Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2006, for PNM Resources, Inc. (PNMR) and its subsidiaries, Public Service Company of New Mexico (PNM) and Texas-New Mexico Power Company (TNMP). The filing represents separate reports for each registrant. PNMR operates as a merchant utility with regulated and unregulated segments, including retail electric services in Texas (First Choice) and wholesale power marketing. A significant event during the period was the acquisition of the Twin Oaks coal-fired power plant on April 18, 2006, for $480 million.
Key Financial Metrics (Six Months Ended June 30, 2006)
| Metric | PNMR Consolidated | PNM Subsidiary | TNMP Subsidiary |
|---|---|---|---|
| Total Operating Revenues | $1,202.5 million | $847.1 million | $124.1 million |
| Net Earnings | $42.6 million | $33.7 million | $4.0 million |
| Diluted EPS | $0.61 | N/A | N/A |
| Operating Cash Flow | $111.6 million | $100.7 million | $20.5 million |
| Investing Cash Flow | ($596.4 million) | ($82.5 million) | ($18.1 million) |
| Financing Cash Flow | $490.5 million | ($28.2 million) | $0.1 million |
| Long-Term Debt | $1,743.6 million | $986.4 million | $416.0 million |
| Short-Term Debt | $842.5 million | $100.2 million | $0 |
| Cash and Equivalents | $73.9 million | $2.7 million | $18.7 million |
Material Changes vs. Prior Period
- Revenue Growth: PNMR consolidated revenues increased 44.3% year-over-year (from $833.2 million to $1,202.5 million), driven primarily by the inclusion of First Choice operations (acquired June 2005) and the Twin Oaks acquisition (April 2006).
- Earnings Increase: Net earnings rose 33.0% to $42.6 million, compared to $32.1 million in the prior year. This was aided by the accretive nature of the TNP acquisition and Twin Oaks contribution of $5.2 million (net of tax).
- Plant Outages: Earnings were negatively impacted by an extended outage at the Palo Verde Nuclear Generating Station (PVNGS) Unit 1, which reduced gross margin by an estimated $22.5 million for the six-month period.
- Interest Charges: Consolidated interest charges increased by $29.2 million year-over-year due to debt associated with the TNP acquisition, the Twin Oaks bridge loan ($480 million), and commercial paper borrowings.
- Gas Segment: PNM Gas revenues increased 11.6% due to higher natural gas prices, though volumes decreased 3.6% due to customer conservation and warmer weather.
Guidance, Outlook, and Risks
- Capital Requirements: PNMR projects total capital requirements of $397.1 million for 2006, with $358.0 million for construction. The company intends to fund the permanent financing for the Twin Oaks acquisition through debt and equity issuance to maintain investment-grade ratings.
- Rate Cases: PNM filed a general gas rate case in May 2006 seeking a $20.5 million increase in base rates. A transmission rate case settlement is pending FERC approval, potentially increasing revenues by $4.6 million annually.
- Regulatory Risks:
- California Refund Proceeding: FERC rejected PNM's cost recovery filing for California market refunds, resulting in zero allowed cost offset. PNM has petitioned for rehearing.
- TNMP True-Up: A PUCT rule change effective July 2006 will lower the interest rate TNMP can collect on stranded costs, impacting future carrying charges.
- Market Power: FERC terminated the investigation into PNM's market power in its home control area but requires additional information regarding the El Paso Electric (EPE) control area.
- Legal Contingencies: Pending matters include asbestos litigation (recently dismissed with prejudice), the SESCO environmental settlement ($0.3 million), and the Four Corners Federal Implementation Plan litigation.
- Accounting Changes: The company adopted SFAS 123R (Share-Based Payment) effective January 1, 2006, resulting in a $3.5 million reduction in net earnings for the six-month period.
Investor Verification Checklist
- Twin Oaks Integration: Verify the operational performance and integration costs of the newly acquired Twin Oaks plant and the status of the $480 million bridge loan refinancing.
- PVNGS Outage Impact: Confirm the full financial impact of the PVNGS Unit 1 outage and the timeline for full power restoration (achieved July 16, 2006).
- California Refund Liability: Monitor the outcome of the FERC rehearing regarding PNM's cost recovery for California market refunds, as the current position allows zero offset.
- Interest Rate Exposure: Review the impact of rising interest rates on the $480 million Twin Oaks bridge loan and the company's commercial paper program.
- Regulatory Rate Approvals: Track the status of the PNM gas rate case and the FERC transmission rate settlement to assess future revenue stability.