Business context and reporting period
This unaudited combined Form 10-Q covers the quarter and nine months ended September 30, 2013, compared with the same periods in 2012. The filing is for PNM Resources, Inc. (PNMR), Public Service Company of New Mexico (PNM), and Texas-New Mexico Power Company (TNMP); the 2013 filing does not identify TXNM Energy as a registrant. PNMR is the holding company for regulated electric utilities serving customers in New Mexico and Texas.
Key financial metrics
Amounts below are in millions except per-share data. PNMR consolidated figures are shown unless noted.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Electric operating revenue | $399.7 | $390.4 | $1,065.0 | $1,019.6 |
| Operating income | $117.7 | $118.2 | $246.3 | $237.0 |
| Net earnings attributable to PNMR | $54.6 | $57.9 | $92.9 | $96.5 |
| Diluted earnings per share | $0.68 | $0.72 | $1.15 | $1.20 |
| Consolidated operating cash flow | Not provided for quarter | Not provided for quarter | $311.0 | $205.0 |
Consolidated margin (revenue less cost of energy) was $285.1 million in Q3 2013 versus $279.6 million, and $740.0 million for the nine months versus $722.3 million. Net cash used in investing was $211.4 million and net cash used in financing was $75.1 million for the nine-month period. Cash and cash equivalents were $33.4 million at September 30, 2013.
At September 30, PNMR reported $112.0 million of short-term debt, $52.5 million of current long-term debt installments, and $1,696.3 million of long-term debt. Current assets were $400.5 million and current liabilities were $415.6 million. As of October 25, total availability under revolving credit facilities was $755.9 million. PNMR’s forecast capital requirements, including construction and dividends, totaled $2.054 billion for 2013–2017; additional long-term financing is expected to be needed.
Material changes versus the prior comparable period
- Revenue increased 2.4% in Q3 and 4.4% year to date, while PNMR-attributable earnings declined about 5.7% and 3.7%, respectively. Q3 operating income was slightly lower; nine-month operating income increased.
- PNM’s nine-month segment earnings attributable to common equity were essentially flat at $85.1 million versus $85.2 million. PNM’s weather- and leap-year-normalized retail load fell 1.5% year to date; milder weather and weaker load weighed on results.
- TNMP’s segment earnings increased to $10.1 million in Q3 from $9.1 million, and to $22.2 million year to date from $20.1 million, supported by transmission rate increases, customer growth, and higher usage.
- PNMR operating cash flow rose by $106.0 million, principally reflecting a $95.5 million net income-tax refund in 2013 versus taxes paid in 2012, and lower pension and postretirement contributions. Cash generation was also affected by regulatory refunds and lower PNM retail load.
- PNMR declared dividends of $0.165 per common share versus $0.145 in 2012. The company cited dividend growth as a strategic priority, with a long-term target payout ratio of 50%–60% of ongoing earnings.
Outlook, commentary, risks, and unusual items
- Demand and guidance: Management indicated PNM’s weather-normalized, leap-year-adjusted retail load could decline approximately 1% for full-year 2013; TNMP’s comparable load grew year to date. The filing does not provide a clear consolidated earnings or EPS guidance range.
- San Juan Generating Station (SJGS): PNM, New Mexico regulators, and EPA are pursuing a non-binding alternative to the existing federal requirement for selective catalytic reduction controls on all four units. The proposed plan includes retiring Units 2 and 3 by the end of 2017 and installing SNCR controls on Units 1 and 4, subject to regulatory and other approvals. PNM estimated its share of SNCR and related NAAQS work at $60–$80 million and identified roughly $299 million for certain replacement peaking capacity; these estimates were excluded from its construction forecast. PNM’s net book value in Units 2 and 3 was about $287 million. The Unit 1 project was approved by participants, but the Unit 4 project did not receive the required participant approval. If the alternative is not implemented, the existing EPA rule calls for SCR controls on all four units; estimated total project cost was $824–$910 million, with PNM bearing about 46.3% based on its then-current ownership share. PNM warns that delay or failure to secure relief could require temporary plant shutdown and replacement-power purchases.
- Other generation and investment plans: PNM expected to close its approved purchase of the Delta gas-fired facility in early 2014. It sought approval for the proposed $63.2 million, 40-MW La Luz gas-fired station, targeted for service in 2016. A 2014 renewable procurement plan, including 23 MW of solar facilities and a wind PPA, remained subject to NMPRC action.
- Financing and tax items: TNMP exchanged $93.2 million of 9.50% bonds for 6.95% bonds due 2043 and paid $13.0 million cash, reducing interest expense but recording a regulatory asset associated with the exchange premium and cash payment. PNMR repurchased $23.0 million principal of 9.25% notes for $26.0 million plus accrued interest. New Mexico tax-credit impairments increased income tax expense by $3.9 million, and a state tax-rate change caused a further $1.2 million expense in Corporate and Other during the first half of 2013. A $1.7 million regulatory disallowance was recorded in Q3 after certain deferred costs were judged no longer probable of recovery.
- Other material exposures: Environmental compliance, SJGS and Four Corners ownership and coal-supply arrangements, water availability, fuel costs, rate recovery, and pending legal and regulatory proceedings could affect future costs and reliability. Several potential losses and costs cannot yet be estimated or predicted. The filing states that known lawsuits, environmental costs, and commitments were not expected to have a material effect, but actual outcomes could differ and could be material.
- Liquidity and controls: Management said existing cash generation, credit facilities, and capital-market access were expected to meet requirements, while noting that adverse market conditions could limit financing access. Disclosure controls were concluded effective, and no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether EPA approves the revised SJGS plan, whether NMPRC approves unit retirements and cost recovery, and how the unapproved Unit 4 work and ownership restructuring are resolved.
- The ultimate cost, timing, and customer-rate treatment of SJGS and Four Corners environmental controls and any replacement generation.
- PNM’s actual load, weather, wholesale-market, and regulatory results versus management’s stated full-year load expectation.
- PNMR’s ability to fund its projected capital program and debt maturities while maintaining liquidity, investment-grade ratings, and dividend growth.
- Outcomes and potential financial effects of outstanding coal, tax, environmental, water, and rate proceedings, including amounts that the filing says cannot presently be estimated.