PNM Resources, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

PNM Resources, Inc. is a regulated electric utility company, serving approximately 800,000 residential and business customers in New Mexico and Texas.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview and Revenue Distribution

PNM Resources operates primarily through two regulated utility subsidiaries: Public Service Company of New Mexico (PNM) and Texas-New Mexico Power Company (TNMP).

  • PNM: This subsidiary is the largest in the group, providing generation, transmission, and distribution of electricity to residential, commercial, and industrial customers across New Mexico. It also engages in new generation resource development.
  • TNMP: This segment operates as a regulated transmission and distribution utility for electric service to customers in Texas, serving roughly 100 communities. The business has a heavy focus on transmission and distribution rather than generation.

The core of PNM’s revenues stems from providing regulated electricity service. Revenue is predominantly driven by demand for energy by residential, commercial, and industrial customers within their respective territories, and rates are governed by state regulatory commissions.

Industry Trends and Competitive Landscape

The utilities industry is characterized by a few prevailing trends:

  • Shift Towards Renewable Energy: Governments and businesses are increasingly focused on renewable energy, which drives demand for solar, wind, and other clean power sources.
  • Infrastructure Modernization: The aging infrastructure of utility networks needs updates to accommodate new demand and improve efficiency. That includes smart grid initiatives, grid improvements, energy storage, and transmission upgrades.
  • Regulatory Scrutiny: Utilities face greater scrutiny, and hence more complex regulatory requirements, as regulators strive to meet climate goals while preserving affordable rates. This is a double edged sword as it can provide a moat but also limit the flexibility of utilities.
  • Consolidation: The industry shows a trend of consolidation, with large companies acquiring smaller entities in pursuit of scale and profitability.

PNM finds itself amidst a dynamic competitive landscape: * Regional Competitors: PNM operates in regional marketplaces that also have other providers offering energy to both retail and commercial customers. * Alternative Energy Providers: These include companies, and even households, focused on distributed-generation solutions like rooftop solar. * Direct-Service Alternatives: Larger industrial and commercial users have the option of self-generation, rather than being beholden to utilities like PNM.

What makes PNM different?

  • Geographic Focus: PNM is mostly focused in New Mexico and Texas, which gives them specialized regulatory expertise in those markets.
  • Commitment to Renewable Energy: PNM has pledged a greater commitment to renewable and clean energy sources.
  • Balance of Generation and Distribution: While PNM has significant generation capacity, TNMP, in Texas, is mainly involved with transmission and distribution. This gives PNM access to more customers.

Financial Analysis

PNM has both strengths and weaknesses:

  • Revenue Consistency: A regulated utility generally provides a steady source of revenue, as power demand stays roughly constant. But, this also results in lower profits and less growth in revenues.
  • Dependable Free Cash Flow: Stable revenue supports steady operating cash flow, an important consideration for long term capital investments.
  • Regulatory Oversight: State regulatory oversight creates a framework for earnings, meaning large increases in profits are difficult to achieve. This does add some protection and consistency, however, it can also limit profits.

A closer look at recent financial statements reveals some interesting data: * Debt: PNMR has significant debt, which has a high impact on the company’s financial stability and interest expense. A company with a high amount of debt can be more sensitive to financial issues like interest rate increases. * Capital Expenditures: PNMR is spending a large amount of cash flow on upgrading its infrastructure which may have an important implication on earnings in future years. * ROIC: PNMR has not been able to produce an attractive ROIC, a sign that the company’s profitability may not be desirable. Low ROIC can also make financing more expensive. * Net income: Net income attributable to PNMR common shareholders in 2022 is relatively low compared to total revenues, highlighting the pressure on margins.

Earnings calls reveal some concerns: * Shareholder Concerns About Debt Levels: Management has repeatedly defended the high amount of debt with the justification of a long term approach. * Interest Rates: High interest rates have increased debt servicing costs for PNMR, reducing net income. * Regulatory Approvals: Regulatory requirements often put a barrier on the growth of the company, but the company is actively working with regulators.

Moat Rating: 2/5

  • The utility industry as a whole is inherently moated, but the presence of competition and new entrants makes this a narrow moat industry.
  • Intangible Assets: PNM possesses some regional brand recognition, but it isn’t considered a major differentiator compared to its peers. * Regulatory Approval: The company possesses regulatory approval for electricity production, transmission, and distribution. This can limit the entry of new players and gives the company some edge over the competition, but they are not guaranteed. * Switching Costs: While a company can switch to private production of energy, the cost is usually quite high compared to the value of service. Thus customers will likely remain with PNMR.
  • Cost Advantages: PNM has not demonstrated cost advantages compared to its peers that would make it more profitable than them. * Network Economics: In a limited geographical region, network effects have an effect in terms of economies of scale and scope. However, the size of PNM compared to the market is quite small.

Risks Affecting the Moat and Business Resilience: * Technological Disruptions: The biggest risk comes from renewable energy, new ways of producing and distributing electricity, and the possibility of less regulation. * Regulatory Changes: Policy makers changing regulations such as mandates for production, or pricing, can significantly affect PNMR’s business. * Economic Cycles: Economic downturns might result in decreased electricity consumption and reduced overall profitability. * Credit/Interest Rates: Increased interest rates will negatively impact the business due to the high debt obligations.

  • Natural Disasters: The physical infrastructure is also subject to destruction due to hurricanes, floods, or other natural disasters which will affect operations.

Business Resilience: * Due to the nature of electricity production, PNM has a relatively stable base of revenue, with some level of resilience even in adverse economic conditions. However, the level of debt makes the company less resilient in downturns.

Understandability Rating: 3/5

  • The company’s business model is quite straight forward and easy to understand.
  • However, the valuation is complicated due to the nature of utility companies where several regulations, different types of accounting, and long-term projections can make a proper valuation tedious. Also, you need specialized industry specific knowledge of the energy industry to better understand the competitive advantages.

Balance Sheet Health Rating: 3/5

  • The company has a good amount of assets, with fixed assets like plants and equipment constituting a major part of the balance sheet. * However, high levels of debt relative to total assets means the company may not be as stable in case of economic downturns.
  • The company’s profitability, which is quite low, further contributes to concerns about long-term viability. * The company has a high leverage, that may hamper its ability to get good terms for additional financing needed for growth and operations.

company name (ticker symbol) | Moat: / 5 | Understandability: / 5 | Balance Sheet Health: / 5

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