PNM Resources, Inc. (now TXNM Energy) — Q3 2016 Form 10-Q
Business context and period. This historical filing is by PNM Resources, Inc. and its regulated utility subsidiaries Public Service Company of New Mexico (PNM) and Texas-New Mexico Power Company (TNMP); it is not filed under the TXNM Energy name. It covers the quarter and nine months ended September 30, 2016. The interim statements are unaudited, and results are seasonal.
Key financial results
| PNMR consolidated | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Electric operating revenue | $400.4m | $417.4m | $1,026.7m | $1,103.2m |
| Operating income | $108.1m | $121.5m | $214.4m | $243.5m |
| Net earnings attributable to PNMR | $54.4m | $61.0m | $92.0m | $107.1m |
| Diluted earnings per share | $0.68 | $0.76 | $1.15 | $1.34 |
| Utility margin | $291.6m | $293.2m | $744.2m | $749.2m |
Profitability and changes. Nine-month revenue declined about 6.9% and attributable earnings fell about 14.0%; Q3 attributable earnings declined about 10.9%. Lower coal and purchased-power costs reduced both revenue and expense, with lower coal costs under the new San Juan coal supply agreement passed through to customers. Utility margin, a management measure of revenue less energy costs, was slightly lower. Results also faced regulatory disallowances, lower PNM industrial load, lower wholesale prices for PVNGS Unit 3, reduced Navopache Electric Cooperative revenues, and higher depreciation, interest, and employee costs. Partly offsetting these pressures were PNM’s rate increase, increased TNMP load and rates, and lower PVNGS lease expense. PNMR declared dividends of $0.22 per share in each of Q2 and Q3 2016, versus $0.20 per quarter in 2015.
Cash flow, investment, debt, and liquidity. For the first nine months, operating cash flow was $321.0m, versus $335.6m; additions to utility and non-utility plant were $502.5m, versus $411.6m. Investing cash flow was a use of $604.8m, including a $122.3m net investment in the Westmoreland loan. Financing provided $245.4m, and period-end cash was $7.7m. At September 30, total debt was approximately $2.66bn, including short-term debt, current maturities, and long-term debt; this was up from approximately $2.34bn at year-end 2015. PNMR’s long-term debt was 57.6% of reported capitalization, a measure that excludes short-term debt. Current assets of $398.9m were below current liabilities of $701.8m. As of October 21, consolidated revolving-credit availability was $592.8m. Management expected internal cash generation, credit facilities, and capital-market access to support needs, while anticipating additional long-term financing during 2016–2020.
Outlook, commentary, and material matters
- Rate case: A New Mexico order authorized a $61.2m increase in PNM non-fuel rates effective for bills after September 30, 2016. PNM appealed disallowances concerning PVNGS Unit 2 assets and SJGS balanced-draft conversion costs. It recorded $11.3m of pretax regulatory disallowances; if its appeal fails on all issues, additional losses could reach $168.5m based on September 30 book values.
- Generation transition: PNM’s approved plan retires SJGS Units 2 and 3 at year-end 2017. Recovery is limited to 50% of their estimated undepreciated book value, subject to regulatory treatment. A separate filing is required by 2018 to assess SJGS’s role after mid-2022. The Clean Power Plan was stayed pending litigation; compliance costs and effects on coal and other generation remain uncertain.
- Guidance and capital plan: Management’s stated target was 7%–8% ongoing earnings growth through 2019 and a 50%–60% dividend payout ratio based on ongoing earnings; ongoing earnings is a non-GAAP measure. Projected 2016–2020 capital requirements, including construction and dividends, totaled $2.675bn, including $2.322bn of construction expenditures. No specific 2016 GAAP earnings guidance is provided in the text.
- Coal financing and contingencies: PNMR subsidiary NM Capital lent $125m to finance the San Juan mine purchase; $110m was outstanding at September 30, secured by mine assets and equity. PNMR guaranteed the associated bank financing and provided reclamation-bond letter-of-credit support. Management viewed likely loss on the loan and letter of credit as limited, but default and coal-supply risks remain relevant.
- Other risks and unusual items: The filing identifies environmental compliance, coal-mine reclamation, spent nuclear fuel, water availability, utility cost recovery, weather, wholesale power prices, and access to capital as risks. The nine-month results included a $5.1m IRS-related interest-income item, partly offset by associated expenses. No material changes to stated risk factors were reported.
Important facts for investors to verify
- Follow the New Mexico Supreme Court appeal and quantify any further write-offs if the rate-case disallowances stand.
- Reconcile ongoing-earnings growth targets with reported GAAP earnings and the causes of the year-over-year decline.
- Review debt maturities, variable-rate exposure, refinancing plans, and actual liquidity after outstanding borrowings and letters of credit.
- Track SJGS retirement and replacement-resource decisions, mine-loan repayment, reclamation funding, and environmental compliance costs.
- Confirm the implementation and customer revenue effects of PNM’s rate increase, and whether TNMP’s load and transmission-rate growth continue.