PNM RESOURCES, INC.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations for PNMR is presented on a combined basis, including
certain information applicable to PNM and TNMP. The MD&A for PNM and TNMP is
presented as permitted by Form 10-Q General Instruction H(2). This report uses
the term "Company" when discussing matters of common applicability to PNMR, PNM,
and TNMP. A reference to a "Note" in this Item 2 refers to the accompanying
Notes to Condensed Consolidated Financial Statements (Unaudited) included in
Item 1, unless otherwise specified. Certain of the tables below may not appear
visually accurate due to rounding.
MD&A FOR PNMR
EXECUTIVE SUMMARY
Overview and Strategy
PNMR is a holding company with two regulated utilities serving approximately
794,000 residential, commercial, and industrial customers and end-users of
electricity in New Mexico and Texas . PNMR's electric utilities are PNM and TNMP.
PNMR strives to create a clean and bright energy future for customers,
communities, and shareholders. PNMR's 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.
Financial and Business Objectives
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 •Maintaining investment grade credit ratings
In conjunction with these objectives, PNM and TNMP are dedicated to:
•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 •Supporting the communities in their service territories
Earning Authorized Returns on Regulated Businesses
PNMR's success in accomplishing its financial objectives is highly dependent on two key factors: fair and timely regulatory treatment for its utilities and the utilities' strong operating performance. The Company has multiple strategies to achieve favorable regulatory treatment, all of which have as their foundation a focus on the basics: safety, operational excellence, and customer satisfaction, while engaging stakeholders to build productive relationships. Both PNM and TNMP seek cost recovery for their investments through general rate cases, interim cost of service filings, and various rate riders. Fair and timely rate treatment from regulators is crucial to PNM and TNMP in earning their allowed returns and critical for PNMR to achieve its financial objectives. PNMR believes that earning allowed returns is viewed positively by credit rating agencies and that improvements in the Company's ratings could lower costs to utility customers. Additional information about rate filings is provided in Note 17 of the Notes to Consolidated Financial Statements in the 2019 Annual Reports on Form 10-K and in Note 12. State Regulation
The rates PNM and TNMP charge retail customers are subject to traditional rate
regulation by the NMPRC,
New Mexico 2015 Rate Case - OnSeptember 28, 2016 , the NMPRC issued an order that authorized PNM to implement an increase in base non-fuel rates of$61.2 million forNew Mexico retail customers, effective for bills sent afterSeptember 30 , 82 -------------------------------------------------------------------------------- Table of Contents 2016. This order was on PNM's application for a general increase in retail electric rates (the "NM 2015 Rate Case") filed inAugust 2015 . The NMPRC's order included a determination that PNM was imprudent in purchasing certain leased capacity in PVNGS Unit 2, extending other PVNGS leased capacity, and installing BDT environmental controls equipment on SJGS. PNM appealed the NMPRC's imprudence findings to theNM Supreme Court . Specifically, PNM appealed the NMPRC's determination that PNM was imprudent in certain matters in the case, including the disallowance of the full purchase price of 64.1 MW of capacity in PVNGS Unit 2, the undepreciated costs of capitalized improvements made during the period the 64.1 MW of capacity was leased by PNM, the costs of converting SJGS Units 1 and 4 to BDT, and future contributions for PVNGS decommissioning attributable to 64.1 MW of purchased capacity and the 114.6 MW of capacity under the extended leases. InMay 2019 , theNM Supreme Court issued its decision on the matters that had been appealed in the NM 2015 Rate Case.The NM Supreme Court upheld all of the decisions in the NMPRC's order except for their decision to permanently disallow recovery of future decommissioning costs related to the purchased and extended leases because PNM was deprived of its rights to due process of law and remanded the case to the NMPRC for further proceedings. InJanuary 2020 , the NMPRC issued its order in response to theNM Supreme Court's remand that reaffirmed itsSeptember 2016 order except for the decision to permanently disallow recovery of certain future decommissioning costs related to PVNGS Units 1 and 2. The NMPRC indicated that PNM's ability to recover these costs will be addressed in a future proceeding and closed the NM 2015 Rate Case docket. As a result of theNM Supreme Court's ruling, PNM recorded a pre-tax impairment of$149.3 million as ofJune 30, 2019 which is reflected as regulatory disallowances and restructuring costs in the Condensed Consolidated Statements of Earnings. This amount reflects capital costs not previously impaired during the pendency of the appeal related to PNM's purchase of 64.1 MW, in PVNGS Unit 1, undepreciated capital improvements made during the period such interests had been leased, and investments in BDT environmental controls equipment on SJGS Units 1 and 4. The impairment was offset by tax impacts of$45.7 million which are reflected as income taxes on the Condensed Consolidated Statements of Earnings.New Mexico 2016 Rate Case - InJanuary 2018 , the NMPRC approved a settlement agreement that authorized PNM to implement an increase in base non-fuel rates of$10.3 million , which includes a reduction to reflect the impact of the decrease in the federal corporate income tax rate and updates to PNM's cost of debt (aggregating$47.6 million annually). This order was on PNM's application for a general increase in retail electric rates filed inDecember 2016 (the "NM 2016 Rate Case"). The key terms of the order include: •A ROE of 9.575% •A requirement to return to customers over a three-year period the benefit of the reduction in theNew Mexico corporate income tax rate to the extent attributable to PNM's retail operations (Note 14) •A disallowance of PNM's ability to collect an equity return on certain investments aggregating$148.1 million at Four Corners, but allowing recovery of a debt-only return •An agreement to not implement non-fuel base rate changes, other than changes related to PNM's rate riders, with an effective date prior toJanuary 1, 2020 •A requirement to consider the prudency of PNM's decision to continue its participation in Four Corners in PNM's next general rate case filing
PNM implemented 50% of the approved increase for service rendered beginning
2020 Decoupling Petition - OnMay 28, 2020 , PNM filed a petition for approval of a rate adjustment mechanism that would decouple the rates of its residential and small power rate classes. Decoupling is a rate design principle that severs the link between the recovery of fixed costs of the utility through volumetric charges. If approved, customer bills will not be impacted untilJanuary 1, 2022 . PNM cannot predict the outcome of this matter. TNMP 2018 Rate Case - OnDecember 20, 2018 , the PUCT approved a settlement stipulation allowing TNMP to increase annual base rates by$10.0 million based on a ROE of 9.65%, a cost of debt of 6.44%, and a capital structure comprised of 55% debt and 45% equity. In addition, the approved settlement stipulation allows TNMP to refund the regulatory liability recorded atDecember 31, 2017 related to federal tax reform to customers and reflects the reduction in the federal corporate income tax rate to 21%. New rates under the TNMP 2018 Rate Case became effectiveJanuary 1, 2019 .
Advanced Metering - TNMP completed its mass deployment of advanced meters across its service territory in 2016 and has installed more than 242,000 advanced meters. Beginning in 2019 the majority of costs associated with TNMP's AMS program are being recovered through base rates.
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InFebruary 2016 , PNM filed an application with the NMPRC requesting approval of a project to replace its existing customer metering equipment with Advanced Metering Infrastructure ("AMI"), which was denied. As ordered by the NMPRC, PNM's 2020 filing for energy efficiency programs to be offered in 2021, 2022, and 2023 includes a proposal for an AMI pilot project. Rate Riders and Interim Rate Relief - The PUCT has approved mechanisms that allow TNMP to recover capital invested in transmission and distribution projects without having to file a general rate case. The NMPRC has approved PNM recovering fuel costs through the FPPAC, as well as rate riders for renewable energy and energy efficiency. These mechanisms allow for more timely recovery of investments. OnApril 6, 2020 , TNMP filed its first application for a periodic distribution rate adjustment (the "2020 DCOS"). TNMP's 2020 DCOS application requests an increase in annual distribution revenues of$14.7 million and that new rates go into effect beginning inSeptember 2020 . OnJune 26, 2020 , TNMP reached a unanimous settlement agreement with parties that would authorize TNMP to collect a$14.3 million annual distribution revenue requirement beginning inSeptember 2020 . The case is pending review by the PUCT. See Note 12.
FERC Regulation
Rates PNM charges wholesale transmission customers are subject to traditional rate regulation byFERC . Rates charged to wholesale electric transmission customers are based on a formula rate mechanism pursuant to which rates for wholesale transmission service are calculated annually in accordance with an approved formula. The formula includes updating cost of service components, including investment in plant and operating expenses, based on information contained in PNM's annual financial report filed withFERC , as well as including projected transmission capital projects to be placed into service in the following year. The projections included are subject to true-up. Certain items, including changes to return on equity and depreciation rates, require a separate filing to be made withFERC before being included in the formula rate. InMay 2019 , PNM filed an application withFERC requesting approval to purchase a new 165-mile long 345-kV transmission line and related facilities (the "Western Spirit Line"). Under related agreements, PNM will provide transmission service to approximately 800 MW of new wind generation to be located in easternNew Mexico beginning in 2021 using an incremental rate. All necessary regulatory approvals for PNM to purchase and provide transmission service from the Western Spirit Line have been obtained. PNM has no full-requirements wholesale generation customers. Delivering At or Above Industry-Average Earnings and Dividend Growth PNMR's financial objective to deliver at or above industry-average earnings and dividend growth enables investors to realize the value of their investment in the Company's business. PNMR's current target is 5% to 6% earnings and dividend growth for the period 2020 through 2023. Earnings growth is based on ongoing earnings, which is a non-GAAP financial measure that excludes from GAAP earnings certain non-recurring, infrequent, and other items that are not indicative of fundamental changes in the earnings capacity of the Company's operations. PNMR uses ongoing earnings to evaluate the operations of the Company and to establish goals, including those used for certain aspects of incentive compensation, for management and employees. PNMR targets a dividend payout ratio in the 50% to 60% range of its ongoing earnings. PNMR expects to provide at or above industry-average dividend growth in the near-term and to manage the payout ratio to meet its long-term target. The Board will continue to evaluate the dividend on an annual basis, considering sustainability and growth, capital planning, and industry standards. The Board approved the following increases in the indicated annual common stock dividend: Approval Date Percent IncreaseDecember 2017 9%December 2018 9%December 2019 6% Maintaining Investment Grade Credit Ratings The Company is committed to maintaining investment grade credit ratings in order to reduce the cost of debt financing and to help ensure access to credit markets, when required. See the subheading Liquidity included in the full discussion of Liquidity and Capital Resources below for the specific credit ratings for PNMR, PNM, and TNMP. OnApril 6, 2020 , S&P downgraded the ratings for PNMR, PNM, and TNMP one notch and affirmed TNMP's first mortgage bond rating. All of the 84 -------------------------------------------------------------------------------- Table of Contents credit ratings issued by both Moody's and S&P on the Company's debt continue to be investment grade. Business Focus To achieve its business objectives, focus is directed in key areas: Safe,Reliable and Affordable Power ; Utility Plant and Strategic Investments;Environmentally Responsible Power ; and Customer, Stakeholders, and Community Engagement. The Company works closely with its stakeholders to ensure that resource plans and infrastructure investments benefit from robust public dialogue and balance the diverse needs of our communities. Equally important is the focus of PNMR's utilities on customer satisfaction and community engagement.
Safe, Reliable, and
PNMR and its utilities are aware of the important roles they play in enhancing economic vitality in their service territories. Management believes that maintaining strong and modern electric infrastructure is critical to ensuring reliability and supporting economic growth. When contemplating expanding or relocating their operations, businesses consider energy affordability and reliability to be important factors. PNM and TNMP strive to balance service affordability with infrastructure investment to maintain a high level of electric reliability and to deliver a safe and superior customer experience. Investing in PNM's and TNMP's infrastructure is critical to ensuring reliability and meeting future energy needs. Both utilities have long-established records of providing customers with safe and reliable electric service. InMarch 2020 , theWorld Health Organization declared COVID-19 a global pandemic andPresident Trump declared the COVID-19 pandemic a national emergency in theU.S. The Company continues to closely monitor developments and has taken and continues to take steps to mitigate the potential risks related to the COVID-19 pandemic. The Company has assessed and updated its existing business continuity plans in response to the impacts of the pandemic through crisis team meetings and working with other utilities and operators. It has identified its critical workforce, staged backups and limited access to control rooms and critical assets. The Company has worked to protect the safety of its employees using a number of measures, including minimizing exposure to other employees and the public and mandating work-from-home and flexible arrangements for all applicable job functions. The Company is also working with its suppliers to understand the potential impacts to its supply chain and remains focused on the integrity of its information systems and other technology systems used to run its business. However, the Company cannot predict the extent or duration of the ongoing COVID-19 pandemic, its effects on the global, national or local economy, or on the Company's financial position, results of operations, and cash flows. The Company will continue to monitor developments related to COVID-19 and will remain focused on protecting the health and safety of its customers, employees, contractors, and other stakeholders, and on its objective to provide safe, reliable, affordable and environmentally responsible power. As discussed in Note 12, both PNM and TNMP have suspended disconnecting certain customers for past due bills and waived late fees during the pandemic and have been provided regulatory mechanisms to recover these and other costs resulting from COVID-19. See additional discussion below regarding the Company's customer, community, and stakeholder engagement in response to COVID-19 and in Item 1A. Risk Factors. OnMarch 26, 2020 , the PUCT issued an order establishing an electricity relief program for electric utilities, REPs, and customers impacted by COVID-19. The program allows providers to implement a rider to collect unpaid residential retail customer bills and to ensure these customers continue to have electric service. In a separate order, the PUCT authorized electric utilities to establish a regulatory asset for costs related to COVID-19 which includes but is not limited to costs related to unpaid accounts. OnJune 24, 2020 , the NMPRC authorized the creation of a regulatory asset to defer incremental costs related to COVID-19, including increases to bad debt expense and the creation of a regulatory liability for all offsetting cost savings resulting from COVID-19. The NMPRC Order allows the Company to request recovery in future ratemaking proceedings and imposes additional reporting requirements related to COVID-19 on changes to customer usage, increased costs and savings recorded to regulatory assets and liabilities and impacts to delinquent accounts.
Utility Plant and Strategic Investments
Utility Plant Investments - During the 2017 to 2019 period, PNM and TNMP together invested$1.5 billion in utility plant, including substations, power plants, nuclear fuel, and transmission and distribution systems. During 2018 and 2019, PNM constructed an additional 50 MW of PNM-owned solar-PV facilities, which were approved by the NMPRC in PNM's 2018 renewable energy procurement plan. OnMay 1, 2019 , PNM executed an agreement to purchase the Western Spirit Line, which has been approved byFERC and the NMPRC. Under the agreement, subject to certain conditions being met prior to closing, PNM will purchase the Western Spirit Line upon its expected commercial operation date in 2021 at a net cost of approximately$285 million , including customer reimbursements.New Mexico's clean energy future depends on a reliable, resilient, secure grid to deliver an evolving mix of energy resources to customers. PNM has launched the Wired for the Future capital program, which emphasizes new investments in its transmission and distribution infrastructure with three primary objectives: delivering clean energy, enhancing customer 85 -------------------------------------------------------------------------------- Table of Contents satisfaction and increasing grid resilience. Projects are aimed at advancing the infrastructure beyond its original architecture to a more flexible and redundant system accommodating growing amounts of intermittent and distributed generation resources and integrating evolving technologies that provide long-term customer value. See the subheading Capital Requirements included in the full discussion of Liquidity and Capital Resources below for additional discussion of the Company's projected capital requirements. Strategic Investments - In 2017,PNMR Development and AEP OnSite Partners created NMRD to pursue the acquisition, development, and ownership of renewable energy generation projects, primarily in the state ofNew Mexico . Abundant renewable resources, large tracts of affordable land, and strong government and community support makeNew Mexico a favorable location for renewable generation.New Mexico ranks 3rd in the nation for energy potential from solar power according to theNebraska Department of Energy & Energy Sun Index and ranks 3rd in the nation for land-based wind capacity according to theU.S. Office of Energy Efficiency and Renewable Energy .PNMR Development and AEP OnSite Partners each have a 50% ownership interest in NMRD. Through NMRD, PNMR anticipates being able to provide additional renewable generation solutions to customers within and surrounding its regulated jurisdictions through partnering with a subsidiary of one ofthe United States' largest electric utilities. As ofJune 30, 2020 , NMRD's renewable energy capacity in operation was 85.1 MW, which includes 80 MW of solar-PV facilities to supply energy to the Facebook data center located within PNM's service territory, 1.9 MW to supply energy toColumbus Electric Cooperative located in southwestNew Mexico , 2.0 MW to supply energy to theCentral New Mexico Electric Cooperative , and 1.2 MW of solar-PV facilities to supply energy to theCity of Rio Rancho, New Mexico . The NMPRC has approved PNM's request to enter into an additional 25-year PPA to purchase renewable energy and RECs from an aggregate of approximately 50 MW of capacity from solar-PV facilities to be constructed by NMRD to supply power to the Facebook data center. These facilities began commercial operation onJuly 1, 2020 . NMRD actively explores opportunities for additional renewable projects, including large-scale projects to serve future data centers and other customer needs.
Integrated Resource Plan
NMPRC rules require that investor-owned utilities file an IRP every three years. The IRP is required to cover a 20-year planning period and contain an action plan covering the first four years of that period. PNM filed its 2017 IRP onJuly 3, 2017 . The 2017 IRP analyzed several scenarios utilizing assumptions that PNM continues service from its SJGS capacity beyond mid-2022 and that PNM retires its capacity after mid-2022. Key findings of the 2017 IRP included, among other things, that retiring PNM's share of SJGS in 2022 and exiting ownership in Four Corners in 2031 would provide long-term cost savings for PNM's customers and that the best mix of new resources to replace the retired coal generation would include solar energy and flexible natural gas-fired peaking capacity as well as energy storage, if the economics support it, and wind energy provided additional transmission capacity becomes available. The 2017 IRP also indicated that PNM should retain the currently leased capacity in PVNGS. OnJune 11, 2020 , PNM provided notice to the lessors and the NMPRC that PNM will return the leased assets for both PVNGS Unit 1 and 2 upon expiration of the leases inJanuary 2023 and 2024. PNM issued an RFP for replacement power resources onJune 25, 2020 and intends to file for abandonment and approval of replacement resources with the NMPRC in early 2021. See additional discussion regarding PNM's leased capacity in PVNGS in Note 13 as well as PNM's 2017 IRP and the SJGS Abandonment Application in Note 12. In the third quarter of 2019, PNM initiated its 2020 IRP process which will cover the 20-year planning period from 2019 through 2039. Consistent with historical practice, PNM has provided notice to various interested parties and has hosted a series of public advisory presentations. NMPRC rules require PNM to file its 2020 IRP inJuly 2020 . InApril 2020 , the NMPRC approved PNM's request to extend the deadline to file its 2020 IRP until six months after the NMPRC issues a final order approving replacement resources in PNM's SJGS Abandonment Application. PNM will continue to seek input from interested parties as a part of this process. PNM cannot predict the outcome of this matter.
Environmentally Responsible Power PNMR has a long-standing record of environmental stewardship. PNM's environmental focus is in three key areas:
•Developing strategies to provide reliable and affordable power while
transitioning to a 100% emissions-free generating portfolio by 2040
•Preparing PNM's system to meet
PNMR's corporate website (www.pnmresources.com) includes a dedicated section providing key environmental and other sustainability information related to PNM's and TNMP's operations demonstrating the Company's commitment to ESG
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principles. This information highlights plans for PNM to be coal-free by 2031
(subject to regulatory approval) and to have an emissions-free generating
portfolio by 2040.
The Energy Transition Act ("ETA")
OnJune 14, 2019 , Senate Bill 489, known as the ETA, became effective. Prior to the enactment of the ETA, the REA established a mandatory RPS requiring utilities to acquire a renewable energy portfolio equal to 10% of retail electric sales by 2011, 15% by 2015, and 20% by 2020. The ETA amends the REA and requires utilities operating inNew Mexico to have renewable portfolios equal to 20% by 2020, 40% by 2025, 50% by 2030, 80% by 2040, and 100% zero-carbon energy by 2045. The ETA also amends sections of the REA to allow for the recovery of undepreciated investments and decommissioning costs related to qualifying EGUs that the NMPRC has required be removed from retail jurisdictional rates, provided replacement resources to be included in retail rates have lower or zero-carbon emissions. The ETA provides for a transition from fossil-fueled generating resources to renewable and other carbon-free resources by allowing utilities to issue securitized bonds, or "energy transition bonds," related to the retirement of certain coal-fired generating facilities to qualified investors. See additional discussion of the ETA in Note 16 of the Notes to Consolidated Financial Statements in the 2019 Annual Reports on Form 10-K and below in PNM's SJGS Abandonment Application.
PNM expects the ETA will have a significant impact on PNM's future generation portfolio, including PNM's planned retirement of SJGS in 2022. PNM cannot predict the full impact of the ETA on potential future generating resource abandonment and replacement filings with the NMPRC.
SJGS
SJGS Abandonment Application - As discussed in Note 12, onJuly 1, 2019 , PNM filed a Consolidated Application for the Abandonment and Replacement of SJGS and Related Securitized Financing Pursuant to the ETA (the "SJGS Abandonment Application"). The SJGS Abandonment Application sought NMPRC approval to retire PNM's share of SJGS in mid-2022, and for approval of replacement resources and the issuance of approximately$361 million of energy transition bonds as provided by the ETA. The application included several replacement resource scenarios including PNM's recommended replacement scenario, which is consistent with PNM's goal of having a 100% emissions-free generating portfolio by 2040 and would have provided cost savings to customers while preserving system reliability. The application included three other replacement resource scenarios that would have placed a greater amount of resources in theSan Juan area, or resulted in no new fossil-fueled generating facilities, or no battery storage facilities being added to PNM's portfolio. When compared to PNM's recommended replacement resource scenario, the three alternative resource scenarios were expected to result in increased costs to customers and the two alternative resource scenarios that resulted in no new fossil-fueled generating facilities were expected to not provide adequate system reliability. The NMPRC issued an order requiring the SJGS Abandonment Application be considered in two proceedings: one addressing SJGS abandonment and related financing and the other addressing replacement resources but did not definitively indicate if the abandonment and financing proceedings would be evaluated under the requirements of the ETA. The NMPRC'sJuly 10, 2019 order also extended the deadline to issue the abandonment and financing order to nine months and to issue the replacement resources order to 15 months. After several requests for clarification and legal challenges, inJanuary 2020 , theNM Supreme Court ruled the NMPRC is required to apply the ETA to all aspects of PNM's SJGS Abandonment Application, and that any previous NMPRC orders inconsistent with their ruling should be vacated.The NM Supreme Court issued a subsequent opinion, onJuly 23, 2020 , more fully explaining the legal rationale for theJanuary 2020 ruling. Hearings on the abandonment and securitized financing proceedings were held inDecember 2019 and hearings on replacement resources were held inJanuary 2020 . InFebruary 2020 , the Hearing Examiners issued two recommended decisions recommending approval of PNM's proposed abandonment of SJGS, subject to approval of the separate replacement resources proceeding, and approval of PNM's proposed financing order to issue Securitized Bonds. The Hearing Examiners recommended, among other things, that PNM be authorized to abandon SJGS byJune 30, 2022 , to issue Securitized Bonds of up to$361 million , and to establish a rate rider to collect non-bypassable customer charges for repayment of the bonds (the "Energy Transition Charge"). The Hearing Examiners recommended an interim rate rider adjustment upon the start date of the Energy Transition Charge to provide immediate credits to customers for the full value of PNM's revenue requirement related to SJGS until those reductions are reflected in base rates. In addition, the Hearing Examiners recommended PNM be granted authority to establish regulatory assets to recover costs that PNM will pay prior to the issuance of the Securitized Bonds, including costs associated with the bond issuances as well as for severances, job training, and economic development funds. OnMarch 27, 2020 , the Hearing Examiners issued a partial recommended decision related to PNM's requested replacement resources. The Hearing Examiners recommended the NMPRC approve PNM's requested PPA replacement resources related to 350 MW of solar-PV facilities and 60 MW of battery storage facilities. OnApril 1, 2020 , the NMPRC 87 -------------------------------------------------------------------------------- Table of Contents unanimously approved the Hearing Examiners' recommended decisions regarding the abandonment of SJGS and the Securitized Bonds. OnApril 29, 2020 , the NMPRC issued an order declining to bifurcate a determination on replacement resources and deferring final consideration until the issuance of a comprehensive recommended decision addressing the entire portfolio of replacement resources. OnJune 24, 2020 , the Hearing Examiners issued a second recommended decision on PNM's request for approval of replacement resources that addressed the entire portfolio of replacement resources. The Hearing Examiners recommended that the NMPRC take one of two approaches to select replacement resources. The first approach emphasized resource selection criteria identified in the ETA and would include PPA's for 650 MW of solar and 300 MW of battery storage. The second approach emphasized the NMPRC's traditional resource selection criteria including price and reliability, which included a mix of solar PPAs combined with battery storage agreements and a 200 MW PNM-owned natural gas facility. OnJuly 29, 2020 the NMPRC issued an order approving the Hearing Examiners' first recommended approach, concluding that this approach satisfies threshold reliability considerations for replacement resources. PNM has 60 days from the date of the order to file an application in a separate case seeking approval of the proposed final, executed contracts, for any replacement resources that are not currently in evidence that have been approved by the NMPRC. Pursuant to the NMPRC'sApril 1, 2020 order approving the abandonment of SJGS and the related issuance of Securitized Bonds, PNMR recorded obligations totaling$38.1 million for estimated severances and other costs resulting from the planned retirement of SJGS in 2022, and for expected funding to state agencies for economic development and workforce training upon the issuance of the Securitized Bonds. This obligation is reflected in other deferred credits and as a corresponding deferred regulatory asset on PNMR's Condensed Consolidated Balance Sheets as ofJune 30, 2020 . These estimates may be adjusted in future periods as the Company refines its expectations. See additional discussion of PNM's SJGS Abandonment Application and the related challenges filed with theNM Supreme Court in Note 12. Other Environmental Matters - In addition to the regional haze rule and the ETA, SJGS and Four Corners may be required to comply with other rules that affect coal-fired generating units. InMarch 2017 ,President Trump issued an Executive Order on Energy Independence. The order sets out two general policies: promote clean and safe development of energy resources, while avoiding regulatory burdens, and ensure electricity is affordable, reliable, safe, secure, and clean. OnJune 19, 2019 ,EPA released the final Affordable Clean Energy rule.EPA is taking three separate actions in the final rule: (1) repealing the Clean Power Plan; (2) promulgating the Affordable Clean Energy rule; and (3) revising the implementing regulations for all emission guidelines issued underClean Air Act Section 111(d) which, among other things, extends the deadline for state plans and the timing ofEPA 's approval process.EPA set the Best System of Emissions Reduction ("BSER") for existing coal-fired power plants as heat rate efficiency improvements based on a range of "candidate technologies" that can be applied inside the fence-line. Rather than setting a specific numerical standard of performance,EPA 's rule directs states to determine which of the candidate technologies to apply to each coal-fired unit and establish standards of performance based on the degree of emission reduction achievable based on the application of BSER. The final rule requires states to submit a plan toEPA byJuly 8, 2022 and thenEPA has one year to approve the plan. If states do not submit a plan or their submitted plan is not acceptable,EPA will have two years to develop a federal plan. The rule is not expected to impact SJGS sinceEPA 's final approval of a state SIP would occur after the planned shutdown of SJGS in 2022 (subject to NMPRC approval). The Company is reviewing the rule with respect to impacts to Four Corners. See Note 11. OnDecember 20, 2018 ,EPA published in theFederal Register a proposed rule that would revise the Carbon Pollution Standards rule issued inOctober 2015 for certain fossil-fueled power plants. The proposal would revise the emissions standards for new, reconstructed, or modified coal-fired EGUs to make them less stringent. PNM does not expect SJGS or Four Corners will be subject to the Carbon Pollution Standards rule thatEPA has proposed to revise. PNM's review of the GHG emission reductions standards under the Affordable Clean Energy rule and the revised proposed Carbon Pollution Standards rule is ongoing. The Affordable Clean Energy rule has been challenged by several parties and may be impacted by further litigation. As discussed above, SJGS may also be required to comply with additional CO2 emissions restrictions issued by theNew Mexico Environmental Improvement Board pursuant to the recently enacted ETA. PNM cannot predict the impact these standards may have on its operations or a range of the potential costs of compliance, if any. Renewable Energy PNM's renewable procurement strategy includes utility-owned solar capacity, as well as solar, wind and geothermal energy purchased under PPAs. As ofJune 30, 2020 , PNM has 157 MW of utility-owned solar capacity in operation. In addition, PNM purchases power from a customer-owned distributed solar generation program that had an installed capacity of 138.6 MW atJune 30, 2020 . PNM also owns the 500KW PNM Prosperity Energy Storage Project . The project was one of the first combinations of battery storage and solar-PV energy in the nation and involved extensive research and development of advanced grid concepts. The facility also was the nation's first solar storage facility fully integrated into a utility's power grid. PNM also purchases the output from New Mexico Wind, a 204 MW wind facility, and the output of Red Mesa Wind, an existing 102 MW wind energy center. PNM's 2020 renewable energy procurement plan was approved by the NMPRC inJanuary 2020 and includes a PPA to procure 140 MW of renewable energy and RECs from LaJoya Wind beginning in 2021. 88 -------------------------------------------------------------------------------- Table of Contents The NMPRC's approved portfolio to replace the planned retirement of SJGS will result in PNM executing solar PPAs of 650 MW combined with 300 MW of battery storage facilities. The majority of these renewable resources are key means for PNM to meet the RPS and related regulations that require PNM to achieve prescribed levels of energy sales from renewable sources, including those set by the recently enacted ETA, without exceeding cost requirements. As discussed in Strategic Investments above, PNM is currently purchasing the output of 130 MW of solar capacity from NMRD that is used to serve the Facebook data center which includes two 25-year PPAs to purchase renewable energy and RECs from an aggregate of approximately 100 MW of capacity from two solar-PV facilities to be constructed by NMRD to supply power to Facebook, Inc. The first 50 MW of these facilities began commercial operations inNovember 2019 and the second 50 MW facility began commercial operation inJuly 2020 . Additionally, PNM has entered into three separate 25-year PPAs to purchase renewable energy and RECs to be used by PNM to supply additional renewable power to the Facebook data center. These PPAs include the purchase of power and RECs from a 50 MW wind project, which was placed in commercial operation inNovember 2018 , a 166 MW wind project to be operational inDecember 2020 , and a 50 MW solar-PV project to be operational inDecember 2021 . OnMay 31, 2019 , PNM filed an application with the NMPRC for approval of a program under which qualified governmental and large commercial customers could participate in a voluntary renewable energy procurement program ("PNM Solar Direct"). The costs of the program would be recovered directly from subscribing customers through a rate rider, including the costs to procure renewable energy from 50 MW of solar-PV facilities under a 15-year PPA. These facilities are expected to be placed in commercial operation byMarch 31, 2021 . InMarch 2020 , the NMPRC approved PNM's application, including the rate rider and PPA. PNM will continue to procure renewable resources while balancing the impact to customers' electricity costs in order to meetNew Mexico's escalating RPS and carbon-free resource requirements.
Energy Efficiency
Energy efficiency plays a significant role in helping to keep customers' electricity costs low while meeting their energy needs and is one of the Company's approaches to supporting environmentally responsible power. PNM's and TNMP's energy efficiency and load management portfolios continue to achieve robust results. In 2019, incremental energy saved as a result of new participation in PNM's portfolio of energy efficiency programs is estimated to be approximately 65 GWh. This is equivalent to the annual consumption of approximately 9,500 homes in PNM's service territory. PNM's load management and annual energy efficiency programs also help lower peak demand requirements. In 2019, TNMP's incremental energy saved as a result of new participation in TNMP's energy efficiency programs is estimated to be approximately 16 GWh. This is equivalent to the annual consumption of approximately 1,285 homes in TNMP's service territory. InApril 2018 , TNMP received the "Partner of the Year Energy Efficiency Delivery Award" for its High-Performance Homes Program. As discussed above, inApril 2020 , PNM filed an application for energy efficiency and load management programs to be offered in 2021, 2022, and 2023. The proposed program also requests an AMI pilot program. PNM cannot predict the outcome of this matter.
Water Conservation and Solid Waste Reduction
PNM continues its efforts to reduce the amount of fresh water used to make electricity (about 35% more efficient than in 2007). Continued growth in PNM's fleet of solar and wind energy sources, energy efficiency programs, and innovative uses of gray water and air-cooling technology have contributed to this reduction. Water usage has continued to decline as PNM has substituted less fresh-water-intensive generation resources to replace SJGS Units 2 and 3 starting in 2018, as water consumption at that plant has been reduced by approximately 50%. Focusing on responsible stewardship ofNew Mexico's scarce water resources improves PNM's water-resilience in the face of persistent drought and ever-increasing demands for water to spur the growth ofNew Mexico's economy. In addition to the above areas of focus, the Company is working to reduce the amount of solid waste going to landfills through increased recycling and reduction of waste. In 2019, 16 of the Company's 23 facilities met the solid waste diversion goal of a 65% diversion rate. The Company expects to continue to do well in this area in the future.
Customer, Stakeholder, and Community Engagement
Another key element of the Company's commitment to ESG principles is fostering
relationships with its customers, stakeholders and communities. The Company
strives to deliver a superior customer experience. Through outreach,
collaboration, and various community-oriented programs, the Company has
demonstrated a commitment to building productive relationships with
stakeholders, including customers, community partners, regulators, intervenors,
legislators, and shareholders. PNM continues to focus its efforts to enhance the
customer experience through customer service improvements, including enhanced
customer service engagement options, strategic customer outreach, and improved
communications. These efforts are
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supported by market research to understand the varying needs of customers,
identifying and establishing valued services and programs, and proactively
communicating and engaging with customers. As a result, PNM has seen significant
gains in customer satisfaction in recent years in both the JD Power Electric
Utility Residential Customer Satisfaction StudySM and its own proprietary
relationship surveys.
The Company has leveraged a number of communications channels and strategic
content to better serve and engage its many stakeholders. PNM's website
www.pnm.com, provides the details of major regulatory filings, including general
rate requests, as well as the background on PNM's efforts to maintain
reliability, keep prices affordable, and protect the environment. The Company's
website is also a resource for information about PNM's operations and community
outreach efforts, including plans for building a sustainable energy future for
New Mexico and to transition to an emissions-free generating portfolio by 2040.
PNM has also leveraged social media in communications with customers on various
topics such as education, outage alerts, safety, customer service, and PNM's
community partnerships in philanthropic projects. As discussed above, PNMR's
corporate website, www.pnmresources.com, includes a dedicated section providing
additional information regarding the Company's commitment to ESG principles and
other sustainability efforts.
With reliability being the primary role of a transmission and distribution
service provider in
Local relationships and one-on-one communications remain two of the most valuable ways both PNM and TNMP connect with their stakeholders. Both companies maintain long-standing relationships with governmental representatives and key electricity consumers to ensure that these stakeholders are updated on Company investments and initiatives. Key electricity consumers also have dedicated Company contacts that support their important service needs. Another demonstration of ESG principles is the Company's tradition of supporting the communities it serves inNew Mexico andTexas . This support extends beyond financial donations from thePNM Resources Foundation and corporate giving to also include collaborations on community projects, customer low-income assistance programs, and employee volunteerism. In response to COVID-19, additional efforts were made in each of these areas and exhibit the Company's core value of caring for its customers and communities. In addition to the extensive engagement both PNM and TNMP have with nonprofit organizations in their communities, thePNM Resources Foundation provides more than$1 million in grant funding each year acrossNew Mexico andTexas . These grants help nonprofits innovate or sustain programs to grow and develop business, develop and implement environmental programs, and provide educational opportunities. Beginning in 2020, thePNM Resources Foundation is funding grants with a three-year focus on decreasing homelessness, increasing access to affordable housing, reducing carbon emissions, and community safety with an emphasis on COVID-19 programs in 2020. As part of this emphasis,$0.2 million has been awarded to nonprofits inNew Mexico andTexas to assist with work being done on the front lines of the pandemic for community safety, with a focus on helping senior citizens and people currently experiencing homelessness during the shelter-in-place directives. Also in 2020, thePNM Resources Foundation expanded its matching donation program to offer 2-to-1 matching on donations made to social justice nonprofits and increasing the annual amount of matching donations available to each of its employees. During the three years endingDecember 2019 , corporate giving contributed approximately$6.2 million to civic, educational, environmental, low income, and economic development organizations. PNMR recognizes its responsibility to support programs and organizations that enrich the quality of life for the people in its service territories and communities and seeks opportunities to further demonstrate its commitment in these areas as needs arise. In 2020, PNM has partnered with key local organizations to initiate funding for programs focused on diversity, equity and inclusion. In response to COVID-19 community needs, PNMR donated to anEmergency Action Fund in partnership with key local agencies to benefit approximately ninety nonprofits and small businesses facing challenges due to lack of technology, shifting service needs, and cancelled fundraising events. Additionally, employee teams have supported first responders and other front-line workers through the delivery of food and other supplies often procured from local businesses struggling during stay-at-home orders. While its service territory does not include theNavajo Nation , PNM's operations include generating facilities and employees in this region that has been disproportionately affected by the pandemic. In response, employee teams focused efforts to this region and also provided available supplies of personal protective equipment. PNM has also collaborated with theNavajo Tribal Utility Authority Wireless (NTUAW) to set up wireless "hot spots" throughout theNavajo Nation in areas without internet access to assist first responders and support continued education opportunities amidst school closures. These actions supplement PNM's continued support for theNavajo Nation . The PNM Navajo Nation Workforce Training Scholarship Program provides support for Navajo tribal members and encourages the pursuit of education and training in existing and emerging jobs in the communities in which they live. In 2019, PNM invested an additional$500,000 into this scholarship program to further assist in the development and education of theNavajo Nation workforce. PNM also continues to partner in the Light up Navajo project, piloted in 2019 and modeled after mutual aid to connect homes without electricity to the power grid. 90
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Another important outreach program is tailored for low-income customers and includes thePNM Good Neighbor Fund to provide customer assistance with their electric utility bills. COVID-19 has increased the needs of these customers along with customerswho may not otherwise need to seek assistance. In addition to the suspension of customer disconnections and expansion of customer payment plans, PNM responded with increased communications through media outlets and customer outreach to connect customers with nonprofit community service providers offering financial assistance, food, clothing, medical programs, and services for seniors. As a result of these communication efforts, approximately 1,000 families in need have received emergency assistance through thePNM Good Neighbor Fund during the second quarter of this year. Volunteerism is also an important facet of employee culture keeping our communities safer, stronger, smarter and more vibrant. In 2019, PNM and TNMP employees and retirees contributed over 13,300 volunteer hours serving local communities by supporting at least 250 organizations. Volunteers also participate in a company-wide annual Day of Service at nonprofits acrossNew Mexico andTexas along with participation on a variety of nonprofit boards and independent volunteer activities throughout the year.
Economic Factors
PNM - In the three and six months endedJune 30, 2020 , PNM experienced a decrease in weather-normalized retail load of 1.7% and 0.3% compared to 2019. PNM experienced decreased sales to commercial customers partially offset by an increase in the usage of residential customers when compared to 2019 as a result ofNew Mexico state restrictions related to COVID-19 and did not experience significant impacts to its other customer classes. TNMP - In the three and six months endedJune 30, 2020 , TNMP experienced an increase in volumetric weather-normalized retail load of 2.9% and 1.5% compared to 2019. Weather-normalized demand-based load, excluding retail transmission customers, decreased 2.8% in the three months endedJune 30, 2020 and was flat for the six months endedJune 30, 2020 compared to 2019. TNMP has experienced increased volumetric usage related to residential consumers offset by decreases in its demand based commercial consumer class as a result of impacts related to COVID-19. The Company is unable to determine the duration or final impacts from COVID-19 as discussed in more detail in Item 1A. Risk Factors. The Company expects that some of the negative impacts to customer usage at PNM and TNMP will be offset by reduced operations and maintenance expenses resulting from the Company's efforts to maintain social distancing and that these costs could be further reduced if the economic impacts of COVID-19 persist into the summer. However, if current economic conditions extend through the summer and beyond, the Company may be required to implement additional measures such as further reducing or delaying operating and maintenance expenses and planned capital expenditures. Results of Operations Net earnings (loss) attributable to PNMR were$42.2 million , or$0.53 per diluted share in the six months endedJune 30, 2020 compared to($57.2) million , or ($0.72 ) per diluted share, in 2019. Among other things, earnings in the six months endedJune 30, 2020 benefited from regulatory disallowance recorded in 2019 resulting from theNM Supreme Court's opinion in PNM's appeal of the NMPRC's decisions in the NM 2015 Rate Case, warmer weather at PNM, higher earnings on PNM's renewable rate rider, higher transmission rates at PNM and TNMP, lower plant maintenance costs at PNM and lower employee related and outside service expenses at PNM. These increases were partially offset by increased depreciation and property taxes due to increased plant in service at PNM and TNMP, and losses on PNM's PVNGS and coal mine reclamation investment securities. Additional information on factors impacting results of operations for each segment is discussed below under Results of Operations. Liquidity and Capital Resources PNMR and PNM have revolving credit facilities with capacities of$300.0 million and$400.0 million that currently expire inOctober 2023 . Both facilities provide for short-term borrowings and letters of credit and can be extended throughOctober 2024 , subject to approval by a majority of the lenders. In addition, PNM has a$40.0 million revolving credit facility with banks having a significant presence inNew Mexico , which expires inDecember 2022 , and TNMP has a$75.0 million revolving credit facility, which expires inSeptember 2022 .PNMR Development has a revolving credit facility with a capacity of$40.0 million , with the option to further increase the capacity up to$50.0 million upon 15-days advance notice, that expires inFebruary 2021 .The PNMR Development Revolving Credit Facility bears interest at a variable rate and contains terms similar to the PNMR Revolving Credit Facility. Total availability for PNMR on a consolidated basis was$609.3 million atJuly 24, 2020 . Total availability at PNMR, on a consolidated basis, does not reflect a reduction of$100.3 million that PNM has reserved to provide liquidity support for the PNM Floating Rate PCRBs. The Company utilizes these credit facilities and cash flows from operations to provide funds for both construction and operational expenditures. PNMR also has intercompany loan agreements with each of its subsidiaries. 91
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PNMR projects that its consolidated capital requirements, consisting of construction expenditures, capital contributions forPNMR Development's 50% ownership interest in NMRD, and dividends, will total$4.5 billion for 2020 - 2024, including amounts expended throughJune 30, 2020 . The construction expenditures include estimated amounts for an anticipated expansion of PNM's transmission system, including the planned purchase of the Western Spirit Line, and expenditures for PNM's Wired for the Future capital program. InJanuary 2020 , PNMR entered into agreements to sell approximately 6.2 million shares of PNMR common stock under forward purchase arrangements (the "PNMR 2020 Forward Equity Sale Agreements"). Under the PNMR 2020 Forward Equity Sale Agreements, PNMR has the option to physically deliver, cash settle, or net share settle all or a portion of PNMR common stock on or before a date that is 12 months from their effective dates. PNMR did not initially receive any proceeds upon execution of these agreements. The initial forward sales price of$47.21 per share is subject to adjustments based on net interest rate factor and by expected future dividends on PNMR's common stock. PNMR expects to physically settle all shares under the agreements on or beforeJanuary 7, 2021 . See Note 9. To fund capital spending requirements to meet growth that balances earnings goals, credits metrics and liquidity needs, the Company has entered into a number of other financing arrangements in 2020, including the TNMP 2020 Bond Purchase Agreements, the PNM 2020 Term Loan and the PNM 2020 Note Purchase Agreement. For further discussion on these financing arrangements see Liquidity and Capital Resources discussion below as well as Note 9. See discussion of the NMPRC'sApril 1, 2020 approval of PNM's request to issue approximately$361 million of Securitized Bonds upon the retirement of SJGS in 2022, and the related appeal of that order to theNM Supreme Court in Note 12. After considering the effects of these financings and the Company's short-term liquidity position as ofJuly 24, 2020 , the Company has consolidated maturities of long-term and short-term debt aggregating approximately$1,019.2 million throughJuly 2021 . In addition to internal cash generation, 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 2020-2024 period. The Company currently believes that its internal cash generation, existing credit arrangements, and access to public and private capital markets will provide sufficient resources to meet the Company's capital requirements for at least the next twelve months. The Company is in compliance with its debt covenants. RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto. Trends and contingencies of a material nature are discussed to the extent known. Refer also to Disclosure Regarding Forward Looking Statements and to Part II, Item 1A. Risk Factors.
A summary of net earnings attributable to PNMR is as follows:
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 Change 2020 2019 Change
(In millions, except per share amounts)
Net earnings (loss) attributable to PNMR $ 57.5 $ (75.9)
79.9 79.9 - 80.0 79.9 0.1
Net earnings attributable to PNMR per
diluted share $ 0.72 $ (0.95)
(1) Excludes anti-dilutive shares for the three and six months ending
The components of the change in net earnings attributable to PNMR are:
Three Months Ended Six Months Ended
June 30, 2020 June 30, 2020
(In millions)
PNM $ 132.4 $ 97.4
TNMP 0.9 3.9
Corporate and Other - (1.9)
Net change $ 133.4 $ 99.4
Information regarding the factors impacting PNMR's operating results by segment are set forth below.
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Segment Information
The following discussion is based on the segment methodology that PNMR's management uses for making operating decisions and assessing performance of its various business activities. See Note 2 for more information on PNMR's operating segments. PNM PNM defines utility margin as electric operating revenues less cost of energy, which consists primarily of fuel and purchase power costs. PNM believes that utility margin provides a more meaningful basis for evaluating operations than electric operating revenues since substantially all fuel and purchase power costs are offset in revenues as those costs are passed through to customers under PNM's FPPAC. Utility margin is not a financial measure required to be presented under GAAP and is considered a non-GAAP measure.
The following table summarizes the operating results for PNM:
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 Change 2020 2019 Change
(In millions)
Electric operating revenues $ 260.8 $ 238.2 $ 22.6 $ 508.9 $ 507.5 $ 1.4
Cost of energy 67.9 58.9 9.0 142.4 158.2 (15.8)
Utility margin 192.9 179.4 13.5 366.5 349.3 17.2
Operating expenses 101.6 255.5 (153.9) 200.1 362.0 (161.9)
Depreciation and amortization 41.8 39.8 2.0 83.2 79.0 4.2
Operating income 49.6 (116.0) 165.6 83.2 (91.7) 174.9
Other income (deductions) 24.1 7.7 16.4 (6.4) 25.7 (32.2)
Interest charges (19.2) (18.5) (0.7) (36.8) (36.9) 0.1
Segment earnings (loss) before
income taxes 54.5 (126.8) 181.3 40.0 (102.8) 142.8
Income (taxes) benefit (4.9) 43.5 (48.4) (2.5) 41.5 (44.0)
Valencia non-controlling interest (3.9) (3.5) (0.4) (7.7) (6.3) (1.4)
Preferred stock dividend requirements (0.1) (0.1) - (0.3) (0.3) -
Segment earnings $ 45.5 $ (86.9) $ 132.4 $ 29.5 $ (67.9) $ 97.4 The following table shows total GWh sales, including the impacts of weather, by customer class and average number of customers:
Three Months Ended June 30, Six Months Ended June 30,
Percentage Percentage
2020 2019 Change 2020 2019 Change
(Gigawatt hours, except customers)
Residential 809.0 660.6 22.5 % 1,577.3 1,456.2 8.3 %
Commercial 813.5 933.7 (12.9) 1,652.2 1,761.9 (6.2)
Industrial 337.3 266.2 26.7 671.6 516.3 30.1
Public authority 59.7 54.2 10.1 108.2 103.8 4.2
Economy energy service (1) 94.7 163.9 (42.2) 261.2 320.8 (18.6)
Other sales for resale 654.9 484.4 35.2 1,260.1 1,359.1 (7.3)
2,769.1 2,563.0 8.0 % 5,530.6 5,518.1 0.2 %
Average retail customers
(thousands) 534.4 529.6 0.9 % 533.7 529.3 0.8 %
(1) PNM purchases energy for a large customer on the customer's behalf and
delivers the energy to the customer's location through PNM's transmission
system. PNM charges the customer for the cost of the energy as a direct pass
through to the customer with only a minor impact in utility margin resulting
from providing ancillary services.
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Operating Results - Three Months Ended June 30, 2020 compared to 2019
The following table summarizes the significant changes to utility margin:
Three Months
Ended
June 30, 2020
Change
Utility margin: (In millions)
Retail customer usage/load - Weather normalized KWh sales
decreased 1.7%, due to decreased sales to commercial customers
partially offset by increased sales to residential customers $ (2.0)
Weather - Warmer weather in 2020; cooling degree days were 76.6%
higher in 2020 8.4
Transmission - Higher revenues under formula transmission rates 2.0
Rate riders - Includes renewable energy, fuel clause, and energy
efficiency riders 5.6
Other (0.5)
Net Change $ 13.5
The following tables summarize the primary drivers for changes in operating
expenses, depreciation and amortization, other income (deductions), interest
charges, and income taxes:
Three Months
Ended
June 30, 2020
Change
Operating expenses: (In millions)
Lower plant maintenance and administrative costs at SJGS,
PVNGS, and gas-fired plants, partially offset by higher costs
at Four Corners $ (8.3)
Regulatory disallowance resulting from the NM Supreme Court's
May 2019 decision in PNM's appeal of the NM 2015 Rate Case
(Note 12) (149.3)
Higher property taxes due to increases in utility plant in
service 0.6
Higher employee related and outside service expenses 1.1
Reclassification of upfront and quarterly commitment fees,
offset in interest charges 0.6
Other 1.4
Net Change $ (153.9) Depreciation and amortization:
Increased utility plant in service, including solar facilities
under the renewable rider $ 1.5
Other 0.5
Net Change $ 2.0
Other income (deductions):
Higher gains on investment securities in the NDT and coal mine
reclamation trusts $ 17.0
Lower equity AFUDC (0.3)
Lower interest income and trust expenses related to investment
securities in the NDT and coal mine reclamation trusts (0.3)
Net Change $ 16.4
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Three Months
Ended
June 30, 2020
Change
Interest charges: (In millions)
Lower interest on term loans $ 0.7
Interest on deposit by PNMR Development for transmission
interconnections in 2019, which is offset in Corporate and Other 1.0
Issuance of $200.0 million of SUNs in April 2020 (1.1)
Lower debt AFUDC resulting from FERC audit (Note 12) (1.9)
Reclassification of upfront and quarterly commitment fees, offset in
operating expenses 0.6
Net Change $ (0.7)
Income (taxes) benefits:
Higher segment earnings before income taxes $ (45.9)
Changes in the anticipated effective tax rate, including
amortization of excess deferred income taxes (Note 14) 5.1
Reversal of excess deferred income taxes resulting from regulatory
disallowances in the NM 2015 Rate Case (Note 12) (7.5)
Other (0.1)
Net Change $ (48.4) Operating Results - Six Months Ended
The following table summarizes the significant changes to utility margin:
Six Months
Ended
June 30, 2020
Change
Utility margin: (In millions)
Retail customer usage/load - Weather normalized KWh sales
decreased 0.3% due to decreased sales to commercial customers
partially offset by increased sales to residential customers $ (1.4)
Weather - Warmer weather in 2020; cooling degree days were 76.3%
higher in 2020 6.2
Leap Year - Increase in revenue due an additional day in 2020 1.8
Transmission - Increase primarily due to higher revenues under
formula transmission rates and the addition of new customers 2.8
Rate riders - Includes renewable energy, fuel clause and energy
efficiency riders 9.2
Other (1.4)
Net Change $ 17.2
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The following tables summarize the primary drivers for changes in operating
expenses, depreciation and amortization, other income (deductions), interest
charges, and income taxes:
Six Months
Ended
June 30, 2020
Change
Operating expenses: (In millions)
Lower plant maintenance and administrative costs at SJGS,
PVNGS, and gas-fired plants, partially offset by higher costs
at Four Corners $ (9.4)
Regulatory disallowance resulting from the NM Supreme Court's
May 2019 decision in PNM's appeal of the NM 2015 Rate Case
(Note 12) (150.6)
Higher property taxes due to increases in utility plant in
service 0.8
Lower employee related and outside service expenses (3.4)
Reclassification of upfront and quarterly commitment fees,
offset in interest charges 0.6
Other 0.1
Net Change $ (161.9) Depreciation and amortization:
Increased utility plant in service, including solar facilities
under the renewable rider $ 3.5
Other 0.7
Net Change $ 4.2
Other income (deductions):
Lower gains on investment securities in the NDT and coal mine
reclamation trusts $ (29.8)
Lower equity AFUDC (1.1)
Lower interest income and trust expenses related to investment
securities in the NDT and coal mine reclamation trusts (0.4)
Other (0.9)
Net Change $ (32.2)
Interest charges:
Lower interest on term loans $ 0.9
Interest on deposit by PNMR Development for potential transmission
interconnections in 2019, which is offset in Corporate and Other 1.9
Issuance of $200.0 million of SUNs in April 2020 (1.1)
Lower debt AFUDC resulting from FERC audit (Note 12) (1.9)
Reclassification of upfront and quarterly commitment fees, offset in
operating expenses 0.6
Other (0.3)
Net Change $ 0.1
Income (taxes) benefits:
Higher segment earnings before income taxes $ (35.9)
Changes in the anticipated effective tax rate, including
amortization of excess deferred income taxes (Note 14) (0.6)
Reversal of excess deferred income taxes resulting from regulatory
disallowances in the NM 2015 Rate Case (Note 12) (7.5)
Net Change $ (44.0)
96-------------------------------------------------------------------------------- Table of Contents TNMP TNMP defines utility margin as electric operating revenues less cost of energy, which consists of costs charged by third-party transmission providers. TNMP believes that utility margin provides a more meaningful basis for evaluating operations than electric operating revenues since all third-party transmission costs are passed on to consumers through a transmission cost recovery factor. Utility margin is not a financial measure required to be presented under GAAP and is considered a non-GAAP measure.
The following table summarizes the operating results for TNMP:
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 Change 2020 2019 Change
(In millions)
Electric operating revenues $ 96.9 $ 92.0 $ 4.9 $ 182.4 $ 172.3 $ 10.1
Cost of energy 26.0 24.9 1.1 50.2 47.2 3.0
Utility margin 70.9 67.1 3.8 132.2 125.1 7.1
Operating expenses 25.3 24.0 1.3 50.5 49.3 1.2
Depreciation and amortization 22.4 20.5 1.9 44.2 40.7 3.5
Operating income 23.2 22.6 0.6 37.5 35.2 2.3
Other income (deductions) 2.0 0.7 1.3 2.5 1.3 1.2
Interest charges (7.4) (6.6) (0.8) (14.5) (15.4) 0.9
Segment earnings before income
taxes 17.8 16.7 1.1 25.5 21.1 4.4
Income (taxes) (1.6) (1.5) (0.1) (2.2) (1.8) (0.4)
Segment earnings $ 16.2 $ 15.3 $ 0.9 $ 23.3 $ 19.4 $ 3.9 The following table shows total sales, including the impacts of weather, by retail tariff consumer class and average number of consumers:
Three Months Ended Six Months Ended
June 30, June 30,
Percentage Percentage
2020 2019 Change 2020 2019 Change
Volumetric load (1) (GWh) 789.1 744.0 6.1 % 1,395.7 1,370.5 1.8 %
Demand-based load (2) (MW) 4,902.1 4,587.5 6.9 % 9,786.0 9,309.5 5.1 %
Average retail consumers
(thousands) (3) 258.3 255.0 1.3 % 257.7 254.4 1.3 %
(1) Volumetric load consumers are billed on KWh usage.
(2) Demand-based load includes consumers billed on monthly KW peak and also
includes retail transmission customers that are primarily billed under TNMP's
rate riders.
(3) TNMP provides transmission and distribution services to REPs that provide
electric service to their customers in TNMP's service territories. The number of
consumers above represents the customers of these REPs. Under TECA, consumers in
Texas have the ability to choose any REP to provide energy.
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Operating Results - Three Months Ended June 30, 2020 compared to 2019
The following table summarizes the significant changes to utility margin:
Three Months
Ended
June 30, 2020
Change
Utility margin: (In millions)
Transmission rate relief/load - Transmission cost of service rate
increases in September 2019, and March 2020 $ 2.6
Volumetric-based customer usage/load - Weather normalized KWh sales
increased 2.9%, the average number of retail consumers increased 1.3% 0.5
Demand-based customer usage/load - Lower demand-based revenues for
large commercial and industrial customers; weather normalized billed
demand excluding retail transmission customers decreased 2.8% (0.7)
Weather - Warmer weather in 2020; cooling degree days were6.7% higher
in 2020 0.9
Rate Riders - Impacts of rate riders, including the CTCsurcharge,
energy efficiency rider, rate case expense rider, andtransmission
cost recovery factor 0.5
Net Change $ 3.8
The following tables summarize the primary drivers for changes in operating
expenses, depreciation and amortization, other income (deductions), interest
charges, and income taxes:
Three Months
Ended
June 30, 2020
Change
Operating expenses: (In millions)
Higher employee related expenses $ 1.2
Higher capitalization of administrative and general and other
expenses due to higher construction expenditures (0.4)
Higher property taxes due to increased utility plant in service 0.3
Other 0.2
Net Change $ 1.3
Depreciation and amortization:
Increased utility plant in service $ 1.6
Other 0.3
Net Change $ 1.9
Other income (deductions):
Higher equity AFUDC $ 0.5
Higher CIAC 0.7
Other 0.1
Net Change $ 1.3
Interest charges:
Repayment of $35.0 million term loan in December 2019 $ 0.3
Issuance of $80.0 million first mortgage bonds in July 2019 (0.7)
Issuance of $110.0 million first mortgage bonds in April 2020 (0.6)
Other 0.2
Net Change $ (0.8)
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Three Months
Ended
June 30, 2020
Change
Income (taxes) benefits:
(In millions)
Higher segment earnings before income taxes $ (0.2)
Other 0.1
Net Change $ (0.1) Operating Results - Six Months Ended
The following table summarizes the significant changes to utility margin:
Six Months
Ended
June 30, 2020
Change
Utility margin: (In millions)
Transmission rate relief/load - Transmission cost of service rate
increases in March 2019 , September 2019 , and March 2020 6.6
Volumetric-based customer usage/load - Weather normalized KWh sales
increased 1.5% in addition to the leap-year impact; theaverage number
of retail consumers increased 1.3% 0.5
Demand-based customer usage/load - Demand-based revenues for large
commercial and industrial customers excluding retailtransmission
customers is flat -
Weather - Milder weather in the first quarter was offset by warmer
weather in the second quarter (0.1)
Rate Riders - Impacts of rate riders, including the CTC surcharge,
energy efficiency rider, rate case expense rider, andtransmission
cost recovery factor 0.3
Other (0.2)
Net Change $ 7.1
The following tables summarize the primary drivers for changes in operating
expenses, depreciation and amortization, other income (deductions), interest
charges, and income taxes:
Six Months
Ended
June 30, 2020
Change
Operating expenses: (In millions)
Higher employee related expenses $ 0.3
Higher capitalization of administrative and general and other
expenses due to higher construction expenditures (0.2)
Higher property taxes due to increased utility plant in service 0.7
Other 0.4
Net Change $ 1.2
Depreciation and amortization:
Increased utility plant in service $ 3.3
Other 0.2
Net Change $ 3.5
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Six Months
Ended
June 30, 2020
Change
Other income (deductions): (In
millions)
Higher equity AFUDC $ 0.4
Higher CIAC 0.7
Other 0.1
Net Change $ 1.2
Interest charges:
Repayment of $172.3 million 9.50% first mortgage bonds in April 2019 $ 4.3
Issuance of $225.0 million first mortgage bonds in March 2019 (2.2)
Issuance of $80.0 million first mortgage bonds in July 2019 (1.5)
Repayment of $35.0 million term loan in December 2019 0.6
Issuance of $110.0 million first mortgage bonds in April 2020 (0.6)
Other 0.3
Net Change $ 0.9
Income (taxes) benefits:
Higher segment earnings before income taxes $ (0.9)
Amortization of excess deferred federal income taxes (Note 14) 0.5
Net Change $ (0.4) Corporate and Other
The table below summarizes the operating results for Corporate and Other:
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 Change 2020 2019 Change
(In millions)
Electric operating revenues $ - $ - $ - $ - $ - $ -
Cost of energy - - - - - -
Utility margin - - - - - -
Operating expenses (4.3) (5.5) 1.2 (9.8) (11.3) 1.5
Depreciation and amortization 5.9 5.8 0.1 11.6 11.7 (0.1)
Operating income (loss) (1.6) (0.2) (1.4) (1.8) (0.4) (1.4)
Other income (deductions) (0.3) (0.1) (0.2) (0.9) (1.0) 0.1
Interest charges (4.5) (4.7) 0.2 (10.2) (9.2) (1.0)
Segment earnings (loss) before income
taxes (6.4) (5.1) (1.3) (12.9) (10.5) (2.4)
Income (taxes) benefit 2.2 0.8 1.4 2.4 1.9 0.5
Segment earnings (loss) $ (4.2) $ (4.2) $ - $ (10.5) $ (8.6) $ (1.9)
Corporate and Other operating expenses shown above are net of amounts allocated
to PNM and TNMP under shared services agreements. The changes in operating
expense for the three months and six months ended June 30, 2020 include an
increase for the reclassification of $0.4 million in upfront and quarterly
commitment fees, previously recorded as interest charges, and an increase of
$1.0 million in legal and consulting costs that were not allocated to PNM or
TNMP. Substantially all depreciation and amortization expense and other income
(deductions) are offset in operating expenses as a result of allocation of these
costs to other business segments.
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Operating Results - Three Months Ended June 30, 2020 compared to 2019
The following tables summarize the primary drivers for changes in other income
(deductions), interest charges, and income taxes:
Three Months
Ended
June 30, 2020
Change
Other income (deductions): (In millions)
Higher equity method investment income from NMRD $ 0.4
Increase in donations and other contributions (0.5)
Other (0.1)
Net Change $ (0.2)
Interest charges:
Lower interest on term loans $ 1.4
Higher short-term borrowings (0.7)
Reclassification of upfront and quarterly commitment fees, offset in
operating expense 0.4
Elimination of intercompany interest (1.0)
Other 0.1
Net Change $ 0.2
Income (taxes) benefits:
Impact of difference in effective tax rates used by PNMR and its
subsidiaries in the calculation of income taxes in interim periods $ 1.1
Higher segment loss before income taxes 0.3
Net Change $ 1.4 Operating Results - Six Months Ended
Six Months
Ended
June 30, 2020
Change
Other income (deductions): (In millions)
Higher equity method investment income from NMRD $ 0.4
Increase in donations and other contributions (0.6)
Other 0.3
Net Change $ 0.1
Interest charges:
Lower interest on term loans $ 1.9
Higher short-term borrowings (1.4)
Reclassification of upfront and quarterly commitment fees, offset in
operating expenses 0.4
Elimination of intercompany interest (1.9)
Net Change $ (1.0)
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Six Months
Ended
June 30, 2020
Change
Income (taxes) benefits:
(In millions)
Impact of difference in effective tax rates used by PNMR and
its subsidiaries in the calculation of income taxes in
interim periods $ -
Higher segment loss before income taxes 0.6
Other (0.1)
Net Change $ 0.5 © Edgar Online, source
