TXNM ENERGY INC quarterly report, Q2 FY2020

Business context and reporting period

PNM Resources, Inc. (PNMR), together with its regulated electric utilities Public Service Company of New Mexico (PNM) and Texas-New Mexico Power Company (TNMP), filed this unaudited combined Form 10-Q for the quarter and six months ended June 30, 2020. The businesses serve customers in New Mexico and Texas. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.

Financial results and position

PNMR consolidated	Q2 2020	Q2 2019	Six months 2020	Six months 2019
Electric operating revenue	$357.6	$330.2	$691.3	$679.9
Utility margin (revenue less cost of energy; non-GAAP)	$263.8	$246.4	$498.7	$474.5
Operating income (loss)	$71.2	$(93.6)	$118.9	$(56.9)
Net earnings (loss) attributable to PNMR	$57.5	$(75.9)	$42.2	$(57.2)
Diluted earnings (loss) per share	$0.72	$(0.95)	$0.53	$(0.72)

PNMR’s Q2 revenue rose about 8% year over year, while six-month revenue increased about 2%. Q2 utility margin grew $17.3 million; first-half utility margin grew $24.2 million.
The comparable 2019 periods included a large regulatory impairment: $149.3 million in Q2 and $150.6 million in the first half, principally tied to the New Mexico rate-case ruling on PVNGS investments and SJGS environmental equipment. Its absence in 2020 is the main reason operating results swung from losses to profits.
Investment-security results were volatile: PNMR recorded a $21.6 million gain in Q2 2020 versus $4.6 million in Q2 2019, but a $11.2 million loss for the first half of 2020 versus an $18.6 million gain a year earlier. These results relate largely to PNM decommissioning and reclamation trusts.
For Q2, PNM reported revenue of $260.8 million, operating income of $49.6 million and net earnings available for common stock of $45.5 million. TNMP reported revenue of $96.9 million, operating income of $23.2 million and net earnings of $16.2 million. TNMP’s first-half net earnings were $23.3 million, up from $19.4 million.
PNM’s weather-normalized retail load declined 1.7% in Q2 and 0.3% year to date, with commercial weakness partly offset by higher residential use. TNMP’s weather-normalized volumetric retail load increased 2.9% in Q2 and 1.5% year to date; commercial demand-based load was weaker in Q2.

Cash flow, debt and liquidity

First-half operating cash flow was $165.8 million, down from $171.9 million. Investing cash outflow was $367.2 million, including $343.8 million of plant additions, compared with $312.1 million of investing outflow and $293.1 million of plant additions in 2019. Financing provided $200.4 million; cash, restricted cash and equivalents ended June at $2.8 million.
At June 30, PNMR reported $252.5 million of short-term debt and $3.217 billion of long-term debt including current maturities, or approximately $3.47 billion combined. Total liabilities were $5.81 billion and equity was $1.76 billion. PNMR’s capitalization table showed long-term debt at 65.3% of capitalization, excluding short-term debt and lease obligations.
At July 24, reported consolidated revolving-credit availability was $609.3 million; the filing says this figure does not reflect $100.3 million reserved to support PNM floating-rate bonds. The company reported compliance with debt covenants and stated it expected available internal cash, credit facilities and capital-market access to meet needs for at least 12 months.
Management projected total capital requirements of approximately $4.47 billion for 2020–2024, including construction, NMRD contributions and dividends. It anticipated needing additional long-term financing during that period. Debt maturities through July 2021 were approximately $1.019 billion.
In 2020, PNM issued $200 million of senior unsecured notes and refinanced a $250 million term loan; TNMP issued $110 million of bonds in April, with another $75 million issued after quarter-end. PNMR also had forward equity-sale agreements covering approximately 6.2 million shares, expected to be physically settled by January 2021.

Material changes, outlook and significant matters

Management’s target was 5%–6% growth in ongoing earnings and dividends for 2020–2023, with a target dividend payout ratio of 50%–60% of ongoing earnings. Ongoing earnings is a non-GAAP measure; the filing provides no specific quarterly earnings forecast.
PNMR’s common dividend declared for Q2 was $0.3075 per share, compared with $0.2900 in Q2 2019. Six-month declared dividends were $0.615 per share versus $0.580.
The NMPRC approved PNM’s plan to retire its share of the San Juan Generating Station (SJGS) by June 2022 and issue up to approximately $361 million of energy-transition bonds. The approvals were appealed, and PNM said it could not predict the outcome. The NMPRC approved a replacement-resource approach on July 29, 2020, after quarter-end, comprising 650 MW of solar PPAs and 300 MW of battery storage; required contract approvals remained outstanding.
PNMR and PNM recorded estimated obligations of $38.1 million and $36.8 million, respectively, for severance, related costs and economic-development/workforce-training funding connected with the planned SJGS retirement and bond issuance. The estimates may change and are subject to challenges.
PNM notified lessors it will return its leased PVNGS Unit 1 and Unit 2 interests when the leases expire in 2023 and 2024. Transfer restrictions or inability to find a qualified buyer could affect execution; PNM intends to seek recovery of undepreciated investment and related obligations from customers.
COVID-19 created uncertainty around electricity demand, customer payment and bad-debt levels, employee availability, project schedules, supply chains, investment values and access to capital. Regulators authorized mechanisms to defer certain pandemic-related costs, but recovery depends on future proceedings. PNM recorded $1.3 million of COVID-related regulatory assets at quarter-end; TNMP reported $0.3 million of related regulatory assets.
PNM’s weather-normalized retail load was affected by pandemic-related shifts from commercial to residential use. Management said lower usage could be partly offset by reduced operating and maintenance expenses, and that further expense or capital-spending reductions might be considered if economic conditions persisted.
S&P downgraded issuer ratings for PNMR, PNM and TNMP one notch on April 6, 2020; the filing said ratings remained investment grade. A $30.3 million letter-of-credit facility supporting San Juan mine reclamation bonds was due to expire October 21, 2020, and PNMR was seeking a replacement.
Other material uncertainties include regulatory recovery and environmental compliance costs, coal-mine reclamation, water rights, litigation, nuclear plant obligations, and the effect of market movements on trust investments. The filing states that outcomes or potential losses for several matters cannot currently be predicted or reasonably estimated.

Most important facts for investors to verify

Whether operating earnings and cash generation remain solid after separating recurring utility performance from the 2019 impairment comparison and investment-security gains or losses.
Availability and cost of refinancing, including near-term maturities, the $100.3 million liquidity reserve for PNM bonds, and settlement of PNMR’s forward equity agreements.
Final regulatory and court outcomes for SJGS abandonment, securitized financing, replacement resources and recovery of related costs.
Progress and regulatory treatment of the PVNGS lease returns and replacement capacity.
COVID-19 effects on customer collections, load, capital projects and the timing or likelihood of recovering deferred costs from customers.
Replacement of the expiring $30.3 million reclamation letter-of-credit support and any resulting change in contingent exposure.