Business context and reporting period
Combined unaudited Form 10-Q for PNM Resources, Inc. (PNMR), Public Service Company of New Mexico (PNM), and Texas-New Mexico Power Company (TNMP), for the quarter and nine months ended September 30, 2017. PNMR is a holding company for regulated electric utilities serving approximately 772,000 customers in New Mexico and Texas. Amounts below are in U.S. dollars; financial statement figures are generally in millions.
Financial performance and position
| PNMR consolidated | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Electric operating revenue | $419.9 | $400.4 | $1,112.4 | $1,026.7 |
| Operating income | $142.5 | $108.1 | $283.5 | $214.4 |
| Net earnings attributable to PNMR | $73.7 | $54.4 | $134.2 | $92.0 |
| Diluted earnings per share | $0.92 | $0.68 | $1.67 | $1.15 |
| Utility margin | $316.2 | $291.6 | $801.6 | $744.2 |
- For the nine-month period, operating cash flow was $417.3, compared with $321.0 in 2016. Plant additions were $353.4 versus $502.5; investing cash flow was $(329.0), financing cash flow $(49.7), and ending cash $43.1.
- At September 30, PNMR reported total assets of $6,697.3, total liabilities of $4,852.6, and equity of $1,833.1. Debt comprising short-term debt, current long-term debt, and long-term debt was approximately $2,714.2.
- PNMR declared common dividends of $0.2425 per share for Q3, up from $0.22. Its stated target is 7%–8% ongoing earnings growth for 2015–2019 and a 50%–60% ongoing-earnings dividend payout ratio; these are targets, not specific 2017 earnings guidance.
- PNM’s nine-month net earnings available for common stock were $104.0 versus $60.9; TNMP’s net earnings were $34.5 versus $31.8.
Material changes versus the prior comparable period
- PNMR’s nine-month attributable earnings rose $42.2 and diluted EPS increased $0.52. The principal contributors included the PNM rate increase effective in late 2016, stronger transmission revenues, TNMP rate relief and demand growth, lower PNM maintenance costs, higher construction-related AFUDC, and no 2017 regulatory disallowance expense compared with 2016.
- Offsets included weaker weather-normalized retail load and milder weather at PNM, lower wholesale revenue following the NEC contract change, higher depreciation and property taxes from plant additions, and higher income taxes on increased earnings. PNM’s nine-month weather-normalized retail load declined 0.7%; TNMP’s volumetric weather-normalized load increased 1.7%.
- The 2016 comparison included regulatory disallowance and restructuring charges. In 2017, adoption of stock-compensation accounting produced a $10.4 cumulative retained-earnings adjustment at January 1 and excess tax benefits recognized in earnings, including $2.3 for PNMR for the nine months.
Outlook, management commentary, risks and contingencies
- PNM’s pending 2016 rate-case revised stipulation proposed a $62.3 revenue increase, phased in from January 2018 and January 2019, at a 9.575% ROE. Approval was pending. If approved as filed, PNM estimated an approximately $21 regulatory disallowance related to Four Corners SCR investments receiving debt-only rather than equity return.
- PNM’s 2017 integrated resource plan found that retiring its San Juan Generating Station (SJGS) share after mid-2022 and exiting Four Corners after the coal contract expires in 2031 could reduce long-term customer costs. These conclusions are not final decisions: future retirements and replacement resources require regulatory approval. SJGS Units 2 and 3 were scheduled for retirement by December 31, 2017 under an existing order.
- PNM’s appeal of its 2015 rate-case order leaves material potential disallowances unresolved. At September 30, the net book values identified as at risk included $76.9 for PVNGS Unit 2 purchased capacity, $39.9 for related improvements, and $50.0 for SJGS balanced-draft equipment. Outcomes of the appeal and customer/intervenor cross-appeals remain uncertain.
- PNMR expected 2017–2021 capital requirements, including construction and dividends, of $2,961.9. Management expected to need additional long-term financing during that period but believed operating cash generation, credit facilities, and capital-market access would be sufficient. Consolidated revolving-credit availability was $635.0 as of October 20, 2017; PNMR had $266.5 of short-term debt at September 30, including $100.0 due in December 2017.
- PNM had arranged $450.0 of private-placement notes for issuance in 2018 to refinance notes maturing that year. Its $200.0 variable-rate term loan is due by January 2019. TNMP issued $60.0 of 3.22% first mortgage bonds and extended its $75.0 revolving facility maturity to September 2022.
- Environmental, regulatory, and operational risks include coal-mine reclamation costs, coal supply disputes, future air and water requirements, spent nuclear fuel storage, drought and water availability, and climate regulation. EPA proposed repealing the Clean Power Plan in October 2017; the proposal and any replacement requirements remained uncertain. PNM’s share of a disputed Four Corners coal-purchase shortfall was estimated at approximately $6.5, with the company expecting substantially all any payment to be recoverable through its fuel adjustment clause.
- Management cited mixed economic conditions in New Mexico and continued growth in Texas. The filing emphasizes seasonality and weather sensitivity; quarterly results should not be assumed to represent full-year performance. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Confirm outcomes of PNM’s pending New Mexico rate cases and 2015 rate-case appeals, including potential disallowances and timing of rate recovery.
- Track final regulatory decisions on PNM’s renewable procurement plan, AMI proposal, and the future of SJGS and Four Corners, including required capital spending and reclamation obligations.
- Assess debt refinancing and funding needs against the $2.96 billion 2017–2021 capital-requirement estimate, credit-facility availability, and variable-rate exposure.
- Evaluate the quality and repeatability of earnings growth, including the effects of rate relief, weather, securities gains, and stock-compensation tax benefits.
- Review the full filing’s legal, environmental, and coal-supply disclosures for developments that could affect costs, customer recovery, or operating plans.