Business context and reporting period
This unaudited Form 10-Q covers the quarter ended March 31, 2018. Although the request identifies TXNM Energy Inc., 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); confirm the intended issuer. PNMR is a holding company whose two regulated utilities serve about 776,000 customers in New Mexico and Texas.
Key financial results
PNMR consolidated figures below are for the three months ended March 31; dollar amounts are in millions unless stated otherwise.
| Metric | 2018 Q1 | 2017 Q1 | Change |
|---|---|---|---|
| Electric operating revenue | $317.9 | $330.2 | Down 3.7% |
| Operating income | $46.1 | $58.1 | Down 20.6% |
| Operating margin | 14.5% | 17.6% | Down 3.1 percentage points |
| Net earnings attributable to PNMR | $15.0 | $22.9 | Down 34.4% |
| Diluted earnings per share | $0.19 | $0.29 | Down $0.10 |
| Operating cash flow | $78.9 | $131.6 | Down $52.7 |
| Utility plant additions | $117.7 | $114.8 | Up $2.9 |
Net earnings were $18.8 million, including $3.7 million attributable to Valencia’s non-controlling interest and $0.1 million of subsidiary preferred dividends. PNMR declared a quarterly common dividend of $0.265 per share, up from $0.2425.
At March 31, PNMR reported cash of $3.8 million, total current assets of $277.3 million and current liabilities of $782.8 million. Current and long-term debt totaled approximately $2.82 billion, versus approximately $2.74 billion at year-end 2017. Debt-to-capital was 60.3% for PNMR, 53.5% for PNM and 42.8% for TNMP. The filing reports $669.4 million of consolidated facility availability as of April 23, 2018; this is borrowing capacity, not cash on hand.
Material changes and operating drivers
- PNMR earnings fell primarily because PNM earnings declined $8.8 million; TNMP earnings rose $1.8 million and Corporate and Other earnings declined $0.8 million.
- PNM utility margin decreased $4.8 million. The loss of PVNGS Unit 3 wholesale sales and related transmission costs, lower load and economic hedge results outweighed rate relief, higher transmission revenue and colder weather. Operating costs rose, including maintenance and expenses related to SJGS Unit 4, partly offset by savings from retiring SJGS Units 2 and 3.
- TNMP earnings increased $1.8 million, supported by higher transmission rates, customer load and colder weather. A $1.5 million tax-reform-related amount was deferred as a regulatory liability rather than retained as revenue.
- Lower investment-security gains were a significant year-over-year headwind: PNMR reported $0.3 million in gains in 2018 versus $6.7 million in 2017. The comparison is affected by a 2018 accounting change under which equity-security fair-value changes are recognized in earnings.
- Operating cash flow declined, with working-capital changes—including accounts payable—contributing. Investing cash outflow was $119.2 million, including $117.7 million of plant additions and a $5.0 million NMRD investment. Financing cash flow was $40.1 million, including $300 million of new PNMR notes and debt repayments.
Outlook, risks and unusual items
- Management targets 6% growth in ongoing earnings and dividends for 2018–2021 and a long-term dividend payout ratio of 50%–60% of ongoing earnings. Ongoing earnings is a non-GAAP measure; this target is not a GAAP earnings forecast.
- Estimated 2018–2022 capital requirements, including construction and dividends, total $3.14 billion. Management expects additional long-term financing during that period and said current cash generation, credit arrangements and capital-market access should cover at least the next 12 months. It anticipates a possible at-the-market equity program beginning in 2020.
- PNM’s approved 2016 rate case provides a net $10.3 million increase in non-fuel revenue requirement, implemented in phases beginning February 2018 and January 2019. PNM recorded a $27.9 million pre-tax disallowance in 2017 because certain Four Corners investments receive debt-only rather than equity returns; an appeal and future prudence review remain relevant.
- PNM’s 2015 rate-case appeal leaves potentially material cost-recovery exposure. At March 31, book values of disputed investments included $75.3 million for PVNGS Unit 2 capacity, $39.1 million for related improvements and $49.4 million for SJGS balanced-draft equipment. Outcomes and timing remain uncertain.
- A coal silo collapse took SJGS Unit 1 out of service on March 17, 2018. PNM expected repairs and inspections to be completed by the end of May and anticipated insurance reimbursement subject to a $2.0 million deductible; PNM’s stated repair-cost exposure was $1.0 million. The NMPRC ordered additional information after a petition sought an investigation.
- PNMR’s $51.0 million Westmoreland loan exposure is secured by SJCC assets and equity. A technical default concerning delivery of the parent company’s financial statements was waived in March 2018. Westmoreland disclosed it was exploring strategic alternatives, potentially including Chapter 11; the filing says parent bankruptcy alone would not constitute a loan default.
- PNM’s 2017 resource plan indicates customer cost savings from retiring its remaining SJGS share after mid-2022 and exiting Four Corners after 2031, but these actions require regulatory approval. Environmental compliance, mine reclamation, water availability, coal supply, and changing greenhouse-gas rules remain uncertainties.
- All ratings reported were investment grade, but S&P changed the outlook for PNMR, PNM and TNMP from stable to negative in January 2018. The filing says the companies were in compliance with debt covenants; facilities require debt-to-capital ratios at or below 65%.
Most important facts for investors to verify
- Confirm the issuer: the supplied filing is for PNMR, PNM and TNMP, not an entity named TXNM Energy Inc.
- Track the NMPRC and court outcomes affecting PNM’s disputed investments, Four Corners returns and future SJGS operations.
- Verify completion and cost of the SJGS Unit 1 repairs, insurance recovery and any regulatory response.
- Monitor Westmoreland’s financial condition, loan repayments and the status of the technical-default waiver.
- Assess financing needs, upcoming maturities, capital spending and available facility capacity alongside the negative S&P outlook.
- Distinguish recurring operating performance from investment gains, tax effects and management’s non-GAAP ongoing-earnings targets.