TXNM Energy Q3 2024 Earnings Call Transcript

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Provided by Quartr
November 1, 2024

There are 10 speakers on the call.

Operator

Good day, and welcome to the TXNM Energy Third Quarter 2024 Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Lisa Goodman of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Wyatt, and thank you everyone for joining us this morning for the TXNM Energy 3rd 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 Collin 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.

Speaker 1

For a detailed discussion of factors affecting TXNM Energy results, please refer to our current and future annual reports on Form 10 ks, quarterly reports on Form 10 Q as well as reports on Form 8 ks 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 Q3 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.

Speaker 1

So we are all ready to treat you to our results and update. I'll start on Slide 4. Ongoing earnings for the Q3 are $1.43 per share, reflecting some warmer weather and timing impacts. Based on our year 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.

Speaker 1

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 PNM, 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. Tom will talk more about this also.

Speaker 1

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 powered 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.

Speaker 2

Thank you, Pat, and good morning, everyone. I will start on Slide 6 with TNMP. TNMP continues to set new system peak records, including another one yesterday, its 6th new 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.

Speaker 2

We are expecting a 2% to 3% growth in our traditional volumetric 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 serve, providing confidence in our growth assumptions and production from oil and gas load in West Texas remains 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 TCOS filing that recover transmission investments made into our system.

Speaker 2

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 contracts already in 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 semiannual T cost and DCRF rate mechanisms to recover our invested capital. Our regulatory highlight for the Q3 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 7.

Speaker 2

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 $600,000,000 of capital investments that would be recovered primarily through our existing semiannual DCRF filings. For West Texas planning, ERCOT has laid out its proposal to the Texas Commission for local projects totaling the $4,000,000,000 estimate previously made for the region. TNMP is proposed as a suggested owner or co owner for a number of these projects involving both new and existing infrastructure.

Speaker 2

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 $600,000,000 to $900,000,000 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 semiannual TCOS filing. There is no update this quarter on the pending rules for mobile generation, which were proposed earlier this year for comment.

Speaker 2

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 P and M on Slide 8. We have 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.

Speaker 2

Also, the Department of Energy announced that it has selected PNM's virtual power plant project for funding through the GRIP program. This project is designed to integrate smart grid technology, distribution side and 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 4 50 megawatts of solar and storage to our system. We have a lot of advantages in New Mexico when it comes to clean energy.

Speaker 2

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 have 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. And there have been a number of constructive workshops on several topics, including our regional markets and the other benefits this could bring to customers.

Speaker 2

I will 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 are 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.

Speaker 2

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 will be issuing our next RFP in the 4th quarter for resources to come online between 2029 and 2,032. In addition to meeting increased demand, this RFP will cover the years where we need to bring on new generations that facilitate our exit from Four Corners coal plant in 2,031. This will complete PNM's exit from coal as we look towards the next step in our energy transition.

Speaker 2

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 market with a focus on customer benefits. We expect to make a decision on which market we will join before the end of the year.

Speaker 2

To realize the value of New Mexico renewable potential, we need to develop and implement transmission plans to complement the plans for generation resources. Pennium 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.

Speaker 2

Lastly, let me provide an update on our 2025 rate review filing. The procedural scheduled calls for testimony from staff and intervenors 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 early March with a final decision in the case by early July. With that, I will turn it over to Lisa for a more detailed look at the numbers.

Speaker 3

Thank you, Don and good morning everyone. I will start on slide 11 with a recap of 3rd quarter 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 DCRF mechanisms at TNMP, the implementation of new retail rates at TNMP in January and income from our PNM decommissioning trucks. Load growth at TNMP and TNMP was more than offset by the impact of nozzle milder temperatures compared to last year, reducing earnings on a net basis.

Speaker 3

Lower transmission margins at PNM also reduced earnings along with depreciation, property tax and interest expenses associated with new investments. Lastly, dilution impact 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've gotten through the majority of our annual earnings and we are comfortable narrowing our guidance to a range of $2.70 $2.75 We have been above expectations in some drivers, including PNM low growth and weather, while we have seen decreases from other drivers, mainly PNM transmission margins and corporate interest expense. We have raised $100,000,000 of equity through the Q3 by way of our ATM.

Speaker 3

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 $550,000,000 of corporate term loans. The debt 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 agencies. On Slide 13, we have updated our capital plan to incorporate the additional $150,000,000 of investments included in TNMP's system resiliency plan for a total of $600,000,000 These capital plans already include PNM's recently approved grid modernization plan with investments of $344,000,000 $291,000,000 of these investments are planned through 2028 with the remaining amount in 2029. Adding the full amount of TNMP's system resiliency plan has increased our rate base growth slightly to 10.7% on a consolidated basis for 2024 through 2028.

Speaker 3

Don 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 TNMP's resiliency resiliency investments into our earnings power and we remain comfortable with our targeted 6% to 7% growth in EPS through 20.28. We continue to plan for an average $100,000,000 of equity per year to fund planned capital investments through 2028. We have assumed we financed additional $150,000,000 of TNMP investments with approximately 45 percent equity or $70,000,000 from 2025 through 2027.

Speaker 3

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.

Speaker 1

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 PNM 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.

Operator

We'll now begin the question and answer session. And our first question comes from Nicholas Campanella with Barclays. Please go ahead.

Speaker 4

Hey, good morning. CapEx trick or treat.

Speaker 1

Well, it's a treat.

Speaker 4

Definitely a treat. I should clarify that. So, it's good to see the $600,000,000 to $900,000,000 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 prepared remarks, you kind

Speaker 5

of talked about having to prioritize capital within the plan as well as the balance sheet.

Speaker 4

So just to prioritize capital within the plan as well as the balance sheet. So just how should we kind of think about this $600,000,000 to $900,000,000 Would that replace current CapEx in your projections as

Speaker 6

it stands today?

Speaker 4

Or is it truly incremental? Just maybe you can kind of give us a little bit there?

Speaker 2

Yes, absolutely. Good morning, Nick, and look forward to seeing you in about 9 or 10 days at EEI. We would love to see that $600,000,000 to $900,000,000 being incremental starting in about the 'twenty six, 'twenty seven timeframe and going through 2,030 based on the ERCOT schedule.

Speaker 4

All incremental. Okay. Thank you. And then on the New Mexico rate case, understand that you could potentially see a path where parties file testimony or potentially you get a settlement filed here. Just putting some parameters around that, are you willing to file a partial settlement?

Speaker 4

Is this to really take all the issues off the table? Just what can we kind of potentially see here as we get into November? Thanks.

Speaker 2

No, absolutely, Nick. And this rate case, we have kind of taken a different approach and we begin discussions with all the intervening parties before we actually file the case. And it's a traditional kind of T and D case. While those legacy issues are behind us now and we have continued those discussions even through this week about a potential settlement. And we are still hopeful that there will be a settlement.

Speaker 2

So I think all avenues are open at this point, whether it's a partial settlement, a settlement as we continue to work with the intervening parties.

Speaker 4

All right. I will get back in the queue. Stay in the week here. Thanks.

Speaker 3

Thanks, Nick.

Operator

Our next question comes from Julien Dumoulin Smith with Jefferies. Please go ahead.

Speaker 7

Hey, good morning, team. Happy Halloween indeed. Thanks for all the treats. Maybe tricks down the line, I don't know. Anyway, just following up on what Campe was saying there real quickly, if I can.

Speaker 7

On the 60900 there, real quickly here. Just 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?

Speaker 2

Upside is upside, Julian. I would look at it between the $600,000,000 $900,000,000 The upside would be if they chose a different path. And I think we've listed out, say, with the $345,000,000 path, it looked like based on just how ERCOT's allocated the projects another 900,000,000 dollars If they do the 565 kV path, then right now we have 0 allocated to us out of that. So I kind of think about it like that.

Speaker 7

But just to clarify that, you have 0 allocated to that. Your contention is that you merit some amount of that, if I understand your comments correctly?

Speaker 2

Or you On the 765 kV?

Speaker 5

Yes.

Speaker 2

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.

Speaker 7

Got it. All right. So it does sound like there's really some moving pieces there. All right. Excellent.

Speaker 7

Thank you. And then related here, just going into the financing plan real quickly, I mean, you've made an allusion to this, maybe not necessarily conventional equity in all context 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 $900,000,000 or $600,000,000 wherever that comes out to be a traditional equity piece?

Speaker 7

Or would you think about layering an additional equity content, if you will?

Speaker 3

Jill, in 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% 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.

Speaker 5

Got

Speaker 7

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 rate case process here in potential settlement. Just any nuance or any pieces of this that you could really look at to get resolved here, maybe asking that a little bit more directly?

Speaker 2

Yes. No, Julien, I think we are in discussions and I don't want to jump in front of that. But we have had really good discussions with intervenors all along the way. And again, it's a traditional kind of T and D type rate case at this point.

Speaker 7

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

Speaker 7

All the best.

Speaker 3

Thanks. Look forward to seeing you at EEI. Thanks, Julien.

Operator

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

Speaker 6

Hi, good morning. Thanks for taking my question. Good morning. Good morning. On the West Texas On the West Texas Transmission and Permian Reliability Study, you highlighted the additional $900,000,000 under the 3.45 kilobytes scenario.

Speaker 6

If I'm not mistaken, the traditional path is the 3.45 kilobytes

Speaker 8

So what

Speaker 6

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 time line to address the remaining unresolved ownership?

Speaker 2

On the pathway that you are correct that 345 kV was one of the paths. I am 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.

Speaker 6

Okay. Great. Thank you. And then secondly, a lot of growth in Texas, obviously. You haven't filed a rate case there since, I think, 2018.

Speaker 6

What is your expectation for when you will file there again? Obviously, you have some constructive cost recovery there with the TCOS and DCRF mechanism?

Speaker 2

Yes. You are 100% right. It's been 6 years since we have filed a rate case there. We have gotten 2 extensions. We are always looking at rate recovery and whether we file 1 or not.

Speaker 2

There have been some changes in the business between our transmission and our distribution there. So we are exploring that as a potential in 2025.

Speaker 6

Great. Thanks for taking my questions.

Speaker 1

Thank you. Citi, I.

Operator

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

Speaker 9

Good morning and happy Halloween.

Speaker 3

And to you, Ryan. Yes.

Speaker 9

In terms of P and M load growth, the customer count is relatively flat for this year versus previous years, but yet your retail load is expected to accelerate for the Q4 with some industrial growth. Can you elaborate around what types of customers are and what you're seeing in the market?

Speaker 2

Yes. No, absolutely. And Ryan, good morning. We have had some industrial load that we have talked about ramping up for probably the last 12 or 18 months and COVID kind of slowed that down. We are actually seeing that ramp and it's been ramping the last half of the year.

Speaker 2

So that's what's kind of closing the gamut there that we would expect to be within the 2% to 3% guidance range.

Speaker 9

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

Speaker 3

Yes. Ryan, we do we've had a lot of emphasis in the space 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 'twenty five as well.

Speaker 1

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

Speaker 9

Okay. And then maybe one follow-up in terms of the financing plan, given there's a biased 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 is there I think your year to date you've already achieved your ATM program for this year. Is there still opportunity to execute on further ATM issuance in the remaining 2 months of the year?

Speaker 3

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% of equity issuance for any upside on the CapEx side.

Speaker 9

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

Speaker 2

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 wouldn't think of it as financial bottom line impact. But again, the focus is on the customer.

Speaker 9

Thanks for taking my question.

Speaker 1

Thanks Ryan. See you soon.

Operator

And the next question comes from Andrew Weisel with Scotia Howard Weil. Andrew, please go ahead.

Speaker 8

Thank you. Good morning, everybody.

Speaker 3

Good morning. Good morning.

Speaker 8

I've got 2 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?

Speaker 3

So on 2024, Dawn mentioned the industrial customers have been ramping 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 load growth is very strong this year and we continue to see that in the coming years.

Speaker 3

And like we said before, lots of economic development efforts here in New Mexico. And so we are getting additional load, particularly in And so we are getting additional load, particularly from the industrial side.

Speaker 5

Okay, great. And I

Speaker 3

see the data center,

Speaker 5

I think

Speaker 8

that's a new disclosure, 2.5% year to date. Any thoughts on how big that outlook might be for 2024 or beyond?

Speaker 2

That's where we are 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.

Speaker 8

Okay. Great. We will stay tuned. Next question, just to clarify on the equity. I know you have talked very clearly about the high level plan, but specifically the $70,000,000 related to the Texas System resiliency plan.

Speaker 8

Would that be financed through an ATM and would it be spread over those 3 years or more front loaded in 2025?

Speaker 3

Yes. So we have spread them over the 3 years, 'twenty five through 'twenty seven. And it really is any additional equity will match as we spend the capital. And for us, we always look to optimize our financing plans. So it really depends on the market conditions, and we will just see what kind of vehicles we use then.

Speaker 8

Okay, 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, etcetera. 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 Capyuan regulatory approvals, whether that's related to the balance sheet, your labor force, customer affordability or just general corporate bandwidth?

Speaker 2

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. That depends on a

Speaker 7

lot of factors, as you can

Speaker 2

imagine, what load growth is doing, what the policies of the states are and they all kind of go into the mix as we kind of look at it. So.

Speaker 8

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

Speaker 3

Thank you. Thank you.

Operator

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

Speaker 1

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 will provide more color on our capital investment opportunities. Stay safe.

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