10-K: PNM Resources, Inc. Releases 2023 Annual Report, Details Financial Performance and Strategic Initiatives

PNM Resources, Inc. files its 2023 annual report, highlighting its financial performance, strategic objectives, and commitment to a clean energy future.

Summary

• PNM Resources, Inc. (PNMR) released its 2023 annual report, detailing its financial results and strategic initiatives.
• The report emphasizes PNMR's focus on achieving authorized returns, delivering industry-average earnings and dividend growth, and maintaining investment-grade credit ratings.
• PNMR's strategy is built on Environmental, Social, and Governance (ESG) principles, with a commitment to transitioning to an emissions-free generating portfolio by 2040.
• The company's financial objectives are highly dependent on fair and timely regulatory treatment and strong operating performance.
• PNMR's electric utilities, PNM and TNMP, seek cost recovery for their investments through general rate cases, periodic cost of service filings, and various rate riders.
• The report also discusses the termination of the merger agreement with Avangrid, effective December 31, 2023.
• PNM's 2024 Rate Change application proposed a $63.8 million increase in base non-fuel revenues, but the NMPRC approved a $6.1 million increase.
• The NMPRC also disallowed $84.8 million of PNMs Four Corners net book value and $45 million of PVNGS undepreciated investments.
• PNM formed PNM Energy Transition Bond Company I, LLC (ETBC I) and issued $343.2 million of Securitized Bonds.
• PNM is focused on achieving 100% zero-carbon energy by 2045, as required by the New Mexico Energy Transition Act (ETA).

Sentiment

Score: 4

Explanation: The document presents a mixed picture. While there are positive aspects such as the commitment to renewable energy and cost savings through EIM, the negative regulatory outcomes and the termination of the merger agreement create uncertainty and concern. The overall sentiment is cautiously negative.

Positives

• PNM is actively participating in the EIM, generating significant cost savings for customers.
• TNMP is experiencing high growth across its service territory, supported by new legislation in Texas.
• PNM is making significant investments in renewable energy resources and battery storage.
• PNM is committed to reducing its carbon emissions and transitioning to a clean energy future.
• PNM and TNMP are focused on improving customer service and community engagement.
• PNM has a customer distributed solar generation program that represented 281.6 MW at December 31, 2023.
• PNM has a goal to reduce freshwater use at 80% by 2035 and 90% by 2040 from 2005 levels.

Negatives

• The NMPRC approved a significantly lower rate increase than requested by PNM in the 2024 Rate Change.
• The NMPRC disallowed $84.8 million of PNM's Four Corners net book value and $45 million of PVNGS undepreciated investments.
• PNM's Four Corners Abandonment Application was denied by the NMPRC and upheld by the NM Supreme Court.
• PNM experienced a decrease in weather-normalized retail electric KWh sales by 1.0% in 2023.
• PNM is facing increasing stakeholder scrutiny related to ESG matters and climate change.
• PNM is dependent on fossil-fueled generation for 43.3% of its electricity.

Risks

• PNMR's profitability depends on recovering costs through regulated rates and earning a fair return on invested capital.
• Unsatisfactory outcomes of regulatory proceedings could jeopardize the economic viability of certain generating facilities.
• Compliance with environmental laws and regulations may result in increased capital, operating, and other costs.
• Customer electricity usage could be reduced by increases in prices charged and other factors.
• Costs of decommissioning, remediation, and restoration of power plants could exceed estimates.
• PNMR may be unable to meet its financial obligations if its subsidiaries are unable to pay dividends.
• Disruptions in the credit and capital markets may impact the Companys ability to raise capital.
• Reductions in credit ratings could materially and adversely affect the Companys growth, strategy, business, financial position, results of operations, and liquidity.
• The impacts and implementation of U.S. tax reform legislation may negatively impact PNMRs, PNMs, and TNMPs businesses, financial position, results of operations, and cash flows.
• PNM and TNMP are subject to information security breaches and risks of unauthorized access to their information and operational technology systems as well as physical threats to assets.

Future Outlook

PNMR expects to provide at or above industry-average dividend growth in the near-term and anticipates that it will be necessary to obtain additional long-term financing in the form of debt refinancing, new debt issuances, and/or new equity in order to fund its capital requirements during the 2024-2028 period.

Management Comments

• PNMR strives to create a clean and bright energy future for customers, communities, and shareholders.
• PNMRs strategy and decision-making are focused on safely providing reliable, affordable, and environmentally responsible power built on a foundation of Environmental, Social and Governance (ESG) principles.
• PNMR is focused on achieving three key financial objectives: Earning authorized returns on regulated businesses, Delivering at or above industry-average earnings and dividend growth, and Maintaining investment grade credit ratings.

Industry Context

The announcement reflects the broader industry trend of transitioning to renewable energy sources and the challenges of balancing cost recovery with environmental goals. The termination of the merger agreement with Avangrid highlights the complexities of large-scale utility mergers and the importance of regulatory approvals.

Comparison to Industry Standards

• The NMPRC approved a 9.26% ROE for PNM, which is below the 10.25% requested and may be considered below average compared to other utilities in the US.
• The disallowance of $84.8 million of PNMs Four Corners net book value and $45 million of PVNGS undepreciated investments is a significant negative outcome compared to industry standards where utilities typically recover these costs.
• The $91.5 million in cost savings to customers through participation in the EIM is a positive result compared to other utilities that do not participate in such markets.
• The $1.9 billion in utility plant investments by PNM and TNMP over the past two years is a significant amount compared to other utilities of similar size.
• The 100% zero-carbon energy by 2045 goal is in line with other leading utilities in the US.

Legal Proceedings

• PNM filed an appeal with the NM Supreme Court of the NMPRCs final order which adopted revisions to the IRP Rule.
• PNM filed a notice of appeal with the NM Supreme Court of the NMPRC decision to deny the Four Corners Abandonment Application.
• PNM filed a notice of appeal with the NM Supreme Court of the NMPRCs order finding that the EUEA does not mandate the NMPRC to authorize or approve a full decoupling mechanism.

Related Party Transactions

• PNMR provides corporate services through shared services agreements to PNMR and all of PNMRs business units, including PNM and TNMP.
• PNM purchases renewable energy from certain NMRD-owned facilities at a fixed price per MWh of energy produced.
• PNM also provides interconnection services to PNMR Development and NMRD.

Stakeholder Impact

• Customers will benefit from cost savings through EIM and the transition to lower-cost, clean generation resources.
• Customers will be impacted by the rate increase approved by the NMPRC.
• Customers will receive rate refunds related to the SJGS retirement.
• Shareholders may be concerned about the lower-than-requested rate increase and the disallowance of certain investments.
• Employees may be affected by the ongoing transition to a clean energy future.
• Communities will benefit from PNMs commitment to environmental stewardship and community engagement.

Next Steps

• PNM will continue to evaluate opportunities that benefit customers and is exploring opportunities with the expectation of reliably achieving incrementally greater cost savings and using the regions increasing renewable resources more efficiently.
• PNM will continue to procure renewable resources while balancing the impact to customers electricity costs in order to meet New Mexicos escalating RPS and carbon-free resource requirements.
• TNMP will look to prioritize investments aligned with these measures that improve the quality of service for current and future customers.
• TNMP anticipates filing its first resiliency plan under the new rules implementing the legislation passed in 2023.
• PNM will continue to pursue additional resources to replace the PVNGS leases.
• PNM will continue to monitor the United States participation in the Paris Agreement and other parties involvement in these types of international accords.

Key Dates

Keywords

renewable energy, regulated utilities, energy transition, rate case, carbon emissions, grid modernization, power generation, transmission, distribution, financial performance