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.

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.

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…

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…

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…

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.

[Operator Instructions] And our first question is from Julien Dumoulin-Smith of Bank of America. Please go ahead.

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.

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.

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.

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.

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.

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.

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.

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?

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.

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?

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.

Wonderful. All right, guys. Thank you so much. Appreciate it. Best of luck. We'll see you soon.

Thank you.

The next question is from Anthony Crowdell of Mizuho. Please go ahead.

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?

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.

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%.

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?

Yes. So our objective is to stay above our threshold, Anthony and our threshold is 13% at Moody's and 14% at S&P.

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?

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.

Great. Thanks so much for taking my questions. And appreciate the detail.

Thank you, Anthony.

Our next question is from Ryan Levine of Citi. Please go ahead.

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?

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.

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?

No, Ryan. There's no onetime included in our forecast - guidance.

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?

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.

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.

Okay. Great. appreciate the questions and answers. Thank you.

Thanks Ryan.

Thanks Ryan.

[Operator Instructions] We do have a question from Paul Fremont of Ladenburg Thalmann & Co. Please go ahead.

Hi. Good morning. Congratulations on a good print.

Thank you, Paul.

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?

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.

Okay. And that would be above your current CapEx guidance range, right?

That would be above our current equity - planned equity issuance, yes.

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?

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.

Great. That's it for me. Thank you so much.

Thanks Paul.

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.

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.

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