Business Context and Reporting Period
Company: PNM Resources, Inc. (Parent of Public Service Company of New Mexico)
Filing Type: Form 8-K (Current Report)
Report Date: October 31, 2003
Period Covered: Unaudited results for the three and nine months ended September 30, 2003.
Business Overview: An energy holding company serving approximately 450,000 natural gas and 390,000 electric customers in New Mexico, with additional wholesale power sales in the Western U.S.
Key Financial Metrics
Revenue and Profitability (Three Months Ended Sept 30, 2003)
- Total Operating Revenues: $385.2 million (up 40% from $274.7 million in Q3 2002).
- GAAP Net Earnings: $16.6 million ($0.41 per diluted share).
- Ongoing Earnings (Non-GAAP): $0.65 per diluted share (excludes one-time charges).
- Operating Income: $35.9 million.
- Gross Operating Margin: $170.7 million (up 8.9% from $156.8 million).
Revenue and Profitability (Nine Months Ended Sept 30, 2003)
- Total Operating Revenues: $1.113 billion (up from $826.7 million in 2002).
- GAAP Net Earnings: $82.3 million ($2.06 per diluted share).
- Ongoing Earnings (Non-GAAP): $1.63 per diluted share.
- Operating Income: $99.2 million.
Segment Performance
- Wholesale Power: Revenues increased $73.0 million (72.1%); Gross margin increased 47.2% to $27.1 million.
- Electric Utility: Retail gross margin increased 4.2% to $104.8 million.
- Gas Utility: Reported a loss of $0.12 per share (compared to $0.10 loss in Q3 2002).
Debt and Liquidity
- Debt Refinancing: Issued $300 million in Senior Unsecured Notes in September 2003 to replace $268 million in existing debt.
- Impact: Expected to save approximately $5 million annually in interest expense.
- One-Time Charge: $16.6 million ($0.24 per share) recorded for costs associated with early retirement of debt.
Material Changes vs. Prior Period
- Revenue Growth: Driven primarily by a 72% increase in wholesale power revenues due to higher average prices, increased sales volume, and new long-term contracts.
- Earnings Variance: GAAP EPS decreased from $0.45 to $0.41 due to a one-time debt refinancing charge of $0.24 per share. Ongoing EPS increased 10% to $0.65.
- Gas Utility Performance: Losses increased 20% year-over-year. The company is awaiting a decision on a proposed gas rate case settlement.
- Accounting Change: Nine-month GAAP earnings included a one-time gain of $0.94 per share due to the cumulative effect of a change in accounting principle.
Guidance, Outlook, and Risks
Guidance
Management reaffirmed 2003 ongoing earnings guidance (excluding one-time items) of $1.80 to $2.05 per diluted share.
Management Commentary
CEO Jeff Sterba attributed earnings improvement to the expansion of long-term wholesale contracts. However, he noted that gas utility operations continue to underperform pending regulatory action on rate increases.
Risks and Contingencies
- Regulatory Risk: Pending decision by the New Mexico Public Regulation Commission on a negotiated gas rate settlement. Residential portion of a $22 million revenue increase was proposed to be deferred to spring/summer 2004.
- Market Risks: Exposure to interest rates, weather, fuel costs, and wholesale power price volatility.
- Forward-Looking Statements: Actual results may differ materially due to competitive environments, legislative actions, and economic performance.
Investor Verification Checklist
- Verify the status of the New Mexico Public Regulation Commission's decision on the pending gas rate case settlement.
- Confirm the execution of new long-term wholesale contracts (e.g., 50MW to Salt River Project, 15-25MW to Overton Power District).
- Monitor the impact of the $300 million debt refinancing on future interest expense and liquidity.
- Review the reconciliation between GAAP and Non-GAAP earnings to understand the magnitude of one-time charges versus core operational performance.
- Assess the sustainability of wholesale power margins given the reliance on short-term and forward contract pricing.