TXNM ENERGY INC quarterly report, Q1 FY2012

Business context and reporting period

This unaudited Form 10-Q covers the three months ended March 31, 2012. 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); it does not identify a registrant named TXNM Energy Inc. PNMR describes itself as a holding company focused on its regulated New Mexico and Texas utilities after selling First Choice in November 2011 and exiting Optim Energy.

Key financial results

PNMR consolidated amounts below are in millions of dollars except per-share data. Quarterly comparisons are with the three months ended March 31, 2011.

Operating margin was approximately 17.6% of revenue, compared with 13.5% in Q1 2011. Revenue fell mainly because First Choice, which contributed $108.5 million of revenue and $13.5 million of earnings in Q1 2011, was no longer consolidated. PNMR’s operating income and attributable net earnings nevertheless increased. The declared common dividend was $0.145 per share, versus $0.125 a year earlier.

At March 31, PNMR reported short-term debt of $149.8 million, current installments of long-term debt of $2.4 million, and long-term debt of $1,671.8 million. Current assets were $427.9 million and current liabilities $429.3 million. At April 27, consolidated revolving-credit availability was $587.8 million, net of outstanding borrowings and letters of credit.

Material changes versus the prior period

• PNM’s segment earnings attributable to PNMR rose to $17.7 million from $3.6 million. The filing attributes the improvement principally to the 2011 retail rate increase and energy-efficiency rider revenues; PNM’s gross margin increased $24.8 million.
• TNMP segment earnings declined to $3.0 million from $4.2 million. Management cited lower usage associated with milder weather, partly offset by rate increases and the advanced-meter surcharge.
• First Choice’s $13.5 million Q1 2011 contribution did not recur following its sale. The reduction in consolidated revenue therefore does not by itself indicate contraction in the remaining utility businesses.
• PNMR operating cash flow decreased by $45.1 million year over year. Management attributed the change primarily to $84.1 million of pension and postretirement plan contributions in Q1 2012, compared with $6.1 million in Q1 2011; a $20.9 million governmental grant and the PNM rate increase partly offset the effect.

Outlook, management commentary, risks and unusual items

• Environmental compliance: EPA’s regional-haze federal implementation plan requires selective catalytic reduction (SCR) at all four San Juan Generating Station units. PNM and New Mexico officials challenged the plan; requests to stay it were denied in March 2012. PNM estimated SCR at $750 million–$1 billion for the station, versus about $77 million for selective non-catalytic reduction (SNCR); PNM owns 46.3%. PNM estimated its share of SCR costs at $18 million–$27 million in 2012 and $85 million–$115 million in 2013, subject to the unresolved regulatory and legal outcome. PNM expected to seek regulatory approval and cost recovery.
• Other environmental exposure: PNM estimated its share of potential SJGS equipment modifications to address air-quality requirements at approximately 46.3% of a $140 million station-wide cost. PNM also estimated its share of possible Four Corners controls at up to $69 million. Requirements, timing, and recoverability remain uncertain.
• Capital needs and funding: Estimated 2012–2016 capital requirements, including amounts already spent through March 31, were $1.526 billion, including $1.294 billion of construction and $232.0 million of dividends. The estimate excludes potential environmental upgrades, additional renewable resources, and peaking capacity. Management expected to need additional long-term financing but believed operating cash generation, credit facilities, and capital-market access would be sufficient.
• Regulatory and business outlook: Management emphasized that earnings depend on timely recovery of utility costs and earning authorized returns. PNM intended to seek a retail rate increase in late 2012. Its 2013 renewable plan proposed solar, wind and geothermal resources; management said the plan could meet required renewable-energy volumes in 2013 and full quantity and diversity requirements in 2014, subject to approvals and project delivery. No specific earnings guidance is provided.
• Mine supply: The San Juan coal mine resumed longwall operations on May 4, 2012, after the quarter-end. Further operating difficulties could constrain SJGS generation; management said the fire was not expected to have a material financial effect based on information then available. PNM’s preliminary filing estimated the incident increased its fuel-cost adjustment deferral by $16.4 million through March 31.
• Legal and other contingencies: The Sierra Club coal-combustion-byproduct settlement was estimated at $10.2 million overall, including about $4.5 million for PNM; substantially all income-statement impact had been recorded in 2011. Other environmental, water-rights, transmission, and rate proceedings remained unresolved. Management stated it could not predict all outcomes or potential losses, though it did not expect known claims and commitments to materially affect financial condition, results, or cash flows.
• Unusual accounting/comparability item: PNMR’s Q1 2012 results include no First Choice operations after its 2011 sale. The sale closed for $329.3 million, including estimated working capital, and generated a $174.9 million pretax gain in 2011; a working-capital settlement dispute remained outstanding.

Most important facts for investors to verify

• Whether EPA, courts, and regulators alter or stay the SJGS SCR requirements, and the eventual cost, schedule, and customer rate recovery.
• Whether PNM and TNMP obtain timely approval to recover operating, renewable-energy, meter-deployment, and capital costs.
• Whether operating cash flow and available credit remain adequate given pension contributions, construction spending, and expected long-term financing needs.
• Whether the San Juan coal mine sustains normal production and whether related fuel-cost deferrals are recoverable.
• How First Choice’s divestiture and the absence of its earnings affect comparisons, and the outcome of the working-capital dispute.
• Whether pending environmental, water, transmission, and rate cases produce material costs, liabilities, or changes in utility operations.