PNM Resources (PNM) is an investor-owned holding company of energy and energy-related businesses, which primarily revolves around its subsidiaries Public Service Company of New Mexico and Texas-New Mexico Power Company. With ownership in eight power plants, this New Mexico-based company generates, transmits and distributes electricity to more than 720,000 homes and businesses between New Mexico and Texas. The company’s fuel mix consists of coal (58%), nuclear (28%), natural gas (9%), and renewables (5%). In early December, Patricia Vincent-Collawn replaced Jeffry Sterba as Chairman, adding to her roles as active President and CEO of PNM Resources.
A Change of Strategy
In September of 2011, PNMR announced its exit from the competitive energy business to return to its focus on a regulated utility model, making it a “pure-play” electric utility company. Both investments in competitive energy businesses, Optim Energy and First Choice Power, proved unprofitable. The risks clearly outweighed the rewards, and consequently, the company wanted to minimize the volatile variables that started affecting PNMR’s overall performance.
During the September interim, a restructuring took place allowing PNMR to reduce its share in Optim Energy from 50% to 1%. Market headwinds hindered Optim Energy’s performance potential with natural gas and power prices relatively low in 2009 and 2010 and, therefore, PNMR wrote off its investment in the company in December of 2010 after it was deemed fully impaired.
Volatility factors also resulted in the sale of First Choice Power to Direct Energy on November 1, 2011. The total sale price of $329 million was comprised of a purchase price of $270 million and working capital of $59 million. The activity allowed PNMR to recapitalize through debt and equity repurchases.
We are optimistic about this approach, as are investors who responded favorably to the change. The announcement was the boost needed to push the stock price above the $16.00-a-share mark, after being in a slump from July through mid-September. Since then, the share price has improved, albeit gradually, and currently hovers around $18.00 a share.
Fans of Renewable Energy
Renewable Energy Requirement Changes
In 2011, PNM allocated $88 million in capital expenditures for PNM renewables due to a regulation in New Mexico mandating electric utility companies increase the amount of electricity generated from renewable resources to 10% from the prior requirement of 6%. The mandate is expected to double to 20% in 2020.
PNMR is also seeing pressure from environmental groups to increase the amount of natural-gas fired plants it operates. This fuel type is cleaner burning than coal, which could result in measurable reductions of greenhouse gas emissions released. As a result, the company may face additional expenses over the long-term in connection to Environmental Protection Agency regulations (discussed below).
The struggle continues for PNM Resources concerning environmental regulations and the cost of implementing such technologies. The company’s San Juan and Four Corners coal-fired power plants, which account for approximately 60% of the electricity used by customers, are both being affected by environmental policy changes.
PNMR may see significant cost increases in its San Juan (New Mexico) power plant in the next five years due to Environmental Protection Agency (EPA) best available retrofit technology (BART) determinations. The EPA is requiring installation of selective catalytic reduction (SCR) technology in all four of PNM’s coal-fired plants in San Juan to meet BART determinations according to the Clean Air Act’s Regional Haze Rule. Recent studies concluded that SCR technologies will improve health and environmental conditions by drastically reducing the amount of nitrogen oxides (NOx) that coal-fired facilities release, which will specifically decrease pollution in parks and wilderness areas.
PNM predicts total installation expenses to range between $750 million to $1 billion, compared to the EPA’s estimated $345 million. Costs through year-end 2013 alone are estimated to be $246 million. In response, PNM has proposed a less expensive alternative involving selective noncatalytic reduction, which would only cost about $77 million and still meet EPA requirements.
PNM also asked a federal appeals court to suspend installation until a final decision is made whether or not to overturn the EPA’s mandate to prevent unnecessary spending for PNM and its customers. However, a lack of response is preventing the company from postponing the installation any longer.
In addition, the company’s Four Corners Power Plant (New Mexico) anticipates additional costs because of the Environmental Protection Agency’s updated regulations concerning mercury and toxic emissions.
Watt’s up with PNM?
Adding It All Up
PNM Resources’ current payout ratio is below industry norms. The stock’s 2.7% dividend yield is also low when compared to the industry average of 4.2%. The dividend policy is being reviewed in February, although no details have been released yet. Indeed, we expect a dividend increase to occur to push the lackluster dividend yield closer towards the industry average.
All in all, while we believe the company has taken some positive steps that have moved the stock price higher over the past few months. Forward visibility, however, is currently lacking with PNM Resources. Positive variables, such as the possible change in the dividend policy and negative ones like the probable capital expenditures from EPA regulations, both require more clarity or investors will be taking a leap of faith with an investment here.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.