Business context and reporting period
Combined unaudited Form 10-Q for the quarter and nine months ended September 30, 2018, filed by PNM Resources, Inc. (PNMR), Public Service Company of New Mexico (PNM), and Texas-New Mexico Power Company (TNMP). PNMR is a holding company with regulated electric utilities serving about 780,000 customers in New Mexico and Texas. The supplied filing is under the name PNM Resources, not TXNM Energy Inc.
Financial performance and position
Unless noted otherwise, amounts are in millions of dollars. PNMR figures are consolidated.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Electric operating revenue | $422.7 | $419.9 | $1,092.9 | $1,112.4 |
| Operating income | $128.0 | $144.6 | $253.5 | $290.0 |
| Net earnings attributable to PNMR | $87.5 | $73.7 | $140.7 | $134.2 |
| Diluted earnings per share | $1.09 | $0.92 | $1.76 | $1.67 |
| Utility margin (non-GAAP) | $309.1 | $316.2 | $799.1 | $801.6 |
PNMR declared common dividends of $0.265 per share for Q3 2018, versus $0.2425 a year earlier. Nine-month operating cash flow was $316.9, down from $416.3; investing cash outflow was $326.5, including $365.5 of plant additions; financing provided $40.6. Cash and cash equivalents at September 30 were $35.0.
At September 30, PNMR reported $262.6 of short-term debt, $471.9 of current long-term debt installments, and $2,142.6 of long-term debt, net. These balance-sheet categories total approximately $2,877.1 of debt. PNMR’s long-term debt capitalization share was 59.4%. Consolidated revolving-credit availability was $653.7 as of October 30, 2018; the filing also reports $56.2 of invested cash at that date.
Changes versus the prior comparable period
- PNMR nine-month attributable earnings rose $6.5, while operating income fell $36.5 and utility margin declined $2.5. Lower income-tax expense—primarily reflecting the lower federal tax rate and regulatory amortization of excess deferred taxes—supported earnings.
- Management attributed pressure on PNM results to lower wholesale sales after PVNGS Unit 3 became a jurisdictional resource, higher plant maintenance and costs associated with additional SJGS Unit 4 capacity, and higher depreciation and property taxes. Rate relief, transmission revenues, weather, and lower interest expense provided offsets.
- TNMP nine-month net earnings increased to $40.9 from $34.5, helped by higher load and transmission rate relief, with lower income-tax expense; higher depreciation and interest partly offset gains.
- Cash from operations declined $99.4 year over year. PNMR reported higher utility-plant additions than in the prior-year period, while financing cash flow improved from a $49.7 outflow to a $40.6 inflow, amid debt issuance and refinancing activity.
Outlook, commentary, risks, and unusual items
- Management’s stated target is 5%–6% earnings and dividend growth for 2018–2022, based on ongoing earnings, a non-GAAP measure; the target payout ratio is 50%–60% of ongoing earnings. The filing does not provide a specific GAAP earnings forecast.
- Projected 2018–2022 capital requirements, including amounts spent through September 30, total $2,984.5: $2,497.3 construction expenditures, $62.5 NMRD capital contributions, and $424.7 dividends. Management expects to need additional long-term financing and says resources are expected to be sufficient for at least the next 12 months. It anticipated a possible at-the-market equity program beginning in 2020.
- Debt maturities and refinancing needs are significant: PNMR term loans of $100 each were due in December 2018, PNM’s $200 term loan in January 2019, and $172.3 of TNMP first mortgage bonds in April 2019. The filing says repayment or refinancing is expected through credit facilities, new debt, or other financing.
- PNM’s 2017 resource plan found customer savings from retiring its SJGS share in 2022 and exiting Four Corners after 2031, but those actions are not final and require regulatory approvals. PNM had $405.5 of undepreciated SJGS investment; early retirement could expose it to unrecovered plant and reclamation costs. Related coal mine reclamation liabilities and possible accelerated-retirement costs are also material considerations.
- PNM’s appeals of prior rate-case disallowances remain unresolved. Potential additional write-offs include $73.9 for PVNGS Unit 2 purchased capacity, $38.3 for related improvements, and $50.3 for SJGS balanced-draft equipment. An adverse ruling on cross-appeals could increase exposure further. TNMP’s proposed $25.9 annual rate increase was followed, after quarter-end, by an unopposed settlement for a $10.0 increase, subject to PUCT review.
- PNM’s SJGS Unit 1 coal silo collapsed in March, causing an outage until July. PNM expects insurance reimbursement subject to a deductible; its stated repair-cost exposure was $1.0. Regulatory staff proposed limiting cost recovery and requiring customer reimbursement for lost off-system sales; the outcome was uncertain.
- Westmoreland repaid the remaining $50.1 principal of PNMR’s Westmoreland Loan in May 2018, terminating the related term loan and PNMR guarantee. Westmoreland filed for Chapter 11 after quarter-end, on October 9; PNM reported the bankruptcy to the NMPRC and said the debtor had authority, subject to conditions, to continue ordinary-course coal-contract performance.
- Environmental regulation, water availability, fuel supply, nuclear waste disposal, market and counterparty risk, and utility rate recovery remain material uncertainties. Management noted that the Clean Power Plan was stayed and EPA had proposed the Affordable Clean Energy rule; impacts were not yet predictable.
- PNMR, PNM, and TNMP reported investment-grade ratings. S&P had moved all three outlooks to negative in January 2018; Moody’s moved PNMR and PNM from positive to stable in June and maintained TNMP’s stable outlook. Management stated the companies were in compliance with debt covenants.
Important facts for investors to verify
- Confirm the final outcomes and timing of PNM’s New Mexico rate-case appeals, the pending SJGS/coal-supply decisions, and TNMP’s rate-case settlement.
- Review upcoming debt maturities, refinancing execution, credit-facility availability, and the effect of rating outlooks on financing costs.
- Assess whether planned capital spending and the 2022 SJGS strategy receive regulatory approval, and how any retirement-related plant and reclamation costs will be recovered.
- Reconcile reported GAAP earnings with management’s ongoing-earnings growth target and monitor whether operating cash flow supports capital needs and dividends.
- Track the consequences of Westmoreland’s Chapter 11 proceeding for coal delivery, reclamation-letter-of-credit exposure, and PNM customers.