TXNM ENERGY INC quarterly report, Q1 FY2023

Business context and reporting period

Unaudited combined Form 10-Q for the three months ended March 31, 2023, filed May 5, 2023. The filing identifies the registrants as PNM Resources, Inc. (PNMR), Public Service Company of New Mexico (PNM), and Texas-New Mexico Power Company (TNMP); this differs from the request metadata’s company name. PNMR is a holding company with regulated electric utilities in New Mexico and Texas, serving approximately 817,000 customers and end-users.

Financial results and liquidity

Unless otherwise noted, amounts are in millions. PNMR consolidated results:

PNMR’s reported earnings improvement reflected stronger utility margin and a $33.0 million year-over-year increase in performance on investment securities in the nuclear decommissioning and reclamation trusts, alongside lower PNM operating and depreciation costs following SJGS retirement and the PVNGS Unit 1 lease disposition. Higher interest expense partly offset the gains. Investment-security gains were $6.4 million in Q1 2023 versus losses of $26.6 million in Q1 2022.

PNM’s net earnings available for common stock were $54.6 million, up from $4.3 million. Its utility margin increased $20.4 million to $220.3 million. TNMP net earnings fell to $10.0 million from $15.1 million; increased rates and demand-based load were more than offset by milder weather, higher operating and depreciation costs, and lower other income.

Cash and cash equivalents were $4.1 million at March 31. PNMR had $409.4 million of short-term debt, while reported long-term debt including current installments was approximately $4.1 billion; total debt including short-term borrowings was approximately $4.5 billion. PNMR’s debt-to-capitalization ratio was 64.7% on the filing’s long-term-capitalization basis. Available consolidated credit capacity was $705.8 million as of April 28; the companies reported covenant compliance. Operating cash flow increased, but investing outflow rose to $251.4 million, chiefly reflecting higher plant additions.

Material changes versus the prior comparable period

• Revenue rose 22.5% and utility margin rose 9.7%; reported earnings also benefited substantially from the swing in investment-security results.
• PNM revenue increased to $430.2 million from $338.7 million, with higher transmission revenue and market prices among the contributors. Wholesale energy sales volume fell, in part following the end of SJGS-related sales agreements.
• TNMP revenue rose to $113.9 million from $105.4 million, but earnings declined. Transmission and distribution rate relief and higher demand-based load, including new cryptocurrency loads, were partly offset by 35.1% fewer heating degree days.
• Short-term debt increased from $232.0 million at year-end 2022 to $409.4 million at March 31, 2023; capital additions also increased.

Outlook, management commentary, risks and unusual items

• Merger: Avangrid’s proposed acquisition of PNMR for $50.30 cash per share remained subject to New Mexico Public Regulation Commission (NMPRC) approval. The merger agreement’s end date was extended to July 20, 2023; the companies and NMPRC sought dismissal of the appeal and remand for further proceedings.
• Rates and investment: PNM’s pending 2024 rate case requests a $63.8 million annual increase in non-fuel revenue, a 10.25% ROE, and a $2.7 billion rate base. The hearing was rescheduled to begin September 5, 2023; the NMPRC extended the suspension period through January 4, 2024. PNM also seeks approval for approximately $344 million of initial grid-modernization investments.
• Generation and reliability: SJGS retired in 2022. PNM’s planned exit from its 13% Four Corners interest by the end of 2024 is not approved; the NMPRC denial is on appeal, argued before the New Mexico Supreme Court in March 2023. Delays in replacement resources created summer 2023 adequacy concerns; PNM reported 420 MW of firm summer purchases plus 40 MW of PVNGS capacity and projected a reserve margin of approximately 11%–16%.
• Potential regulatory exposures: No liability was recorded for the SJGS rate-credit dispute, although PNM estimated a possible loss of $53.2 million at March 31. PNM also estimated a possible $8.7 million exposure related to PVNGS lease costs, with treatment to be addressed in the rate case. Outcomes remain uncertain.
• Financing and capital needs: PNMR projects $5.2 billion of construction expenditures and dividends for 2023–2027 and expects additional long-term financing will be needed. Management believes available cash generation, credit arrangements, and capital-market access can meet requirements for at least the next 12 months. After quarter-end, PNM issued $200 million of senior notes and TNMP issued $130 million of a planned $185 million bond financing; the remaining $55 million TNMP issuance was expected by July 28.
• Other risks: TNMP was named in 22 lawsuits related to the 2021 Texas winter storm; the company cannot predict outcomes. The filing also discusses environmental compliance, reclamation and decommissioning obligations, changing interest rates, commodity and counterparty exposure, and delays or cost increases in replacement-resource projects. Management stated there were no material changes to the prior year’s risk factors.
• Long-term transition: Management targets an emissions-free generation portfolio by 2040; New Mexico law requires 100% zero-carbon energy by 2045. The company notes regulatory, resource, cost-recovery, and execution uncertainties around this transition.

Important facts for investors to verify

• Progress and outcome of the NMPRC merger proceedings before the July 20, 2023 agreement end date.
• Final rate-case decisions, including the requested $63.8 million revenue increase and treatment of SJGS and PVNGS costs.
• Four Corners appeal and whether the proposed sale, exit timing, and associated $75 million coal-contract payment proceed.
• Whether delayed replacement resources are completed on schedule and whether PNM maintains adequate summer reserve margins.
• Debt maturities, actual availability under credit facilities, refinancing costs, and execution of the post-quarter debt offerings.
• How much of Q1 earnings growth is sustainable apart from investment-trust gains and other period-specific factors.