Business context and reporting period
Combined unaudited Form 10-Q for the quarter and six months ended June 30, 2013, filed August 2, 2013. The filing covers PNM Resources, Inc. (PNMR), Public Service Company of New Mexico (PNM), and Texas-New Mexico Power Company (TNMP); figures below are primarily PNMR consolidated unless identified otherwise. PNM is a regulated New Mexico electric utility, while TNMP provides regulated transmission and distribution services in Texas.
Key financial metrics
Amounts are in millions of dollars except per-share data. Year-over-year comparisons are for the corresponding 2012 period.
| PNMR consolidated | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Electric operating revenue | $347.6 | $323.9 | $665.3 | $629.2 |
| Operating income | $77.9 | $65.1 | $128.6 | $118.8 |
| Net earnings attributable to PNMR | $27.7 | $21.5 | $38.3 | $38.6 |
| Diluted earnings per share | $0.34 | $0.27 | $0.48 | $0.48 |
| Operating cash flow | Not presented separately for the quarter | $159.9 | $41.3 |
PNMR’s margin, defined in the segment discussion as revenue less cost of energy, was $241.9 million in Q2 2013 versus $229.1 million, and $454.9 million for the first half versus $442.7 million. Cash flow from investing activities was negative $143.1 million in the first half; financing cash flow was positive $9.0 million.
At June 30, PNMR reported cash of $34.8 million, current liabilities of $444.6 million, long-term debt of $1,711.2 million, current maturities of long-term debt of $52.5 million, and short-term debt of $160.0 million. Consolidated revolving-credit availability was $710.9 million as of July 26, 2013. Capitalization was 51.8% long-term debt, 47.9% common equity, and 0.3% subsidiary preferred stock.
Material changes versus the prior comparable period
- Q2 revenue rose 7.3% and operating income rose 19.6%; PNMR-attributable earnings increased $6.2 million. First-half revenue rose 5.7%, but attributable earnings declined $0.3 million and diluted EPS was unchanged.
- PNM’s Q2 segment earnings increased $9.2 million, helped by higher renewable rider revenue and favorable mark-to-market results on economic hedges. For the first half, PNM earnings increased $3.0 million. TNMP earnings rose $0.3 million in Q2 and $1.1 million for the first half, primarily reflecting rate increases and customer growth.
- First-half operating cash flow improved substantially, mainly because PNMR received a $96.2 million federal tax refund in May 2013, compared with net income taxes paid in the prior-year period. Cash flow was also affected by lower pension and postretirement contributions, the absence of $21.6 million in governmental grants received in 2012, and customer refunds related to a transmission rate settlement.
- PNMR declared a Q2 dividend of $0.165 per share, up from $0.145. Management described a long-term dividend payout target of 50%–60% of ongoing earnings and expected above-average near-term dividend growth; these are strategic targets, not a specific earnings forecast.
Outlook, commentary, risks and unusual items
- Outlook and funding: Management estimated total 2013–2017 capital requirements of $2.054 billion, including $1.790 billion of construction expenditures and dividends. The estimate excludes potential SJGS environmental-control and replacement-capacity costs. PNMR expected to rely on operating cash flow, credit arrangements, and additional long-term financing, potentially including debt or equity. No specific earnings guidance was provided.
- Load and weather: PNM’s weather- and leap-year-adjusted retail load fell 0.6% in Q2 and 1.2% in the first half; management said full-year 2013 sales could be down 1% from 2012. TNMP’s adjusted load was approximately flat in Q2 and up 0.9% for the first half. The filing emphasizes seasonal weather effects.
- San Juan Generating Station (SJGS): The current EPA federal plan requires SCR controls on all four units by September 2016. A non-binding alternative agreed with New Mexico regulators and EPA contemplates retiring Units 2 and 3 by the end of 2017 and installing SNCR controls on Units 1 and 4, subject to multiple approvals. PNM estimated its share of SNCR and related equipment costs at $60–$80 million and identified about $280 million for gas-fired peaking replacement capacity; neither amount was in the current construction forecast. The alternative could fail or be delayed, potentially requiring more costly controls, replacement power, or operational curtailment. PNM’s net book value in Units 2 and 3 was about $289 million.
- Other environmental and regulatory exposure: Four Corners controls could cost PNM up to approximately $75 million. Other pending matters include air-quality standards, coal ash rules, water availability and rights, spent nuclear fuel disposal, and litigation. Management said known matters were not expected to materially affect financial condition, results, or cash flows, but also noted that outcomes and potential losses may be difficult to estimate.
- Financing and tax items: TNMP exchanged $93.2 million of 9.50% bonds for 6.95% bonds due 2043 and paid $13.0 million cash; the exchange recorded a $23.2 million premium, offset by a regulatory asset. PNM borrowed $75 million under a term loan. PNMR repurchased $8.3 million of 9.25% notes for $9.4 million plus accrued interest. State tax-credit impairments increased income tax expense by $3.9 million for the first half; a New Mexico tax-rate change also generated $1.2 million of corporate-level tax expense in Q2 and a $23.9 million regulatory liability for PNM’s regulated tax benefit.
- Credit and controls: S&P raised ratings for PNMR, PNM, and TNMP in April and Moody’s moved their outlooks to positive in June. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the proposed SJGS alternative receives EIB, EPA, and NMPRC approvals, and the eventual retirement, replacement-power, and environmental-control costs and recovery from customers.
- Whether projected capital needs can be funded on acceptable terms, particularly given the excluded SJGS costs, upcoming debt maturities, and reliance on capital markets.
- Whether PNM’s expected retail-load decline and the reported improvement in quarterly earnings persist after weather effects, hedge mark-to-market changes, and tax items.
- Whether PNM’s FPPAC, transmission-rate, renewable procurement, and other regulatory proceedings produce the expected cost recovery and allowed returns.
- How environmental, fuel-supply, water, nuclear, and other legal contingencies develop; the filing states that some outcomes and loss ranges cannot be predicted or clearly quantified.