PNM Resources, Inc. and subsidiaries — Q3 2022 Form 10-Q
Filing identity: The supplied filing is a combined, unaudited Form 10-Q for PNM Resources, Inc. (PNMR), Public Service Company of New Mexico (PNM), and Texas-New Mexico Power Company (TNMP), for the quarter ended September 30, 2022. It does not identify TXNM Energy Inc. as a registrant; investors should confirm the intended issuer and filing.
Business context and reporting period
PNMR is a holding company for regulated electric utilities serving approximately 813,000 customers and end-users in New Mexico and Texas. PNM generates, transmits, and distributes electricity in New Mexico; TNMP provides regulated transmission and distribution services in Texas. The filing compares the three and nine months ended September 30, 2022 with the same 2021 periods. Financial statement amounts below are in millions of dollars unless stated otherwise.
Key financial results
| PNMR consolidated metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Electric operating revenue | $729.9 | $554.6 | $1,673.7 | $1,345.8 |
| Operating income | $182.8 | $151.7 | $337.2 | $269.1 |
| Net earnings attributable to PNMR | $122.4 | $113.3 | $153.8 | $184.6 |
| Diluted earnings per share | $1.42 | $1.32 | $1.78 | $2.14 |
| Utility margin (non-GAAP) | $395.5 | $355.2 | $975.4 | $878.3 |
Q3 earnings attributable to PNMR rose $9.1 million year over year, while nine-month earnings fell $30.8 million. The nine-month decline was chiefly associated with $84.1 million of losses on investment securities held in nuclear decommissioning and mine reclamation trusts, versus $16.1 million of gains in the prior-year period. Management defines utility margin as revenue less cost of energy; it is a non-GAAP measure.
- PNM: Nine-month segment earnings were $95.6 million, down $51.2 million. Higher transmission margin and unregulated margin were outweighed principally by weaker trust investment performance, increased operating costs, depreciation, and interest expense.
- TNMP: Nine-month net earnings were $72.5 million, up $20.2 million. Higher transmission and distribution rates, load growth, and weather contributed to the increase; operating expenses, depreciation, and interest charges also rose.
Cash flow and investment: For the first nine months, PNMR generated $427.5 million of operating cash flow, compared with $408.5 million in 2021. Investing activities used $711.4 million, including $702.9 million of utility and non-utility plant additions, versus $496.2 million of additions in 2021. Financing activities provided $288.4 million. Cash and cash equivalents were $5.6 million at September 30, 2022.
Debt and liquidity: At September 30, PNMR reported $3,893.5 million of long-term debt, $184.7 million of current long-term debt installments, and $60.2 million of short-term debt. PNMR’s long-term debt was 64.8% of its reported capitalization. As of October 21, consolidated revolving-credit availability was $777.7 million; the company reported compliance with debt covenants. Management said it expected internal cash generation, credit arrangements, and capital-market access to meet requirements for at least the next 12 months, while anticipating additional long-term financing during 2022–2026.
Material changes and significant developments
- San Juan Generating Station (SJGS): Unit 1 retired in June and Unit 4 in September 2022. On removal from service, PNM reclassified plant-related amounts, recording approximately $289.4 million of ETA regulatory assets and $22.6 million of other regulatory assets, partly offset by a $77.3 million reduction in regulatory liabilities. A new decommissioning study reduced PNM’s estimated SJGS decommissioning obligation by $21.1 million.
- Trust investment losses: PNMR’s nine-month results included $84.1 million of investment-security losses, a marked reversal from prior-year gains and the principal reported factor behind lower year-to-date earnings.
- Capital spending and financing: Plant additions rose to $702.9 million from $496.2 million. PNM drew $225 million under a delayed-draw term loan, and TNMP issued $160 million of first mortgage bonds. PNMR had hedged $650 million of consolidated variable-rate debt by September 30.
- Revenue composition: PNMR’s other electric operating revenue increased to $367.5 million for the first nine months from $151.6 million, primarily reflecting participation in the Western Energy Imbalance Market (EIM), which began in April 2021. Cost-of-energy pass-throughs also increased, so revenue growth should not be read as equivalent growth in retained margin.
Outlook, commentary, risks, and contingencies
- Merger: The proposed Avangrid acquisition would pay $50.30 in cash per PNMR share, but remained subject to New Mexico Public Regulation Commission (NMPRC) approval and other closing conditions. The merger agreement’s end date had been extended to April 20, 2023. The NMPRC had rejected the parties’ amended stipulation; PNMR and Avangrid appealed.
- Resource adequacy: Replacement-resource projects were delayed. PNM reported no significant resource-adequacy challenge during the 2022 summer peak, but estimated a 2023 summer reserve margin of 4.9%–9.5% after arranging additional power purchases. It continued to assess further options.
- Regulatory rate dispute: A June 2022 NMPRC order directed PNM to issue annualized rate credits tied to SJGS costs, including credits of up to $98.3 million annually, and to address the timing of securitized-bond issuance. PNM began credits in July, then suspended them after the New Mexico Supreme Court granted a partial stay in September; the court continued the stay in November. PNM had recorded no related liability at September 30, judging a loss reasonably possible but not probable.
- Four Corners: The NMPRC denied PNM’s requested exit and securitized financing in December 2021. PNM appealed and reported that recovery of its undepreciated investment remained reasonably possible; no loss was recorded. The proposed exit by the end of 2024 and sale to NTEC remain subject to regulatory outcome. PNM’s planned $75 million payment to NTEC for relief from future coal-supply obligations is not proposed for customer recovery.
- Grid modernization: PNM filed an application in October 2022 seeking approval for approximately $344 million of investment over the first six years of an 11-year strategy, plus a proposed rider to recover associated costs. Approval and recovery were not assured.
- Other legal and regulatory exposure: PNM was contesting FERC-ordered time-value refunds of approximately $35 million in total (about $7 million and $28 million in separate matters); no loss was recorded because PNM concluded it was not probable and could not reasonably estimate any loss. Other matters include environmental compliance and remediation, nuclear spent-fuel storage, reclamation and decommissioning costs, and litigation relating to the 2021 Texas winter storm. Management generally could not predict the outcomes of these proceedings.
- Interest rates and capital markets: The filing identifies rising rates, variable-rate borrowings, refinancing needs, and market access as risks. PNMR reported that $650 million of variable-rate debt was hedged at September 30; PNM entered additional $200 million hedges in October, after quarter-end.
- Management targets: PNMR stated a goal of a 50%–60% dividend payout ratio based on ongoing earnings and described a goal of an emissions-free generation portfolio by 2040. These are targets, not guarantees. The filing also projects $5.17 billion of construction and dividend requirements for 2022–2026, including spending through September 30.
Most important facts for investors to verify
- Confirm that PNMR, rather than TXNM Energy Inc., is the intended issuer for this 2022 filing and reconcile the company-name and ticker history.
- Track the Avangrid merger’s NMPRC appeal, remaining approvals, and April 20, 2023 agreement end date.
- Follow the New Mexico Supreme Court appeal and stay concerning SJGS rate credits, securitized financing timing, and any eventual customer refunds or liabilities.
- Assess the Four Corners appeal, recovery of plant investment, proposed $75 million coal-contract payment, and the feasibility and cost of replacement resources.
- Monitor PNM’s 2023 resource-adequacy position and delays, pricing, and operating dates for replacement generation and storage.
- Verify the drivers and potential duration of trust investment losses, capital spending, borrowing costs, debt maturities, and projected liquidity.
- Review the outcomes of PNM’s FERC refund appeals and pending grid-modernization rate-recovery request.