Business context and reporting period
The filing covers the quarter and six months ended June 30, 2016. Although the request identifies TXNM Energy Inc., this historical combined Form 10-Q is filed by PNM Resources, Inc. (PNMR), Public Service Company of New Mexico (PNM), and Texas-New Mexico Power Company (TNMP). PNMR is the parent of regulated electric utilities serving customers in New Mexico and Texas. Unless noted, consolidated figures below are PNMR’s; amounts are in millions of dollars.
Financial results and liquidity
| PNMR metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Electric operating revenue | $315.4 | $352.9 | $626.4 | $685.8 |
| Utility margin | $234.0 | $238.8 | $452.6 | $456.1 |
| Operating income | $64.8 | $72.4 | $106.3 | $122.0 |
| Net earnings attributable to PNMR | $27.1 | $31.7 | $37.6 | $46.0 |
| Diluted earnings per share | $0.34 | $0.40 | $0.47 | $0.57 |
Revenue fell 10.6% in Q2 and 8.7% for the six-month period; attributable earnings declined 14.5% and 18.2%, respectively. Utility margin—revenue less cost of energy—was down $4.8 million in Q2 and $3.5 million year to date. Lower fuel costs reduced both revenue and energy expense, largely reflecting the new San Juan Generating Station (SJGS) coal supply agreement.
For the six months, operating cash flow was $122.0 million, versus $109.7 million a year earlier. Investing cash outflow was $493.7 million (versus $216.5 million), including utility plant additions and the $122.3 million Westmoreland loan; financing cash inflow was $330.6 million. Cash at June 30 was $4.9 million.
At June 30, PNMR reported $401.4 million of short-term debt, $106.9 million of current long-term debt installments, and $2,217.1 million of long-term debt. Short-term debt had increased from $250.6 million at December 31, 2015. On August 5, consolidated remaining credit-facility availability was $534.8 million; the company said it expects to need additional long-term financing during 2016–2020. Capital requirements for 2016–2020, including construction and dividends, were estimated at $2.412 billion.
Results varied by utility: PNM’s six-month earnings available for common stock fell to $20.1 million from $31.4 million, while TNMP net earnings declined to $18.0 million from $19.6 million. PNMR declared dividends of $0.22 per common share for Q2, compared with $0.20 a year earlier.
Material changes and management commentary
- PNMR attributed the earnings decline principally to weaker PNM results: lower PNM load, lower prices for PVNGS Unit 3 wholesale sales, reduced revenues from wholesale customer Navopache Electric Cooperative, a prior-year gas-transportation refund, and higher maintenance, depreciation, property-tax, interest, and employee costs. Higher TNMP rates and load, warmer weather at PNM, and increased interest income partly offset these effects.
- PNM’s weather-normalized retail sales fell 0.7% in the first half, which management linked to a sluggish New Mexico economy and energy-efficiency programs. TNMP’s weather-normalized retail load rose 2.6%.
- Management’s ongoing-earnings target was 6%–8% growth through 2019, with a target dividend payout ratio of 50%–60% of ongoing earnings. These are targets, not a specific 2016 earnings forecast.
Outlook, risks, contingencies, and unusual items
- PNM rate case: A hearing examiner’s August 4, 2016 recommended decision proposed a $41.3 million increase in non-fuel revenues, versus PNM’s revised $121.5 million request, and a 9.575% return on equity versus PNM’s 10.5% request. It also proposed disallowing recovery of certain PVNGS acquisition, lease, and SJGS balanced-draft conversion costs. PNM said it would object; the final regulatory outcome and accounting impact were uncertain. If adopted in full, the filing identifies $161.3 million of PVNGS Unit 2 acquisition book value, $120.3 million of remaining lease expense, $51.3 million of SJGS conversion book value, and other amounts potentially not recoverable from customers.
- Generation transition: The approved SJGS plan calls for retiring Units 2 and 3 at the end of 2017; PNM expects to recover 50% of their undepreciated net book value over 20 years. A challenge to the regulatory order and complaints concerning financing for the coal mine acquisition remained unresolved. PNM’s planned 80 MW gas plant was estimated to cost $86.8 million and remained subject to approval.
- Westmoreland financing: PNMR subsidiary NM Capital made a $125 million loan to support the SJCC coal-mine purchase, funded by a bank term loan guaranteed by PNMR. The loan was secured by SJCC assets and equity; $125 million was outstanding at June 30, and a $15 million principal payment reduced it to $110 million on August 1. PNMR also provided letter-of-credit support for reclamation bonds; after replacement bonds were accepted, the support was reduced to $30.3 million and the original agreement terminated August 3.
- Regulatory and operating risks: Environmental compliance and possible future controls at SJGS and Four Corners, mine reclamation, spent nuclear fuel disposal, water availability, and litigation could affect costs and operations. The Clean Power Plan was stayed by the U.S. Supreme Court pending judicial review. Management said the ultimate effects of these matters could not be predicted clearly.
- PNMR stated that its debt ratings were investment grade with stable outlooks, but warned that an adverse New Mexico rate-case outcome could affect credit ratings and financing costs. Management believed existing liquidity and capital-market access were sufficient to meet requirements, while noting market access and regulatory cost recovery as risks.
Most important facts for investors to verify
- The final NMPRC rate-case order, including allowed return, recoverable PVNGS and SJGS costs, and any appeal or accounting consequences.
- PNMR’s debt maturities, borrowing capacity, financing needs, and compliance with the 65% debt-to-capital covenant.
- Performance and repayment of the Westmoreland loan, remaining reclamation letter-of-credit exposure, and coal supply arrangements.
- Execution, cost recovery, and timing of SJGS retirements, replacement generation, and Four Corners environmental work.
- Whether changes in load, weather, wholesale power prices, and utility operating costs materially affect earnings and cash generation.