Rating Action: Moody's affirms ratings of Texas-New Mexico Power, changes outlook to negative

Global Credit Research - 03 Sep 2020

Approximately $770 million of debt outstanding

New York, September 03, 2020 -- Moody's Investors Service, ("Moody's") affirmed the ratings of Texas-New Mexico Power Company (TNMP), including its A3 Issuer rating and its A1 senior secured rating, and revised the outlook to negative from stable. TNMP is a transmission and distribution (T&D) utility subsidiary of PNM Resources, Inc. (PNMR, Baa3 stable).

RATINGS RATIONALE

"The negative outlook for TNMP is driven by Moody's expectation that the company's financial profile will weaken as it executes its capital expenditure program with increasing leverage" said Robert Petrosino, VP -- Senior Analyst. "TNMP pays regular dividends to PNMR and is funding its external capital needs with a greater proportion of debt to align more closely with its authorized regulatory capital structure."

In December 2018, TNMP completed its first general rate case in Texas since January 2011. The rate order was generally credit supportive, settling many issues, setting base-line values for future interim updates to TNMP's T&D rates and authorizing TNMP to begin to utilize Texas' distribution capital rider which will reduce regulatory lag. However, the approved capital structure included significantly less equity than the company historically retained, and the utility has been adjusting its actual capital structure accordingly. The more leveraged capital structure will continue to negatively pressure cash flow credit measures.

Prior to tax reform, and the conclusion of its last rate case, TNMP produced strong credit metrics with a cash flow from operation excluding changes in working capital (CFO pre-WC) to debt ratio above 20%. The company also maintained a debt to capital ratio around 40% and cash flow was supported by a 10.1% allowed return on equity (ROE). In its last general rate case, TNMP was authorized with a 9.65% ROE and affirmed its 45% equity ratio. The effects of tax reform and higher levels of capital spending are contributing to TNMP's levering its balance sheet to about 55% debt, in alignment with its authorized debt to equity ratio.

As a result, going forward, we expect TNMP's ratio of CFO pre-W/C to debt, which for the twelve months ending June 2020 was around the 18% threshold we have indicated as a potential trigger for a downgrade, will move to a range of 16-17%.

Environmental, social and governance considerations incorporated into our credit analysis for PNMR and its subsidiaries are primarily related to carbon regulations and social risks related to demographic and societal trends, as well as customer and regulatory relations. TNMP has a low carbon transition risk within the regulated utility sector as an electric transmission and distribution utility that owns no generating assets. Social risks are primarily related to societal and demographic trends, health and safety as well as customer and regulatory relations. From a governance perspective, financial strategy and risk management are key considerations.

The rapid spread of the coronavirus outbreak, severe global economic shock, low oil prices and asset price volatility are creating a severe and extensive credit shock across many sectors, regions, and markets. The combined credit effects of these developments are unprecedented. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. However, we do not consider the impact of the coronavirus outbreak to be a material credit driver for TNMP.

As events related to the coronavirus continue, we are taking into consideration a wider range of potential outcomes, including more severe downside scenarios. The effects of the pandemic could result in financial metrics that are weaker than expected; however, we see these issues as temporary and not reflective of the long-term financial or credit profile of TNMP.

OUTLOOK

TNMP's negative outlook reflects our expectation that TNMP will move toward the 45% equity layer approved by its regulator through dividend payouts and funding its external capital needs. Despite a credit supportive regulatory environment in Texas, including the ability to use timely transmission and distribution cost recovery mechanisms, we expect the utility's CFO pre-W/C to debt ratio to further decline to the 16% to 17% range.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Factors that could lead to an upgrade

While an upgrade is unlikely over the near term, TNMP's rating could be upgraded if regulatory environment under the PUCT becomes more credit supportive leading to higher returns and an improved financial profile, such that its ratio of CFO pre-W/C to debt were to increase to above 22% on a sustainable basis.

Factors that could lead to a downgrade

TNMP's rating could be downgraded if we believe the regulatory framework under the PUCT has become less credit supportive or predictable resulting in lower returns or higher risks; or if financial metrics continue to deteriorate such that CFO pre-W/C to debt were to fall below 18% on a sustained basis.

Affirmations:

..Issuer: Texas-New Mexico Power Company

.... Issuer Rating, Affirmed A3

....Senior Secured Bank Credit Facility, Affirmed A1

....Senior Secured First Mortgage Bonds, Affirmed A1

Outlook Actions:

..Issuer: Texas-New Mexico Power Company

....Outlook, Changed To Negative From Stable

TNMP is an indirect wholly-owned subsidiary of PNM Resources, Inc. (PNMR: Baa3 stable), a utility holding company whose largest subsidiary is the Public Service Company of New Mexico (PNM: Baa2 stable). TNMP is an electric transmission and distribution (T&D) utility with over 10,000 miles of transmission and distribution lines serving over 250,000 end-users in three non- contiguous areas in Texas. Since TNMP's transmission and distribution services are solely within the Electric Reliability Council of Texas (ERCOT) system, TNMP is not subject to rate regulation by the FERC. TNMP is regulated by the PUCT and operates solely within ERCOT in Texas.

The principal methodology used in these ratings was Regulated Electric and Gas Utilities published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1072530. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Robert Petrosino Vice President - Senior Analyst Infrastructure Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Michael G. Haggarty Associate Managing Director Infrastructure Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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