TXNM Energy, Inc.

Good day and welcome to the TXNM Energy Third Quarter 2024 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one, on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Lisa Goodman of Investor Relations. Please go ahead.

Thank you, Wyatt, and thank you everyone for joining us this morning for the TXNM Energy Third Quarter 2024 earnings call. Please note that the presentation for this conference call and other supporting documents are available on our website at txnmenergy.com. Joining me today are TXNM Energy Chairman and CEO Pat Vincent-Coulomb, President and Chief Operating Officer Don Perry, and Senior Vice President and Chief Financial Officer 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 TXNM Energy assumes no obligation to update this information. For a detailed discussion of factors affecting TXNM Energy 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.

Thank you, Lisa. Good morning, everyone, and thank you for joining us for the Halloween edition of our quarterly earnings call, also known as the Third Quarter Call. We had a great Halloween during the Monster Mash, and we snagged all of the Reese's Peanut Butter Cups from our neighbors last night, so we are all ready to treat you to our results and updates. I'll start on slide four. Ongoing earnings for the third quarter are $1.43 per share, reflecting some warmer weather and timing impacts. Based on our -to-date results, we are narrowing our guidance range for the year to $2.70 to $2.75 per share. We continue to target 6% to 7% earnings growth through 2028. Lisa will provide more detail on the numbers and our expectations for the remainder of the year. Don will provide an update on each of our utilities and highlight the customer-focused investments in both New Mexico and Texas that allow us to build a cleaner, more resilient grid. At P&M, our recently approved grid modernization plan will give customers the data they need to have more control over their monthly energy bill. In addition, we have been awarded funding from the DOE to complement these plans with a virtual power plant project. Don will talk more about this also. This DOE award was in addition to funding from the DOE on a joint research and development project that includes New Mexico State and the National Renewable Energy Lab. It will use AI power technology to improve reliability and resiliency of the grid with variable renewable resources. At TNMP, our file system resiliency plan is designed to improve the response of our system to extreme weather events, a direct benefit to the customers we serve. Don, I'll turn things over to you for utility updates.

Thank you, Pat, and good morning, everyone. I'll start on slide 6 with TNMP. TNMP continues to set new system peak records, including another one yesterday, its sixth annual peak of the year. It is 16% higher than last year's peak and reflects a 13% annual growth rate since 2020. The amount of interconnection requests received this year is nearly double the levels we were seeing in 2020, signaling continued growth in our service territory and into the future. We are expecting a 2 to 3% growth in our traditional volume metric and demand-based rate classes in 2024. And we are seeing this across each of our areas we serve. Residential customer counts have steadily increased for many years, and the interconnection requests for housing units in our service territory are trending stronger than the statewide numbers as we continue to see folks moving into our communities that are outside of the larger cities. We also see continued requests for larger accounts which require longer lead times to providing confidence in our growth assumptions and production from oil and gas load in West Texas remain strong. Data centers have also had an impact in our service territory, now totaling over 400 megawatts. These customers typically start off as distribution customers, paying demand-based rates, and eventually move to transmission customer class, paying rates through our T-cost filing that recover transmission investments made into our system. ERCOT's growth expectations for the market have been a topic of conversation all year. For both traditional customers as well as new customers like data centers, legislation passed in Texas last year now requires planning studies to consider load beyond the contract's RDN process. And studies recently completed for West Texas more than doubled the forecast load for the region compared to the studies from just a few years ago. We have been building our system to support this growth and using semi-annual T-cost and DCRF rate mechanisms to recover our invested capital. Our regulatory highlight for the third quarter is the successful resolution of our second set of filings on both transmission and distribution side, adding to the successful resolution in the first half of the year. Turning to slide seven, we have a few key updates on the horizon at TNMP. We filed our system resiliency plan in August and are moving along the procedural schedule with a decision expected no later than February of 2025. The plan includes 600 million of capital investments that would be recovered primarily through our existing semi-annual DCRF filings. For West Texas planning, ERCOT has laid out its proposal to the Texas Commission for local projects totaling the four billion estimate previously made for the region. TNMP is proposed as the suggested owner or co-owner for a number of these projects involving both new and existing infrastructure. We do believe there may be some additional projects TNMP was not selected for that we should also take part in and we will follow the commission process for resolution on these projects. We expect to see a total of 600 to 900 million of projects beginning in 2027. We will be required to file for regulatory approvals of each of these projects. The recovery for these investments will be allowed through our existing semi-annual TCOS filing. There is no update this quarter on the pending rules for mobile generation, which were proposed earlier this year for comment. We will continue to monitor the proposed rules and will consider whether to file for any resources in 2025. Now let's move on to PNM on slide 8. We've had a couple of noteworthy announcements recently. Our grid modernization plan was approved earlier this month, including metering infrastructure. Once in place, customers will be able to use real-time information to manage their energy usage and will also be more efficient and effective in managing our system. Also the Department of Energy announced that it had selected PNM's virtual power plant project for funding through the GRIT program. This project is designed to integrate smart grid technology, distribution-side batteries and other distributed energy resources. The anticipated project outcome will enhance grid stability and benefits for customers. We are continuing our journey to carbon-free and recently added another 450 megawatts of solar and storage to our system. We have a lot of advantages in New Mexico when it comes to clean energy. We have an abundance of solar and wind potential and when joined with battery storage capacity, it allows us to reliably meet our customers' energy needs. We've also had a number of positive regulatory highlights this year at PNM. Earlier this year, the New Mexico Commission approved our application for new resources in 2026. In October, our grid modernization application was approved. There have been a number of constructive workshops on several topics, including our regional markets and the other benefits this could bring to customers. I'll talk more about this when we turn to slide 9 to cover the key items on the horizon for PNM. In the coming weeks, we plan to file an application at PNM for new resources to be in service in 2028. We originally issued an RFP for projects that were able to come online in either 2026, 2027, or 2028. This is the second and last application stemming from this RFP. We're not going to get ahead of our filing and talk about the details, but we are committed to putting forth resources that ensure grid reliability and resilience and movements towards our energy transition. We continue to believe that a balanced mix of utility-owned and third-party developed generation is the best course of action for our customers. We will provide more information when the filing is submitted. As we look forward, we'll be issuing our next RFP in the fourth quarter for resources to come online between 2029 and 2032. In addition to meeting increased demand, this RFP will cover the years where we need to bring on new generations to facilitate our exit from Four Corners coal plant in 2031. This will complete PNM's exit from coal as we look towards the next step in our energy transition. As I mentioned earlier, regional markets hold the key to maximizing benefits to customers. When our intermittent resources are producing more energy than we can use, other regional utilities can purchase this excess. Similarly, when other resources in the West are available at a lower cost, we can lock in those benefits for our customers. Our commission is expected to issue a policy statement today supporting participation in regional markets with a focus on customer benefits. We expect to make a decision on which market we will join before the end of the year. To realize the value of New Mexico renewable potential, we need to develop and implement transmission plans to complement the plans for generation resources. PNM is moving forward by publishing a 20-year transmission planning study later this year. This study will lay out a roadmap to achieve the emission limits and carbon-free energy mandates set forth by the Energy Transition Act and set the stage for New Mexico to be able to contribute to the Western regional planning efforts. It will also provide a more comprehensive framework to integrate our generation, transmission, and distribution businesses. We expect to share more about this result of this study when complete later this year. Lastly, let me provide an update on our 2025 rate review filing. The procedural schedule calls for testimony from staff and interveners are filing a settlement by November 26. We are in discussions with parties about the issues in this case. If a settlement is not reached, rebuttal testimony is due January 17, and hearings are set to occur late February and early March with a final decision in the case by early July. With that, I'll turn it over to Lisa for a more detailed look at the numbers.

Thank you, Don, and good morning, everyone. I'll start on slide 11 with a recap of third-order results. Earnings per share were $1.43 compared to $1.54 in the prior year. Earnings benefited from recovery of capital investments through TCOS and VCRS mechanisms at TNMP, the implementation of new retail rates at P&M in January, and income from our P&M decommissioning trust. Load growth at P&M and TNMP was more than offset by the impacts of milder temperatures compared to last year, reducing earnings on a net basis. Lower transmission margins at P&M also reduced earnings, along with depreciation, property tax, and interest expenses associated with new investments. Lastly, dilution impacts from shares issued in December of last year lowered our earnings on a per-share basis. Now turning to slide 12, I'll cover our guidance assumptions for the rest of the year. We have gotten through the majority of our annual earnings, and we are comfortable narrowing our guidance to a range of $2.70 and $2.75. We have been above expectations in some drivers, including P&M low growth and weather, while we have seen decreases from other drivers, mainly P&M transmission margins and corporate interest expense. We have raised $100 million of equity through the third quarter by way of our ATM. These are forward sales that we plan to settle in December of this year. Earlier in the year, we issued junior subordinated convertible bonds to replace $550 million of corporate term loans. The -for-debt exchange balances our income statement with our balance sheet by achieving a lower interest rate while also receiving equity credit from the rating agency. On slide 13, we have updated our capital plan to incorporate the additional $150 million of investments included in P&M's System Resiliency Plan for a total of $600 million. These capital plans already include P&M's recently approved grid modernization plan with investments of $344 million. $291 million of these investments are planned through 2028 with the remaining amount in 2029. Adding the full amount of P&M's System Resiliency Plan has increased our rate-based growth slightly to .7% on a consolidated basis for 2024 through 2028. Dawn described a number of other opportunities that we have on the horizon and will need to prioritize based on the impact and benefits to our customers and our system along with our balance sheet. As each of those opportunities become more defined, we will integrate them into our plans and projections. On slide 14, we have also incorporated P&M's Resiliency Investment into our earnings power and we remain comfortable with our targeted 6% to 7% growth in EPS through 2028. We continue to plan for an average $100 million of equity per year to fund planned capital investments through 2028. We have assumed we financed the additional $150 million of P&M investments with approximately 45% equity or $70 million from 2025 through 2027. For any incremental capital stemming from the opportunities on the horizon, we continue to assume that the holding company issues equity for 40 to 50% of the total spend to maintain our consolidated credit metrics. We continue to execute on our plans for this year and feel confident in our targets. With that, I'll turn it back over to Pat. Thank

you, Lisa. We are pleased with the positive regulatory outcomes we've seen this year and the opportunities we have on the horizon at both P&M and TNMP. Before I open it up for questions, I want to thank the TNMP linemen who packed up and went to provide mutual assistance after Hurricane Helene. I know their work was appreciated by those impacted by the hurricane and we appreciated it here as well. Wyatt, let's open it up for questions.

I will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. And our first question comes from Nicholas Campanella with Barclays. Please go ahead.

Hey, good morning. CapEx trick or treat.

Well, I see it's a treat. Yeah, it's a treat.

Definitely a treat. I should clarify that. Okay. Hey, so it's good to see the $600-900 million of ERCOT projects. And just thinking about where that, the size of that capital relative to even your current rate base there, even where it's projected to be in 27, it just seems very material. And I acknowledge in the preparatory marks you kind of talked about having to prioritize capital within the plan as well as the balance sheet. So just how should we kind of think about this $600-900 million? Would that replace current CapEx in your projections as it stands today? Or is it truly incremental? Just maybe you can kind of give us a little bit there.

Yeah, absolutely. Good morning, Nick, and look forward to seeing you in about nine or 10 days at EEI. We would love to see that $600-900 million being incremental, starting in about the 26, 27 timeframe and going through 2030 based on the ERCOT schedule.

Incremental. Okay, thank you. And then on the New Mexico rate case, you know, understand that you could potentially see a path where parties file testimony or, you know, potentially you get a settlement filed here. Just putting some parameters around that. Are you, you know, willing to file a partial settlement? Is this to really take all the issues off the table? Just what could we kind of potentially see here as we get into November? Thanks.

No, absolutely, Nick. And this rate case, we've kind of taken a different approach. And we began discussions with all the intervening parties before we actually filed the case. And it's a traditional kind of T&D case. A lot of those legacy issues are behind us now. And we've continued those discussions even through this week about a potential settlement. And we're still hopeful that there will be a settlement. So I think, you know, all avenues are open at this point, whether it's a partial settlement, a settlement, as we continue to work with the intervening parties.

All right. I'll go back in the queue. See you in a week here. Thanks. Thanks, Nick.

Our next question comes from Julian Dimmel and Smith with Jefferies. Please go ahead. Hey, good

morning, team. Happy Halloween indeed. Thank you for all the trees. Maybe Trix down the line. I don't know. Anyway, just following up on what Campy was saying there real quickly, if I can. On the 600 and 900 there, real quickly here, you talked about potentially getting involved in some additional projects. Is that what's contemplated when you talk about the upper end of that range there, or is there an upside to the upside on that, if you will?

An upside to the upside, Julian. You know, I would look at it between the 600 and 900 million. The upside would be if they chose a different path. And I think we've listed out, say, with the 345 KV path, it looked like based on just how ERCOT's allocated the projects, another 900 million. If they do the 565 KV path, then right now we have zero allocated to us out of that. So I kind of think about it like that.

But just to clarify that you have zero allocated to that, your contention is that you merit some amount of that, if I understand your comments correctly? On the 765

KV?

Yeah.

I would assume that the commission would follow kind of the same path, and we would have to look at it to see. Right now what the commission has done is, as you probably know, is there's transmission providers that can dispute, and then they kind of go into a process there. And so we would have to look at it based on that import path, if that import path was selected.

Got it. All right. So it does sound like there's really some moving pieces there. All right. Excellent. Thank you. And then related here, just going back to the financing plan real quickly, I mean, you made an allusion to this. You know, maybe not necessarily conventional equity in all contexts here. Obviously you're increasing your assumptions here today about equity. How do you think about refinancing and potentially upsizing your use of other forms of equity content here within the plan? Again, should we expect on incremental updates when you reflect that 900 or 600, wherever that comes out, to be a traditional equity piece? Or would you think about layering an additional equity content as you

all? You know, Jill, and as those opportunities become more defined and certain, we will integrate them into our plans and projections. And our base assumption is 40 to 50 percent equity. But as you know, we will always look to the market to see what how we can best optimize that financing to get the best shareholder value.

Got it. All right. Excellent. And then just on the regulatory front again, just re asking a little bit of what Nick said as well, just on the the rate case process here in potential settlement. Just any nuance or any pieces of this that you could really look to get resolved here? Maybe asking that a little bit more directly.

Yeah, no, Julian. I think, you know, we're in discussions and I don't want to I don't want to jump in front of that. But we've had really good discussions with the intervenors all along the way. And again, it's a it's a traditional kind of T and D type rate case at this point.

All right. Fair enough. I know there's a couple of different pieces there. So we'll look nicely done, guys. Congrats, Pat, on the additional appointment here and we'll see you guys soon. All right. All the best.

Thanks for the CDI. Thank you, Lynn.

And our next question comes from Michael Monaghan with Evercore ISI. Please go ahead.

Hi, good morning. Thanks for taking my question. So on the morning on the West Texas transmission and Permian Reliability Study, you highlighted the additional nine hundred million under the three forty five KB scenario. You know, if I'm if I'm not mistaken, the traditional path is the three forty five KB. So what would you say the chances are of that traditional pathway that could include that higher investment? And then also, do you know the schedule and timeline to address the remaining unresolved ownership?

You know, I'm on the on the pathway that you are correct that three forty five KB was was one of the past. I'm not going to get in front of the commission on what path they would select import path. So I think we will wait and see on that topic.

Okay, great. Thank you. And then secondly, you know, a lot of growth in Texas, obviously you haven't filed a rate case there since, you know, I think, twenty eighteen. What is your expectation for when you will file file there again? You know, obviously, you have some constructive cost recovery there with the T cost and DCRS mechanism.

Yeah, you're you're 100 percent right. It's been six years since we've we filed the rate case there. We've gotten two extensions. We are we are always looking at the rate recovery and whether we file one or not. There have been some changes in the business between our transmission and our distribution there. So we're exploring that as a potential in twenty twenty five.

Great. Thanks for taking my questions.

Thank you.

The next question comes from Ryan Levine with city. Please go ahead. Good

morning and happy Halloween.

And you, Ryan.

Yes. All right. In terms of TNM low growth, the customer count is relatively flat for this year versus previous years. But yet your retail load as is expected to accelerate for the fourth quarter with some industrial growth. Can you elaborate around what types of customers are and what you're seeing in the market?

Yeah, no, absolutely. And Ryan, good morning. We've had some industrial load that we've talked about ramping up for probably the last 12 or 18 months. And COVID kind of slowed that down. We're actually seeing that ramp and it's been ramping the last half of the year. So that's what's kind of closing the gamut there that we would expect to be within the two to three percent guidance range.

In terms of that trend, is that expected to continue to accelerate into next year? And there's certain industries that you're more levered to.

Yeah, right. And we do. We've had a lot of emphasis in the state on economic development. And so our industrial piece of the business is growing here in New Mexico. And so we continue to see growth going into 25 as well.

And Brian, it's in a variety of industries, large and clean energy industries, but it's spread out. It's not concentrated in any one customer industry.

Okay. And then maybe one follow up in terms of the financing plan, given there's a bias upside to some of the spending. Is it fair to assume that you would lean more heavily on the equity plan in earlier time periods than later time periods, given that bias in your capex outlook? And I think you're here today, you've already achieved your ATM program for this year. Is there still opportunity to execute on further ATM issuance in the remaining two months of the year?

So, Ryan, we laid out on the earnings power a lot of detail regarding our financing plan as we see these incremental opportunities be more defined. And we will, of course, include them in our plans and projections. But our base assumption is the 40 to 50 percent of equity issues for any upside on the capex side.

Okay. And then last question for me, just in terms of the DPP DOE funding, is there a way to quantify the financial benefit to the company of receiving the Department of Energy financing plan? I

think I would quantify it as customer benefit because it's really allowing us to integrate our systems to better serve our customers. So I wouldn't think of it as financial bottom line impact, but again, the focus is on the customer.

Thanks for taking my question.

Thanks, Ryan. See you soon.

And the next question comes from Andrew Weasel with Scotia Howard-Wile. And again, if you have a question, please press star then one. Andrew, please go ahead.

Thank you. Good morning, everybody. Morning. I've got two fine tuning follow up questions and then one high level one for you. So first, following up on the last one about load growth, I noticed that your forecast for 2024 came down a little bit for both states. Anything to point to there and what's the outlook for 2025 and beyond?

So on 2024, Don mentioned the industrial customers that's been wrapping up. It has been a little slower than we expected. And so as a result, we adjusted the ranges there, but we really do feel very positive about low growth in both states. Texas is, as you can see, the demand based low growth is very strong this year. And we continue to see that in the coming years. And like we said before, lots of economic development efforts here in New Mexico. And so we are getting additional load, particularly on the industrial side.

OK, great. And I see the data center. I think that's a new disclosure, two and a half percent year to date. Any thoughts on how big that outlook might be for 24 or beyond?

You know, that's where we're at today and we haven't forecasted it. That's a mix of those that are on our transmission system as well as on our distribution system. OK,

great. We'll stay tuned. Next question, just to clarify on the equity, I know you've talked very clearly about the high level plan, but specifically the 70 million related to the Texas System Resiliency Plan. Would that be financed through an ATM and would it be spread over those three years or more front noted in 2025?

Yeah, so we have spread them over the three years, 25 through 27. And it really is. Any additional equity will match as we spend the capital. And for us, we always look to optimize our financing plan. So it really depends on the market conditions and we will just see what kind of vehicles we use then.

OK, fair enough. Then lastly, my high level question is when we think about upside to capex here, you talked obviously about the Texas System Resiliency is now in the plan, the West Texas transmission you're starting to get more visibility on. Then you've talked about things like New Mexico Resource Plan, etc. My question is more broadly, do you think that there's a limit on how much upside there could be to capex? Is there a cap beyond regulatory approvals, whether that's related to the balance sheet, your labor force, customer affordability or just general corporate bandwidth?

You know, one of the things, one of the screens, thanks Andrew, one of the screens we always go through is customer impacts in our service territory. So that's one of the screens that we look at as we kind of allocate capital, both in New Mexico and Texas. So I would say that's probably the ultimate screen is that depends on a lot of factors, as you can imagine what load growth is doing, you know, what the policies of the state are. And they all kind of go into the mix as we kind of look at it.

All right, very good. Thanks so much, everybody.

Thank you. Thank you.

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

Thank you, Wyatt, and thank you all for joining us this morning. I look forward to seeing all of you at the EEI Financial Conference, where we'll provide more color on our capital investment opportunities. Stay safe.

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