Business context and reporting period
The filing is a combined Form 10-K for PNM Resources, Inc. (PNMR), Public Service Company of New Mexico (PNM), and Texas-New Mexico Power Company (TNMP), for the fiscal year ended December 31, 2016, with comparative results for 2015 and 2014. The filing does not identify “TXNM Energy Inc” as a registrant; investors should verify the intended issuer. PNMR is a holding company whose principal businesses are regulated electric utility operations in New Mexico and Texas. This is an annual filing, not a standalone Q4 report.
Financial and operating results
| PNMR consolidated | 2016 | 2015 | Change |
|---|---|---|---|
| Operating revenue | $1,363.0 million | $1,439.1 million | Down 5.3% |
| Operating income | $278.0 million | $124.4 million | Up $153.6 million |
| Net earnings | $131.9 million | $31.1 million | Up $100.8 million |
| Net earnings attributable to PNMR | $116.8 million | $15.6 million | Up $101.2 million |
| Diluted earnings per share | $1.46 | $0.20 | Up $1.26 |
| Cash from operating activities | $415.5 million | $386.9 million | Up $28.6 million |
| Cash from investing activities | $(699.4) million | $(544.5) million | Outflow increased $154.9 million |
| Long-term debt, including current installments | $2,392.7 million | $2,091.9 million | Up $300.8 million |
PNMR’s operating margin was approximately 20.4%, versus 8.6% in 2015, reflecting a sharp reduction in regulatory disallowances and restructuring costs. The filing reports no standalone consolidated liquidity ratio; year-end cash was $4.5 million, while consolidated credit-facility availability was $607.6 million as of February 21, 2017. Long-term debt was 58.6% of capitalization, compared with 55.7% in 2015. The filing states that all company debt ratings from S&P and Moody’s were investment grade with stable outlooks.
PNMR’s 2016 revenue decline was driven principally by lower PNM revenue, partly offset by TNMP growth. PNM revenue was $1,035.9 million, down from $1,131.2 million; its utility margin was $736.2 million versus $740.1 million. TNMP revenue increased to $327.0 million from $307.9 million, and its utility margin rose to $246.2 million from $234.4 million. PNM’s weather-normalized retail sales fell 0.7%; TNMP’s rose 3.0%.
Fourth-quarter results were seasonal and included the prior-year comparison effect of the San Juan Generating Station (SJGS) charge: PNMR’s Q4 2016 earnings attributable to PNMR were $24.8 million, versus a Q4 2015 loss attributable to PNMR of $91.4 million. The filing does not provide a standalone Q4 cash-flow summary.
Material changes versus prior period
- PNMR’s earnings recovery largely reflects the $165.7 million pre-tax SJGS-related regulatory and restructuring charge recorded in 2015. In 2016, PNMR recorded $15.0 million of regulatory disallowances and restructuring costs; the company also recorded additional SJGS-related estimates during the year.
- PNM implemented a $61.2 million annual increase in non-fuel base rates on October 1, 2016. It filed another rate case in December seeking a $99.2 million increase, with proposed rates effective January 1, 2018.
- PNM’s lower SJGS coal costs reduced fuel and purchased-power pass-through revenue and cost. Lower PVNGS Unit 3 sales prices, lower NEC revenues, and reduced PNM retail load also weighed on results. TNMP benefited from transmission rate adjustments and customer/load growth.
- PNMR’s 2016 investing outflow increased, including utility plant additions and a $122.3 million investment in the Westmoreland San Juan coal-mine loan, partially offset by loan repayments. The company’s stated 2017–2021 construction expenditure plan is $2.083 billion.
- PNM’s share of PVNGS Unit 2 capacity previously leased was purchased for $163.3 million in January 2016. The New Mexico regulator allowed only partial rate-base recovery, and PNM appealed the disallowances.
Outlook, commentary, and principal risks
- Management targets 7%–8% growth in ongoing earnings through 2019, a non-GAAP measure, and a long-term dividend payout ratio of 50%–60% of ongoing earnings. PNMR declared dividends of $0.9025 per share for 2016, up from $0.82 in 2015; the board declared $0.2425 per share in February 2017.
- PNM’s pending rate case requests $99.2 million of additional annual non-fuel revenue and a 10.125% return on equity. The outcome, along with appeals of the prior rate order, could affect cost recovery, earnings, and financing costs.
- Under the approved SJGS regional-haze plan, SJGS Units 2 and 3 are scheduled to shut down by December 31, 2017. PNM expects to recover 50% of their then-undepreciated net book value over 20 years. A regulatory filing due in 2018 will address whether SJGS should continue serving customers after mid-2022; the 2017 resource plan is to analyze both continued-operation and shutdown scenarios.
- PNMR expects total capital requirements, including construction and dividends, of $2.472 billion for 2017–2021 and anticipates needing additional long-term financing. Management stated that internal cash generation, credit arrangements, and access to capital markets should be sufficient, but future access and borrowing costs are exposed to market conditions and credit ratings.
- Key risks include regulatory cost-recovery decisions, declining or changing electricity demand, environmental compliance and climate-policy uncertainty, coal supply and reclamation obligations, nuclear fuel and spent-fuel disposal, water availability and drought, plant or grid outages, cybersecurity, and refinancing needs. Federal Clean Power Plan implementation was stayed pending litigation at the filing date.
- PNMR subsidiary NM Capital’s Westmoreland loan had a $95.0 million balance at year-end, secured by SJCC assets and equity; PNMR guaranteed the related bank borrowing and had $30.3 million of letters of credit supporting mine reclamation bonds. The filing describes credit exposure but states management did not consider it material.
- Management reported effective disclosure controls and internal control over financial reporting; KPMG issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is for PNM Resources, PNM, and TNMP, rather than an entity named TXNM Energy Inc.
- Track the NMPRC rate-case decision and appeals, including potential further disallowances and the proposed $99.2 million rate increase.
- Verify SJGS unit closures, restructuring, remaining coal-supply arrangements, mine-loan repayments, and the 2018 decision on operations beyond mid-2022.
- Review planned financing against debt maturities, especially PNM’s 2017 term loan and bond tender obligations, and the $2.083 billion five-year construction program.
- Assess whether 2016 earnings and the 2019 earnings-growth target are supported by recurring operations; 2015 contained a major one-time SJGS charge, and ongoing earnings is non-GAAP.