10-Q: PNM Resources Reports Mixed Results in First Quarter 2024 Amidst Regulatory Changes

PNM Resources experienced a decrease in net earnings for the first quarter of 2024, influenced by regulatory disallowances and increased operating expenses, despite some gains in investment securities.

Summary

• PNM Resources reported net earnings attributable to PNMR of $47.2 million, or $0.52 per diluted share, for the first quarter of 2024, compared to $55.0 million, or $0.64 per diluted share, in the same period of 2023.
• The decrease in earnings was primarily due to regulatory disallowances, higher employee-related expenses, increased depreciation and amortization, and higher interest charges.
• These negative impacts were partially offset by rate relief approved in PNMs 2024 Rate Change, higher transmission margin and distribution rates at TNMP, higher volumetric load at TNMP, higher weather normalized retail load at PNM, increased performance on PNMs NDT, coal mine reclamation and SJGS decommissioning investment securities, and decreased operational and maintenance expense at PNM primarily due to the disposition of the PVNGS Unit 2 Leased Interest.
• PNM's operating revenues decreased to $308.1 million from $430.2 million year-over-year, while TNMP's operating revenues increased to $128.8 million from $113.9 million.
• The company's capital requirements for 2024-2028 are projected to be $6.8 billion, including construction expenditures and dividends.

Sentiment

Score: 5

Explanation: The document presents a mixed picture with both positive and negative aspects. While there are some positive developments, the overall tone is neutral due to the decrease in earnings and the presence of regulatory and operational challenges.

Positives

• TNMP experienced a 2.7% increase in volumetric weather normalized retail load compared to 2023.
• PNM experienced an increase in industrial load of 10.0% compared to 2023.
• PNM's renewable energy rider generated revenues of $15.3 million in Q1 2024.
• PNM's 2023 IRP was accepted by the NMPRC on April 4, 2024.
• TNMP issued $117.0 million of first mortgage bonds in March 2024.

Negatives

• PNM's operating revenues decreased by $122.1 million year-over-year.
• PNM experienced a regulatory disallowance related to San Juan Coal Mine reclamation remeasurement.
• PNM experienced higher employee related, outside services and vegetation management expenses.
• PNM experienced increased depreciation and amortization.
• PNM experienced lower transmission margin and capacity arrangements.
• PNM experienced milder weather.
• PNM experienced higher interest charges.

Risks

• The company faces risks related to regulatory disallowances and the ability to recover costs.
• There are risks associated with the cost and completion of generation, transmission, and distribution projects.
• The company is exposed to risks related to climate change, including potential financial and reputational risks.
• The company is exposed to risks related to the performance of generating units, transmission systems, and distribution systems, which could be negatively affected by operational issues, fuel quality and supply chain issues (disruptions), unplanned outages, extreme weather conditions, wildfires, terrorism, cybersecurity breaches, and other catastrophic events.
• The company is exposed to risks related to the variability of prices and volatility and liquidity in the wholesale power and natural gas markets.
• The company is exposed to risks related to the availability of fuel and water supplies.
• The company is exposed to risks related to the performance of investment securities in the NDT, SJGS decommissioning trust, and coal mine reclamation trusts.
• The company is exposed to risks related to counterparty performance and credit risk.
• The company is exposed to risks related to the outcome of legal proceedings.

Future Outlook

PNM anticipates filing a general rate case during 2024 with rates requested to be implemented during 2025. The company also expects to continue its transition to a 100% emissions-free generating portfolio by 2040.

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.
• The Company is dedicated to achieving four key business objectives: Maintaining strong employee safety, plant performance, and system reliability; Delivering a superior customer experience; Demonstrating environmental stewardship in business operations, including transitioning to an emissions-free generating portfolio by 2040; and Supporting the communities in their service territories.

Industry Context

The report reflects the ongoing challenges and opportunities in the utility sector, including the transition to renewable energy, regulatory changes, and the need for grid modernization. The company's focus on ESG principles aligns with broader industry trends towards sustainability and environmental responsibility.

Comparison to Industry Standards

• The company's performance is compared to industry-standard metrics such as SAIDI and SAIFI for reliability.
• The company's dividend payout ratio is targeted in the 50% to 60% range of its ongoing earnings, which is a common practice in the utility sector.
• The company's focus on maintaining investment-grade credit ratings is consistent with industry best practices.
• The company's participation in the EIM and WRAP is in line with industry efforts to enhance grid reliability and integrate renewable resources.
• The company's efforts to reduce GHG emissions and transition to a carbon-free portfolio are consistent with broader industry trends towards decarbonization.

Legal Proceedings

• PNM and other parties have filed appeals with the NM Supreme Court regarding the NMPRC's final order in the 2024 Rate Change.
• PNM has filed a motion for variance with the NMPRC, requesting a 16-day variance which would allow for the filing of its next general rate case to be on or before June 14, 2024.
• PNM filed an interim notice informing the NMPRC that PNMs updated analysis indicates it is in the interest of customers for PNM to remain as a participant in Four Corners until the expiration of the current coal supply agreement in 2031.

Related Party Transactions

• PNMR Services Company expenses are charged to the business segments at cost.
• Significant intercompany transactions between PNMR, PNM, and TNMP include interest and income tax sharing payments, as well as equity transactions, and interconnection billings.
• PNM purchases renewable energy from certain NMRD-owned facilities at a fixed price per MWh of energy produced.

Stakeholder Impact

• Customers may experience changes in rates due to regulatory proceedings and investments in infrastructure.
• Shareholders may be impacted by changes in earnings and dividend payouts.
• Employees may be affected by changes in workforce and compensation.
• Communities may be impacted by the company's environmental initiatives and community engagement programs.
• Suppliers may be affected by changes in procurement practices and supply chain management.
• Creditors may be impacted by changes in the company's credit ratings and debt levels.

Next Steps

• PNM will file a general rate case with the NMPRC on or before June 14, 2024.
• TNMP will submit filings for investments and recovery in accordance with new rules developed by the PUCT.
• PNM will continue to procure renewable resources while balancing the impact to customers electricity costs.
• PNM will continue to monitor the impacts of climate change and related regulations.
• PNM will continue to work with the other Four Corners owners to update the necessary project agreements to reflect its continued participation until the expiration of the current coal supply agreement in 2031.

Key Dates

Keywords

PNM Resources, Public Service Company of New Mexico, Texas-New Mexico Power Company, earnings, regulatory disallowances, renewable energy, transmission, distribution, rate case, capital expenditures, debt, credit rating, wildfire mitigation, energy efficiency, climate change, greenhouse gas emissions, coal, natural gas, solar, wind, battery storage, nuclear, decommissioning, reclamation