Executive Summary / Key Takeaways

• Strategic Transformation & Growth: TXNM Energy is actively transforming into a growth-oriented utility, divesting from legacy coal assets and making substantial investments in modern, resilient, and clean energy infrastructure. This strategic pivot is particularly evident in its high-growth Texas markets, positioning the company for significant expansion.
• Ambitious Capital Plan & Earnings Outlook: The company projects $8.6 billion in capital requirements for 2025-2029, driving an increased long-term EPS growth target of 7% to 9% through 2029. This ambitious plan is underpinned by timely regulatory recovery mechanisms and a commitment to maintaining investment-grade credit ratings.
• Technological Advancement as a Moat: TXNM is leveraging smart grid technology, advanced battery storage, and AI-powered grid management to enhance reliability, seamlessly integrate renewable energy, and empower customers with better energy insights, thereby strengthening its competitive position.
• Favorable Regulatory & Market Dynamics: Recent unopposed rate case approvals in New Mexico and Texas, coupled with supportive legislation for economic development and grid resiliency, provide a predictable framework for earnings and capital recovery, fostering a stable operating environment.
• Blackstone Infrastructure Acquisition: The pending acquisition by Blackstone Infrastructure (BX) at $61.25 per share offers a clear valuation floor for investors and is expected to provide patient, long-term capital to facilitate TXNM's extensive growth strategy.

Powering a New Era: TXNM's Strategic Evolution

TXNM Energy, Inc. is a regulated electric utility holding company with deep roots in the American Southwest, serving approximately 839,000 residential, commercial, and industrial customers across New Mexico and Texas through its subsidiaries, Public Service Company of New Mexico (PNM) and Texas-New Mexico Power Company (TNMP). The company's journey, from PNM's founding in 1917 as the Albuquerque Gas Electric Company to the strategic acquisition of TNMP in 2005, has culminated in its recent rebranding as TXNM Energy in August 2024, reflecting TNMP's growing contribution to the consolidated rate base. This evolution underscores a fundamental shift towards a future built on reliable, affordable, and environmentally responsible power, underpinned by a strong commitment to sustainability.

The utility sector is undergoing a profound transformation, driven by increasing demand for electricity, the imperative of decarbonization, and the need for enhanced grid resilience against extreme weather events. TXNM is strategically positioned at the nexus of these trends, particularly benefiting from robust load growth in Texas, fueled by burgeoning data centers and industrial expansion, and New Mexico's progressive clean energy mandates. This dynamic environment sets the stage for TXNM's core investment thesis: a regulated utility poised for significant growth through strategic capital deployment and favorable regulatory frameworks.

In the competitive landscape, TXNM operates within a highly regulated environment, which inherently provides a degree of market stability and predictability. Its primary competitive advantages stem from its exclusive regulatory licenses and established distribution channels in its service territories, fostering strong customer loyalty and recurring revenue streams. This contrasts with specialty contractors like MYR Group Inc. (MYRG), which focus on project-based services, and larger, more diversified utilities such as Duke Energy Corporation (DUK) and Southern Company (SO), which benefit from broader geographic footprints and greater scale. While NextEra Energy, Inc. (NEE) leads in renewable generation and technological innovation, TXNM's integrated utility model and localized expertise offer a unique value proposition, particularly in balancing energy transition with regional economic development.

Technological Differentiators: Building the Grid of Tomorrow

TXNM's strategic vision is deeply intertwined with its commitment to technological advancement, which serves as a critical differentiator and competitive moat. The company is not merely upgrading its infrastructure; it is fundamentally transforming its grid to be smarter, more resilient, and more capable of integrating diverse energy sources.

A cornerstone of this technological roadmap is PNM's Grid Modernization Plan, approved in October 2024. This initiative focuses on integrating smart meters and distribution upgrades, particularly prioritizing low-income areas. The tangible benefits are multifaceted: customers gain real-time insights into their energy usage, enabling better management of monthly bills and improved affordability. Operationally, smart meters enhance the efficiency and effectiveness of system management, allowing for more advanced rate structures and customer offerings.

Battery storage is another key technological pillar. At the end of Q2 2024, PNM operationalized two 6-megawatt batteries on its distribution system, providing a novel solution for reducing constraints on feeders. The company plans to deploy another 30 megawatts (five 6-megawatt units) across its system in the coming years. These batteries are crucial for enhancing grid stability and facilitating the seamless integration of intermittent renewable resources like solar and wind. Furthermore, TXNM has added 450 megawatts of solar and storage to its system, nearly doubling its carbon-free resource capacity by late 2024.

Innovation extends to advanced grid management systems. The Department of Energy (DOE) selected PNM's virtual power plant project for funding through the GRIP program. This project aims to integrate smart grid technology, distribution-sided batteries, and other distributed energy resources, with the stated goal of enhancing grid stability and delivering direct benefits to customers. Additionally, a DOE-funded joint research and development project involving New Mexico State and the National Renewable Energy Lab is utilizing AI-powered technology to improve the reliability and resiliency of the grid, particularly in managing variable renewable resources. These initiatives collectively contribute to TXNM's competitive moat by enabling more efficient operations, reducing costs, and improving service quality, positioning the company to lead in the evolving energy landscape.

Strategic Growth Pillars: Texas and New Mexico

TXNM's growth narrative is distinctly bifurcated, with each state presenting unique opportunities and strategic imperatives.

Texas (TNMP): A High-Growth Engine

TNMP, TXNM's Texas-based utility, is a primary driver of the company's accelerated growth. Operating under the Public Utility Commission of Texas (PUCT), TNMP provides essential transmission and distribution (T&D) services. The Texas market is experiencing explosive demand growth, particularly from data centers and industrial expansion. TNMP has consistently set new system peak records, with its Q1 2025 peak soaring 22% higher than Q1 2024, and overall system demand growing at a 10% compound annual growth rate since 2020. Data center load on TNMP's system totaled over 600 megawatts by the end of 2024, with an additional 70 megawatts picked up in Q1 2025 and another 150 megawatts expected from existing customers by year-end 2025. Interconnection requests were up 6% in Q1 2025 compared to the prior year, signaling sustained expansion.

To support this rapid growth and enhance system resilience, TNMP is undertaking significant capital investments. Its System Resiliency Plan (SRP), approved in Q1 2025, earmarks $546 million for capital improvements through 2027, aimed at protecting the system from extreme weather events. This plan is expected to be largely recovered through existing Distribution Cost Recovery Factor (DCRF) filings. Furthermore, TNMP is set to invest approximately $750 million by 2030 in ERCOT's Permian Basin Reliability Study projects in West Texas, a region projected to see 24 gigawatts of load by 2030. The Texas regulatory environment is highly supportive of these investments, with mechanisms like Transmission Cost of Service (TCOS) and DCRF allowing for timely capital recovery. Additionally, House Bill 5247 (HB 5247) provides a unique advantage by allowing utilities like TNMP to defer depreciation expenses and carrying costs for qualifying investments (exceeding 300% of annual depreciation) to a regulatory asset, effectively eliminating regulatory lag. This robust investment pipeline is projected to drive TNMP's rate base growth by 17% over the next five years, making it the fastest-growing segment of TXNM's business.

New Mexico (PNM): Leading the Clean Energy Transition

PNM, serving New Mexico, is at the forefront of the state's ambitious clean energy transition. The New Mexico Energy Transition Act (ETA) mandates a 100% zero-carbon energy portfolio by 2045, a goal PNM aims to achieve by 2040. The company has made substantial progress, reaching 72% carbon-free generation capacity by 2024, largely due to the retirement of its San Juan Generating Station (SJGS) in 2022, which resulted in a 67% reduction in greenhouse gas emissions from 2021 levels. PNM plans to exit the Four Corners coal plant by 2031, completing its transition away from coal.

PNM is actively procuring new, clean energy resources to meet growing demand and regulatory requirements. It has added 450 megawatts of solar and storage to its system and secured approval for 410 megawatts of resources for 2026 and 450 megawatts for 2028, primarily solar and storage facilities. An upcoming Request for Proposal (RFP) for 2029-2032 resources aims to secure 500 to 2,900 megawatts of new capacity, including replacements for the Four Corners exit. To support this influx of renewables and address system constraints, PNM is developing a 20-year transmission planning study and plans to build two small transmission lines.

Regulatory support in New Mexico has been constructive. The unopposed stipulation in PNM's 2025 rate case, approved in May 2025, will increase revenue requirements by $105 million, based on a 9.45% return on equity and a 51% equity capitalization structure. New legislation, including "site readiness bills," will expedite infrastructure build-out for economic development, allowing utilities to defer costs until recovery. House Bill 91 also provides a new tool for the commission to approve rates specific to low-income customers, aligning with PNM's focus on energy equity. PNM's participation in the Western Energy Imbalance Market (EIM) and plans to join the Extended Day Ahead Market (EDAM) are expected to yield significant cost savings for customers by optimizing renewable energy integration and regional power trading.

Financial Performance: A Foundation for Growth

TXNM's financial performance reflects its strategic investments and the dynamics of its regulated operations. For the six months ended June 30, 2025, net earnings attributable to TXNM were $30.5 million, or $0.32 per diluted share, a decrease compared to $95.2 million, or $1.05 per diluted share, in the same period of 2024. This decline was primarily driven by higher operating expenses, increased depreciation due to new plant in service, lower transmission margins at PNM, and higher interest charges across all segments, partially offset by strong performance from TNMP's higher transmission and distribution rates and increased demand-based load, as well as improved investment securities performance at PNM.
Despite the quarterly variability, TXNM delivered 2024 ongoing earnings of $2.74 per share, hitting the high end of its guidance.

The company's profitability metrics for the trailing twelve months (TTM) demonstrate a solid foundation: a Gross Profit Margin of 64.00%, Operating Profit Margin of 20.27%, Net Profit Margin of 8.76%, and an EBITDA Margin of 45.65%. These figures are competitive within the regulated utility sector, notably higher than a contracting firm like MYR Group (Gross Profit Margin: 9%, Operating Profit Margin: 2%). While larger utilities like Duke Energy (Operating Profit Margin: 26%) and Southern Company (Operating Profit Margin: 26%) may exhibit slightly higher operating and net margins, TXNM's gross margin indicates strong revenue generation from its core services. NextEra Energy (Net Profit Margin: 28%) generally shows superior profitability, reflecting its strong focus on high-growth renewable energy.

TXNM maintains a healthy liquidity position, with $565.3 million available from revolving credit facilities as of July 25, 2025, and consistent compliance with all debt covenants. The company's Debt/Equity ratio of 1.82 is typical for a regulated utility, comparable to Duke Energy (1.70) and NextEra Energy (1.64), and slightly lower than Southern Company (2.00). This capital structure supports its significant investment program.

The company's Free Cash Flow Per Share of -$8.61 (TTM) reflects its aggressive capital expenditure cycle, a common characteristic of utilities undergoing substantial infrastructure upgrades and expansion. This contrasts with the positive free cash flow per share seen in some larger, more mature utilities, highlighting TXNM's current investment phase.

TXNM's commitment to shareholder returns is evident in its quarterly dividend of $0.4075 per share, supported by a 5% increase in December 2024 and a targeted payout ratio of 50% to 60% of ongoing earnings. The board regularly evaluates the dividend based on earnings pace and capital spending, aiming for a sustainable and growing return.

Outlook and Guidance: Fueling Future Value

TXNM Energy has affirmed its 2025 ongoing earnings guidance in the range of $2.74 to $2.84 per diluted share. This outlook is underpinned by the mid-year implementation of new rates at PNM and the continued strong growth trajectory of TNMP. The company anticipates that the third quarter of 2025 will account for more than half of its annual earnings, reflecting the seasonal nature of its business and the timing of rate adjustments.

Crucially, TXNM has raised its long-term EPS growth target to 7% to 9% through 2029, up from its previous 6% to 7% target. This ambitious growth is primarily driven by an over $1 billion increase in its five-year capital investment plan, now totaling $8.6 billion for 2025-2029. This plan includes significant investments in TNMP's rate base, which is projected to grow by 17% over the period, surpassing PNM retail in total rate base growth by 2027. The company's earnings power analysis suggests a potential EPS of $3.86 by 2029 at the midpoint of its growth target. To fund this expansion and maintain strong credit metrics, TXNM anticipates a total equity need of $1.3 billion across the five-year period, with approximately 44% equity financing for the incremental capital.

Management's confidence in achieving these targets is rooted in its ability to balance customer affordability with critical system needs, leverage economic development initiatives, and participate in regional energy markets. While tariffs are expected to have a minor 2% impact on capital plans, the company is committed to mitigating these increases to balance system needs with customer impacts. Future large-scale resource additions, such as those stemming from the 2029-2032 RFP for Four Corners replacement, are not yet included in the current capital plan, representing potential future upside once applications are filed and approved.

Key Risks and Challenges

Despite its compelling growth story, TXNM faces several pertinent risks. Macroeconomic conditions, including inflationary pressures, fluctuating interest rates, and geopolitical activity, could impact capital markets and the company's financial position. Climate change presents ongoing challenges, particularly water supply risks in the arid Southwest for PNM's generating stations, necessitating adaptive measures like sustainable groundwater use and advanced cooling technologies. Extreme weather events, including high winds, severe thunderstorms, hurricanes (in TNMP's Texas Gulf Coast territory), and wildfires, pose operational risks, potentially causing physical damage, disrupting service, and leading to third-party claims. Both PNM and TNMP have implemented wildfire mitigation plans, but remain exposed to risks outside their control.

Regulatory and legislative uncertainties also persist. While recent outcomes have been favorable, the timing and full recovery of costs related to new investments, environmental compliance (e.g., GHG emission limits), and power plant decommissioning remain subject to regulatory approval. Higher rates, if not managed effectively, could lead to reduced customer usage or relocation. Operational risks, including plant performance, supply chain disruptions, and cybersecurity threats, could also impact financial results. Finally, the pending acquisition by Blackstone Infrastructure introduces merger-related risks, including the satisfaction of regulatory approvals, potential litigation, and integration complexities, though management expects the transaction to close in the second half of 2026.

Conclusion

TXNM Energy is undergoing a profound transformation, strategically positioning itself as a leader in the evolving utility landscape. By shedding legacy coal assets and aggressively investing in modern, resilient, and clean energy infrastructure, particularly in the high-growth Texas markets, the company is building a foundation for sustained value creation. The ambitious $8.6 billion capital plan, coupled with favorable regulatory frameworks and a commitment to technological innovation in smart grid and battery storage, underpins a robust long-term EPS growth target of 7% to 9%.

While the company faces inherent risks associated with macroeconomic conditions, climate change, and regulatory uncertainties, its proactive approach to mitigation and strong stakeholder engagement are critical. The pending acquisition by Blackstone Infrastructure provides a clear valuation anchor and patient capital, further de-risking the execution of its growth strategy. For discerning investors, TXNM represents a compelling opportunity to participate in a regulated utility's high-voltage growth story, driven by a clear strategic vision, technological leadership, and a commitment to a sustainable energy future.