PNM Resources, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014; unaudited. The filing is a combined report for PNM Resources, Inc. (PNMR), Public Service Company of New Mexico (PNM), and Texas-New Mexico Power Company (TNMP). Although the request identifies TXNM Energy, the filing itself reports under the name PNM Resources.
Business context
PNMR is a holding company whose regulated electric utilities, PNM and TNMP, serve approximately 751,000 customers and end-users in New Mexico and Texas. Results are seasonal and sensitive to weather, regulation, fuel costs, and electricity demand.
Key financial results
Amounts below are in millions of dollars unless noted. PNMR figures are consolidated.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Electric operating revenue | $414.0 | $399.7 | $1,089.0 | $1,065.0 |
| Operating income | $116.8 | $117.7 | $236.8 | $246.3 |
| Net earnings attributable to PNMR | $55.7 | $54.6 | $97.3 | $92.9 |
| Diluted earnings per share | $0.69 | $0.68 | $1.21 | $1.15 |
| Operating cash flow | — | — | $326.2 | $311.0 |
| Utility and non-utility plant additions | — | — | $293.4 | $233.9 |
PNMR’s nine-month energy margin (revenue less cost of energy) was $734.5 million, down from $740.0 million. Operating margin percentages were approximately 28.2% for Q3 and 21.8% for the nine-month period, compared with 29.5% and 23.1%, respectively, in 2013. Q3 attributable earnings rose about 2%; nine-month earnings rose about 5%, despite lower operating income.
- PNM: Nine-month revenue was $873.4 million, while segment earnings fell to $73.0 million from $85.1 million. Lower retail usage, milder weather, higher cost of energy, and weaker unrealized hedge results pressured margins; rate riders, higher PVNGS Unit 3 power prices, and reduced prior-year tax charges provided offsets.
- TNMP: Nine-month revenue increased to $215.6 million from $201.4 million and segment earnings rose to $28.7 million from $22.2 million. Transmission rate increases, customer growth, and an energy-efficiency incentive contributed to improvement.
Liquidity, debt, and capital
- At September 30, PNMR reported cash of $28.4 million, current assets of $466.3 million, and current liabilities of $700.3 million. Short-term debt was $100.0 million; current maturities of long-term debt were $333.1 million, and long-term debt was $1,542.1 million.
- PNMR’s debt represented 52.0% of stated capitalization at September 30, versus 50.9% at year-end 2013. The filing reports approximately $814 million of consolidated revolving-facility availability as of October 24, 2014; all three registrants’ debt ratings were investment grade.
- Nine-month operating cash flow of $326.2 million exceeded plant additions of $293.4 million. Investing cash flow was negative $311.7 million, including the Rio Bravo acquisition. Cash increased to $28.4 million from $2.5 million at the start of the period.
- Management estimated total 2014–2018 capital requirements, including construction and dividends, at $2.61 billion. It expects to require additional long-term financing through refinancing, debt issuance, and/or equity, and said internal cash generation, credit arrangements, and capital-market access should be sufficient.
Material changes and notable items
- PNM completed its acquisition of the 132-MW Rio Bravo gas peaking facility on July 17, 2014. The transaction involved a $22.8 million cash payment, working-capital adjustments and escrow, and retirement of $14.6 million of project debt; the cash-flow statement reports a $36.2 million acquisition outflow.
- PNM’s Gallup wholesale power contract ended June 29, 2014 after Gallup selected another supplier, reducing a source of wholesale revenue.
- TNMP issued $80 million of 4.03% first-mortgage bonds due 2024 and used proceeds to repay a $50 million term loan and reduce short-term debt. PNM entered into a $175 million variable-rate term loan, due by September 2015.
- PNMR declared common dividends of $0.185 per share for each of the first three quarters of 2014; the nine-month declared amount was $0.555 per share.
Outlook, risks, and contingencies
- San Juan Generating Station (SJGS): A proposed New Mexico regulatory settlement contemplates retiring Units 2 and 3 at year-end 2017, adding 132 MW of Unit 4 capacity, bringing PNM’s 134-MW PVNGS Unit 3 share into retail rates from 2018, and recovering specified environmental costs. Approval remained pending; hearings were scheduled for January 2015, with a decision expected in Q1 2015. If approved as filed, PNM estimated a net pretax regulatory disallowance of $60–$70 million. Negotiations with co-owners, fuel arrangements, and regulatory approvals remained uncertain.
- EPA approved New Mexico’s revised regional-haze plan and withdrew the prior federal plan in October 2014, after the quarter-end; effectiveness was scheduled for November 10, 2014. If the revised plan or related ownership changes are not implemented, PNM may need alternative compliance measures. Environmental requirements, possible greenhouse-gas regulation, and coal-mine reclamation could increase costs or affect plant economics.
- Other significant exposures include uncertain future coal supply and pricing, nuclear spent-fuel disposal and water availability, environmental and mine-reclamation obligations, and pending litigation and regulatory proceedings. Management stated that, except as disclosed, it did not expect known matters to materially affect the company, but outcomes could differ materially from estimates.
- Management cited weaker weather-normalized retail load at PNM and milder weather in 2014; TNMP’s load grew. No specific full-year earnings guidance is provided in the supplied filing text. PNMR’s stated investor-return goal is top-quartile total return over 2012–2016, and its target dividend payout ratio is 50%–60% of ongoing earnings, a non-GAAP measure.
Most important facts for investors to verify
- Whether the NMPRC approved the SJGS settlement, the final cost-recovery terms, and the ultimate regulatory disallowance.
- Progress on binding SJGS co-owner restructuring and post-2017 coal supply, including associated reclamation liabilities.
- PNM’s financing and refinancing needs, especially the $175 million PNM term loan due by September 2015 and other 2015 maturities.
- Whether PNM’s weaker retail load and the loss of the Gallup contract are offset by approved rates, riders, and replacement resources.
- How environmental compliance costs, rate recovery, and capital spending evolve relative to the company’s $2.61 billion 2014–2018 capital-requirement estimate.