Business context and reporting period
This is a combined Form 10-K for the fiscal year ended December 31, 2017, filed by PNM Resources, Inc. (PNMR), Public Service Company of New Mexico (PNM), and Texas-New Mexico Power Company (TNMP). The filing does not identify the registrant as TXNM Energy Inc.; investors should confirm the issuer and filing identity. PNMR is a holding company whose principal businesses are regulated electric utility operations in New Mexico and Texas. Figures below refer to consolidated PNMR unless otherwise noted.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Operating revenue | $1,445.0 million | $1,363.0 million |
| Operating income | $306.5 million | $278.0 million |
| Net earnings attributable to PNMR | $79.9 million | $116.8 million |
| Diluted EPS | $1.00 | $1.46 |
| Operating cash flow | $524.5 million | $415.5 million |
| Investing cash flow | $(466.2) million | $(699.4) million |
| Long-term debt, including current installments | $2,437.6 million | $2,392.7 million |
| Total assets | $6,646.1 million | $6,471.1 million |
Revenue increased 6.0% and operating income rose 10.3%, while net earnings attributable to PNMR declined 31.6%. Operating margin was approximately 21.2% versus 20.4%; net margin attributable to PNMR was approximately 5.5% versus 8.6%. Income tax expense increased to $130.3 million from $63.3 million, including a $57.5 million charge from remeasuring deferred taxes after federal tax reform. The filing reports a 57.73% effective tax rate for 2017.
PNMR’s cash and cash equivalents were $4.0 million at year-end, compared with current liabilities of $835.6 million, including $305.4 million of short-term debt. The company reported $522.3 million of consolidated credit-facility availability as of February 20, 2018 and stated it was in compliance with debt covenants. Debt represented 58.8% of PNMR capitalization, up from 58.6%.
Segment earnings attributable to PNMR were $71.9 million at PNM, down from $76.9 million; $35.6 million at TNMP, down from $41.7 million; and a $27.6 million loss in Corporate and Other, compared with a $1.7 million loss. PNM’s utility margin, a non-GAAP measure, increased to $782.6 million from $736.2 million. TNMP’s utility margin increased to $255.0 million from $246.2 million.
Material changes versus the prior comparable period
- Lower consolidated earnings reflected federal tax-reform remeasurement, PNM regulatory disallowances, lower PNM retail load and milder weather, lower revenue from wholesale customer Navopache Electric Cooperative (NEC), and increased depreciation and property taxes. These more than offset rate relief, higher transmission revenues, and other operating improvements.
- PNM’s weather-normalized retail electricity sales decreased 0.9%; TNMP’s increased 1.2%. TNMP demand-based load, excluding retail transmission customers, increased 4.0%.
- PNM retired San Juan Generating Station (SJGS) Units 2 and 3 in December 2017 and increased its ownership of Unit 4 through a restructuring. PNM’s generation capacity and mix changed as a result.
- Operating cash flow rose by $109.0 million, while investing cash outflow narrowed by $233.2 million, primarily reflecting lower utility-plant spending and Westmoreland loan repayments. Financing cash flow shifted from a $242.4 million inflow to a $58.8 million outflow.
- PNMR declared dividends of $0.9925 per share for 2017, up from $0.9025 in 2016. The Board declared a $0.265 quarterly dividend in February 2018.
Outlook, management commentary, risks, and unusual items
- Management targets 6% growth in ongoing earnings for 2018–2021 and a long-term dividend payout ratio of 50%–60% of ongoing earnings. Ongoing earnings are a non-GAAP measure; the filing does not provide a specific 2018 GAAP earnings forecast.
- Planned 2018–2022 construction expenditures total $2.712 billion, including transmission expansion, solar projects, environmental upgrades, and potential replacement resources for SJGS. Total projected capital requirements, including dividends, are $3.137 billion.
- PNM’s 2017 integrated resource plan concluded that retiring its remaining SJGS capacity in 2022 and exiting Four Corners in 2031 could reduce customer costs. These are planning conclusions, not final retirement approvals; regulatory approval, replacement resources, and recovery of remaining plant investment remain uncertain. PNM reported year-end net book values of $406.7 million for SJGS and $165.3 million for Four Corners.
- PNM’s New Mexico 2016 rate case produced an approved non-fuel revenue increase of $62.3 million before a $4.4 million reduction and tax and debt-cost adjustments; the resulting stated annual increase was $10.3 million, phased in from February 2018 and January 2019. The order allowed a debt return, but not an equity return, on specified Four Corners investments. PNM recorded a $27.9 million pre-tax regulatory disallowance; NEE appealed the order in February 2018.
- The New Mexico 2015 rate case remains under appeal. PNM recorded a further $3.1 million pre-tax regulatory disallowance in 2017 while awaiting judicial and regulatory action. Additional losses could arise depending on appeal outcomes.
- The Tax Cuts and Jobs Act reduced the federal corporate rate from 35% to 21%. The reported tax accounting is provisional; regulated tax benefits are expected to be returned to customers over time. Management warned that customer rate reductions may reduce near-term cash receipts before tax payments decline correspondingly.
- PNMR projected adequate resources to meet capital needs for at least the next 12 months, but expects additional long-term financing, potentially including debt and equity, over 2018–2022. S&P changed the outlook for PNMR, PNM, and TNMP to negative in January 2018 while affirming investment-grade ratings.
- Key risks include regulatory cost recovery and rate-case appeals, possible early retirement and unrecovered plant costs, fuel and water availability, environmental rules, nuclear spent-fuel disposal, credit-market access, interest rates, weather, and cybersecurity. TNMP’s 2018 general rate case and the final effects of tax reform were also pending.
Most important facts for investors to verify
- Confirm that this 2017 filing for PNMR, PNM, and TNMP is the intended filing for the requested TXNM Energy issuer.
- Reconcile the 2017 earnings decline and fourth-quarter loss, including the $57.5 million tax-reform expense and the $27.9 million regulatory disallowance.
- Track New Mexico rate-case appeals and actual recovery of Four Corners, PVNGS, and SJGS investments.
- Verify financing plans, near-term maturities, available credit, credit-rating outlooks, and funding for projected capital expenditures and dividends.
- Monitor approvals and execution of planned generation retirements, replacement resources, transmission projects, and renewable-energy contracts.