Business context and reporting period
Unaudited combined Form 10-Q for the three months ended March 31, 2014, filed May 2, 2014, by PNM Resources, Inc. (PNMR), Public Service Company of New Mexico (PNM), and Texas-New Mexico Power Company (TNMP). The filing identifies the parent as PNM Resources, not TXNM Energy. PNMR is a holding company for regulated electric utilities serving New Mexico and Texas. Results are seasonal and the quarter is not necessarily indicative of full-year performance.
Key financial metrics
Unless otherwise indicated, amounts below are PNMR consolidated and in millions of dollars. Year-over-year comparisons are for Q1 2013.
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Electric operating revenue | $328.9 | $317.7 | +3.5% |
| Margin: revenue less cost of energy | $216.3 | $213.0 | +$3.3 |
| Operating income | $48.8 | $50.7 | -$2.0 |
| Net earnings attributable to PNMR | $12.5 | $10.6 | +$1.8 |
| Diluted EPS | $0.16 | $0.13 | +$0.03 |
| Operating cash flow | $76.4 | -$1.4 | +$77.8 |
| Capital expenditures / utility plant additions | -$83.8 | -$73.6 | -$10.3 |
Operating margin was approximately 14.8% of revenue, versus 16.0% a year earlier; net earnings attributable to PNMR were approximately 3.8% of revenue, versus 3.3%. Interest charges were $29.5 million, down from $31.3 million. PNMR declared dividends of $0.185 per share, compared with $0.165.
Segment results diverged: PNM segment earnings attributable to PNMR were $7.5 million versus $11.4 million; TNMP earnings were $6.8 million versus $3.7 million; Corporate and Other recorded a $1.9 million loss versus a $4.5 million loss.
Balance sheet, debt and liquidity
At March 31, PNMR reported cash of $27.2 million, current assets of $401.0 million, current liabilities of $312.1 million, long-term debt of $1.845 billion, and short-term debt of $100 million. Current assets exceeded current liabilities, although utility regulatory balances and seasonal cash needs are relevant to liquidity. Debt figures exclude operating lease obligations.
Operating cash flow improved sharply from a year-earlier outflow, but management attributed much of the increase to $60.7 million lower pension and postretirement plan contributions and the absence of $15.2 million in customer refunds made in 2013. Cash from operations plus financing covered most, but not all, of investment spending; ending cash was $27.2 million, versus $5.1 million a year earlier.
At April 25, 2014, consolidated availability under revolving credit facilities was $806.9 million. PNMR reported total projected capital requirements of $2.565 billion for 2014–2018, including $2.267 billion of construction expenditures and dividends; estimates include amounts already spent through March 31. Management expects to need additional long-term financing during that period and believes cash generation, credit arrangements, and capital-market access will be sufficient. Moody’s raised ratings by one notch in January 2014 and maintained positive outlooks; S&P moved outlooks to positive on April 30.
Material changes and operating drivers
- PNMR’s higher attributable earnings reflected improved TNMP and Corporate and Other results, partly offset by lower PNM earnings. PNM’s operating income fell $5.9 million, with essentially flat margin and higher operating and depreciation expenses.
- PNM’s weather-normalized retail load declined 2.9%; milder weather also reduced its revenue and margin by $3.3 million. Lower customer usage reduced margin by $4.2 million. Higher PVNGS Unit 3 power prices, renewable rider revenues, and less-negative unrealized hedge results partly offset these pressures.
- TNMP’s margin rose $3.4 million, supported by rate increases, customer and load growth, colder weather, and demand-based billing changes. Weather-normalized retail sales increased 8.1%.
- Income taxes were lower at PNMR ($6.4 million versus $8.0 million), partly because 2013 included an impairment of New Mexico wind energy tax credits that did not recur.
Outlook, risks and unusual items
- San Juan Generating Station (SJGS): PNM sought regulatory approval to retire Units 2 and 3 by the end of 2017, install SNCR controls and related equipment on Units 1 and 4, recover retired-unit book value, and make resource and ownership changes. The revised plan remained subject to EPA, NMPRC, and owner approvals and negotiations. If it fails, the EPA federal plan could require more extensive controls; delay or shutdown could require costly replacement power. The filing estimates $80 million for PNM’s share of SJGS controls and $276.3 million for identified replacement resources, both subject to approvals and change.
- Gallup customer: PNM’s wholesale supply contract expires June 29, 2014, after Gallup awarded its long-term supply contract to another utility. PNM reported $11.7 million of 2013 revenue from Gallup; replacement sales and financial impact are uncertain.
- Other capital and regulatory matters: PNM anticipated closing its approved Delta generating-plant purchase in Q2 2014. It also pursued approval for the La Luz gas-fired facility. TNMP’s $50 million term loan matures June 30, 2014; planned $80 million bond issuance was intended to refinance it and reduce short-term or intercompany borrowing.
- Environmental and legal exposure: Potential costs and outcomes include Four Corners air-control requirements (PNM estimated up to $80.3 million), coal-mine reclamation and supply matters, nuclear waste storage and disposal, and evolving emissions and water regulations. The company stated that it could not reliably predict several outcomes or loss ranges and generally expected known matters not to materially affect financial condition, results, or cash flows.
- Management said there were no material changes to the 2013 annual-report risk factors. Disclosure controls were deemed effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the filing issuer and entity scope: this is a 2014 PNM Resources/PNM/TNMP filing, not a filing under the name TXNM Energy.
- Assess whether PNM can replace the Gallup contract’s contribution after its June 2014 expiration.
- Track EPA and NMPRC decisions, SJGS owner negotiations, cost recovery, and the potential difference between the revised plan and the more costly federal control requirements.
- Evaluate the quality and repeatability of operating cash flow, given the prior-year pension contributions and customer refunds that drove much of the comparison.
- Monitor the planned TNMP refinancing, projected 2014–2018 capital spending, and the need for additional debt or equity financing.