PNM
Resources Inc. (PNM, $36.85): “Outlook Fizzles”
By:
Andrew Plank, AIM Student at Marquette University
Disclosure: The AIM Equity
Fund currently holds this position. This article was written by myself, and it
expresses my own opinions. I am not receiving compensation for it and I have no
business relationship with any company whose stock is mentioned in this
article.
Summary
·
PNM
Resources Inc. (NYSE, PNM) is a utility company that provides the
generation, transmission, and distribution of electricity to its rate-regulated
customer base. The majority of
electricity produced by PNM is through coal fired and gas fired power
plants. PNM operates primarily in New
Mexico and Texas. This firm was founded
in 1917, and is headquartered in Albuquerque, NM.
·
Capital expenditures totaled $500
million in 2017, while PNM estimated total capex for the next five years to
exceed $2 billion.
·
PNM filed for a rate increase which was
approved by the New Mexico Public Regulation Sector (NMPRC), awarding PNM rate
growth of $61.2 million.
·
The EPA along with regulators in New
Mexico approved the forced retirement of Units 2 and 3 at the San-Juan coal
fired power plant.
·
Board declared a $0.2650 per share
dividend paid on February 23rd, 2018.
Key
Points: Moving into 2018, PNM Resources Inc. announced their plan to
spend $2 billion in capital expenditures over the next 5 years. Their current capex spending has hovered
around $500 million a year so this spending plan would be a 20% decrease in
expenditures moving forward. PNM has
stated that they plan to slowly transition into alternative energy from their
coal-fired plants as clean energy initiatives begin to transpire. PNM has not taken part in an acquisition of
an alternative energy firm in the past six years making their statement to
expand into renewable energy seem questionable.
In 2015, PNM requested a rate increase
of $124 million. The NMPRC asked an
examiner to reject their request as they felt it was too high. In September of 2016, the NMPRC agreed to
allow for a $61.2 million rate increase, roughly half the increase that PNM
initially requested. PNM in December of
2016 requested another rate increase of $99.5 million and is currently waiting
on the NMPRC to process their request.
The EPA along with the New Mexico
Environment Department revised a plan for PNM to close electrical generation
units in its coal-fired San Juan plant in New Mexico. This plan also included the construction of a
natural gas plant that would produce 78 MW of electricity to replace the lost
generation from the coal units. PNM
states that they plan to continue to phase out their coal plants in favor of
alternative forms of energy.
PNM Resources paid a $0.2650 per share
dividend on February 23rd, 2018.
PNM has targeted a dividend payout ratio of roughly 50% of ongoing
earnings. The dividend yield of PNM as
of March, 21st 2018 was 2.9%.
What
has the stock done lately?
On November 28th, 2017 PNM
Resources hit a price high of $45.53.
Since reaching its high, the stock price has declined 23% to date. The utility industry has been struggling over
the past couple of months as interest rates continue to rise. Utilities rely heavily on debt financing
because they are an asset intensive industry with large amounts of
infrastructure that need to be built and maintained. Value stocks like utilities also suffer
because dividends are less attractive in a rising interest rate market.
Past
Year Performance: Over the past year, PNM had a price
increase of less than 1%. While the
stock made large gains over the course of a year, these gains were virtually
erased with the rise of interest rates.
Over the past two months, PNM has experienced large amounts of price
volatility which is not surprising considering the market as a whole has
experienced this as well. As these bond
yields continue to rally, the sector as a whole will continue to struggle. PNM has been closely following the Russell
2000 (Figure 1) in terms of the initial price drop, while the firm seems to be
experiencing more volatility than the other stocks in the Russell 2000 over
these past two months.
My Takeaway
PNM Resources has several areas of
concern in regards to their future performance as a firm. The largest issue that PNM faces is being a
utility company that derives a large amount of their energy production through
coal and other fossil fuels. At this
moment, coal has been relatively cheap which has benefited PNM. In the long-term however, the US will
continue to become more environmentally conscious and PNM could be at odds with
the EPA and be forced to make large changes to their operations. PNM has stated that they plan to move away
from coal and into alternative energy, yet they have not built or acquired a
renewable energy plant in the past five years.
They have also stated they plan on lowering capex expenditures in the
future showing they are not planning on any large expenditures in the coming
years. In terms of the future, PNM has expressed
a plan, yet have shown almost no signs of moving towards it. PNM has reaped the gains of being a large
electric utility, but because of their lack of adaption to a quickly changing
marketplace, I do not see a positive outlook for this company.
