Business context and reporting period
PNM Resources, Inc. (PNMR) filed this unaudited combined Form 10-Q for the quarter and six months ended June 30, 2017. The filing covers PNMR and its regulated electric utilities: Public Service Company of New Mexico (PNM) and Texas-New Mexico Power Company (TNMP). The businesses served approximately 770,000 customers and end-users in New Mexico and Texas. Unless noted, financial figures below are consolidated PNMR amounts in millions of dollars.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Electric operating revenue | $362.3 | $315.4 | $692.5 | $626.4 |
| Operating income | $85.1 | $64.8 | $141.1 | $106.3 |
| Net earnings attributable to PNMR | $37.6 | $27.1 | $60.4 | $37.6 |
| Diluted EPS | $0.47 | $0.34 | $0.75 | $0.47 |
Operating margin was approximately 23.5% in Q2 and 20.4% for the six-month period, compared with 20.6% and 17.0%, respectively, a year earlier. PNMR declared dividends of $0.2425 per common share for Q2, up from $0.22. Six-month net cash from operations was $201.6, versus $122.0; investing cash outflow was $213.4, versus $493.7, including $230.9 of utility and non-utility plant additions. Cash at June 30 was $2.2.
At June 30, PNMR reported $373.5 of short-term debt, $174.3 of current long-term debt installments, and $2,199.1 of long-term debt. Long-term debt represented 57.7% of reported capitalization. At July 25, consolidated revolving-credit and New Mexico facility availability was $581.3. Debt facilities generally require a debt-to-capital ratio no greater than 65%.
Material changes versus the prior comparable period
- PNMR-attributable earnings rose $10.5 in Q2 and $22.8 for the first half. Management cited PNM’s 2016 rate increase, higher PNM transmission revenues, TNMP rate increases and load growth, lower PNM maintenance costs, and stock-compensation tax benefits.
- Six-month PNM utility margin increased $28.3, principally from rate relief and transmission revenue; weaker weather-normalized load, milder weather, and reduced wholesale sales partially offset the increase. TNMP utility margin rose $4.5, supported by rate relief and higher customer load.
- PNM and TNMP experienced milder weather overall in the first half. PNM’s weather-normalized retail sales declined 0.5%; TNMP’s increased 3.0%.
- PNMR operating cash flow improved, while plant additions were lower than in the prior-year period, which included PNM’s $163.3 purchase of previously leased PVNGS Unit 2 capacity. PNMR also received $19.2 in Westmoreland Loan principal repayments in 2017, versus a $122.3 loan investment in 2016.
Outlook, commentary, risks and unusual items
- PNMR’s stated target is 7%–8% growth in ongoing earnings through 2019, with a target dividend payout ratio of 50%–60% of ongoing earnings. These are management targets based on a non-GAAP measure, not guarantees.
- PNM’s revised settlement proposal in its 2016 New Mexico rate case provides for a $62.3 annual revenue increase in stages beginning in 2018 and a 9.575% ROE, subject to NMPRC approval. If approved as filed, PNM estimates an approximately $21 regulatory disallowance related to Four Corners SCR investments receiving debt-only rather than equity returns.
- PNM is appealing disallowances in its 2015 rate case. At June 30, the net book values of challenged PVNGS purchase costs, PVNGS improvements, and SJGS balanced-draft equipment were $76.9, $39.9, and $50.0, respectively. Outcomes and potential further losses remain uncertain.
- PNM’s July 2017 integrated resource plan found that retiring its share of the San Juan Generating Station (SJGS) in 2022 and exiting Four Corners after its coal agreement expires in 2031 could reduce customer costs. These are planning conclusions, not approved retirements; regulatory approvals and future filings are required. SJGS Units 2 and 3 are scheduled to retire by the end of 2017 under an existing order.
- After quarter-end, PNM entered a $200 term loan and agreed to issue $450 of notes in 2018 to refinance notes maturing that year. TNMP also agreed to issue $60 of 3.22% first mortgage bonds, subject to conditions, to reduce short-term debt.
- Key exposures include regulatory recovery and rate-case appeals; environmental requirements and potential coal-plant retirement/reclamation costs; coal-supply arbitration (PNM estimated its share of a disputed shortfall at about $6.5, substantially pass-through eligible); and water, nuclear spent-fuel, and other legal matters. The filing states that outcomes for several proceedings cannot be predicted.
- PNMR adopted stock-compensation accounting guidance in 2017, recording a $10.4 cumulative retained-earnings adjustment and $2.1 of excess tax benefits for the six months. Prior-year results also included IRS-related interest income, which management identified as a comparison factor.
Most important facts for investors to verify
- Whether the NMPRC approves the revised 2016 rate-case settlement and the resulting timing and amount of any rate changes or regulatory disallowance.
- The outcome and timing of the 2015 rate-case appeal and cross-appeals, including possible recovery or write-offs of challenged plant costs.
- Whether planned SJGS and Four Corners resource changes proceed, and how retirement, replacement generation, and mine reclamation affect costs and rates.
- Execution and conditions for the announced 2018 debt refinancing, TNMP bond issue, and continued access to credit facilities amid significant capital spending and limited cash on hand.
- PNMR’s ongoing-earnings growth target and dividend payout target; results depend materially on regulation, weather, load, operations, financing, and environmental requirements.