TXNM ENERGY INC quarterly report, Q1 FY2017

Business context and reporting period

This is the unaudited Form 10-Q for the three months ended March 31, 2017, filed April 28, 2017. The filing covers PNM Resources, Inc. (PNMR), Public Service Company of New Mexico (PNM), and Texas-New Mexico Power Company (TNMP); it does not identify the registrants as TXNM Energy Inc. PNMR is the holding company for regulated electric utilities serving about 768,000 customers in New Mexico and Texas. Results are seasonal and the quarter is not necessarily indicative of full-year performance.

Financial performance and liquidity

Unless stated otherwise, PNMR figures are consolidated; dollar amounts are in millions.

PNMR operating margin was approximately 17.0%, up from 13.3%. Utility margin—revenue less cost of energy—was $227.4 million, versus $218.6 million. Net earnings were $26.4 million before deductions for Valencia’s non-controlling interest and subsidiary preferred dividends; net earnings attributable to PNMR were $22.9 million. PNMR declared a quarterly dividend of $0.2425 per share, compared with $0.2200.

PNM revenue was $251.6 million and earnings available for common stock were $16.5 million, versus $4.1 million a year earlier. TNMP revenue was $78.6 million and net earnings were $7.6 million, versus $7.5 million.

At March 31, PNMR had $2.3 million cash, $326.8 million current assets and $962.1 million current liabilities. Short-term debt was $303.1 million; current installments of long-term debt were $414.9 million; and long-term debt was $1,969.3 million. PNMR’s long-term debt represented 58.4% of capitalization, excluding short-term debt. At April 24, consolidated revolving-credit availability was $605.3 million. Debt facilities generally require debt-to-capital ratios no higher than 65%. Management expects to use operating cash flow, credit facilities, and capital-market financing to meet needs.

Material changes versus the prior comparable period

• PNMR-attributable earnings more than doubled, principally reflecting PNM’s New Mexico rate increase, higher TNMP rates and load, and lower PNM plant-maintenance costs.
• PNM utility margin increased $7.0 million, including $13.4 million of rate relief, partly offset by milder weather, lower wholesale-contract revenue and reduced customer usage. PNM weather-normalized retail load declined 0.8%.
• TNMP utility margin increased $1.7 million as rate increases and higher demand-based load outweighed milder weather. TNMP weather-normalized retail load rose 5.4%.
• Operating cash flow rose to $131.6 million. Utility plant additions fell substantially, in part because Q1 2016 included the $163.3 million PVNGS Unit 2 capacity purchase. Investing cash flow also reflected available-for-sale securities transactions and Westmoreland Loan repayments, so cash flow should be assessed with those items in view.
• PNMR adopted stock-compensation accounting guidance, recording $10.4 million as a cumulative adjustment increasing opening retained earnings and $1.8 million of excess tax benefits in Q1 2017.

Outlook, commentary, risks and unusual items

• Management’s stated target is 7%–8% ongoing earnings growth through 2019 and a dividend payout ratio of 50%–60% of ongoing earnings. These are targets, not a guarantee; ongoing earnings is a non-GAAP measure.
• PNM requested a $99.2 million base non-fuel revenue increase in its 2016 rate case, with a proposed 10.125% ROE. A hearing was scheduled for July 2017; settlement discussions were ongoing and any settlement required regulator approval.
• PNM’s draft 2017 integrated resource plan, released April 20, proposed that retiring its share of the San Juan Generating Station (SJGS) in 2022 and exiting Four Corners in 2031 could save customers money. The draft is subject to further review and regulatory decisions. Proposed replacement resources include solar and flexible gas-fired peaking capacity.
• PNM’s appeal of its 2015 rate-case order challenges disallowances involving PVNGS capacity and SJGS balanced-draft equipment. Potential remaining write-offs cited at March 31 included $76.9 million for PVNGS capacity, $39.9 million for related improvements and $50.0 million for SJGS equipment. Outcomes are uncertain.
• PNMR projected $2.47 billion of capital requirements for 2017–2021, including construction and dividends, and said additional long-term financing may be needed. Near-term maturities, refinancing needs, access to capital, rate-case outcomes and credit ratings are material liquidity considerations.
• Key operating and regulatory exposures include coal mine reclamation and coal-supply counterparties; environmental rules and litigation; nuclear fuel storage and possible nuclear assessments; water availability; weather and generation outages; and recovery of investments through regulated rates. The Clean Power Plan was stayed and under federal review, leaving future compliance requirements uncertain.
• PNMR reported investment-grade debt ratings with stable outlooks as of April 24, 2017. Management cautioned that rate-case outcomes could affect ratings or outlooks. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported for the quarter.

Important facts for investors to verify

• Confirm the issuer identity: the supplied filing is for PNMR, PNM and TNMP, despite the request metadata naming TXNM Energy Inc.
• Track the final outcome of PNM’s 2016 rate case, the appeal and cross-appeals of its 2015 rate case, and any resulting changes to allowed returns or asset recovery.
• Compare the final 2017 IRP and subsequent regulatory actions with the draft’s proposed SJGS 2022 retirement and Four Corners 2031 exit; assess replacement-resource and reclamation costs.
• Review debt maturities, refinancing execution, credit-facility availability, covenant headroom and the planned capital program against actual operating cash generation.
• Separate recurring operating performance from securities gains, stock-compensation tax benefits, regulatory effects and other nonrecurring items; reconcile reported GAAP results with management’s ongoing-earnings measure.