Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2004, for PNM Resources, Inc. (the Holding Company) and its principal subsidiary, Public Service Company of New Mexico (PNM). PNM is an integrated public utility providing electric and natural gas services in New Mexico and engaging in wholesale power marketing in the Western United States. Effective December 30, 2004, the Holding Company became a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA).
Key Financial Metrics
| Metric | 2004 | 2003 |
|---|---|---|
| Total Operating Revenues | $1,604.8 million | $1,455.7 million |
| Net Earnings | $87.7 million | $95.2 million |
| Diluted Earnings Per Share | $1.43 | $1.58 |
| Operating Cash Flow | $235.8 million | $228.7 million |
| Total Assets | $3,487.6 million | $3,378.6 million |
| Long-Term Debt | $987.8 million | $987.2 million |
| Return on Average Common Equity | 8.1% | 9.3% |
Material Changes vs. Prior Period
- Net Earnings Decline: Net earnings decreased 7.8% to $87.7 million. This decline is primarily attributed to the absence of a $36.6 million one-time gain in 2003 related to the cumulative effect of adopting SFAS 143 (Asset Retirement Obligations) and a change in pension actuarial valuation dates. 2003 also included non-recurring charges for deregulation transition costs and debt refinancing.
- Revenue Growth: Total operating revenues increased 10.2% to $1.60 billion. This was driven by a 37.0% increase in Gas revenues (due to higher natural gas prices passed through to customers) and a 6.3% increase in Wholesale revenues (due to additional long-term contracts and price improvements).
- Electric Segment: Electric operating revenues decreased slightly (0.2%) due to a 4% retail rate reduction effective September 2003 under the Global Electric Agreement, which was partially offset by a 3.3% weather-normalized load growth.
- Wholesale Margins: While wholesale revenues increased, wholesale gross margin decreased 8.3% due to higher purchase power prices and reduced excess energy availability caused by increased retail load growth and unplanned generation outages.
Guidance, Outlook, and Risks
- Proposed TNP Acquisition: On July 25, 2004, the Company announced a proposed $1.024 billion acquisition of TNP Enterprises, Inc. (including TNMP and First Choice Power). The transaction is expected to close in the second quarter of 2005 and is projected to be accretive to earnings and free cash flow in the first full year post-closing. Regulatory approvals from the NMPRC, PUCT, SEC, and FERC are pending.
- Rate Environment: Under the Global Electric Agreement, retail electric rates are frozen through December 31, 2007. A further 2.5% rate reduction is scheduled for September 1, 2005. The Company must control costs to maintain margins as rates are fixed while costs fluctuate.
- Regulatory and Legal Risks: The Company faces ongoing proceedings related to the Western wholesale power market, including potential refunds from the California energy crisis (2000-2001) and FERC investigations into market manipulation. While the Company has been dismissed from some proceedings, others remain pending with uncertain outcomes.
- Environmental and Fuel Risks: Drought conditions in the Four Corners region pose risks to water supplies for coal-fired generation. The Company is also subject to evolving environmental regulations regarding emissions and coal combustion waste disposal.
Investor Verification Checklist
- TNP Acquisition Status: Verify the progress of regulatory approvals (NMPRC, PUCT, FERC) and the expected closing date for the TNP acquisition.
- Wholesale Market Exposure: Review the status of FERC refund proceedings and potential liabilities related to the California and Pacific Northwest energy markets.
- Rate Freeze Impact: Assess the Company's ability to maintain profit margins given the retail electric rate freeze through 2007 and the scheduled 2.5% reduction in September 2005.
- Generation Availability: Monitor the operational status of key generation assets, particularly the San Juan Generating Station (SJGS) and Palo Verde Nuclear Generating Station (PVNGS), and the impact of unplanned outages on wholesale margins.
- Water Supply: Evaluate the impact of drought conditions in New Mexico on the water supply for coal-fired plants and the status of water rights adjudications.