Business context and reporting period
This is a combined, unaudited Form 10-Q for the three months ended March 31, 2013, filed May 6, 2013, by PNM Resources, Inc. (PNMR), Public Service Company of New Mexico (PNM), and Texas-New Mexico Power Company (TNMP). PNMR was the parent of two regulated electric utilities serving New Mexico and Texas. The filing is seasonal and first-quarter results are not necessarily indicative of full-year performance. The company is identified in this historical filing as PNM Resources, not TXNM Energy.
Financial performance and condition
Unless noted otherwise, amounts are in millions of dollars. PNMR consolidated electric revenue increased 4.0% to $317.7 from $305.4 year over year. Operating income fell to $50.7 from $53.7, and net earnings attributable to PNMR declined to $10.6 from $17.1. Diluted earnings per share were $0.13 versus $0.21. The energy margin (revenue less cost of energy) was nearly flat at $213.0 versus $213.5; operating margin was approximately 16.0% versus 17.6%.
PNM’s earnings attributable to common equity were $11.4 versus $17.7. TNMP net earnings rose to $3.7 from $3.0. PNMR declared a common dividend of $0.165 per share, up from $0.145 a year earlier.
PNMR operating cash flow was negative $1.4, compared with positive $13.6 in Q1 2012. Investing cash outflow was $62.2, including $73.6 of plant additions; financing provided $59.7. Cash and cash equivalents ended the quarter at $5.1. Management attributed the operating cash-flow decline largely to timing and working-capital movements, including lower operating cash receipts, transmission-customer refunds, and changes in payables and other liabilities; pension contributions were lower than in the prior-year quarter.
At March 31, PNMR had $243.3 of short-term debt, $1,669.9 of long-term debt, and $2.5 of current long-term debt installments. Current assets were $432.1 versus current liabilities of $494.1. Separately, at May 1, PNMR reported $653.4 of remaining consolidated revolving-credit availability. The filing says the utilities expect to rely on operating cash, credit facilities, and additional long-term financing to fund capital needs.
Material changes versus the prior comparable period
- PNMR-attributable earnings decreased by $6.5. The principal segment driver was PNM, down $6.3; TNMP improved by $0.7, while Corporate and Other declined by $0.9.
- PNM’s margin was pressured by an $8.4 adverse year-over-year change in unrealized economic-hedge results and a 1.9% decline in weather- and leap-year-normalized retail load. Lower gains on nuclear decommissioning trust investments also reduced other income. Rate riders and wholesale rate increases partly offset these pressures.
- TNMP margin increased $3.1, supported by rate increases, customer usage, transmission cost recovery, and its advanced-meter surcharge.
- PNMR short-term debt increased from $158.7 at December 31, 2012 to $243.3 at March 31, 2013, in part reflecting seasonal first-quarter funding needs.
Outlook, management commentary, risks and unusual items
PNM said current trends could mean full-year 2013 load is down about 1% from 2012, although a stronger third quarter could change that outcome. TNMP’s normalized retail load increased 2.2% in the quarter. Management’s stated long-term dividend payout target is 50%–60% of ongoing earnings; it expected above-average dividend growth in the near term.
PNMR projected total capital requirements of $2.06 billion for 2013–2017, including construction spending and dividends. The estimate excludes potential SJGS environmental upgrades and replacement-capacity costs. Management anticipated a need for additional long-term financing but said internal cash generation, existing credit arrangements, and capital-market access were expected to be sufficient. S&P raised ratings for PNMR, PNM, and TNMP on April 5, 2013, retaining stable outlooks.
A central uncertainty is the San Juan Generating Station (SJGS). A non-binding February 2013 agreement with New Mexico regulators and EPA contemplated retiring Units 2 and 3 by the end of 2017, installing SNCR controls on Units 1 and 4, and developing replacement generation. PNM estimated its share of the controls and related equipment at approximately $63 million and identified approximately $280 million for gas-fired peaking replacement capacity; these amounts were not in the construction forecast and the plan required regulatory approvals. If the plan does not proceed, the existing EPA rule calls for SCRs on all four units by September 2016; the estimated total project cost for all SJGS owners was $824–$910 million. Delays or failure to obtain relief could risk unit shutdowns and uncertain replacement-power costs. PNM also estimated its share of potential Four Corners controls at up to $75 million.
Other notable items include a $1.5 million after-tax impairment of New Mexico wind-energy production tax credits, recorded as additional income-tax expense, and post-quarter financing transactions: TNMP exchanged $93.2 million of 9.50% bonds for 6.95% bonds and paid $13.0 million cash on April 3; PNM borrowed $75.0 million under a term loan on April 22 to repay revolver borrowings. Environmental, regulatory, fuel-supply, water-availability, litigation, and rate-recovery outcomes remain uncertain. Management reported no material change in previously disclosed risk factors and concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether the proposed SJGS plan receives the required state and federal approvals, and the final retirement, control, and replacement-power costs and recovery treatment.
- PNM’s rate recovery, including fuel-cost deferrals and renewable-energy rider proceedings, and the outcome of transmission-rate and wholesale-customer proceedings.
- Whether operating cash flow and revolving-credit availability remain adequate as capital spending, dividends, debt maturities, and seasonal borrowing needs evolve.
- How much of the earnings decline reflects recurring operating conditions versus volatile hedge marks, lower investment gains, and the one-time tax-credit impairment.
- Whether weaker PNM retail load persists and whether TNMP’s load growth and rate mechanisms continue to support earnings.