PNM Resources, Inc. (now TXNM Energy) — Q2 2018 Form 10-Q
Business context and period. This unaudited combined filing covers 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, 2018. PNMR is a holding company whose regulated utilities serve approximately 777,000 customers in New Mexico and Texas.
Key financial results
Amounts below are in millions, except per-share data. The filing presents utility margin as a non-GAAP measure.
| PNMR consolidated | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Electric operating revenue | $352.3 | $362.3 | $670.2 | $692.5 |
| Utility margin | $264.6 | $258.1 | $489.9 | $485.4 |
| Operating income | $79.3 | $87.2 | $125.5 | $145.3 |
| Net earnings attributable to PNMR | $38.2 | $37.6 | $53.2 | $60.4 |
| Diluted earnings per share | $0.48 | $0.47 | $0.67 | $0.75 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $133.9 | $200.6 |
| Utility plant additions | Not presented quarterly | Not presented quarterly | $245.6 | $230.9 |
- Second-quarter PNMR earnings increased modestly, but six-month earnings fell $7.2 million. PNM’s six-month segment earnings were $34.2 million versus $43.3 million; TNMP’s were $24.8 million versus $19.8 million.
- PNMR’s six-month operating cash flow declined $66.7 million, reflecting lower earnings and working-capital movements. Cash and cash equivalents were $4.9 million at June 30.
- At June 30, PNMR reported $282.6 million of short-term debt, $471.7 million of current long-term debt installments, and $2.12 billion of long-term debt. Long-term debt was approximately 59.9% of reported capitalization, which excludes short-term debt.
- As of July 25, consolidated remaining availability under credit facilities was $669.9 million. Management said it expects internal cash generation, credit arrangements, and capital-market access to meet requirements for at least 12 months, while anticipating additional long-term financing during 2018–2022.
Material changes and management commentary
- PNMR’s six-month revenue decreased $22.3 million, while utility margin increased $4.5 million. The revenue decline chiefly reflected lower other electric operating revenue as PVNGS Unit 3 shifted from wholesale sales to serving New Mexico retail customers. Warmer weather, transmission revenues, and rate increases supported margin.
- PNM’s six-month operating income fell $20.6 million, including higher maintenance and costs from additional SJGS Unit 4 ownership, partly offset by savings from retiring SJGS Units 2 and 3. Lower investment-security gains also reduced other income.
- TNMP’s six-month earnings rose $5.0 million, supported by load growth, transmission rate increases, and lower income tax expense. Its weather-normalized retail load increased 2.5%.
- Tax reform lowered the federal corporate tax rate to 21%. Tax-related rate reductions and refunds to customers affected both utilities; PNMR’s estimated 2018 effective tax rate was 12.47%.
- PNMR stated a target of 6% earnings and dividend growth for 2018–2021, based on ongoing earnings, a non-GAAP measure. It targets a dividend payout ratio of 50%–60% of ongoing earnings. Projected 2018–2022 construction expenditures and dividends total $3.15 billion; management anticipated periodic debt issuance and a possible at-the-market equity program beginning in 2020.
Outlook, risks, and unusual items
- PNM’s 2017 resource plan found that retiring its share of San Juan Generating Station (SJGS) after the coal-supply agreement expires in 2022, and exiting Four Corners after its agreement expires in 2031, could reduce customer costs. These are planning conclusions, not final decisions; regulatory approvals are required. PNM reported $406.4 million of undepreciated SJGS investment and warned that early retirement could put recovery at risk.
- PNM recorded $1.8 million of additional regulatory disallowance expense in Q2 related to its appeal of the 2015 New Mexico rate-case order. The appeal leaves potential additional write-offs of disallowed PVNGS and SJGS investments. A separate appeal challenges treatment of $148.1 million of Four Corners investments; PNM had recorded a $27.9 million disallowance in 2017.
- TNMP filed a rate case seeking a $25.9 million annual base-rate increase, including $7.7 million of proposed riders for Hurricane Harvey restoration and vegetation management. Any rate changes were expected in early 2019; the outcome was uncertain.
- A coal silo collapse caused an SJGS Unit 1 outage from March until repairs were completed July 5. PNM estimated its repair-cost exposure at $1.0 million after insurance, but regulatory staff preliminarily recommended denying recovery of repair-related costs and requiring customer reimbursement for lost off-system sales.
- PNM received $50.1 million of final principal repayment on the Westmoreland loan in May and used part of the proceeds to repay $43.0 million under the related BTMU loan; both loan agreements and PNMR’s guarantee were effectively terminated. PNMR’s separate $30.3 million letter-of-credit support for San Juan mine reclamation bonds remained outstanding.
- Other exposures include coal-mine reclamation and environmental compliance costs, unresolved water-rights and environmental proceedings, commodity and interest-rate risk, and uncertainty over future greenhouse-gas rules. Management said all debt ratings were investment grade, but S&P had moved issuer outlooks to negative in January; Moody’s changed PNMR and PNM outlooks from positive to stable in June. The company reported compliance with debt covenants.
Important facts for investors to verify
- Progress and outcomes of PNM’s pending New Mexico rate-case appeals, including potential recovery of PVNGS, BDT, and Four Corners investments.
- Whether PNM files for SJGS retirement or replacement resources, and whether regulators allow recovery of undepreciated plant and reclamation costs.
- The result of TNMP’s rate case and the timing and amount of any approved customer rates.
- Actual capital spending, cash generation, debt refinancing, and funding plans against the stated $3.15 billion 2018–2022 requirement.
- Insurance recovery and regulatory treatment of the SJGS Unit 1 outage, and any change in outstanding San Juan mine reclamation letters of credit.