Filing summary
Entity and period: The supplied filing is the joint 2013 Form 10-K of PNM Resources, Inc. (PNMR), Public Service Company of New Mexico (PNM), and Texas-New Mexico Power Company (TNMP), for the year ended December 31, 2013, filed February 28, 2014. It is not filed under the name TXNM Energy Inc.; investors should confirm the intended issuer and corporate-name continuity.
Business context
PNMR is a holding company centered on two regulated electric utilities: PNM, which generates, transmits, and distributes electricity in New Mexico, and TNMP, which provides transmission and distribution service in Texas. PNMR had exited its competitive First Choice and Optim Energy businesses by 2012. The utilities served approximately 746,000 customers and end-users.
Financial and operating metrics
| PNMR consolidated | 2013 | 2012 | Change |
|---|---|---|---|
| Operating revenue | $1,387.9 million | $1,342.4 million | +3.4% |
| Operating income | $286.8 million | $273.7 million | +4.8% |
| Net earnings attributable to PNMR | $100.5 million | $105.5 million | -4.8% |
| Diluted earnings per share | $1.25 | $1.31 | -$0.06 |
| Operating cash flow | $386.6 million | $281.3 million | +$105.3 million |
| Investing cash flow | -$331.4 million | -$285.9 million | More investment outflow |
| Total assets | $5,500.2 million | $5,372.6 million | +2.4% |
| Long-term debt, including current installments | $1,745.4 million | $1,672.3 million | +$73.1 million |
PNMR’s operating margin was approximately 20.7% versus 20.4% in 2012; net earnings attributable to PNMR were approximately 7.2% of revenue versus 7.9%. These are simple calculations from reported totals. PNMR reported $149.2 million of short-term debt at year-end, in addition to long-term debt. Year-end cash was $2.5 million. Consolidated current assets of $401.5 million were below current liabilities of $492.7 million.
PNM revenue rose 2.2% to $1,116.3 million, while segment earnings attributable to PNM fell to $87.6 million from $91.0 million. Weather-normalized retail sales declined 1.8%; management cited a sluggish New Mexico economy and milder weather. TNMP revenue increased 8.6% to $271.6 million and earnings rose to $29.1 million from $26.7 million, supported by rate increases, customer growth, and higher usage.
PNMR’s 2013 operating cash flow benefited substantially from a $95.3 million net income-tax refund, compared with taxes paid in 2012, as well as rate changes. Cash flow should therefore be assessed alongside underlying operations and tax timing. The filing reports no consolidated gross-profit line; PNM and TNMP reported margins (revenue less cost of energy) of $741.6 million and $214.0 million, respectively.
Material changes and capital position
- PNMR diluted EPS declined despite higher revenue and operating income. The 2012 comparison also excludes the large First Choice sale gain recorded in 2011.
- PNM recorded $12.2 million of regulatory disallowances in 2013, including a $10.5 million write-off of an under-collected fuel and purchased power adjustment balance under a proposed settlement.
- TNMP exchanged $93.2 million of 9.50% bonds for 6.95% bonds in 2013, with cash consideration; the filing says this reduced TNMP interest expense by $1.8 million.
- PNMR declared $0.68 per common share in 2013, up from $0.58 in 2012. Management’s long-term dividend payout target is 50%–60% of ongoing earnings; the Board declared a $0.185 quarterly dividend in February 2014.
- Planned construction expenditures for 2014–2018 total $2.267 billion; forecast capital requirements including dividends total $2.565 billion. Management expects to use operating cash, credit facilities, and additional long-term financing and/or equity.
At February 21, 2014, PNMR reported $718.5 million of consolidated remaining credit availability. Credit ratings were investment grade at both S&P and Moody’s; Moody’s had raised ratings one notch in January 2014 and maintained positive outlooks. PNMR’s and PNM’s $100 million and $75 million term loans, respectively, were scheduled to mature in December and October 2014; PNM anticipated refinancing its facility.
Outlook, risks, and unusual items
- San Juan Generating Station (SJGS): PNM’s proposed regional-haze plan contemplates retiring Units 2 and 3 by the end of 2017, installing controls on Units 1 and 4, and replacing part of the capacity. Regulatory approvals, EPA action, owner approvals, and recovery of costs remain uncertain. PNM sought recovery over 20 years of the retired units’ net book value and approval to include its PVNGS Unit 3 share in retail resources beginning in 2018. Failure to implement an acceptable compliance plan could require plant shutdowns and potentially costly replacement power.
- Environmental investment: The 2014–2018 construction forecast includes $80.0 million for SJGS environmental upgrades, $276.3 million for identified replacement resources, and $80.3 million for Four Corners upgrades. Environmental rulemaking and cost recovery remain key uncertainties.
- Coal and generation: SJGS’s coal contract expires in 2017, with post-2017 supply not yet arranged. Four Corners’ coal contract was extended through 2031; PNM estimates fuel costs will increase about 26% during the extension period. PNM’s major baseload plant availability declined in 2013 at SJGS and Four Corners; drought, water rights, fuel supply, and unplanned outages could affect generation and costs.
- Wholesale customer exposure: PNM’s Gallup contract was due to expire June 30, 2014. Gallup ranked another bidder higher and was negotiating with it; PNM reported $11.7 million of 2013 revenue from the contract. PNM could not predict the outcome.
- Other contingencies: The filing describes environmental and regulatory litigation, coal-mine reclamation obligations, spent nuclear fuel disposal uncertainty, a disputed Four Corners coal severance tax assessment, and water-rights matters. Management stated it did not expect known lawsuits, environmental costs, or commitments to materially affect financial condition, results, or cash flows, but outcomes could differ from estimates.
- Management reported effective internal control over financial reporting, and the independent auditors issued unqualified opinions on the 2013 financial statements.
Most important facts for investors to verify
- Confirm the issuer identity: this filing names PNM Resources, Inc., PNM, and TNMP—not TXNM Energy Inc.
- Track PNMR earnings and cash generation excluding the sizable, timing-sensitive 2013 tax refund; verify the drivers of declining EPS.
- Monitor NMPRC and EPA decisions, SJGS owner restructuring, retirement-cost recovery, replacement-resource approvals, and resulting capital needs.
- Verify refinancing of 2014 term-loan maturities and funding plans for the $2.267 billion 2014–2018 construction program.
- Monitor the Gallup contract outcome, PNM retail-load trends, and the degree to which regulatory mechanisms permit timely recovery of rising costs.