TXNM ENERGY INC quarterly report, Q2 FY2019

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 six months ended June 30, 2019. PNMR is a holding company for regulated electric utilities serving approximately 785,000 customers and end-users in New Mexico and Texas. Amounts below are in millions except per-share data.

Financial performance and position

PNMR reported first-half operating cash flow of $171.9, investing cash outflow of $312.1, and financing cash inflow of $142.4. Utility plant additions were $293.1, up from $245.6 in the prior-year period. Cash, restricted cash, and equivalents ended June at $4.2.

At June 30, PNMR had $342.4 of short-term debt, $100.2 of current long-term debt, and $2,672.2 of long-term debt on its balance sheet, or approximately $3.11 billion combined. Total equity was $1.67 billion. At July 26, consolidated availability under credit facilities was $692.7; management said the company was in compliance with debt covenants and had sufficient resources for at least the next 12 months. The current ratio was approximately 0.45, based on reported current assets and liabilities.

Material changes versus the prior comparable period

• PNMR swung from profit to loss in both Q2 and the first half, principally due to a $149.3 pre-tax impairment recorded in Q2 at PNM following a New Mexico Supreme Court decision in the 2015 rate-case appeal. The charge covered disallowed PVNGS Unit 2 purchase and improvement costs and SJGS best-draft-technology costs; related tax impacts were $45.7.
• Q2 revenue fell 6.3%, while first-half revenue rose 1.4%. The company attributed weaker PNM utility margin mainly to milder weather; its Q2 cooling degree days were 52.8% lower than a year earlier. First-half utility margin declined $15.5.
• TNMP first-half net earnings declined to $19.4 from $24.8, as higher depreciation and lower transmission margin more than offset rate relief and stronger demand-based revenues. PNM recorded a first-half attributable loss of $67.9.
• PNMR first-half operating cash flow increased from $133.9 to $171.9, but plant additions also rose. Short-term debt increased from $235.9 at year-end 2018 to $342.4 at June 30, 2019.
• Adoption of the new lease accounting standard added $143.9 of operating lease right-of-use assets and $143.9 of operating lease liabilities at PNMR; the filing says adoption materially affected the balance sheet but not earnings or cash flows.

Outlook, management commentary, and risks

• PNMR’s target is 5%–6% earnings and dividend growth for 2019–2023, based on “ongoing earnings,” a non-GAAP measure. It targets a 50%–60% dividend payout ratio on ongoing earnings. The declared dividend was $0.29 per share for Q2, versus $0.265 a year earlier.
• PNMR projected $4.05 billion of capital requirements for 2019–2023, including construction, NMRD contributions, and dividends. Management expects additional long-term financing, potentially including debt and/or equity; it anticipated using an at-the-market equity program or similar issuance beginning in 2020.
• PNM’s July 1, 2019 application seeks approval to retire its share of San Juan Generating Station (SJGS) in 2022, approve replacement resources, and issue approximately $361 million of energy transition bonds. Its recommended resource plan includes a 280 MW gas peaking plant, 70 MW of battery storage, and power purchase agreements for 350 MW of solar and 60 MW of storage. Regulatory approval, cost recovery, and the applicable legal framework remained unresolved.
• New Mexico’s Energy Transition Act sets renewable portfolio requirements of 40% by 2025, 50% by 2030, 80% by 2040, and 100% zero-carbon energy by 2045. The company’s stated goal is an emissions-free generation portfolio by 2040. Management cautioned that the full financial and operational effects of the law and related proceedings could not yet be predicted.
• Other material exposures include environmental rules and litigation, coal-mine reclamation and plant decommissioning obligations, water availability, nuclear fuel storage, counterparty and market risks, and recovery of costs through regulated rates. The filing states that known matters generally were not expected to materially affect financial condition, but actual outcomes could differ and potentially be material.
• Management cited milder weather, the impairment, higher employee costs and depreciation, and lower TNMP transmission revenues as pressures; rate increases, investment-security gains, and lower PNM interest expense partly offset them. No material changes to disclosed risk factors were reported.

Investor verification priorities

• Confirm the final regulatory treatment and recoverability of costs affected by the $149.3 million impairment, including any further action on PVNGS decommissioning costs.
• Track NMPRC decisions on the SJGS retirement, replacement resources, and proposed energy-transition financing, including whether the ETA applies to those proceedings.
• Assess refinancing needs and access to capital against near-term maturities, the $4.05 billion capital plan, and potential equity issuance.
• Review the assumptions underlying management’s 5%–6% ongoing earnings and dividend growth target, including the reconciliation of ongoing earnings to GAAP results.
• Monitor coal-mine reclamation estimates, environmental compliance obligations, and recovery of related costs from customers.