Net earnings for Public Service Co. of New Mexico plummeted 26 percent from April to June compared with the second quarter of 2015, thrusting PNM’s controversial rate case into the spotlight during a conference call with investors this week.
That drop, plus an 11.8 percent decline in net earnings at Texas New Mexico power, pushed parent firm PNM Resources’ overall net earnings down 14.5 percent.
The downturn is aggravating concerns about recommendations made last week by a New Mexico Public Regulation Commission hearing examiner. The examiner said PNM’s request for a 14.4 percent rate hike this year should be cut to 6.4 percent.
If the PRC follows those recommendations – particularly the examiner’s advice to reject any rate recovery for $153 million PNM spent to acquire ownership of 64 megawatts of power from the Palo Verde Nuclear Generating Station in Arizona – it could prompt an appeal to the state Supreme Court, executives said in the conference call Tuesday.
“Unfortunately, the hearing examiner has issued a recommendation that may ultimately threaten our ability to provide reliable, affordable and carbon-free power to our customers while maintaining a strong balance sheet and credit metrics,” said PNM Resources Chairman, President and CEO Pat Vincent-Collawn.
It could also mean a delay in investments, such as a plan to install smart meters on residences and businesses.
PNM’s stock price dropped slightly after the examiner’s recommendations on Friday, but has since climbed back above $33 a share as of Wednesday.
The company will file “strong exceptions,” or objections, to the recommendations, but it is also weighing legal options, executives said.
“We’re focused on exceptions now to get the commission to reconsider the recommendations,” PNM Chief Financial Officer Chuck Eldred told investors. “But in the event the PRC votes to not correct these items … we will definitely pursue aggressively our legal options, including an appeal to the Supreme Court.”
A Supreme Court appeal could take 12 to 18 months to resolve. But the company would prefer that route over trying to get concerns from this case re-addressed in its next rate case, which the company expects to file in December.
“We are going to fight it,” Vincent-Collawn said.
A number of things have contributed to PNM’s drop in earnings, including declining electric demand in New Mexico.
While consumption by commercial users climbed 0.5 percent in the 2016 second quarter compared with last year, residential demand dropped by 0.4 percent and industrial load plummeted by 7.1 percent.
For the first half of this year, electric load overall was down by 0.7 percent and the company projects a 1 percent annual decline by year-end. That’s on top of a 1.4 percent decline in 2015.
New Mexico’s still-sluggish economy, combined with energy -efficiency programs that lower consumption, have contributed to load declines in recent years. In addition, the company has said a sharp drop in consumption by Intel Corp. in Rio Rancho accelerated the industrial decline early this year.
PNM also faced increased depreciation expenses, higher property taxes from new investments, higher interest rates for issuance of new long-term debt and declining sales prices for some of PNM’s Palo Verde generation during the second quarter.
PNM’s Texas utility benefited from load growth and new transmission rates during the second quarter. But increased operations and maintenance costs, milder temperatures, and higher depreciation and property tax expenses combined to offset the benefits.
PNM Resources, on the other hand, improved its corporate earnings from a negative $1.6 million in the second quarter of 2015 to a positive $700,000 this past quarter. The parent firm benefited from improved interest expenses on the repayment of long-term debt, plus net interest earned on a loan made to the Westmoreland Coal Co. for purchase of the San Juan Coal Mine.
Meanwhile, the company expressed concern that lack of adequate rate relief for capital investments by PNM could cut into the company’s bottom line and potentially erode its credit standing.
Given the financial challenges faced by PNM, the company is re-evaluating some capital expenditures, such as a plan to spend $87.2 million to upgrade PNM’s residential and commercial meters with smart meter technology. PNM asked the PRC to suspend hearings on that plan, scheduled for later this month, to allow it to first evaluate how the pending rate case will affect its finances.
Rating agencies are keeping close tabs on everything, Eldred told investors.
“We keep them well informed,” he said. “I believe in general that they’re surprised and discouraged with our regulatory treatment. It seems they won’t take action, if any at all, until after a final order by the PRC.”
Both Moody’s and Standard & Poor’s rated PNM as below investment grade, or junk-bond status, from 2008 to 2013, when the utility regained investment-grade ratings.
But, in May, after the PRC re-opened hearings in the rate case – setting a final PRC decision back by a month – Moody’s released an “Issuer Comment” that called the move “credit negative.”
PNM Resources narrowed its earnings guidance range on Tuesday to $1.55 to $1.65 per share, reflecting the impact of procedural delays in the rate case, Vincent-Collawn said.