TXNM Energy (then PNM Resources, Inc.) — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. The combined filing covers PNM Resources, Inc. (PNMR), its New Mexico utility PNM, and Texas utility TNMP. Amounts below are U.S. dollars; financial statement figures are generally in millions.
Business context and financial results
PNMR is a holding company for regulated electric utilities serving approximately 762,000 customers and end-users in New Mexico and Texas. PNM generates, transmits, and distributes electricity; TNMP provides regulated transmission and distribution services.
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Electric operating revenue | $311.0 million | $332.9 million |
| Operating income | $41.5 million | $49.6 million |
| Net earnings attributable to PNMR | $10.5 million | $14.3 million |
| Diluted EPS | $0.13 | $0.18 |
| Cash from operating activities | $90.6 million | $66.7 million |
| Cash and cash equivalents at quarter-end | $3.9 million | $122.4 million |
| Dividends declared per common share | $0.22 | $0.20 |
PNMR’s operating margin, calculated as operating income divided by revenue, was approximately 13.4%, versus 14.9% a year earlier. Investing cash outflow was $393.5 million, including utility plant additions of $278.8 million and a $122.3 million cash outflow for the Westmoreland loan. Financing cash inflow was $260.7 million. At March 31, PNMR reported $358.0 million of short-term debt, $166.1 million of current long-term debt installments, and $2,108.4 million of long-term debt, totaling approximately $2.63 billion of reported debt.
Material changes and management commentary
- PNMR revenue decreased 6.6% and earnings attributable to PNMR fell 26.5% year over year. Management cited lower PNM load and milder weather, alongside increased maintenance, depreciation, property taxes, interest, and employee-related costs. Reduced PVNGS lease expense, TNMP rate increases, higher interest income, and higher realized securities gains partly offset those pressures.
- PNM revenue declined $26.3 million, largely reflecting $26.4 million less fuel and purchased-power costs passed through to customers. PNM utility margin decreased $0.9 million; PNM segment earnings attributable to common stockholders were $4.1 million, compared with $10.0 million.
- TNMP revenue rose to $75.4 million from $70.9 million, and utility margin increased $2.3 million, supported by transmission rate increases and rate riders. TNMP net earnings were $7.5 million versus $7.7 million.
- Operating cash flow improved by $23.9 million, partly because a $30.0 million PNM pension contribution made in Q1 2015 did not recur. The company’s cash balance nonetheless fell substantially as capital investment and the Westmoreland loan were funded.
Outlook, financing, risks, and unusual items
- Management’s target was 7%–9% annual ongoing earnings growth through 2019, a non-GAAP measure, and a dividend payout ratio of 50%–60% of ongoing earnings. It expected above-average dividend growth in the near term.
- PNM’s pending New Mexico rate case sought a $123.5 million revenue increase and a 10.5% return on equity; hearings took place in April 2016, with new rates expected in Q3 2016. The outcome remained uncertain. PNMR projected $2.39 billion of total construction and dividend requirements for 2016–2020 and expected to need additional long-term financing, potentially debt and/or equity.
- As of April 22, 2016, consolidated revolving-credit availability was $545.6 million. Management said internal cash generation, credit arrangements, and capital-market access should be sufficient for requirements, while noting that difficult market conditions could restrict financing access. All reported Moody’s and S&P debt ratings were investment grade with stable outlooks.
- PNM’s plan calls for retiring SJGS Units 2 and 3 at the end of 2017; the regulator authorized recovery over 20 years of 50% of their then-undepreciated book value. PNM recorded a further $0.8 million Q1 expense related to estimated SJGS disallowances and restructuring. It had recorded $165.7 million of related losses in 2015; the final disallowance depends on projected and actual book values and regulatory treatment.
- PNMR subsidiary NM Capital lent $125.0 million to a Westmoreland subsidiary to finance its acquisition of the San Juan coal mine. The loan is secured by mine assets and equity, and PNMR guarantees NM Capital’s bank borrowing. PNMR also supported a $40.0 million letter of credit for reclamation bonding. An opponent filed a regulatory complaint concerning the financing; PNM was ordered to respond. These arrangements create counterparty, credit, and regulatory exposure.
- The Clean Power Plan was stayed by the U.S. Supreme Court pending judicial review. Environmental compliance, coal-mine reclamation and bonding, nuclear waste storage, water availability, litigation, and regulatory rate recovery remain material uncertainties. The filing says the potential outcomes or costs of several matters cannot be predicted.
Most important facts for investors to verify
- Progress and final outcome of PNM’s $123.5 million rate case, including the timing and amount of any approved recovery.
- PNMR’s debt maturities, available credit, and funding plan for the projected 2016–2020 capital program.
- Repayment performance and collateral adequacy for the Westmoreland loan, and the status of the reclamation letter of credit and regulatory complaint.
- Actual SJGS retirement costs, rate recovery, and developments in environmental and coal-supply proceedings.
- Whether earnings growth targets refer to ongoing non-GAAP earnings and how reported GAAP results compare with that measure.