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 809,000 residential, commercial, and industrial customers and end-users of electricity in
New Mexicoand 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. Recent Developments Merger On October 20, 2020, PNMR, Avangrid and Merger Sub entered into the Merger Agreement pursuant to which Merger Sub will merge with and into PNMR, with PNMR surviving the Merger as a wholly-owned subsidiary of Avangrid. Pursuant to the Merger Agreement, each issued and outstanding share of PNMR common stock at the Effective Time will be converted into the right to receive $50.30in cash. The proposed Merger has been unanimously approved by the Boards of Directors of PNMR, Avangrid and Merger Sub and approved by PNMR shareholders at the Special Meeting of Shareholders held on February 12, 2021. The Merger Agreement provided that it may be terminated by each of PNMR and Avangrid under certain circumstances, including if the Effective Time shall not have occurred by the January 20, 2022End Date; however, either PNMR or Avangrid could extend the End Date to April 20, 2022if all conditions to closing have been satisfied other than the obtaining of all required regulatory approvals. As discussed below, on December 8, 2021, the NMPRC issued an order rejecting the stipulation agreement relating to the Merger. In light of the NMPRC ruling, on January 3, 2022, PNMR, Avangrid and Merger Sub entered into an Amendment to the Merger Agreement pursuant to which PNMR and Avangrid agreed to extend the End Date to April 20, 2023. The Merger is subject to certain regulatory approvals, including from the NMPRC. The Joint Applicants (PNMR and Avangrid) to the NMPRC application and a number of intervening parties had entered into an amended stipulation and agreement in the Joint Application for approval of Merger pending before the NMPRC. An evidentiary hearing was held in August 2021. On November 1, 2021, a Certification of Stipulation was issued by the hearing examiner, which recommended against approval of the amended stipulation. On December 8, 2021, the NMPRC issued an order adopting the Certification of Stipulation, rejecting the amended stipulation reached by the parties. On January 3, 2022, PNMR and Avangrid filed a notice of appeal with the NM Supreme Court. On February 2, 2022, PNMR and Avangrid filed a statement of issues outlining the argument for appeal. On April 7, 2022, PNMR and Avangrid filed their Brief in Chief with the NM Supreme Court. Answer briefs are due from the NMPRC on June 13, 2022, and response briefs are due July 6, 2022. With respect to other regulatory proceedings related to the Merger, in 2021 PNMR received clearances for the Merger from the FTCunder the HSR Act, CFIUS, the FCC, FERC, the PUCT, and the NRC. As a result of the delay in closing of the Merger due to the need to obtain NMPRC approval, PNMR and Avangrid were required to make a new filing under the HSR Act and request extensions of approvals previously received from the FCC and NRC. On February 9, 2022, the request for extension was filed with the NRC. On February 24, 2022, the requests for a 180-day extension were granted by the FCC. PNMR and Avangrid expect to make a new filing under the HSR Act later in 2022. No additional approvals are required from CFIUS, FERCor the PUCT. Consummation of the Merger remains subject to the satisfaction or waiver of certain customary closing conditions, including, without limitation, the absence of any material adverse effect on PNMR, the receipt of required regulatory approval from the NMPRC, and the agreements relating to the divestiture of Four Corners being in full force and effect and all applicable 75 -------------------------------------------------------------------------------- Table of Contents regulatory filings associated therewith being made. The agreement relating to the divestiture of Four Corners has been entered into and is in full effect and related filings have been made with the NMPRC. Financial and Business Objectives PNMR is focused on achieving three key financial objectives:
• Earn allowed returns on regulated companies • Deliver earnings and dividend growth at or above the industry average • Maintain investment-grade credit ratings
In line 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
Earn permitted returns on regulated companies
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, periodic 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 the rate filings is provided in Note 17 of the Notes to the Consolidated Financial Statements in the 2021 Annual Reports on Form 10-K.
The tariffs charged to customers by PNM and TNMP are subject to the traditional tariff regulation of the NMPRC,
2020 Decoupling Petition - On
May 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 would not be impacted until January 1, 2022. On October 2, 2020, PNM requested an order to vacate the public hearing and stay the proceeding until the NMPRC decides whether to entertain a petition to issue a declaratory order resolving the issues raised in the motions to dismiss. On October 7, 2020, the hearing examiner approved PNM's request to stay the proceeding and vacate the public hearing and on October 30, 2020PNM filed a petition for declaratory order asking the NMPRC to issue an order finding that full revenue decoupling is authorized by the EUEA. On March 17, 2021, the NMPRC issued an order granting PNM's petition for declaratory order which commences a proceeding to address petitions. Oral arguments were made on July 15, 2021. On January 14, 2022, the hearing examiner issued a recommended decision recommending the NMPRC find that the EUEA does not mandate the NMPRC to authorize or approve a full decoupling mechanism, defining full decoupling as limited to energy efficiency and load management measures and programs. The recommended decision also states that a utility may request approval of a rate adjustment mechanism to remove regulatory disincentives to energy efficiency and load management measures and programs through a stand-alone petition, as part of the utility's triennial energy efficiency application or a general rate case and that PNM is not otherwise precluded from petitioning for a rate adjustment mechanism prior to its next general rate case. Finally, the recommended decision stated that the EUEA does not permit the NMPRC to reduce a utility's ROE based on approval of a disincentive removal mechanism founded on removing regulatory disincentives to energy efficiency and load management measures and programs. The recommended decision does not specifically prohibit a downward adjustment to a utility's capital structure, based on approval of a disincentive removal mechanism. On April 27, 2022, the NMPRC issued an order adopting the recommended decision in its entirety. See Note 12. PNM cannot predict the outcome of this matter. PVNGS Leased Interest Abandonment Application - On April 2, 2021, PNM filed the PVNGS Leased Interest Abandonment Application. In the application PNM requested NMPRC authorization to decertify and abandon its Leased Interest and to create regulatory assets for the associated remaining undepreciated investments with consideration of cost 76 -------------------------------------------------------------------------------- Table of Contents recovery of the undepreciated investments in a future rate case. PNM also sought NMPRC approval to sell and transfer the PNM-owned assets and nuclear fuel supply associated with the Leased Interest to SRP, which will be acquiring the Leased Interest from the lessors upon termination of the existing leases. In addition, PNM sought NMPRC approval for a 150 MW solar PPA combined with a 40 MW battery storage agreement, and a stand-alone 100 MW battery storage agreement to replace the Leased Interest. To ensure system reliability and load needs are met in 2023, when a majority of the leases expire, PNM also requested NMPRC approval for a 300 MW solar PPA combined with a 150 MW battery storage agreement. On August 25, 2021, the NMPRC issued an order confirming PNM requires no further NMPRC authority to abandon the PVNGS Leased Interest and to sell and transfer the PNM-owned assets and nuclear fuel supply associated with the Leased Interest to SRP. The order bifurcated the issue of approval of the two PPAs and three battery storage agreements into a separate docket so it may proceed expeditiously and deferred a ruling on the other issues. On February 16, 2022, the NMPRC approved the two PPAs and three battery storage agreements. On April 15, 2022, PNM made a compliance filing with the NMPRC in which it updated the NMPRC on the status of the PPAs and the battery storage agreements listed above. It has been determined that the projects will not be in commercial operation in time for the 2023 summer peak. PNM is conferring with project developers and is unable to predict the outcome of this matter. For additional information on PNM's Leased Interest and the associated abandonment application see Note 12 and Note 13. Advanced Metering - Currently, TNMP has approximately 262,000 advanced meters across its service territory. Beginning in 2019, the majority of costs associated with TNMP's AMS program are being recovered through base rates. On July 14, 2021, TNMP filed a request with the PUCT to consider and approve its final reconciliation of the costs spent on the deployment of AMS from April 1, 2018through December 31, 2018of $9.0 million, and approve appropriate carrying charges until full collection. On February 10, 2022, the PUCT approved substantially all costs included in TNMP's AMS reconciliation application. On October 2, 2020, TNMP filed an application with the PUCT for authorization to implement necessary technological upgrades of approximately $46 millionto its AMS program by November 2022. On January 14, 2021, the PUCT approved TNMP's application. TNMP will seek recovery of the investment associated with the upgrade in a future general rate proceeding or DCOS filing. 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 PUCT also approved rate riders that allow TNMP to recover amounts related to energy efficiency and third-party transmission costs. The NMPRC has approved PNM recovering fuel costs through the FPPAC, as well as rate riders for renewable energy, energy efficiency and the TEP. These mechanisms allow for more timely recovery of investments.
Rates PNM charges wholesale transmission customers are subject to traditional rate regulation by
FERC. Rates charged to wholesale electric transmission customers, other than customers on the Western Spirit Line described below, 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 with FERC, 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 with FERCbefore being included in the formula rate. In May 2019, PNM filed an application with FERCrequesting approval to purchase and provide transmission service on the Western Spirit Line. All necessary approvals were obtained. In December 2021, PNM completed the purchase of the Western Spirit Line and service under related transmission service agreements was initiated using an incremental rate that is separate from the formula rate mechanism described above.
Deliver earnings and dividend growth at or above the industry average
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. 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. The Board will continue to evaluate the dividend on an annual basis, considering sustainability and growth, capital planning, and industry standards. Under the terms of the Merger Agreement, PNMR has agreed not to declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwise, with respect to any of its equity securities, or make any other 77 -------------------------------------------------------------------------------- Table of Contents actual, constructive or deemed distribution in respect of any equity securities (except (i) PNMR may continue the declaration and payment of planned regular quarterly cash dividends on PNMR common stock for each quarterly period ended after the date of the Merger Agreement, which for any fiscal quarter in 2022 shall not exceed
$0.3475, with usual record and payment dates in accordance with past dividend practice, and (ii) for any cash dividend or cash distribution by a wholly-owned subsidiary of PNMR to PNMR or another wholly-owned subsidiary of PNMR). The Board approved the following increases in the indicated annual common stock dividend: Approval Date Percent Increase December 20206.5% December 20216.1%
Maintain 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. On
February 10, 2022, Moody's downgraded TNMP's issuer rating from A3 to Baa1 and changed the outlook from negative to stable. 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. All of the 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
Safety is the first priority of our business and a core value of the Company. PNMR utilizes a Safety Management System to provide clear direction, objectives and targets for managing safety performance and minimizing risks and empowers employees to "Be the Reason Everyone Goes Home Safe". PNMR measures reliability and benchmark performance of PNM and TNMP against other utilities using industry-standard metrics, including System Average Interruption Duration Index ("SAIDI") and System Average Interruption Frequency Index ("SAIFI"). PNM's and TNMP's investment plans include projects designed to support reliability and reduce the amount of time customers are without power. 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. 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 supporting flexible arrangements for all applicable job functions. The Company is also working with its suppliers to manage the 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 suspended disconnecting certain customers for past due bills, 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. 78
April 1, 2021, PNM joined and began participating in the EIM. The EIM is a real-time wholesale energy trading market operated by the CAISO that enables participating electric utilities to buy and sell energy. The EIM aggregates the variability of electricity generation and load for multiple balancing authority areas and utility jurisdictions. In addition, the EIM facilitates greater integration of renewable resources through the aggregation of flexible resources by capturing diversity benefits from the expanding geographic footprint and the expanded potential uses for those resources. PNM completed a cost-benefit analysis, which indicated participation in the EIM would provide substantial benefits to retail customers. In 2018, PNM filed an application with the NMPRC requesting, among other things, to recover initial capital investments and authorization to establish a regulatory asset to recover other expenses that would be incurred in order to join the EIM. The NMPRC approved the establishment of a regulatory asset but deferred certain rate making issues, including but not limited to issues related to implementation and ongoing EIM costs and savings, the prudence and reasonableness of costs to be included in the regulatory asset, and the period over which costs would be charged to customers until PNM's next general rate case filing. PNM has experienced an aggregate of $15.8 millionin cost savings to customers through participation in the EIM, $3.3 millionof which has occurred in the three months ended March 31, 2022.
Utility plant and strategic investments
Utility Plant Investments - During the 2020 and 2021 periods, PNM and TNMP together invested
$1.6 billionin utility plant, including substations, power plants, nuclear fuel, and transmission and distribution systems. New Mexico'sclean energy future depends on a reliable, resilient, secure grid to deliver an evolving mix of energy resources to customers. PNM has launched a capital initiative, which emphasizes new investments in its transmission and distribution infrastructure with three primary objectives: delivering clean energy, enhancing customer 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 Partnerscreated NMRD to pursue the acquisition, development, and ownership of renewable energy generation projects, primarily in the state of New Mexico. Abundant renewable resources, large tracts of affordable land, and strong government and community support make New Mexicoa favorable location for renewable generation. New Mexicoranks third in the Nation for energy potential from solar power according to the Nebraska Department of Energy & Energy Sun Indexand ranks third in the Nation for land-based wind capacity according to the U.S. Office of Energy Efficiency and Renewable Energy. PNMR Development and AEP OnSite Partnerseach 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 of the United States'largest electric utilities. As of March 31, 2022, NMRD's renewable energy capacity in operation was 135.1 MW, which includes 130 MW of solar-PV facilities to supply energy to the Meta data center located within PNM's service territory, 1.9 MW to supply energy to Columbus Electric Cooperativelocated in southwest New Mexico, 2.0 MW to supply energy to the Central New Mexico Electric Cooperative, and 1.2 MW of solar-PV facilities to supply energy to the City of Rio Rancho, New Mexico. In addition, PNM's February 8, 2021application with the NMPRC for approval to service the Meta data center includes construction of a 50 MW solar facility owned by NMRD, which is expected to be operational in 2023. 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. NMPRC rules required PNM to file its 2020 IRP in July 2020. In April 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. On January 29, 2021, PNM filed its 2020 IRP. The plan focuses on a carbon-free electricity portfolio by 2040 that would eliminate coal at the end of 2024. This includes replacing the power from San Juanwith a mix of approved carbon-free resources and the plan to exit Four Corners at the end of 2024. The plan highlights the need for additional investments in a diverse set of resources, including renewables to supply carbon-free power, energy storage to balance supply and demand, and efficiency and other demand-side resources to mitigate load growth. See additional discussion regarding PNM's 2020 IRP filing in Note 12. 79 -------------------------------------------------------------------------------- Table of Contents Environmentally Responsible PowerPNMR has a long-standing record of environmental stewardship. PNM's environmental focus is in three key areas:
• Develop strategies to deliver reliable and affordable power while transitioning to a 100% emission-free generation portfolio by 2040 • Prepare the PNM 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 and other information that collectively demonstrates the Company's commitment to ESG principles. This information highlights plans for PNM to be coal-free by 2024 (subject to regulatory approval) and to achieve an emissions-free generating portfolio by 2040. In
February 2022PNM named its first Chief Environmental Officer. The Chief Environmental Officer is responsible for developing and implementing the Company's business strategy and positions on environmental and sustainability policy issues and is charged with establishing organization-wide policies, strategies, goals, objectives and programs that advance sustainability and ensure compliance with regulations. The role serves as the Company's primary contact with various regulatory and stakeholder agencies on environmental matters. In addition, the role leads environmental justice work, incorporating impacts to tribal, worker and affected communities and advance ESG reporting. On September 21, 2020, PNM announced an agreement to partner with Sandia National Laboratoriesin research and development projects focused on energy resiliency, clean energy, and national security. The partnership demonstrates PNMR's commitment to ESG principles and its support of projects that further its emissions-free generation goals and plans for a reliable, resilient, and secure grid to deliver New Mexico'sclean energy future.
The energy transition law (“LTA”)
June 14, 2019, Senate Bill 489, known as the ETA, became effective. The ETA amends the REA and requires utilities operating in New Mexicoto 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 11 and in Note 16 of the Notes to Consolidated Financial Statements in the 2021 Annual Reports on Form 10-K. PNM expects the ETA will have a significant impact on PNM's future generation portfolio, including PNM's planned retirement of SJGS in 2022 and the planned Four Corners exit in 2024. PNM cannot predict the full impact of the ETA on potential future generating resource abandonment and replacement filings with the NMPRC. SJGS Abandonment Application - As discussed in Note 12, on July 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 millionof Securitized 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 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. After several requests for clarification and legal challenges, in January 2020, the NM Supreme Courtruled 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. In February 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 by June 30, 2022, to issue Securitized Bonds of up to $361 million, and to establish the Energy Transition Charge. The hearing examiners recommended an interim rate rider adjustment upon the start date of the Energy 80 -------------------------------------------------------------------------------- Table of Contents 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. On April 1, 2020, the NMPRC unanimously approved the hearing examiners' recommended decisions regarding the abandonment of SJGS and the Securitized Bonds. On April 10, 2020, CFRE and NEE filed a notice of appeal with the NM Supreme Court of the NMPRC'sapproval of PNM's request to issue securitized financing under the ETA. On January 10, 2022, the NM Supreme Courtissued its decision rejecting CFRE's and NEE's constitutional challenges to the ETA and affirmed the NMPRC's final order. On June 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. On July 29, 2020, the NMPRC issued an order approving resource selection criteria identified in the ETA that include PPA's for 650 MW of solar and 300 MW of battery storage. Throughout 2021 and continuing into 2022, PNM provided notices of delays and status updates to the NMPRC for the approved SJGS replacement resource projects. All four project developers have notified PNM that completion of the projects will be delayed and no longer available for the 2022 summer peak and some may also not be available for the 2023 summer peak. The delays in the SJGS replacement resources, coupled with the abandonment of SJGS Units 1 and 4, present a risk that PNM will have insufficient operational resources to meet the 2022 summer peak to reliably serve its customers. PNM entered into three agreements to purchase power from third parties in the second half of 2021 to minimize potential impacts to customers and on February 17, 2022, PNM provided a notice and request with the NMPRC that PNM had obtained agreement from the SJGS owners and WSJ LLCto extend operation of Unit 4 until September 30, 2022. SJGS Unit 4 is expected to provide 327 MW of capacity and improve PNM's projected system reserve margin to meet the 2022 summer peak. However, given the most recent force majeure notice described in Note 11, PNM does not know whether reduced levels of coal inventory may continue until normal conditions recur in the longwall panel or whether the period of non-normal conditions will impact full load operations through the remainder of the CSA and the projected system reserve margin for the 2022 summer peak. On February 23, 2022, the NMPRC issued an order finding that PNM did not require NMPRC approval to extend operation of SJGS Unit 4 for an additional three-month period. On March 24, 2022 FERCaccepted the amended San Juan ProjectParticipation Agreement, effectively extending the operations of SJGS Unit 4 through September 30, 2022. On February 28, 2022, WRA and CCAE filed a Joint Motion for Order to Show Cause and Enforce Financing Order and Supporting Brief, which requests that the NMPRC order PNM to show cause why its rates should not be reduced at the time SJGS is abandoned, and to otherwise enforce the NMPRC's April 1, 2020final order. On March 14, 2022, PNM filed its response to the Joint Motion to Show Cause refuting the movants' claims that the ETA and April 1, 2020Financing Order require energy transition bonds be issued at the time of abandonment and that rates be reduced upon abandonment as not being legally supportable. The movants' filed joint replies on March 24, 2022. In response, on March 30, 2022, the NMPRC issued an Order appointing hearing examiners to conduct a hearing, if necessary, and to issue a recommended decision to address the issues raised by the motion. The Order also states that the hearing examiners should endeavor to issue a recommended decision with sufficient time for consideration of exceptions and for the NMPRC to be able to take action prior to June 30, 2022. PNM filed testimony on April 20, 2022and a hearing is scheduled to begin on May 23, 2022. PNM cannot predict the outcome of this matter.
See additional discussion of ETA and San Juan’s request for abandonment of PNM in notes 11 and 12.
Four Corners Abandonment Application - On
January 8, 2021, PNM filed the Four Corners Abandonment Application, which seeks NMPRC approval to exit PNM's 13% share of Four Corners as of December 31, 2024, and issuance of approximately $300 millionof energy transition bonds as provided by the ETA. As ordered by the hearing examiner in the case, PNM filed an amended application and testimony on March 15, 2021. The amended application provided additional information to support PNM's request, provided background on the NMPRC's consideration of the prudence of PNM's investment in Four Corners in the NM 2016 Rate Case and explained how the proposed sale and abandonment provides a net public benefit. On December 15, 2021, the NMPRC issued a final order denying approval of the Four Corners Abandonment Application and the corresponding request for issuance of securitized financing. On December 22, 2021, PNM filed a Notice of Appeal with the NM Supreme Court of the NMPRCdecision to deny the application. See additional discussion of the ETA and PNM's Four Corners Abandonment Application in Notes 11 and 12. PNM enhanced its plan to exit Four Corners and emphasized its ESG strategy to reduce carbon emissions on March 12, 2021with an announcement for additional plans for seasonal operations at Four Corners beginning in the fall of 2023, subject to the necessary approvals. The solution for seasonal operations ensures the plant will be available to serve each owners' customer needs during times of peak energy use while minimizing operations during periods of low demand. This approach results in an estimated annual 20 to 25 percent reduction in carbon emissions at the plant and retains jobs and royalty payments for the Navajo Nation. 81 -------------------------------------------------------------------------------- Table of Contents PNM Solar Direct In 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 proposed to recover costs of the program directly from subscribing customers through a rate rider. Under the rider, PNM would procure renewable energy from 50 MW of solar-PV facilities under a 15-year PPA. PNM had fully subscribed the entire output of the 50 MW facilities at the time of the filing. In March 2020, the hearing examiner issued a recommended decision recommending approval of PNM's application that was subsequently approved by the NMPRC. These facilities are expected to begin commercial operations in the second quarter of 2022.
The community solar law
June 18, 2021, Senate Bill 84, known as the Community Solar Act, became effective. The Community Solar Act establishes a program that allows for the development of community solar facilities and provides customers of a qualifying utility with the option of accessing solar energy produced by a community solar facility in accordance with the Community Solar Act. The NMPRC is charged with administering the Community Solar Act program, establishing a total maximum capacity of 200 MW community solar facilities (applicable until November 2024) and allocating proportionally to the New Mexicoelectric investor-owned utilities and participating cooperatives. As required under the Community Solar Act, the NMPRC opened a docket on May 12, 2021, to adopt rules to establish a community solar program no later than April 1, 2022. On March 30, 2022, the NMPRC issued an Order that adopted a rule on the administration of the Community Solar Act program. The rule requires utilities to file proposed community solar tariffs with the NMPRC within 60 days from the publication of the rule. See Note 12. Electric Vehicles PNMR is building upon its ESG goal of 100% emissions-free generation by 2040 with plans for additional emissions reductions through the electrification of its vehicle fleet. Growing the number of electric vehicles within the Company's fleet will benefit the environment and lower fuel costs furthering the commitment to ESG principles. Under the commitment, existing fleet vehicles will be replaced as they are retired with an increasing percentage of electric vehicles. The new goals call for 25% of all light duty fleet purchases to be electric by 2025 and 50% to be electric by 2030. To demonstrate PNMR's commitment to increase the electrification of vehicles in its service territory, PNM filed a TEP with the NMPRC on December 18, 2020. The TEP supports customer adoption of electric vehicles by focusing on addressing the barriers to electric vehicle adoption and encourage use. PNM's proposed program budget will be dedicated to low and moderate income customers by providing rebates to both residential and non-residential customers towards the purchase of chargers and/or behind-the-meter infrastructure. On November 10, 2021, the NMPRC issued a final order approving PNM's TEP. See Note 12. In December 2021, PNM announced that it will be joining the National Electric Highway Coalition, which plans to build fast-charging ports along major U.S.travel corridors. The coalition, with approximately 50 investor-owned electric companies is committed to providing electric vehicle (EV) fast charging ports that will allow the public to drive EVs with confidence throughout the country's major roadways by the end of 2023.
Other environmental issues
Four Corners may be required to comply with environmental rules that affect coal-fired generating units, including regional haze rules and the ETA. On
June 19, 2019, EPArepealed the Clean Power Plan, promulgated the ACE Rule, and revised the implementing regulations for all emission guidelines issued under the CAA Section 111(d). On January 19, 2021, the DC Circuit issued an opinion vacating and remanding the ACE Rule, holding that it was based on a misconstruction of Section 111(d) of the Clean Air Act, but stayed its mandate for vacatur of the repeal of the Clean Power Plan to ensure that the now-outdated rule would not become effective. The U.S. Supreme Courtgranted four petitions for certiorari seeking review of the DC Circuit's decision, and oral arguments in the case were held on February 28, 2022. A decision is expected in June 2022. In addition, on January 27, 2021, President Bidensigned an executive order requiring a review of environmental regulations issued under the Trump Administration, which will include a review of the ACE rule.
PNM's renewable procurement strategy includes utility-owned solar capacity, as well as solar, wind and geothermal energy purchased under PPAs. As of
March 31, 2022, PNM has 158 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 211.8 MW at March 31, 2022. PNM also owns the 500 KW 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. 82 -------------------------------------------------------------------------------- Table of Contents PNM also purchases the output from New Mexico Wind, a 200 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 in January 2020and includes a PPA to procure 140 MW of renewable energy and RECs from La Joya Wind II that became operational in June 2021. The NMPRC approved the portfolio to replace the planned retirement of SJGS resulting in PNM executing solar PPAs of 650 MW combined with 300 MW of battery storage agreements. In addition, the PVNGS Leased Interest Abandonment Application approved by the NMPRC includes solar PPAs of 450 MW combined with 290 MW of battery storage agreements. 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. See additional discussion of the ETA and PNM's San Juan Abandonment Application in Notes 11 and 12 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 Meta 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 constructed by NMRD to supply power to Meta, Inc.The first 50 MW of these facilities began commercial operations in November 2019and the second 50 MW facility began commercial operations in July 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 Meta data center. These PPAs include the purchase of power and RECs from a 50 MW wind project, which was placed in commercial operation in November 2018, a 166 MW wind project which became operational in February 2021, and a 50 MW solar-PV project expected to be operational in 2022. In addition, the NMPRC issued an order that will allow PNM to service the Meta data center for an additional 190 MW of solar PPA combined with 50 MW of battery storage and a 50 MW solar PPA expected to be operational in 2023. See Note 12. PNM will continue to procure renewable resources while balancing the impact to customers' electricity costs in order to meet New Mexico'sescalating RPS and carbon-free resource requirements.
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 2021, incremental energy saved as a result of new participation in PNM's portfolio of energy efficiency programs was 107 GWh. This is equivalent to the annual consumption of approximately 12,689 homes in PNM's service territory. PNM's load management and annual energy efficiency programs also help lower peak demand requirements. In 2021, TNMP's incremental energy saved as a result of new participation in TNMP's energy efficiency programs is estimated to be approximately 19 GWh. This is equivalent to the annual consumption of approximately 2,469 homes in TNMP's service territory.
TNMP's High-Performance Homesresidential new construction energy efficiency program was honored for the sixth year in a row by ENERGY STAR. This recognition includes the program's fourth straight Partner of the Year Sustained Excellence Award. For information on PNM's and TNMP's energy efficiency filing with the NMPRC and PUCT see Note 12.
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%. As the Company moves forward with its mission to achieve 100% carbon-free generation by 2040, it expects that more significant water savings will be gained. PNM has set a goal to reduce freshwater use 80% by 2035 and 90% by 2040 from 2005 levels. Focusing on responsible stewardship of
New Mexico'sscarce water resources improves PNM's water-resilience in the face of persistent drought and ever-increasing demands for water to spur the growth of New Mexico'seconomy. 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 2021, 18 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. In
December 2021, PNMR was named, for the second consecutive year, to Newsweek's list of America's Most Responsible 83 -------------------------------------------------------------------------------- Table of Contents Companies highlighting companies in areas of ESG. 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 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 continues to experience steady performance in customer satisfaction in both the J.D. Power Electric Utility Residential Customer Satisfaction StudySM and its own proprietary relationship surveys. In the 2021 fourth quarter J.D. Poweroverall customer satisfaction results, PNM outperformed the West Midsize industry average by one point. 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 Mexicoand 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 Texas'deregulated market, TNMP continues to focus on keeping end-users updated about interruptions and to encourage consumer preparation when severe weather is forecasted. In the third quarter of 2021, TNMP provided a 30-person team in support of another utility that experienced significant damage to their transmission and distribution system as a result of Hurricane Ida. TNMP has been honored by the Edison Electric Institutefour times since 2012 for its assistance to out-of-state utilities affected by hurricanes. TNMP has also been honored twice for hurricane response in its own territory. 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 the Company's commitment to ESG principles is the Company's tradition of supporting the communities it serves in New Mexicoand Texas. This support extends beyond corporate giving and financial donations from the PNM Resources Foundationto 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. During the three years ending December 31, 2021, corporate giving contributed $10.4 millionto civic, educational, environmental, low income, and economic development organizations. PNMR recognizes its responsibility to support programs and organizations that enrich the quality of life across its service territories and seeks opportunities to further demonstrate its commitment in these areas as needs arise. In response to COVID-19 community needs, PNMR donated to an Emergency Action Fundin 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. PNM also donated to the Pueblo Relief Fundand delivered personal protective supplies to pueblo areas and tribal nations throughout New Mexico. While its service territory does not include the Navajo 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 the Navajo Tribal Utility Authority Wireless("NTUAW") to set up wireless "hot spots" throughout the Navajo Nationin areas without internet access to assist first responders and support continued education opportunities amidst school closures. These actions supplement PNM's continued support for the Navajo 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 $500,000into this scholarship program to further assist in the development and education of the Navajo Nationworkforce. PNM has invested in paid summer college engineering internship programs for American Indian students available in the greater Albuquerquearea, established the PNM Pueblo Education Scholarship Endowment to invest in higher education for Native American Indian students, and supported the Coalition to Stop Violence Against Native Women. 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. In a more active role in 2021, PNM also partnered with key local organizations to initiate funding for programs focused on diversity, equity, and inclusion. Another important outreach program is tailored for low-income customers and includes the PNM Good Neighbor Fundto provide customer assistance with their electric utility bills. COVID-19 has increased the needs of these customers along with customers who may not otherwise need to seek assistance. In addition to the suspension of residential customer disconnections 84 -------------------------------------------------------------------------------- Table of Contents from April 2020through August 2021and the 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, 4,147 families in need received emergency assistance through the PNM Good Neighbor Fundduring 2021. Additionally, PNM has worked closely with the New Mexico Department of Finance and Administrationto implement strategies ensuring customers receive rent benefits, including utility bill assistance, from the Emergency Rental Assistance Program("ERAP"). As a result of these efforts, the ERAP has paid over $6 millionin customer arrears since the launch of the program in March 2021. Additionally, as a part of corporate giving, on October 1, 2020, PNM introduced $2.0 millionin funding for new COVID Customer Relief Programs to support income-qualified residential customers and small business customers who have been impacted by the financial challenges created by COVID-19 and have past due electric bills. Qualified customers that pay a portion of their past-due balance can receive assistance toward their remaining balance. Volunteerism is also an important facet of employee culture, keeping our communities safer, stronger, smarter and more vibrant. In 2021, new programs were launched to provide employees with COVID-safe projects through virtual, hybrid, and limited group gatherings. Employees and nonprofits remained resilient, creative, and innovative and responded to community need and selflessly gave their time and talents to organizations throughout New Mexicoand Texascompleting 8,741 volunteer hours with nonprofits and other community organizations. Volunteers also participate in a company-wide annual Day of Service at nonprofits across New Mexicoand Texasalong with participation on a variety of nonprofit boards and independent volunteer activities throughout the year. In addition, the Company facilitated employee and customer Earth Daycleanups across PNM's service territory resulting in over 2,200 gallons of trash collected. In addition to the extensive engagement both PNM and TNMP have with nonprofit organizations in their communities, the PNM Resources Foundationprovides nearly $1.6 millionin grant funding each year across New Mexicoand Texas. 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, the PNM Resources Foundationis funding grants with a three-year focus on decreasing homelessness, increasing access to affordable housing, reducing carbon emissions, and increasing community safety with an emphasis on COVID-19 programs. As part of this emphasis, $0.5 millionis awarded annually to nonprofits in New Mexicoand Texasto 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. The PNM Resources Foundationcontinued to expand its matching donation program to offer 2-to-1 matching on employee donations made to social justice nonprofits and increased the annual amount of matching donations available to each of its employees. PNM Resources Foundationawarded $0.3 millionof additional grants to non-profits supporting TNMP communities following the winter storm in February 2021.
PNM - In the three months ended
March 31, 2022, PNM experienced a decrease in weather normalized residential load of 5.0%, more than offset by an increase in weather normalized commercial load of 5.4% compared to 2021, largely returning to pre-COVID-19 levels. In addition, PNM experienced an increase in industrial load of 8.1%. TNMP - In the three months ended March 31, 2022, TNMP experienced an increase in volumetric weather normalized retail load of 1.2% compared to 2021. Weather normalized demand-based load, excluding retail transmission consumers increased 3.1% in the three months ended March 31, 2022compared to 2021. Although the Company has experienced signs of recovery from state restrictions related to COVID-19, it is unable to determine the duration or final impacts from COVID-19 as discussed in more detail in Item 1A Risk Factors of the 2021 Annual Report on Form 10-K. The Company is also closely monitoring the impacts on the capital markets of other macroeconomic conditions, including actions by the Federal Reserveto address inflationary concerns or other market conditions, and geopolitical activity. The Company has not experienced, nor does it expect significant negative impacts to customer usage at PNM and TNMP resulting from these economic impacts. However, if current economic conditions worsen, the Company may be required to implement additional measures such as reducing or delaying operating and maintenance expenses and planned capital expenditures.
Net earnings attributable to PNMR were
$16.0 million, or $0.19per diluted share in the three months ended March 31, 2022compared to $17.6 million, or $0.20per diluted share in 2021. Among other things, earnings in the three months ended March 31, 2022benefited from higher weather normalized retail load at PNM, higher volumetric and demand-based load at TNMP, colder weather conditions at PNM and TNMP, higher transmission margin at PNM and TNMP, higher distribution rates at TNMP, lower plant maintenance costs at PNM, AMS carrying charges at TNMP, lower interest expense at Corporate and Other, and lower costs related to the Merger at Corporate and Other. These increases were offset by decreased performance on 85 -------------------------------------------------------------------------------- Table of Contents PNM's NDT and coal mine reclamation investment securities, increased operational and maintenance expense, including higher employee related and outside service expense at PNM and TNMP, increased depreciation and property taxes at PNM and TNMP due to increased plant in service, and higher interest charges at PNM and TNMP. Additional information on factors impacting results of operations for each segment is discussed below under Results of Operations.
Cash and capital resources
PNMR and PNM have revolving credit facilities with capacities of
$300.0 millionand $400.0 millionthat currently expire in October 2023. Both facilities provide for short-term borrowings and letters of credit and can be extended through October 2024, subject to approval by a majority of the lenders. In addition, PNM has a $40.0 millionrevolving credit facility with banks having a significant presence in New Mexicothat expires in December 2022, and TNMP has a $75.0 millionrevolving credit facility, which expires in September 2024and contains two one-year extension options, subject to approval by a majority of the lenders. Total availability for PNMR on a consolidated basis was $705.5 millionat April 21, 2022. 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. PNMR projects that its consolidated capital requirements, consisting of construction expenditures and dividends, will total $4.8 billionfor 2022 - 2026, including amounts expended through March 31, 2022. These construction expenditures include expenditures for PNM's capital initiative that includes investments in transmission and distribution infrastructure to deliver clean energy, enhance customer satisfaction, and increase grid resilience.
In order to fund the capital expenditures necessary to meet growth that balances earnings objectives, credit metrics and liquidity needs, the Company has entered into a number of other financing arrangements. A complete listing of current funding arrangements is provided in Notes 9 and 7 of the Notes to the Consolidated Financial Statements of the 2021 Annual Reports on Form 10-K.
After considering the effects of these financings and the Company's short-term liquidity position as of
April 21, 2022, the Company has consolidated maturities of long-term and short-term debt aggregating approximately $285.6 millionthrough April 2023. 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 2022-2026 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. As of March 31, 2022and April 21, 2022, the Company was 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.
The summary of net profit attributable to PNMR is as follows:
Three Months Ended March 31, 2022 2021 Change (In millions, except per share amounts) Net earnings attributable to PNMR
Diluted average ordinary shares and ordinary equivalents
86.2 86.1 0.1 Net earnings attributable to PNMR per diluted share
The components of the change in net income attributable to PNMR are:
Three Months Ended March 31, 2022 (In millions) PNM $ (14.2) TNMP 6.4 Corporate and Other 6.3 Net change $ (1.6) 86
Information regarding the factors impacting PNMR’s operating results by segment is presented below.
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 and is considered a non-GAAP measure.
The following table summarizes PNM’s operating results:
Three Months Ended March 31, 2022 2021 Change (In millions) Electric operating revenues
$ 338.7 $ 271.2 $ 67.5Cost of energy 138.8 88.9 49.9 Utility margin 199.9 182.3 17.6 Operating expenses 109.1 107.3 1.8 Depreciation and amortization 45.8 41.9 3.9 Operating income 45.0 33.1 11.9 Other income (deductions) (22.1) 4.8 (26.9) Interest charges (14.6) (12.9) (1.7) Segment earnings before income taxes 8.4 25.0 (16.6) Income (taxes) (0.8) (2.8) 2.0 Valencia non-controlling interest (3.1) (3.5) 0.4 Preferred stock dividend requirements (0.1) (0.1) - Segment earnings $ 4.3 $ 18.5 $ (14.2)
The following table shows total GWh sales, including weather impacts, by customer category and average number of customers:
Three Months Ended March 31, Percentage 2022 2021 Change (Gigawatt hours, except customers) Residential 795.3 828.2 (4.0) % Commercial 795.7 752.4 5.8 Industrial 410.9 380.0 8.1 Public authority 45.0 47.4 (5.1) Economy energy service (1) 133.5 129.1 3.4 Other sales for resale (2) 1,900.8 746.4 154.7 4,081.2 2,883.5 41.5 % Average retail customers (thousands) 542.0 538.8 0.6 % (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. (2) Increase in other sales for resale is the result of participation in the EIM beginning in
April 2021. 87
-------------------------------------------------------------------------------- Table of Contents Operating Results - Three Months Ended
March 31, 2022, compared to 2021
The following table summarizes the significant changes in the utility margin:
Three Months Ended
March 31, 2022Change Utility margin: (In millions) Retail customer usage/load - Weather normalized retail KWh sales increased 5.4% for commercial customers, 8.1% for industrial customers, partially offset by decreased sales to
customers of 5.0% $ 0.3 Weather - Colder weather in 2022; heating degree days were
in 2022 1.1 Transmission - Increase primarily due to higher revenues from the addition of new customers including on the Western Spirit
formula transmission rates, and higher volumes 17.1 Rate riders - Includes renewable energy, FPPAC, and energy efficiency riders (3.1) Unregulated margin - Higher sales and lower cost of energy associated with 65 MW of SJGS Unit 4 2.4 Other (0.2) Net Change $ 17.6 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 March 31, 2022 Change Operating expenses: (In millions) Lower plant maintenance costs at SJGS, Four Corners, PVNGS, and gas-fired plants $ (3.5) Higher property taxes due to increases in utility plant in service including the Western Spirit Line 0.7 Higher employee related, outside services, and vegetation management expenses 4.1 Other 0.5 Net Change $ 1.8
Depreciation and amortization:
Increased utility plant in service including the Western Spirit Line
$ 3.5Other 0.4 Net Change $ 3.9Other income (deductions): Decreased performance on investment securities in the NDT and coal mine reclamation trusts $ (27.5)Other 0.6 Net Change $ (26.9)88
Table of Contents Three Months Ended March 31, 2022 Change Interest charges: (In millions) Issuance of
$150.0 millionSUNs in December 2021 $ (1.0) Refinancing of $160.0 millionSUNs in July 2021 1.0 Higher interest on term loans (0.1) Higher interest on remarketed PCRBs (0.1) Interest on transmission customer deposits (1.2) Other (0.3) Net Change $ (1.7) Income (taxes): Lower segment earnings before income taxes $ 4.1Lower amortization of federal excess deferred income taxes (1.4) Other (0.7) Net Change $ 2.0TNMP 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 and is considered a non-GAAP measure.
The following table summarizes TNMP’s operating results:
Three Months Ended March 31, 2022 2021 Change (In millions) Electric operating revenues
$ 105.4 $ 93.5 $ 11.9Cost of energy 29.6 26.5 3.1 Utility margin 75.8 67.0 8.8 Operating expenses 27.9 27.8 0.1 Depreciation and amortization 23.6 22.2 1.4 Operating income 24.2 17.0 7.2 Other income 2.1 1.1 1.0 Interest charges (9.2) (8.5) (0.7) Segment earnings before income taxes 17.2 9.6 7.6 Income (taxes) (2.2) (0.9) (1.3) Segment earnings $ 15.1 $ 8.7 $ 6.489
Table of Contents The following table shows total sales, including weather impacts, by retail rate consumer category and average number of consumers:
Three Months Ended March 31, Percentage 2022 2021 Change Volumetric load (1) (GWh) 698.0 676.0 3.3 % Demand-based load (2) (MW) 5,652.4 5,116.8 10.5 % Average retail consumers (thousands) (3) 266.3 261.5 1.8 % (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
Texashave the ability to choose any REP to provide energy.
Results of operations – Quarters ended
The following table summarizes the significant changes in the utility margin:
Three Months Ended March 31, 2022 Change Utility margin: (In millions) Transmission rate relief - Transmission cost of service rate increases in March 2021, September 2021, and March 2022 $ 4.4 Distribution rate relief - Distribution cost of service rate increase in September 2021 3.2 Volumetric-based consumer usage/load - Weather normalized KWh sales increased 1.2%; the number of volumetric consumers increased 3.5% 0.4 Demand-based consumer usage/load - Weather normalized
MW on demand
sales for large commercial and industrial consumers
transmission consumers increased 3.1% 0.2 Weather - Colder weather in 2022; heating degree days were
8.5% higher in
2022 0.4 Rate Riders and other- Impacts of rate riders, including the
cost recovery factor, energy efficiency rider, and rate case expense rider, which are offset in operating expenses 0.2 Net Change $ 8.8
The following tables summarize the main factors of variation in operating expenses, depreciation, other income (deductions), interest expenses and income taxes:
Three Months Ended March 31, 2022 Change Operating expenses: (In millions) Higher employee related and outside service expenses, partially offset by lower vegetation management expenses $ 1.1 Higher property taxes due to increased utility plant in service 0.1 Higher capitalization of administrative and general and other expenses due to higher construction expenditures in 2022 (0.8) Lower energy efficiency expense and rate case amortization which are offset in utility margin (0.2) Other (0.1) Net Change $ 0.1 90
Table of Contents Three Months Ended
March 31, 2022Change
Depreciation and amortization: (In millions) Increased utility plant in service $ 1.6 Other (0.2) Net Change $ 1.4 Other income: AMS Reconciliation carrying charges (Note 12)
$ 1.2Other (0.2) Net Change $ 1.0Interest charges: Issuance of $65.0 millionfirst mortgage bonds in 2021 $ (0.4)Other (0.3) Net Change $ (0.7)Income (taxes): Higher segment earnings before income taxes $ (1.6)Other 0.3 Net Change $ (1.3)Corporate and Other
The table below summarizes the results of corporate and other operations:
Three Months Ended March 31, 2022 2021 Change (In millions) Electric operating revenues $ - $ - $ - Cost of energy - - - Utility margin - - - Operating expenses (5.1) 1.2 (6.3) Depreciation and amortization 6.3 5.7 0.6 Operating income (loss) (1.2) (6.9) 5.7 Other income (deductions) (0.2) (0.4) 0.2 Interest charges (2.5) (4.5) 2.0 Segment (loss) before income taxes (3.9) (11.8) 7.9 Income (taxes) benefit 0.5 2.1 (1.6) Segment (loss)
$ (3.4) $ (9.7) $ 6.3Corporate and Other operating expenses shown above are net of amounts allocated to PNM and TNMP under shared services agreements. The amounts allocated include certain expenses shown as depreciation and amortization and other income (deductions) in the table above. The change in operating expense includes a decrease of $5.7 millionin costs related to the Merger that were not allocated to PNM or TNMP. Substantially all depreciation and amortization expense is offset in operating expenses as a result of allocation of these costs to other business segments. 91
-------------------------------------------------------------------------------- Table of Contents Operating Results - Three Months Ended
March 31, 2022compared to 2021 The following tables summarize the primary drivers for changes in other income (deductions), interest charges, and income taxes: Three Months Ended March 31, 2022Change Other income (deductions): (In millions)
Higher equity method investment income from NMRD $ 0.1 Other 0.1 Net Change $ 0.2 Interest charges: Lower interest on short-term borrowings
$ 0.2Repayment of PNMR 2018 SUNs in March 2021 2.0 Higher interest on term loans (0.2) Net Change $ 2.0Income (taxes) benefits: Impact of difference in effective tax rates used by PNMR and its subsidiaries in the calculation of income taxes in interim periods $ 0.9Lower segment loss before income taxes (2.0) Lower non-deductible Merger related costs 0.5 Lower investment tax credit amortization (0.6) Other (0.4) Net Change $ (1.6)
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