TXNM ENERGY INC quarterly report, Q2 FY2015

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Business context and reporting period

Combined unaudited Form 10-Q for the quarter and six months ended June 30, 2015, filed July 31, 2015. The registrants named in the filing are PNM Resources, Inc. (PNMR), Public Service Company of New Mexico (PNM), and Texas-New Mexico Power Company (TNMP); “TXNM Energy Inc” is not identified as a registrant in the supplied filing text. PNMR is a holding company for regulated electric utilities serving about 756,000 customers and end-users in New Mexico and Texas. Results are seasonal and should not be treated as necessarily representative of a full year.

Financial performance and liquidity

  • PNMR, Q2 2015: Electric operating revenue was $352.9 million, up 1.9% from $346.2 million. Operating income was $72.4 million versus $71.3 million; net earnings attributable to PNMR were $31.7 million versus $29.1 million. Diluted EPS was $0.40 versus $0.36.
  • PNMR, first half 2015: Revenue was $685.8 million, up 1.6%; operating income was $122.0 million, up 1.6%; net earnings attributable to PNMR were $46.0 million, up 10.6%. Diluted EPS was $0.57 versus $0.52. Declared dividends were $0.40 per share for the half-year, compared with $0.37.
  • Segment performance, first half: PNM revenue was $537.4 million, down slightly, and segment earnings attributable to PNMR were $31.4 million versus $27.8 million. TNMP revenue rose 8.6% to $148.4 million and net earnings rose to $19.6 million from $16.3 million. PNM’s weather-normalized retail load fell 1.2%; TNMP’s rose 3.5%.
  • Margins: PNMR’s reported margin (revenue less cost of energy) was $238.8 million in Q2 versus $236.7 million, and $456.1 million for the half-year versus $453.0 million. PNM’s half-year margin fell $5.4 million to $343.8 million, while TNMP’s increased $8.4 million to $112.3 million.
  • Cash flow, PNMR first half: Operating cash flow was $109.7 million, down from $123.8 million. Investing cash outflow was $216.5 million, mainly reflecting $233.0 million of plant additions. Financing cash inflow was $84.9 million. Cash ended at $6.4 million, down from $28.3 million at year-end 2014.
  • Debt and liquidity: At June 30, PNMR had $187.6 million of short-term debt, $300.0 million of current long-term debt installments, and $1.731 billion of long-term debt. Total liabilities were $4.102 billion. At July 24, consolidated credit-facility availability was $719.7 million; PNMR reported $1.9 million of invested cash. The company anticipated additional long-term financing to fund its 2015–2019 capital needs.
  • Capital plan: Forecast capital requirements for 2015–2019 totaled $2.556 billion, including $2.234 billion of construction expenditures and $319 million of PNMR common dividends. Management said internal cash generation, credit arrangements, and capital-market access were expected to provide adequate funding.

Material changes versus prior comparable period

  • PNMR’s first-half earnings improvement reflected higher TNMP earnings, lower corporate interest expense, and increased other income, partly offset by weaker PNM operating income and a larger corporate-and-other loss.
  • TNMP benefited from transmission rate increases, customer growth and usage, and its advanced-meter surcharge. PNM was pressured by lower load and weather, the end of its Gallup wholesale contract, weaker wholesale activity, and greater unrealized hedge losses.
  • PNM operating expenses included $1.7 million of regulatory disallowances in the first half, with $1.5 million recorded in Q2 after management concluded certain deferred costs were no longer probable of recovery.
  • PNMR operating cash flow declined year over year, while plant additions increased substantially. First-half utility and non-utility plant additions were $233.0 million versus $160.9 million in 2014.
  • PNMR repaid $118.8 million of 9.25% senior unsecured notes at maturity using term-loan and revolving-credit borrowings; PNM drew the remaining $25 million under its $125 million multi-draw facility. PNM’s $39.3 million pollution-control bonds were successfully remarketed at 2.40%.

Outlook, management commentary, risks and unusual items

  • Rates: PNM’s proposed $107.4 million retail rate increase, sought for January 2016 with a 10.5% requested ROE, was dismissed by the NMPRC in May on application-completeness and future-test-year grounds, not on the merits of the requested rates. PNM appealed and expected to file a new application in Q3 2015, with new rates then expected in Q3 2016.
  • San Juan Generating Station (SJGS): PNM’s plan contemplated retiring Units 2 and 3 by year-end 2017, adding replacement generation, and installing SNCR/BDT equipment on Units 1 and 4. A hearing examiner recommended significant changes to the parties’ proposed settlement. Depending on the final NMPRC decision, PNM estimated a pre-tax regulatory disallowance of $60–$70 million under the filed stipulation, or $145–$155 million if the examiner’s recommended modifications were adopted. The outcome and approvals remained uncertain.
  • Coal and restructuring: Agreements filed after quarter-end provided for a proposed new coal supply arrangement through June 2022 and restructuring of SJGS ownership. Their effectiveness depends on regulatory approvals, other conditions, and the coal-company sale closing. PNM said anticipated lower coal costs would benefit customers through its fuel-cost adjustment clause.
  • Environmental exposure: Compliance costs and the economic viability of SJGS and Four Corners remained subject to air rules, litigation, and regulatory approvals. PNM estimated its share of Four Corners controls at up to $91.8 million. The filing also identifies uncertainty around proposed greenhouse-gas rules, coal-ash and effluent requirements, mine reclamation, and water availability.
  • Other unusual items: PNM recorded a $4.2 million reduction in energy cost from a gas-transportation refund and a $1.1 million gain on the sale of Gallup-related facilities in Q2. A June 2015 Supreme Court decision overturned EPA’s MATS rule, but further proceedings remained pending.
  • Financing and credit: A $175 million PNM term loan was due September 2015 and a $100 million PNMR term loan was due December 2015; PNM sought NMPRC approval to issue up to $300 million of senior unsecured notes. Moody’s assigned PNMR a Baa3 issuer rating, upgraded TNMP, and changed the entities’ outlooks to stable; S&P ratings were investment grade with positive outlooks as described in the filing. Regulatory outcomes, refinancing access, variable-rate debt, and credit-rating changes could affect liquidity and costs.
  • Other uncertainties: PNM faced a dispute with wholesale customer Navopache Electric Cooperative over the scope of a long-term power contract. PNM also gave notice of termination of its expired union agreement effective August 21, 2015, while negotiations continued. Management reported no material changes to the previously disclosed risk factors and no material changes in internal control over financial reporting.

Important facts for investors to verify

  1. Confirm the issuer identity and ticker: the supplied filing is for PNMR, PNM, and TNMP, not a registrant named TXNM Energy Inc.
  2. Track the NMPRC’s final decisions on PNM’s rate case and the SJGS retirement, restructuring, replacement resources, and potential regulatory disallowance.
  3. Verify that SJGS coal-supply and ownership-restructuring agreements become effective and that required regulatory and other approvals are obtained.
  4. Assess whether operating cash flow, the $719.7 million reported credit availability, and planned debt or equity financing are sufficient for the capital program and near-term maturities.
  5. Monitor PNM load trends, TNMP growth, hedge results, and the sustainability of reported earnings gains, including the effects of one-time refunds, gains, and regulatory items.