Business context and reporting period
Combined unaudited Form 10-Q for the quarter and six months ended June 30, 2012, filed August 3, 2012. The registrants are PNM Resources, Inc. (PNMR), Public Service Company of New Mexico (PNM), and Texas-New Mexico Power Company (TNMP). PNMR reported a utility-focused business after selling retail electric provider First Choice in November 2011; the 2011 comparison includes First Choice. The filing identifies the parent as PNM Resources, Inc., not TXNM Energy.
Key financial metrics
PNMR consolidated amounts, except per-share data; dollar amounts in millions.
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Electric operating revenue | $323.9 | $415.6 | $629.2 | $803.2 |
| Operating income | $65.1 | $32.9 | $118.8 | $85.1 |
| Net earnings attributable to PNMR | $21.5 | $4.1 | $38.6 | $20.7 |
| Diluted earnings per share | $0.27 | $0.04 | $0.48 | $0.22 |
| Operating cash flow | Not separately stated | Not separately stated | $41.3 | $84.7 |
- For the first six months, PNM Electric revenue was $510.5 million and earnings available for PNM common stock were $34.4 million, versus $473.5 million and $2.1 million in 2011. TNMP revenue was $118.7 million and net earnings were $11.0 million, versus $113.8 million and $8.3 million.
- PNMR’s reported six-month operating margin was approximately 18.9% of revenue, versus 10.6% in 2011; the comparison is affected by First Choice’s inclusion in 2011 and the prior-year regulatory disallowance.
- Six-month capital additions to utility and non-utility plant were $156.8 million. Cash and cash equivalents were $3.2 million at June 30.
- At June 30, PNMR had $207.0 million of short-term debt and $1.672 billion of long-term debt. Short-term debt rose from $82.7 million at December 31, 2011. Consolidated long-term debt fair value was reported at $1.944 billion.
- Consolidated credit-facility availability was $570.5 million at July 27, 2012. Credit agreements require debt-to-capital ratios no greater than 65%; the filing reports no trigger of contingent debt provisions.
Material changes versus the prior comparable period
- PNMR six-month earnings attributable to the parent increased $17.9 million to $38.6 million. The main contributors were improved PNM Electric earnings ($32.3 million change) and TNMP earnings ($2.7 million change), partly offset by the absence of First Choice earnings ($20.1 million in the 2011 period).
- PNM’s improvement reflected its 2011 retail rate increase, higher energy-efficiency rider revenue, and no repeat of the $17.5 million regulatory disallowance recorded in Q2 2011. Lower realized gains on nuclear decommissioning trust investments and higher interest expense partly offset the gains.
- TNMP’s earnings improved, primarily because the 2011 period included a $3.9 million regulatory disallowance; AMS surcharge revenue and lower maintenance expense also contributed. Higher depreciation from the smart-meter deployment partially offset these benefits.
- PNMR operating cash flow fell $43.4 million year over year. Management attributed the decline chiefly to $85.6 million of pension and other postretirement contributions versus $16.1 million in 2011, and cash income taxes paid versus a refund in 2011; a $21.6 million governmental grant and improved operating results partly offset the decline.
- First Choice’s sale generated a $174.9 million pretax gain in 2011; it was not a 2012 earnings source. A working-capital sale-price dispute remained under independent review, with management not expecting a material outcome.
Outlook, commentary, and principal risks
- Management projected total 2012–2016 capital requirements of $1.529 billion, including construction spending and dividends, and anticipated needing additional long-term financing, potentially debt refinancing, new debt, and/or equity. The estimate excludes potentially significant environmental upgrades and certain future generation and renewable investments.
- PNM expected rate base to grow at a 2% compound annual rate through 2013, potentially 6% through 2016 with additional investments; TNMP projected 8% compound annual rate-base growth through 2013. These are company estimates, not earnings guidance.
- PNM planned to seek a New Mexico retail rate increase in late 2012. A proposed renewable-energy rate rider and a FERC transmission-rate settlement remained subject to regulatory approval; a firm-requirements wholesale customer settlement was still being finalized.
- The most significant quantified environmental exposure was the EPA regional-haze requirement at the San Juan Generating Station (SJGS). Bids for SCR installation were estimated at $750–$805 million before certain owner costs; PNM owns 46.3%. PNM’s earlier total-project estimate was $750 million–$1 billion. The alternative SNCR estimate was about $77 million, but was not based on detailed conceptual design. The FIP compliance date remained September 21, 2016 despite a temporary EPA stay; litigation and discussions over alternatives continued.
- Further environmental requirements at SJGS and Four Corners, greenhouse-gas rules, water availability, fuel supply, and rate recovery could raise costs or affect plant economics. PNM stated that it could not predict final requirements or their effects.
- The San Juan coal-mine fire had been extinguished and longwall mining resumed in May 2012. PNM estimated a $17.3 million increase in FPPAC deferrals through April 30, 2012 and said it did not expect the incident to materially affect results, but future mining difficulties could require reduced generation or unit shutdowns.
- Other matters include nuclear spent-fuel disposal uncertainty, multiple environmental and regulatory proceedings, and rate-recovery caps that may defer customer recovery of costs. Management generally did not expect known claims and commitments to materially affect financial condition, results, or cash flows, while cautioning that outcomes remain uncertain.
- PNMR declared a $0.145 per-share dividend considered attributable to Q2 2012, up from $0.125 in the comparable prior period. The filing provides no formal full-year earnings or EPS guidance.
Most important facts for investors to verify
- Whether pending regulatory actions permit timely recovery of PNM’s fuel, renewable-energy, transmission, and environmental costs.
- The final SJGS emissions-control requirement, project scope and cost, compliance timetable, and PNM’s share of funding.
- Whether operating cash generation and available credit remain sufficient as capital spending, pension funding, and short-term borrowings evolve.
- Progress on PNM’s expected late-2012 rate filing and the outcomes of pending FERC and NMPRC proceedings.
- Whether coal supply, water availability, and other plant-operating risks alter generation levels or costs.
- The resolution of the First Choice working-capital dispute and any material change in the company’s stated expectations.