Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2003, for PNM Resources, Inc. (Holding Company) and its principal subsidiary, Public Service Company of New Mexico (PNM). PNM is an integrated public utility providing electricity and natural gas services in New Mexico, while the Holding Company manages corporate activities and unregulated wholesale energy operations. The company operates as a "merchant utility," balancing regulated retail service with competitive wholesale power marketing.
Key Financial Metrics
| Metric | 2003 | 2002 |
|---|---|---|
| Total Operating Revenues | $1,455.7 million | $1,118.7 million |
| Net Earnings | $95.2 million | $63.7 million |
| Earnings Per Share (Diluted) | $2.37 | $1.61 |
| Operating Cash Flow | $228.7 million | $97.4 million |
| Total Assets | $3,378.6 million | $3,247.2 million |
| Long-Term Debt | $987.2 million | $980.1 million |
| Return on Average Common Equity | 9.3% | 6.4% |
Material Changes vs. Prior Period
- Net Earnings Growth: Net earnings increased 49.5% to $95.2 million. This was primarily driven by a $37.4 million cumulative effect of adopting SFAS 143 (Asset Retirement Obligations) and improved wholesale operations performance.
- Wholesale Operations: Wholesale revenues surged 60.1% to $550.4 million due to the addition of long-term contracts and more stable market prices. Gross margin in this segment increased $51.3 million.
- Utility Operations:
- Electric: Revenues decreased slightly ($3.1 million) due to a 4% retail rate reduction effective September 2003 and the transfer of a significant customer to wholesale rates. However, customer growth offset some of these declines.
- Gas: Revenues increased 29.2% to $358.3 million, driven by higher natural gas prices. However, gross margin decreased $3.2 million due to the expiration of a rate rider, as gas costs are passed through to customers.
- One-Time Charges: Earnings were reduced by a $16.7 million write-off of transition costs related to the repeal of New Mexico's electric deregulation and a $16.6 million write-off for long-term debt refinancing costs.
Guidance, Outlook, and Risks
- 2004 Outlook: Management expects earnings to benefit from higher gas rates (approved in January 2004), lower fuel costs from the new San Juan Generating Station (SJGS) underground mine, and productivity improvements. The company plans to expand wholesale business through long-term contracts.
- Regulatory Environment: The company operates under a five-year rate path (Global Electric Agreement) approved in 2003, which includes retail rate reductions. The New Mexico Legislature repealed the Electric Utility Industry Restructuring Act, allowing the company to re-apply regulatory accounting (SFAS 71).
- Legal and Regulatory Risks:
- FERC Investigations: The company is involved in FERC proceedings regarding alleged market manipulation in the California wholesale market (2000-2001). While dismissed from one "Gaming Practices" docket, it faces potential disgorgement in a "Gaming Partnerships" docket.
- Environmental Litigation: Pending citizen suits regarding Clean Air Act violations (opacity limits) at SJGS and investigations into coal mine reclamation costs.
- Water Supply: Drought conditions in the Four Corners region pose a risk to water availability for generation plants, though the company has secured supplemental contracts.
- Unusual Items: The adoption of SFAS 143 resulted in a significant non-cash gain. The company also faces potential liabilities from the California energy crisis refund proceedings, though exact amounts remain uncertain.
Investor Verification Checklist
- Wholesale Market Exposure: Verify the stability of wholesale power prices and the company's ability to secure new long-term contracts to maintain velocity.
- Regulatory Rate Recovery: Confirm the timeline and magnitude of the approved gas rate increase and the impact of the fixed electric rate path through 2007.
- Legal Contingencies: Monitor the outcome of FERC "Gaming Partnerships" proceedings and California refund liabilities, as these could result in significant cash outflows.
- Asset Retirement Obligations: Review the assumptions used for SFAS 143 regarding nuclear and fossil fuel decommissioning costs, as changes in estimates could materially impact future earnings.
- Water Rights: Assess the long-term security of water supplies for the SJGS and Four Corners plants given regional drought conditions.