PNM Resources, Inc. (NYSE:PNM) Q4 2023 Earnings Conference Call February 6, 2024 11:00 AM ET
Company Participants
Lisa Goodman – Executive Director, IR
Pat Vincent-Collawn – Chairman and CEO
Don Tarry – President and COO
Lisa Eden – SVP, CFO and Treasurer
Conference Call Participants
Julien Dumoulin-Smith – Bank of America
Anthony Crowdell – Mizuho
Ryan Levine – Citi
Paul Fremont – Ladenburg Thalmann & Co.
Operator
Good morning, and welcome to the PNM Resources 2023 Earnings Call. [Operator Instructions] Please note this event is being recorded.
I would now like to turn the conference over to Lisa Goodman with Investor Relations. Please go ahead.
Lisa Goodman
Thank you, Lynea, and thank you, everyone, for joining us this morning for the PNM Resources 2023 Earnings 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 and CEO, Pat Vincent-Collawn; President and Chief Operating Officer, Don Tarry; and Senior Vice President, Chief Financial Officer and Treasurer, Lisa Eden.
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.
With that, I will turn the call over to Pat.
Pat Vincent-Collawn
Thank you, Lisa. Good morning, everyone, and thank you for joining us today on Pay a Compliment Day. So even though I can’t see any of you, let me just say that you are all looking really good this year.
Now I’m going to get started on Slide 4. Some of you may be joining us for the first time or possibly the first time in a few years since we announced our merger. While we were disappointed with the outcome, we have continued to advance our standalone business strategy to invest in the infrastructure needed to meet customer needs, enable the clean energy transition and diversify our rate base.
Yes, we’re still standing and we’re better than we’ve ever been. The energy transition, along with customer needs for reliability and resiliency result in substantial growth for our Utility businesses. The continued increase in infrastructure needed to serve customers will more than double our rate base from 2020 to 2028.
We have been improving the diversification of our rate base, prioritizing capital to make significant investments at TNMP to support the continued high growth in that service territory. These are recovered to capital riders in place through the Public Utilities Commission of Texas.
At PNM, an increase in transmission investments also benefits FERC customers and are recovered through the formula rate. As a result, more of our investments are recovered through these recovery mechanisms that were designed to encourage these investments. Over time, we’ve moved our TNMP and FERC rate base from a combined 31% back in 2018 to now more than 50%. And yes, you heard that right, TNMP and FERC rate base are now over half of our consolidated rate base.
Turning to Slide 5; consistent execution of our plans has resulted in a strong track record of achieving our financial targets. We remain flexible, responding to changing conditions each year and making adjustments to stay on track. We hold ourselves accountable to delivering results. We have achieved 6% earnings and dividend growth since 2019 and are positioned to continue this trajectory even in the current market environment.
And lastly, I’m still here, and the team is still here, and we’re focused on continuing to deliver our plans to customers, communities and shareholders. Both Don and Lisa have been at the company over 20 years and have helped shape the course we’ve been charging. We had a strong financial profile three years ago. And with our increased diversification, it is even stronger today.
Now turning to Slide 6, we are reporting ongoing earnings today of $2.82 for 2023, once again ahead of expectations. While some pieces of our recent PNM rate decision were disappointing, the questions around recovery of our legacy generation assets are resolved, and we now have a clear path going forward. From a 2024 base, we are targeting 6% to 7% earnings growth through 2028. This is based on a 10% rate base growth over the same period, and Lisa will walk you through our financing assumptions in the earnings power slide.
I know how much you have all missed that slide and its back. Our 2024 guidance incorporates the PNM rate decision in our range of $2.65 to $2.75. Don will talk more about our regulatory plans moving forward. But before that, let me provide a quick update on our sale of New Mexico Renewable Development or NMRD. We are still on track to close this month. Our net proceeds are anticipated to be $115 million to reflect our 50% ownership share in the entity as we monetize the cash flows from this unregulated business.
With that, Don, I’ll turn it over to you.
Don Tarry
Thank you, Pat, and good morning, everyone.
I’ll pick up on Slide 8 with more on our investment strategy at TNMP. The continued high growth across our three service territories in Texas require substantial infrastructure investments to support customer growth and grid reliability for existing customers. Economic growth across the state continues to push the demand on our system to new levels after setting new system peaks.
Over the last few summers, TNMP has already seen a new peak in 2024 as cold temperatures in January pushed the system demand beyond the record-setting levels of last August. Additionally, in response to concerns about extreme weather events and grid conditions, the Texas legislature in 2023 passed a series of bills aimed at encouraging investments to enhance grid reliability and resilience which I’ll talk more about in a minute.
Our service territory is scattered across three distinct areas of the state, North Central Texas, the Gulf Coast and West Texas. Each of these three areas has different industries in their economy, which means our growth is well diversified. As the larger metropolitan areas in the state continue to grow, these economies have been extending out further into our service territory.
Turning to Slide 9; the regulatory framework in Texas also strongly encourages investments into the grid by providing timely recovery through rate mechanisms outside of general rate cases to minimize regulatory lag. On the transmission side, the transmission cost of service or TCOS mechanism has allowed for semiannual filings for several years. TNMP has already made their first filing in 2024 in January, requesting recovery for an incremental $97 million of transmission rate base. We expect to follow our usual pattern and file again in the second half of the year.
On the distribution side, this will be the first year TNMP expects to make two distribution cost recovery factor filings or DCRF filings after semiannual filings were permitted through legislation last year. Recovery under the DCRF continues to require an earnings monitoring test to prevent over earning on the year-end rate base, which we will file in the spring. We will then make our first filing in the second quarter and our second in the fourth quarter of this year.
The regulatory clock on these filings has also been shortened to be similar to the transmission side with an advanced notice period for customers and then a 60- to 75-day period for commission review. We also expect to make our first resilience plan filing this year under the new rules implemented the legislature passed last year. An independent evaluation and development of a system resiliency plan covering three years is required in the filing. Under the rules, we may choose to recover the associated cost of capital investments under the existing TCOS or DCRF rules, deferring depreciation on assets until recovery begins.
We have estimated $450 million of projects in our current investment plan that could be part of our filing. The rules also allow for recovery of certain O&M costs like vegetation management expenditures that exceeds the amount authorized for recovery in our base rates. There is a 180-day clock for these filings and we would make our filing this summer and expect recovery to begin in 2025.
Some additional items that were passed in last year’s legislative session are working their way through the PUCT rules. We continue to believe temporary mobile generation will play an important role across each region of our service territory, assisting TNMP and restoring power to distribution customers after a significant event. We have not included any potential amounts related to this need in our current capital plans. In regards to the legislation on West Texas transmission planning, the PUCT has required ERCOT to file a reliability plan no later than July of 2024.
And after an opportunity for stakeholder feedback, we would expect the commission to review and approve a reliability plan for the Permian Basin, which could lead to additional investment needs. Another law shortens the time frame to consider applications for certificates of convenience and necessity, or CCN, for the new transmission across the state to further encourage new transmission development. TNMP recently gained approval for a couple of projects in December and January that were reviewed and approved under the shorter schedule than we’ve seen historically as the commission moves closer to that 6-month clock.
Legislation was also implemented to allow for recovery of total employee compensation. And while this is not material to TNMP’s bottom line, we would plan to include these costs in the future under a general rate review filing. In total, these mechanisms provide TNMP, the opportunity to earn our authorized return. And we will likely see additional investment opportunities in the future currently not included in our capital plan.
Now turning to PNM on Slide 10; our investments at PNM are similar and that they are focused on customer-driven T&D projects to strengthen the grid. PNM hit a new system peak in 2022 and in 2023 after not seeing one in nearly a decade. Clean energy mandates in New Mexico over the next 20 years, where we’ll acquire additional transmission resources to integrate a growing amount of intermittent renewable resources on the system. The transition to clean energy has also led to some economic development wins for the state, including Maxeon Solar, first U.S. manufacturing facility being built in Albuquerque.
Grid modernization investments for utilities across the state are also being considered at the commission level now under rule making prompted by legislation. We have reduced the amount of capital investments into generation resources substantially over the last decade to support lower costs for our customers.
The renewable resources chosen to replace our San Juan coal plant and our Palo Verde lease capacity were secured through renewable and storage purchase agreements. We do think there is an operational advantage to having utility ownership of battery storage on our system as we have more control on how the resource is cycled to support our customers’ patterns of use.
With the passage of the IRA, utility ownership on a cost basis has become more competitive and we currently have a proposal in front of the commission for storage through utility ownership and the capital for the own storage is in our plan. Otherwise, our generation capital supports our existing fleet of resources that provides overall system liability to our customers.
Turning to Slide 11; the ratemaking structure in New Mexico provides the opportunity to earn our authorized return through the use of a future test year and specific riders, such as the fuel clause. Generation and distribution system costs are completely tied to serving our retail customers and are recovered through a general rate review mechanism. Our transmission system is used to serve both retail customers and FERC transmission customers that are moving energy across our system, and those costs are allocated between the different sets of customers based on utilization of the system.
FERC transmission costs are recovered through a formula rate, which allows for an annual filing to update the system utilization and corresponding rates for the customer. In the past several rate filings, the most controversial issue has been recovery of our generation resources.
In the general rate review decided last month, the commission resolved the remaining generation transitional issues that date back to decisions made by the prior commission in 2016. The decision in this case resolved those issues and allows the focus to turn towards a forward-looking solution of grid modernization and resiliency investments that are required as we transition to carbon-free while providing value to our customers.
Our application for distribution level of battery storage did not have any opposition from interveners and was approved by the commission for recovery in 2024 rate change. We received recovery in this case for over $2 billion of incremental investments and approval for 97% of our requested O&M costs. Our fuel clause was also approved for continuation.
Another application currently in front of the commission proposes grid modernization investments, including smart meters and other distribution level projects designed to empower customers and lay the groundwork for a more resilient grid. We expect the decision on this case by the third quarter.
We also expect a decision this summer on our proposal for new resources in 2026. We have put forth 350 megawatts of solar and storage purchases along with a 60-megawatt utility-owned battery. Recovery for any new resources approved in this docket that cannot be included in our fuel clause would be also part of our next rate case filing.
We have a couple of upcoming filings on our agenda. We will make our annual filing associated with our FERC formula where we expect to see increased utilization of transmission system by FERC customers based on new contracts. We also plan to make our next retail rate filing this summer for rates that would become effective in the third quarter of 2025. The filing will use a future test year ending partway through 2026 and we assume a 13-month regulatory clock.
On Slide 12, after taking into account these changes, the average residential bill at PNM is significantly lower than both our regional and national average. The Energy Transition Act is achieving its goals for customer benefits as we exit coal. We are seeing load growth to reduce the per-customer impacts and our fuel costs have been significantly reduced by our participation in the Western energy imbalance market and its optimization of renewable resources. We have also exercised discipline in our O&M costs and are focused on initiatives that provide direct benefits to customers.
With that, I will turn the time over to Lisa to walk through the financials.
Lisa Eden
Thank you, Don, and good morning, everyone.
I’ll start on Slide 14 with a summary over the year-over-year changes in 2023 earnings. As Pat reported earlier, 2023 ongoing earnings are $2.82 per share, a $0.13 increase from 2022. Load growth and weather added to PNM’s and TNMP’s combined earnings on a year-over-year basis. At PNM, lower operating costs as we transition our generation portfolio to carbon-free energy and higher transmission margins driven by increased usage of our system increased earnings year-over-year.
Continued rate recovery of transmission and distribution investments at TNMP through TCOS and DCRF filings increased earnings. These increases were partially offset at both utilities by expenses for depreciation, property tax and interest associated with new rate-based investments. Lower earnings at corporate reflect higher interest rates year-over-year, partially mitigated by the hedges we’ve previously put in place. Detailed segment-level drivers can be found in the appendix of today’s presentation.
Slide 15 provides an overview of our financial outlook. Our guidance for 2024 is a range of $2.65 to $2.75. I’ll walk through the drivers of 2024 earnings compared to 2023, along with our estimated quarterly earnings distribution. I’ll then move into our capital investment plan which has been carried out through 2028 and reflects rate base growth of 10% and our financing plans to support these investments. And then I will carry those assumptions forward into our earnings power slide, showing the earnings potential of our business through 2028. Lastly, I’ll recap our dividend and payout ratio based on the increase announced in December.
Let’s get started on Slide 16 with 2024 guidance. We are introducing a range of $2.65 to $2.75 for 2024. At PNM, our recent rate case outcome at $0.12 to year-over-year earnings. Keep in mind that going into this case, PNM was able to earn its return by offsetting the regulatory lag on new investments made since 2018 through the energy transition. We expect to earn our authorized return in 2024 since new rates have trued up our investments and costs.
At TNMP, rate relief through the TCOS and DCRF mechanisms increases earnings, including our first year of implementing two DCRF filings, along with the recently approved resiliency rules. Higher transmission margins and income from our decommissioning trust also adds to earnings of PNM in 2024. These increases at both utilities are offset by the depreciation, property tax and interest costs associated with new investments.
At Corporate, the increase in debt balances to fund future growth are partially offset by the equity issued in 2023 and the proceeds from the sale of NMRD expected in February. We continue to have $600 million hedges in place in 2024 to hold the underlying interest rate at 3.5%. Our guidance reflects the additional shares issued through our ATM program in 2023 to support capital investments. We issued a total of 4.4 million shares which has a $0.14 impact on year-over-year earnings per share.
As for our quarterly distribution of earnings, we remain a summer peaking utility with the third quarter being our largest quarter from an earnings perspective. The remaining three quarters are fairly evenly split.
Turning to Slide 17, we have updated and rolled out our capital plan through 2028 for a total of $6.1 billion over five years, but in large part, it remains the same as the capital plan that we shared with you on our third quarter earnings call last year. TNMP continues to be our largest category of investments as we support the increase in system demand across our service territory while also benefiting from a supported legislative and regulatory environment, as Don discussed earlier.
Based on the new legislation, there may be additional opportunities beyond the current plan for things like temporary mobile generation or additional transmission investments in West Texas. PNM T&D includes nearly $300 million in 2024 through 2028 for the grid modernization investments that are currently being considered by the commission. Approximately $175 million of those costs are associated with automated meters, which we believe is a priority for customers and necessity to implement more advanced rate structures.
PNM own battery storage includes $135 million for the 60-megawatt utility-owned battery included in our 2026 resource filings. We expect a decision this summer. Our plans also include another 30 megawatts of the smaller distribution level battery storage that will be required – that will require a separate commission approval, and we see potential for that need to grow. We do not have any other new utility-owned generation included in our plans but as economic development efforts continue in New Mexico, we will see a need for additional resources beyond 2026.
In this circumstance, regardless whether they are utility-owned or PPS, we would need to put forth a filing with those resources for commission approval. The bottom of the slide shows that this investment plan translates into 10% rate base growth for 2024 through 2028. TNMP is our fastest-growing area of 13% and surpasses the level of rate base at PNM Retail by 2028.
On Slide 18, I’ll share the financing assumptions in our plan. In 2023, we raised $200 million of equity through our ATM program to support investments made at both utilities and issued those shares in December. We expect $115 million of proceeds from our MMRD sale in February, and we issued $343 million in securitization bonds in November. I also noted earlier that we continue to have $600 million of hedges in place for 2024 and $300 million for 2025.
As we move forward, we continue to see an equity need of $100 million per year on average through 2028 for a total of $500 million to support our 10% rate base growth. We currently have two term loans at the holding company, totaling $1 billion with half maturing in 2025 and the other half maturing in 2026. We’ve previously talked about our intentions to refinance this amount on a longer-term basis. As we do this, we will look to utilize debt instruments that provide equity credit to benefit our metrics and support our ratings. We believe this provides an efficient way of financing growth but also refinancing the business more permanently.
As we have done in the past, we are being transparent about our modeling assumptions upfront, but we have not made any firm commitments to these instruments or timing. We will evaluate market conditions as they evolve in order to optimize our financing over our longer-term plans.
Before we leave this slide, S&P recently moved our outlook from positive to stable at all three entities. The move up to a positive outlet was done following the 2020 announcement of our merger based on the benefits of being part of a larger entity. The stable outlook brings us back to the same rating and outlook held prior to the merger announcement.
Now let’s turn to Slide 19 for the highly anticipated return of our potential earnings power slide. This view incorporates our capital investment plans and financing assumptions and it supports our targeted earnings growth of 6% to 7% through 2028 from our 2024 guidance midpoint of $2.70. We have rolled forward rate base to incorporate the CapEx plan that we just walked through for PNM Retail, PNM FERC and TNMP.
We are assuming that we earn our authorized return on rate base with the currently authorized equity capitalization. I’ll note that PNM Retail incorporates the newly authorized ROE of 9.26% and equity capitalization of 50% for all years. At FERC, we’ve been able to offset regulatory lag and earn our 10% authorized return these last few years after acquiring the Western Spirit transmission line in 2021.
Total PNM also includes items not in rates, which accounts for any short-term interest expense and offsets through AFUDC, decommissioning and reclamation trust income and certain incentive compensation that is not recovered in rates. TNMP earns its return in each year. Any regulatory lag stemming from the use of a historical test year is largely offset by low growth, the addition of a second DCRF filing and improved recovery under the resiliency rider. Short-term interest expense is offset by AFUDC and the incentives provided by the energy efficiency rules fills any remaining gaps.
The Corporate and Other and equity financing lines reflects the financing assumptions that I covered on the previous slide. Again, these are modeling assumptions and the range of impacts we’re showing on this slide allow for flexibility as we optimize these financing plans based on the market conditions.
The consolidated EPS is a range supporting our target of 6% to 7% growth through 2028. This is an update from our previous target, which incorporated various outcomes, impacting PNM and our overall financing needs. The resolution of PNM’s rate case gives us increased confidence in our plans.
When comparing to our rate base growth of 10% over the same period of 2024 through 2028, the difference is primarily financing costs. We feel confident in our plan and the ability to execute on our growth targets. As we move forward, we will continue to update this slide to provide transparency into our plans and reflect any material changes. Before I hand things back to Pat, Slide 20 shows our dividend. We increased our annual dividend to $1.55 in December, a 5.4% increase. We maintained dividend growth throughout the merger process and look to grow the dividend to stay within our targeted payout ratio as we manage the business over a long-term horizon.
With that, I’ll turn it back over to Pat.
Pat Vincent-Collawn
Thank you, Lisa. Before I open it up for questions, let me acknowledge all of our teams here at PNM Resources. Everyone here plays a part in executing our business strategy, whether it’s working on infrastructure construction from start to finish, answering customer calls, restoring power or supporting our teams and the customers that are the core of our purpose. Thank you. Your efforts are both seen and appreciated. And I hope that you all agree that we are still standing better than we’ve ever been.
Lynea, let’s please open it up for questions.
Question-and-Answer Session
Operator
[Operator Instructions] And our first question is from Julien Dumoulin-Smith of Bank of America. Please go ahead.
Julien Dumoulin-Smith
Hi, good morning, team. Thank you guys very much. I appreciate it. And thankfully, we have our wonderful slides back here. So I appreciate all the added disclosure – renewed disclosure. Well, look, I mean, a bunch of different things stemming off that, if we can. Maybe just first off, just what are you saying here vis-a-vis 2027 here?
I mean obviously, you talked about a new rate case here, mid part of this year. I mean, implicitly, are we to kind of think that you don’t get back to the full earnings power until 2027? Or how do you think about sort of the cadence of earned returns in New Mexico in the interim here. And then also, just maybe you could speak a little bit to the dynamics around the corporate and other as there’s some gyrations there as well through the forecast period.
Pat Vincent-Collawn
Okay. Don is going to talk about the rate case and the cadence in New Mexico, and then Lisa will talk about Corporate and Other.
Don Tarry
On the rate case, we will, as we talked about this summer file our next forward-looking test year in New Mexico. And what you’re going to see is you’re going to see rate cases likely every couple of years. It’s a 13-month window. That allows rates to stay affordable, allows our cost to get recovered in a timely manner. And again, these are smaller rate increases, and these are forward-looking test periods as well, too. So I think you’re going to see that on the cadence as we kind of work our way through that earnings power through 2027.
Lisa Eden
Yes. And I would also say at TNMP and FERC, we really are earning our allowed return there, especially in Texas where you have added another DCRF filing. In terms of the Corporate and Other and financing. Julien, we have really think thought about this in two ways, right? We have put forth $500 million of equity to fund growth through the time period. And then we’re also thinking about our term loans and so we will refinance those more permanently, which we’ve talked about before, and we will use debt instruments with equity content to refinance those. And all those are assumptions. So we have included in our earnings power.
Julien Dumoulin-Smith
Excellent. And maybe just a follow-up where you picked it up, left it off there. Just on the balance sheet, are you talking about the $100 million in equity, but then some amount of the $1 billion being refinanced with equity linked. I mean what portion are you expecting there? And then just more specifically here, I think not so much has changed, but what specific FFO to debt metric are you guys targeting at this point? And maybe even within that, how have the latest conversations post deal break, have they gone with the rating agencies here, post rate case resolution.
Pat Vincent-Collawn
Yes. Julien, we went back to see both rating agencies. I mean, Lisa and her team have been keeping up with them all during in the deal, and then Don and I joined the team to visit both rating agencies. They were very constructive. They understand where we are in 2023 because of the San Juan credit write-off and they all agree it was the appropriate decision to get rid of this like that San Juan credit and bring everybody on board. But they have been very, very constructive with us. They know our commitment to investment-grade credit rating, I think we’re the only utility actually has it in our long-term incentive plan. So I’ll let Lisa give you more color, but we have had some real good discussions with them.
Lisa Goodman
Yes. And Julien, one of the things that we did during – while we were under the merger that we really pushed out the maturities of those term loans, right, to ’25 and ’26 which has given us more time to think about what – how we’re refinancing the $1 billion at the HoldCo. What we’re looking at junior subs, and particularly specialists and Moody’s changed their guidance recently and it provides equity credit for junior subscribe.
Julien Dumoulin-Smith
Yes. Okay. Wonderful. So the junior is on that piece. And then lastly, if I can, just to come back to what’s included in the plan or what have you – I mean just to clarify earlier, so the reason for the jump in ’27 is what exactly? How do you think about that versus as you say, like several smaller rate cases here. I mean I would have thought that there would have been more of a steady increase versus kind of a more a slight step function there from ’26 to ’27, if you will. Is that just a conservative planning on how returns look? Or what is that?
Don Tarry
I think it’s a combination of a couple of different factors. This is an earnings power slide to start with, so it’s based on what your rate base is. I will tell you, the great legislation that we’ve seen in Texas allows us to file a grid, resiliency filing. If you kind of think about that, that’s a 3-year filing. We’ll file ours midyear. We’ve baked $450 million in that. If you kind of think of the timing, that’s coming in over that space in a period of time in ’26, ’27, ’28, so it kind of fits into that arena.
I will tell you that $450 million because you have to do a study, is a conservative number. We’ll do the study and file it midyear and expect rates to go into effect in 2025. I think there’s some other things out there. As we kind of think about our rate case cadence in New Mexico on that forward-looking element associated with it and kind of head down that path.
And then one of the questions you always ask is what’s upside to the upside. And in Texas, I mean, there’s things that we kind of hit on in our – as we kind of talked when we’re going through the presentation, but the temporary mobile generation isn’t in our capital plan. That would be a potential that’s out there as well as the WesTex planning process, which is we’re in the hard core center of that WesTex planning process, ERCOT is in the process of designing what’s needed at this point, and then we’ll have the opportunity to weigh in associated with that.
Julien Dumoulin-Smith
Got it. And the upside and the upside here, especially with the mobile gen, et cetera. I mean is that – that’s a ’24 item that you would expect to kind of come more into view?
Don Tarry
You would see a lot of these that kind of ramp up as they get later in the period, and I think that’s the important piece. But the mobile generation, the rules probably will be defined. They haven’t been defined yet. They’ll probably be defined by the end of the year and then you’ll be able to see kind of what’s added at that point in time.
Julien Dumoulin-Smith
Wonderful. All right, guys. Thank you so much. Appreciate it. Best of luck. We’ll see you soon.
Pat Vincent-Collawn
Thank you.
Operator
The next question is from Anthony Crowdell of Mizuho. Please go ahead.
Anthony Crowdell
Hi. Good morning. Just kind of – great, you guys are back. Just wanted to jump on some of Julien’s questions. If I could take a part one, if I think if you move the earnings growth from 5% to 6% to 7%, rate base growth stayed the same and no change in equity needs. What was the driver from going from 5% growth to 6% to 7%? It’s just a roll forward to one of the outer years that, I guess, Julien was hitting on? Or is it an improved earnings or ROE in the plan?
Pat Vincent-Collawn
Well, I’ll let Lisa go through the details, Anthony, but part of it was just we reset to 2024, right? And then we were able to optimize some of the regulatory lag and some of the rate cases and the ROEs in there. So I’ll let Lisa talk a little bit more, but that was really the main couple of drivers.
Lisa Eden
Yes, I agree, Pat. The main driver is the rebasing of 2024. But we’ve also gotten more certainty after the PNM rate case, and so we’ll be able to put forward to plan, both in terms of financing and also solidified as the rate base growth that you see here. And that’s really where we arrived to the 6% to 7%.
Anthony Crowdell
Great. And then I know you guys are focused on the balance sheet. I know you have a targeted payout ratio. I’m just wondering, do you have a targeted FFO to debt ratio?
Lisa Eden
Yes. So our objective is to stay above our threshold, Anthony and our threshold is 13% at Moody’s and 14% at S&P.
Anthony Crowdell
Great. And then just lastly, Pat, if I could put you on the hot seat here. When we roll back the clock a couple of years and think of the driver of maybe what got the company and the Board to maybe seek a larger platform in that merger. I mean, do those conditions still exist today? I mean the company is a great plan that they’ve unveiled and it really highlights the growth in Texas. But just wondering, when you think about what the drivers that maybe caused the company to look for a bigger platform, maybe a bigger balance sheet and then when you look at it today?
Pat Vincent-Collawn
Yes. And Anthony, what we’re sort of here in our deep breath phase because it’s been about, what, five weeks since the deal broke. And – but what I would tell you that I believe and the Board believes and the management team believes is that the size is still important in this world and the opportunity to access cheaper capital, to access material supplies, employee opportunities is still there.
We frame that strategic rationale up against market conditions, right? We look at where interest rates are and equity values are and then we need to see – I think anybody would need to see a fact pattern from the commission in New Mexico. They’re kind of changing the way that they are thinking. So when the Board talks about it, that’s what we’re balancing.
Anthony Crowdell
Great. Thanks so much for taking my questions. And appreciate the detail.
Pat Vincent-Collawn
Thank you, Anthony.
Operator
Our next question is from Ryan Levine of Citi. Please go ahead.
Ryan Levine
Good morning. Hi, everybody. In terms of the $6.1 billion CapEx outlook, I mean, clearly, you’re pursuing a number of incremental investment opportunities that could bring that higher. Is there any way to provide some color around how big that number can be in the backdrop of the regulatory and commercial opportunities you’re pursuing?
Don Tarry
I mean I’m not going to throw a number out, but I will tell you kind of the categories that are associated with it, and they’re primarily in Texas and they’re around the temporary mobile gen that we talked a little bit about. Again, we need to see the plan defined or the rules defined and then we’ll have a better feel. The system resiliency, right now, we have $450 million in the capital budget. I will tell you that’s a conservative number based on what we think that grid resiliency study will come out to be.
West Texas planning. It’s kind of in that process of – and the way that works is customers provide their – what they anticipate their load to be to ERCOT and then ERCOT kind of has to develop what is needed. The great thing about that is that’s in West Texas in the core of our area. And then on the New Mexico side because we really haven’t addressed that. Lisa alluded to this a little bit. But we always try to balance rates, customer rates with our capital budget.
But we see low growth associated with new customers, that’s where I think you would see additional capital that was invested both on the resource side, but definitely on the transmission and distribution side as we kind of look at that. So those are the factors that we look at as we kind of look at our capital budget.
Ryan Levine
And then a couple more modeling questions. In terms of ’24, was there any onetime gains included in your ’24 guidance around decommissioning trust or anything related to that?
Lisa Eden
No, Ryan. There’s no onetime included in our forecast – guidance.
Ryan Levine
I appreciate the clarity there. In terms of the junior sub opportunity on the $1 billion credit or $1 billion refi. How much incremental EPS do you think that opportunity presents in terms of your financial modeling or I guess on the flip side, to the extent you’re not – you don’t go in that route. How would that impact your EPS outlook?
Lisa Eden
Ryan, I think the junior subs for us is really a great vehicle and efficient way to reach both our objectives for earnings growth and also support our credit metrics. With the potential earnings power slide, we really put out a lot of details for you to model. So I think that answers your question.
Pat Vincent-Collawn
There’s absolutely a range of numbers in there, so you can model. So we’ve put some bookings in it for you is how I’d say it, yes.
Ryan Levine
Okay. Great. appreciate the questions and answers. Thank you.
Pat Vincent-Collawn
Thanks Ryan.
Don Tarry
Thanks Ryan.
Operator
[Operator Instructions] We do have a question from Paul Fremont of Ladenburg Thalmann & Co. Please go ahead.
Paul Fremont
Hi. Good morning. Congratulations on a good print.
Pat Vincent-Collawn
Thank you, Paul.
Paul Fremont
Really two questions. One on incremental investment over and above what’s in your current forecast, what should we assume as the equity percent to finance that?
Lisa Eden
We really think about equity to supporting our growth. And so if we do have additional investments, we will finance that in a balanced way and we’re probably looking at that 40% to 50% equity as we add incremental capital.
Paul Fremont
Okay. And that would be above your current CapEx guidance range, right?
Lisa Eden
That would be above our current equity – planned equity issuance, yes.
Paul Fremont
And then just a follow-up on another question that was asked earlier. With respect to considering strategic options, is there a point at which sort of the Board needs to decide whether that is going to be sort of an ongoing effort or whether that effort is terminated? How should we think about that?
Pat Vincent-Collawn
I think it’s always been kind of an ongoing effort. We reassess every year the market outlook, the landscape of the industry, our position. So I think Board of Directors that have a fiduciary duty are looking at it constantly. And if the time is right, the time is right, if it’s not right, it’s not right. But you always look.
Paul Fremont
Great. That’s it for me. Thank you so much.
Pat Vincent-Collawn
Thanks Paul.
Operator
And this will conclude our question-and-answer session. I would like to turn the conference back over to Pat Vincent-Collawn for any closing remarks.
Pat Vincent-Collawn
Thank you, Lynea, and thank you all for joining us this morning. We’re looking forward to seeing many of you in the coming weeks. Please stay safe, and remember to pay everyone a compliment today. Thank you.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
