10-Q: PNM Resources Reports Second Quarter 2024 Results Amidst Regulatory and Strategic Shifts

PNM Resources' second quarter 2024 results reflect a complex interplay of regulatory changes, strategic investments, and market dynamics, impacting both earnings and future outlook.

Summary

• PNM Resources reported net earnings attributable to PNMR of $95.2 million, or $1.05 per diluted share, for the six months ended June 30, 2024, compared to $100.3 million, or $1.16 per diluted share, in 2023.
• The results were influenced by rate relief from PNMs 2024 Rate Change, higher transmission and distribution rates at TNMP, increased volumetric load at TNMP, and higher weather normalized retail load at PNM.
• These gains were offset by increased operational and maintenance expenses, higher depreciation and amortization, a regulatory disallowance related to San Juan Coal Mine reclamation, lower transmission margin at PNM, and higher interest charges.
• PNM filed a new rate case on June 14, 2024, seeking a $174.3 million increase in retail revenues, including a $92.2 million increase in base rates and a $82.1 million increase in revenues collected under PNMs FPPAC, and an ROE of 10.45%.
• The company continues to invest in infrastructure, including transmission and distribution systems, substations, power plants, and nuclear fuel, with a projected capital requirement of $6.8 billion for 2024-2028.
• PNM is also focused on transitioning to a carbon-free generating portfolio by 2040, with a significant portion of its capital investments directed towards renewable energy resources and battery storage.

Sentiment

Score: 5

Explanation: The document presents a mixed picture. While there are positive aspects such as the company's commitment to renewable energy and grid modernization, the lower earnings, increased expenses, and regulatory challenges create a neutral to slightly negative sentiment.

Positives

• PNM secured rate relief from the 2024 Rate Change, which positively impacted earnings.
• TNMP experienced higher transmission and distribution rates, contributing to increased revenue.
• PNM and TNMP both experienced higher volumetric load, which increased revenue.
• PNM continues to make progress towards its goal of a carbon-free generating portfolio by 2040.
• PNM has a significant amount of renewable energy capacity in service, including solar, wind, and geothermal resources.
• The company has a strong focus on customer satisfaction and community engagement.

Negatives

• PNM experienced a regulatory disallowance related to San Juan Coal Mine reclamation, which negatively impacted earnings.
• PNM experienced lower transmission margin and higher interest charges, which negatively impacted earnings.
• PNM and TNMP both experienced increased operational and maintenance expenses, which negatively impacted earnings.
• PNM experienced increased depreciation and amortization, which negatively impacted earnings.
• PNM experienced lower performance on investment securities in the NDT, partially offset by increased performance in the coal mine reclamation trusts.

Risks

• The company faces risks related to regulatory proceedings, including the ability to recover costs and earn allowed returns.
• 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, unplanned outages, extreme weather conditions, wildfires, storms, terrorism, cybersecurity breaches, and other catastrophic events.
• The company is exposed to risks related to climate change, including potential financial and reputational risks resulting from increased stakeholder scrutiny related to climate change, litigation, legislative and regulatory efforts to limit GHG.
• The company is exposed to risks related to the availability of fuel and water supplies, including the ability of the mine supplying coal to Four Corners and the companies involved in supplying nuclear fuel to provide adequate quantities of fuel.
• The company is exposed to risks related to the performance of its investments in trusts for decommissioning and reclamation, including potential losses from equity market risks.
• The company is exposed to risks related to counterparty performance and credit risk, including the ability of counterparties to supply fuel and perform reclamation activities and impacts to financial support provided to facilitate reclamation and decommissioning at SJGS.
• The company is exposed to risks related to the outcome of legal proceedings, including the extent of insurance coverage.

Future Outlook

PNM is focused on transitioning to a carbon-free generating portfolio by 2040 and is seeking to recover costs associated with this transition through regulatory filings. The company 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.
• PNM is focused on addressing energy affordability by promoting participation in utility programs among households with high energy burden to offset high bills.

Industry Context

The report reflects the ongoing trend in the utility industry towards renewable energy and grid modernization, as well as the challenges of balancing these investments with affordability and reliability. The company is also navigating a complex regulatory landscape, particularly in New Mexico, with the implementation of the Energy Transition Act and other state and federal regulations.

Comparison to Industry Standards

• PNMR targets a dividend payout ratio in the 50% to 60% range of its ongoing earnings, which is consistent with many other utilities.
• PNMR expects to provide at or above industry-average dividend growth in the near-term, which is a common goal for investor-owned utilities.
• PNMRs focus on maintaining investment grade credit ratings is also consistent with industry standards.
• PNMs renewable energy portfolio and carbon-free goals are in line with the broader industry trend towards decarbonization.
• TNMPs focus on grid reliability and resilience is consistent with the needs of the Texas deregulated market.
• The company's participation in the EIM and WRAP is consistent with industry efforts to improve grid efficiency and reliability.

Legal Proceedings

• PNM and other parties have filed appeals with the NM Supreme Court regarding the NMPRCs final order in the 2024 Rate Change.
• PNM has filed an appeal with the NM Supreme Court regarding the NMPRCs decision to deny the application for the Four Corners Abandonment Application.
• PNM has intervened in an appeal with the NM Supreme Court regarding the NMPRCs decisions related to the Community Solar Act.
• The Company is involved in various legal and regulatory proceedings in the normal course of its business.

Related Party Transactions

• PNMR Services Company expenses are charged to the business segments.
• 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 rate increases due to the proposed rate case and other regulatory filings.
• Customers may benefit from improved grid reliability and resilience due to infrastructure investments.
• Customers may benefit from increased access to renewable energy and energy efficiency programs.
• Shareholders may experience fluctuations in stock price due to market conditions and regulatory outcomes.
• Employees may be affected by changes in operations and workforce planning.
• Communities may benefit from economic development and job training programs.

Next Steps

• 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.
• 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 submit filings for investments and recovery in accordance with new rules implementing legislation passed in 2023.
• PNM will continue to monitor the United States participation in the Paris Agreement and other parties involvement in these types of international accords.
• PNM will continue to monitor the impacts on the capital markets of other macroeconomic conditions, including actions by the Federal Reserve to address inflationary concerns or other market conditions, and geopolitical activity.

Key Dates

Keywords

PNM Resources, PNM, TNMP, earnings, renewable energy, rate case, regulatory, transmission, distribution, capital expenditures, debt, carbon-free, climate change, wildfire, decommissioning, coal, natural gas, solar, wind, battery storage