Business context and reporting period
This combined Form 10-K covers the fiscal year ended December 31, 2018, for PNM Resources, Inc. (PNMR), Public Service Company of New Mexico (PNM), and Texas-New Mexico Power Company (TNMP). PNMR is a holding company with regulated electric utility operations in New Mexico and Texas. The filing identifies the parent as PNM Resources, Inc.; the supplied company label, TXNM Energy Inc., does not match the registrant name in the filing.
The report is annual, not a standalone fourth-quarter filing. The filing states PNMR’s common stock traded on the NYSE under “PNM.”
Key financial metrics
| PNMR consolidated | 2018 | 2017 |
|---|---|---|
| Operating revenues | $1,436.6 million | $1,445.0 million |
| Operating income | $236.0 million | $315.0 million |
| Net earnings attributable to PNMR | $85.6 million | $79.9 million |
| Diluted earnings per share | $1.07 | $1.00 |
| Net cash from operating activities | $428.2 million | $523.5 million |
| Cash and cash equivalents at year-end | $2.1 million | $4.0 million |
| Long-term debt, including current installments | $2,670.1 million | $2,437.6 million |
PNMR’s long-term debt was 61.1% of capitalization, versus 58.8% in 2017. Short-term debt was $235.9 million at year-end. Consolidated availability under credit facilities was $729.0 million as of February 22, 2019; management said it expected internal cash generation, credit arrangements, and capital-market access to fund requirements for at least the next 12 months.
PNM’s utility margin, a company-defined non-GAAP measure, was $777.9 million, down from $782.6 million. PNM segment earnings were $54.7 million versus $71.9 million. TNMP segment earnings rose to $51.6 million from $35.6 million. Corporate and Other recorded a $20.6 million loss, compared with a $27.6 million loss.
PNMR declared $1.085 per common share in dividends for 2018, up from $0.9925. The Board declared a quarterly dividend of $0.29 per share in February 2019.
Material changes and unusual items
- PNMR revenue declined modestly, but attributable earnings increased. Lower income-tax expense following federal tax reform and rate/load improvements contributed to the earnings increase.
- Operating income fell, chiefly reflecting PNM regulatory disallowances and restructuring costs, including a $35.0 million pre-tax impairment of SJGS Unit 4 interests and a $29.8 million pre-tax loss on the unrecoverable portion of increased coal-mine reclamation estimates.
- Investment securities produced a $17.2 million loss in 2018, compared with a $27.2 million gain in 2017, weighing on PNM results.
- Operating cash flow decreased by $95.2 million year over year. Investing cash outflow was $475.7 million; financing cash inflow was $45.6 million.
- Fourth-quarter unaudited PNMR results included operating revenue of $343.8 million and an attributable net loss of $55.1 million, compared with revenue of $332.6 million and an attributable net loss of $54.3 million in Q4 2017. The filing attributes the 2018 quarterly results in part to the SJGS-related charges.
Outlook, management commentary and risks
- Management targets 5%–6% growth in ongoing earnings and dividends for 2018–2022, and a long-term dividend payout ratio of 50%–60% of ongoing earnings. Ongoing earnings is a non-GAAP measure; the target is not a guarantee of results.
- PNMR projected $2.709 billion of construction expenditures for 2019–2023 and total capital requirements of $3.237 billion, including dividends and NMRD contributions. Potential replacement resources for SJGS and other prospective investments are not fully included.
- PNM’s 2017 integrated resource plan and December 2018 filing say customers could benefit from retiring PNM’s share of San Juan Generating Station (SJGS) after its coal-supply and operating agreements expire in mid-2022. Retirement and replacement resources require regulatory approval. The company also identified a possible exit from Four Corners after its coal supply agreement expires in 2031.
- PNM recorded $373.6 million of remaining undepreciated SJGS investments it intends to seek to recover if the plant retires early. Recovery is uncertain; the NMPRC’s order also bars recovery of specified investment in PNM’s 132 MW jurisdictional interest if SJGS Unit 4 is abandoned.
- PNM’s 2015 rate-case appeal remained pending, with $18.4 million of cumulative pre-tax disallowances recorded through 2018. Certain investments could face further write-offs depending on court and regulator decisions. The 2016 rate case resulted in a $10.3 million annual non-fuel rate increase; the TNMP 2018 rate settlement approved a $10.0 million annual base-rate increase effective January 1, 2019.
- Westmoreland, parent of the San Juan coal mine operator, filed for Chapter 11 bankruptcy. The bankruptcy court approved a plan for sale of core assets, including the mine; failure to complete the sale or transfer related agreements could affect SJGS coal supply and reclamation-bond support.
- Key exposures include regulatory cost recovery and authorized returns, plant availability and replacement-power costs, environmental requirements, coal and nuclear fuel supply, water availability and drought, cybersecurity, weather events, and access to capital. S&P maintained investment-grade ratings but changed the outlook for PNMR, PNM, and TNMP to negative in January 2018; Moody’s affirmed ratings and set PNMR and PNM outlooks to stable in June 2018.
- Tax reform reduced the federal corporate rate to 21%. Benefits for regulated operations are being passed to customers through rates, which management said reduces near-term cash flows. The company reported effective internal control over financial reporting, and KPMG issued unqualified financial-statement opinions.
Important facts for investors to verify
- Progress and final regulatory decisions on SJGS retirement, recovery of remaining plant balances, and approval and cost of replacement resources.
- Resolution of PNM’s pending 2015 rate-case appeal and the potential effect on PVNGS and other disallowed investments.
- Whether the San Juan mine sale closes and the coal-supply, reclamation, and letter-of-credit arrangements remain supported.
- PNMR’s ability to fund its $3.237 billion projected 2019–2023 capital requirements while maintaining investment-grade ratings and dividend growth.
- Actual cash generation and the extent to which tax-related customer refunds, regulatory outcomes, and planned borrowing affect liquidity and earnings.
- Whether reported annual earnings and the Q4 loss are representative of ongoing earnings, given the significant SJGS and investment-security items.