank you.

Chuck Eldred

No, no, no, I was just kidding. Go ahead.

Anthony Crowdell

No. It was more on friending you on Facebook. So, I’d rather just look at the Q; and if not, I’ll follow up.

Chuck Eldred

Maybe we’ll just Facebook the answer to you as well.

Anthony Crowdell

Perfect.

Pat Vincent-Collawn

Yes. You can friend us on PNM Facebook page.

Anthony Crowdell

I look at that a lot.

Operator

Okay. Thank you. And we also have a follow-up from Lasan Johong with Auvila Research Consulting.

LasanJohong

Thank you. Last question. There is a hard deadline of October 1 for the implementation of the GRC, correct; the commission can’t respond past October 1st, right?

Pat Vincent-Collawn

That is correct.

LasanJohong

Great. Thank you very much.

Pat Vincent-Collawn

You’re welcome.

Operator

Thank you. And there are no more questions at the present time. So, I would like to return the call over to management for any closing comments.

Pat Vincent-Collawn

Thank you. And thank you everyone for joining us today and your interest in PNM Resources. As development happen on today’s hearing and on the general rate case, we will definitely keep you informed through 8-Ks or investor releases. So, we look forward to continuing to talk with you. And have a great rest of your day.

Operator

Thank you. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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