Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2004, for PNM Resources, Inc. (the Holding Company) and its principal subsidiary, Public Service Company of New Mexico (PNM). The Company operates as an integrated public utility providing electricity and natural gas in New Mexico, alongside wholesale energy marketing operations in the Western United States. The financial statements are unaudited but have been reviewed by Deloitte & Touche LLP.
Key Financial Metrics (Six Months Ended June 30, 2004)
| Metric | 2004 (in thousands) | 2003 (in thousands) |
|---|---|---|
| Total Operating Revenues | $809,266 | $711,346 |
| Operating Income | $55,798 | $63,340 |
| Net Earnings | $41,627 | $64,965 |
| Diluted EPS | $0.68 | $1.09 |
| Net Cash from Operating Activities | $132,488 | $60,336 |
| Net Cash Used in Investing Activities | $(48,416) | $(4,690) |
| Net Cash Used in Financing Activities | $(91,120) | $(56,709) |
| Long-Term Debt (less current) | $985,346 | $987,210 |
| Cash and Cash Equivalents | $5,646 | $12,694 |
Note: 2003 Net Earnings included a one-time cumulative effect of accounting changes of $36.6 million.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 13.8% to $809.3 million, driven by a 26.0% increase in Gas revenues (due to higher prices and a PRC-approved rate increase) and a 19.8% increase in Wholesale revenues (due to new long-term contracts and higher market prices).
- Earnings Decline: Net earnings decreased 35.9% to $41.6 million. This decline is primarily attributed to the absence of a $36.6 million one-time gain in 2003 related to the adoption of SFAS 143 (Asset Retirement Obligations) and a $16.7 million write-off of transition costs in 2003 that did not recur.
- Operating Performance: Excluding non-recurring items, earnings growth was driven by lower interest costs (down 28.1% due to refinancing), customer load growth, and improved wholesale velocity.
- Cash Flow: Operating cash flow more than doubled to $132.5 million, reflecting strong wholesale and gas sales and lower pension contributions compared to 2003.
Guidance, Outlook, and Risks
- Acquisition: On July 24, 2004, the Company executed an agreement to acquire TNP Enterprises, Inc. for approximately $189 million in stock and cash, assuming $835 million of debt. This is expected to expand the customer base by 76% and provide a platform in the Texas competitive market.
- Regulatory Environment: The Company faces a retail electric rate freeze through 2007 and a scheduled 2.5% rate reduction effective September 2005. A $22 million annual gas rate increase was approved in January 2004.
- Legal and Regulatory Risks:
- FERC Proceedings: The Company is involved in ongoing proceedings regarding the California energy crisis, including refund liabilities and allegations of market manipulation (Gaming Partnerships Order). While dismissed from the "Gaming Practices" docket, the "Gaming Partnerships" matter remains under review.
- Environmental: Litigation continues regarding Clean Air Act violations at the San Juan Generating Station (opacity limits) and potential New Source Review (NSR) rule changes that could require significant capital expenditures.
- Water Supply: Drought conditions in the Four Corners region pose a risk to water availability for generation plants, though supplemental contracts and shortage sharing agreements are in place for 2004.
- Outlook: Management expects 2004 earnings to benefit from higher wholesale prices, new gas rates, lower fuel costs from the new SJGS mine, and lower interest costs, contingent on stable market prices and plant performance.
Investor Verification Checklist
- Acquisition Financing: Verify the status of regulatory approvals and the execution of the $450 million financing package (equity and debt) required for the TNP acquisition.
- FERC Liability Exposure: Monitor the outcome of the California Refund Proceeding and the Gaming Partnerships Order to assess potential refund liabilities or disgorgement of profits.
- Environmental Compliance: Track the resolution of the Grand Canyon Trust/Sierra Club citizen suit regarding opacity violations at SJGS and the impact of potential NSR rule changes on capital requirements.
- Rate Freeze Impact: Assess the Company's ability to control costs and grow revenues given the retail electric rate freeze through 2007 and the scheduled 2005 rate reduction.
- Wholesale Market Volatility: Review the Company's exposure to mark-to-market fluctuations in its wholesale energy portfolio and the effectiveness of its risk management (VAR) limits.