TXNM Energy, Inc.

Good day and welcome to the TXNM Energy Q1 2025 conference call. All participants will be in listen-only mode. Should you need assistance, you 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 a touch-tone phone. To withdraw your question, please press star and then two. Please note this event is being recorded. I would now like to turn the conference over to Lisa Goodman, Investor Relations. Please go ahead.

Thank you, Dave. And thank you, everyone, for joining us this morning for the TXNM Energy First Quarter 2025 Earnings Call. Please note that the presentations for this conference call and other supporting documents are available on our website at txnmenergy.com. Joining me today are TXNM Energy Chair and CEO, Pat Kulan, President and Chief Operating Officer, Don Terry, 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. And good morning, everyone. And thank you for joining us today on Billy Joel's 76th birthday. What a better way to celebrate his birthday by kicking our call off with Piano Man. But even more exciting than Billy Joel's birthday is that today is PNM's 108th birthday. We were founded in 1917 as the Albuquerque Gas and Electric Company. And today we're celebrating more than a century of serving our customers. So happy birthday to PNM. I'll start on slide four with our financial results and company updates. Ongoing earnings for the first quarter this year are 19 cents. This keeps us on track with our expectations for the year, which reflects the mid-year implementation of new rates at PNM. We are affirming our guidance for 2025 at a range of $2.74 to $2.84 per share, along with maintaining our long-term EPS growth target of 7% to 9%. Lisa will cover the numbers in more detail. I'm going to cover a couple of highlights for this quarter before handing things over to Don. Rate-based growth at TNMP continues to be supported by timely recovery of our investments. During the first quarter, our system resiliency plan was approved, allowing us to invest and recover $546 million in capital improvements that will enhance our ability to protect our system and respond to extreme weather events in service of our customers. In New Mexico, the unopposed stipulation in our rate case continues to move forward. Hearings in the docket were completed in February and in April, the hearing examiners recommended approval of the stipulation. We expect the Commission to make a decision in May or June ahead of the July 1st rate implementation date. New Mexico completed this year's legislative session with some key bills signed. The state has seen increased levels of interest in economic development and has identified the need to expedite the build-out of infrastructure needed to serve new large customers. The business community rallied around these site readiness bills, which were passed with strong bipartisan support. This provides an avenue for electric, gas, and water utilities to pre-build this infrastructure and is designed to allow New Mexico to become even more competitive in attracting new businesses. Another piece of legislation we supported was the creation of a wildfire task force. The purpose of the task force is to develop a comprehensive approach on how New Mexico can better prevent and respond to wildfires and make recommendations on solutions for this. We see this as a positive step forward in laying the groundwork for future legislation that can help protect our customers, employees, and the communities we serve. With that, Don, I'll turn it over to you for more details.

Thank you, Pat, and good morning, everyone. I'll start on slide six with TNMP. TNMP has already set a new system peak in the first quarter, coming in 22% higher than last year's first quarter system peak. Demand-based load from traditional customers, along with data centers, had a strong start to the year. Demand-based load increased 9.7%, largely driven by growth in our north and west Texas regions. Where commercial businesses have grown in, the areas where data centers have been located. Data center load picked up another 70 megawatts in the first quarter. We have a couple of existing customers that are expected to increase their demand up to another 150 megawatts before the end of the year. Interconnection requests were also up 6% compared to the first quarter of last year. with a noticeable uptick in the Gulf Coast area, supporting our continued growth expectations. Pat highlighted the regulatory success TNMP has already seen in the first quarter of this year. Our system resiliency plan was approved with $546 million of capital investments planned through 2027. TNMP has filed and received approval for $83 million of transmission rate-based investments made last year. and the proposed order approving recovery of $176 million of distribution rate-based investments pending final approval from the Commission this month. At the end of April, the Commission formally approved the common projects in ERCOT's Permian Basin Reliability Study. TNMP will be investing approximately $750 million by 2030 to complete our share of these projects, which we added into our capital plans in February. We expect to file CCN's applications for these projects in the first quarter of 2026. Turning to slide seven, we have not made any additional changes to our five-year capital plan from the updates at our year-end earnings call in February. Our plan remains focused on supporting the high level of growth in Texas with a reliable and resilient grid. The level of investments grows significantly over the five years of our plan. from 600 million this year to over a billion starting in 2028. Rate base grows by 17% and becomes the largest portion of our total rate base. All of the discussions in Texas around ERCOT load forecasts and higher voltage transmission lines supports the growth embedded in our plans. We continue to see good discussions in the Texas legislature on items that help facilitate these growth plans. This year's session ends June 2nd So it's too early to know which bills will pass, but there has been some good progress. There were a handful of bills introduced this year aimed at reducing regulatory lag or strengthening credit metrics as capital spending increases. And each of these could benefit TNMP. In addition, we have been having conversations on these same topics with stakeholders as we prepare to file our general rate review later this year. There are also utility bills addressing wildfire prevention, ranging from pole inspections to the approval of wildfire mitigation plans. We are pleased that the legislature recognizes the need for some definition around utility responsibility and their associated liabilities, and we will be closely following the remaining progress. The upcoming regulatory agenda includes our second TCOST and DCRF filings, and we will look to receive approval on both mechanisms before filing our general rate review in the fourth quarter, which will kick off the 180-day statutory clock. We are targeting the implementation of new rates in Q2 of next year. Let's move on to P&M on slide 8. The hearing examiner's recommendation to approve the unopposed stipulation in our rate review is our top highlight. It has been quite some time since we were able to achieve this type of agreement in a rate review. The hearings were originally scheduled for two and a half weeks, and ultimately were held for two days and provided a good opportunity for hearing examiners and commissioners to ask questions and discuss policy items raised in the filing. We were pleased to see the recommendation and look forward to commission decision in May or June ahead of the implementation in July. We also filed an unopposed stipulation in our 2028 resource filing for 450 megawatts of resources, including 150 megawatts solar and storage facility in the Central Consolidated School District, the same area where the San Juan coal plant was retired. This was a key priority for stakeholders. Hearings in these dockets were held in one day, and the hearing examiner issued their recommendation to approve the stipulation earlier this week. We expect a decision from the Commission in the third quarter. As Pat mentioned, New Mexico's 60-day legislative session ended in March, and a key priority from the business community was for site readiness. The bill's primary objective allows utilities to prepare sites and build capacity to serve these customers in advance. It also shortens the regulatory approval timeline and allows utilities to defer costs until they can be included in a rate case proceeding. These bills have been signed into law and we are excited to see their impact along with the proposals that will come from the Wildfire Task Force. Another bill, HB 91, added a key tool that has been missing from rate-making. The Commission did not have the ability to approve rates specific to low-income customers. This will be an important tool that can be used in our next rate review. Turning to slide 9, I'll cover the current outlook at PNM. Again, we have not made any changes to our five-year capital investment plan, and we remain focused on balancing the needs of our system with customer rate impacts. One area coming into greater focus for PNM is transmission development. We completed a 20-year transmission study late last year and have been holding discussions with stakeholders, including the Commission last week. We were able to share details about how additional investments could improve our system and meet the growing demands of our customers, along with ways these investments could utilize resources in New Mexico to provide benefits to our customers. We have a number of upcoming items on our regulatory agenda. We will look for a decision on our rate review in Q2 and our 2028 resource application in Q3. We will make our annual update to FERC formula rates in June. We will also be proposing the build out of two small transmission lines later this year that would improve our ability to serve our customers, perform maintenance on existing lines, and facilitate economic development. These investments have already been included in our capital plan. We currently have an RFP outstanding for new resources available between 2029 and 2032. We forecasted a need of at least 500 megawatts of new capacity by 2030, with the actual amount dependent upon the type of resources selected from the independently monitored process. We expect to file a resource application to propose our selected resources at the beginning of next year. Our current capital plan does not include any amounts for this, and we will incorporate any new amounts after that application is filed. With that, I'll turn it over to Lisa for a few more detailed look at the numbers.

Thank you, Don, and good morning, everyone. I'll start on slide 11 with a recap of first quarter results. Ongoing earnings per share were 19 cents. This is consistent with the expectation provided for the first quarter and reflects the absence of new rate recovery at PNM until the second half of the year. Overall earnings benefited from recovery of capital investment through TCOS and DCRF mechanisms at TNMP and retail load growth at both utilities, including the impact of weather. Degree days were higher at TNMP, partially offsetting lower heating degree day experience in New Mexico. These increases were offset by new demand charges from energy storage agreements implemented at PNN in late 2024, lower transmission margins, higher insurance premiums, and the timing of planned outage costs. Remember that under our unopposed rate stipulation, any changes to our demand charges are deferred to the balance sheet, reducing variability in these costs once the new rate request has been approved. Depreciation, property tax, and interest expense associated with new investments increased year over year. Detailed drivers for each of our segments are available in the appendix. We have affirmed our guidance range for 2025 of $2.74 to $2.84. We have updated the quarterly EPS distribution in the appendix to reflect our latest assumptions, the third quarter continues to account for more than half of our EPS for the year. The capital plan on slide 12 remains the same as the plan we showed at the end of February. We expect tariffs to have about a 2% impact on these plans as we move forward, and we will incorporate any changes into our capital allocation and prioritization process. We are mindful of customer impact and will balance this with system needs as we work to mitigate any increases. I'll wrap up with our earnings power on slide 13. There are no changes from what we disclosed in February, which included a number of incremental capital opportunities and increased our growth target. We continue to target EPS growth of 7% to 9%, from 2025 through 2029, and the earnings power supports the upper half of this range. We feel confident in our ability to execute on this plan. With that, I'll turn it back over to Pat.

Thank you, Lisa. Before I open it up for questions, I want to take a moment to thank our teams across New Mexico and Texas. These are exciting times for us as we build out our systems and prepare for growth. Our teams are stepping up to the plate, and I am proud to lead these teams and watch our employees grow and succeed. Dave, with that, let's open it up for questions.

We will begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're 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 and then two. Our first question comes from Nick Campanelli with Barclays. Please go ahead.

All right. Hey, everyone, and happy birthday. Thank you. Morning. Morning. So, hey, a lot of good comments on legislation in your preparers, but I was just curious, this House Bill 5247 involving the Permian transmission projects, I just wanted to confirm that you would be in scope for that, and maybe you can kind of talk about how that impacts your earned ROEs in a normal rate year or allows you to maybe accelerate some more capital and how that can kind of impact what's assumed on the TNMP side. Thank you.

Hey, thanks, Nick. And you're referring to 5247, House Bill 5247, the unified tracker? Correct. Yeah. No, we see that as beneficial to TNMP, as you are probably very familiar with and others on the call. That allows you to, you know, kind of group everything together. It kind of looks and smells a lot like the system resiliency recovery mechanism where you can defer pretty much everything to the balance sheet and earn on it and then bring it in so you eliminate regulatory lag associated with it. So I think the way to think about it is it would be beneficial to TNMP from an EPS perspective. Timing of cash flows will be a little bit different because TCOS specifically as it relates to premium basin, you get to file twice a year, but here you'd file it once a year.

Okay, that's great. Appreciate that. And then, look, I just wanted to address that, you know, on prior calls, especially when you came out of the AGR process, you still seem to acknowledge the benefits of size and scale, you know, mostly from a viewpoint of sourcing more efficient capital to finance what is a very large and growing rate plan or large and growing CapEx plan. So just maybe you can kind of give us an updated view on how you're thinking about that today and if anything is kind of changing in your mind.

No, Nick, the board still holds the same views that they did, that going into, you know, an environment of large growth, that size and scale can really help with a large capital plan. So nothing has changed there.

Okay, and then just one last one, if I can. You know, I know, Lisa, that's the retirement date, and, you know, the effective date in that was March 15th, or no sooner than March 15th. So, you know, now that we're just in May, maybe just an update on how you're viewing that role as a team.

We are enjoying the fact that we still have Lisa Eden Services with us, and we are going to celebrate that. And when we have news on another CFO, we will let everybody know.

Okay. Thank you.

Thanks. And the next question comes from Julian DeMullen-Smith with Jefferies. Please go ahead.

Hi. Good morning. It's Brian Rousseau on for Julian.

Hi, Brian. Morning, Brian.

Hey, just on the upcoming TNMP base rate case, what are the major drivers of the case? Is it kind of less about regulatory lag, more about rate design and cap structure? And can you remind us, what is the actual balance sheet equity ratio for TNMP as of March?

Yeah, thank you. It will be rate design primarily. Obviously, we'll look at capital structure as well, too. Currently, the capital structure at KNMP is 45% equity. And so those will be the factors. But a big part of it is rate design. We haven't been in in seven years. We're starting our seventh year here, so it's important to get that rate design adjusted.

Okay, good. And then on the TNMP side, Permian Basin CapEx. It's $750 million, but it seems heavily weighted towards 2030, or half of the CapEx is for that one year. Just curious, you know, what your confidence level is on the execution timeline, and then secondarily, are there any maybe indirect upside CapEx for the 765KV projects that are approved, understanding that TNP is not going to directly participate in the 765, but just curious if there's any ancillary type capex.

Yeah, on the first part of your question, we are confident in being able to deliver on approximately 750 million of capital. We'll file our CCNs. The commission has kind of staged those CCNs so that they can come in in time based on the overall design. And so our first set of CCNs will be filed early part of next year. We're already down the path of getting and ordering all the equipment that we need associated with it. On the 765 KV, not any indirect as we're aware of at this time, but we do look at the overall size of 765 when you look at the whole state of opportunities as we look forward in Texas.

Thank you. Is there still the plan to refinance the remaining parent-level debt later this year with equity-like securities or junior support and data notes?

Yes, Brian. That's our plan. We have a term loan. The majority of the term loan is not expiring until mid of next year, and so we have ample of time to refinance that holding company debt with equity-like securities.

And then lastly, the RFP at PNM. You mentioned 500 megawatts, but is it up to several thousand megawatts by 2032? Just trying to bookend what the capex upside might be at PNM, the earliest in early 2026.

Yeah, no, absolutely. So when you look at the 29 to 30, 2032, It was anywhere from 900 megawatts up to 2,900 megawatts, depending upon the types of resources that were selected.

Okay, great. Thank you very much.

Thank you.

Thank you. And the next question comes from Michael Lonegan with Evercore ISI. Please go ahead.

Hi, good morning. Thanks for taking my question. Good morning. Good morning. Just a follow-up on the New Mexico RFP process. Just wondering, you know, how is it progressing? You know, are tariffs making it more complicated? And, you know, you talked about the size of Megalox, but, you know, can you talk about your targeted ownership there?

In New Mexico, we follow, we have an independent evaluator that participates with us, you know, which is a good thing because as you kind of work through the process, they file their report with the commission and that helps justify the resources that are needed. And I think that's important as we go through the RFP process. And that's how it's been established. So our timeline is going as expected. There will be abilities for folks to identify based on May 1st what their resources are and the prices. And working with the independent evaluator, if tariff prices change, those will probably be incorporated, but we'll work jointly with the independent evaluator. I don't want to get out in front of that process because, again, it's working together. So we will do what's right for customers as it relates to the types of resources and who owns them and who doesn't own them.

Great, thanks. And then, you know, on the topic of tariffs, what are you seeing, you know, as far as the impact as it relates to your capital plans?

Yeah, Mike, I think Lisa said about 2%. It's in line with what other utilities are saying. It's not real large right now.

Okay. And then, you know, lastly, for me, in New Mexico, you know, you've talked about pursuing transmission development to support the growing demand. And I know you have $185 million of transmission billed in your current five-year CapEx plan. Just wondering what you see as the size of the incremental investment opportunity over the five-year period and beyond?

You know, over the five-year period, because transmission takes a little bit of time to develop, probably just a little bit more. But when you get outside that five-year period, to kind of give you a feel of – and these were transmission studies that were done that we presented to the commission last week. You know, when you kind of take into consideration statewide the transmission that needs to be built, it's in the round about $4 billion in transmission. Okay. over that 20-year.

Thanks for taking my question.

Thank you.

And the next question comes from Anthony Rodel with Mizuho. Please go ahead.

Hey, good morning, team. I can't believe Nick really wanted to get rid of Lisa that quick. I know, I know.

Thank you, Anthony.

Yeah, I mean, remember that. Remember that.

I will. I will.

I guess just actually following up on one of Nick's questions, talking about the Texas legislation, HB, I think it's 57. I forgot the number, 5247. I believe, and it may have been changed, and maybe that's my question, that to qualify for that legislation, you had to spend, I thought it was like 3X of depreciation. Is that accurate as the bill stands now? does TNMP, would they qualify under that legislation?

Yes, that is correct on the 300% above depreciation, and yes, TNMP would fit that.

Great. And now here's an off-the-beaten-path question. Before most calls, you guys usually have like a message that in the music that you select before the call. Like after the AGR deal, I think it was like Elton John, I'm Still Standing, and there was like a message there. This is Piano Man, and I didn't get the message. I'm wondering, was there a message, or just you guys are big Billy Joel fans?

We're big Billy Joel fans. No hidden messages today.

Okay, thanks. Thanks for taking my questions.

Congrats. Thank you. Again, if you have a question, please press star and then one. This concludes our question and answer session. I would like to turn the conference back over to Pat Colon for any closing remarks.

Thank you, Dave. And thank you all for joining us this morning. And as you raise a glass tonight, please raise one to Billy Joel for 76 and PNM for 109. Thank you all. Stay safe.