Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2010, for PNM Resources, Inc. (PNMR) and its subsidiaries, Public Service Company of New Mexico (PNM) and Texas-New Mexico Power Company (TNMP). PNMR operates regulated electric utilities in New Mexico and Texas, an unregulated retail electric provider (First Choice) in Texas, and holds a 50% equity interest in Optim Energy, an independent power producer. The company sold its natural gas operations (PNM Gas) in January 2009, which are reported as discontinued operations.
Key Financial Metrics
| Metric (in thousands) | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Operating Revenues | $383,457 | $385,865 |
| Operating Income | $10,543 | $29,903 |
| Net Earnings (Loss) from Continuing Operations | $(5,214) | $16,407 |
| Net Earnings (Loss) Attributable to PNMR | $(8,449) | $89,549 |
| EPS (Basic/Diluted) - Continuing Ops | $(0.09) | $0.15 |
| EPS (Basic/Diluted) - Net Earnings | $(0.09) | $0.98 |
| Net Cash Flows from Operating Activities | $(13,256) | $(15,288) |
| Short-term Debt | $287,973 | $198,000 |
| Long-term Debt | $1,565,366 | $1,565,206 |
| Cash and Cash Equivalents | $28,986 | $14,641 |
Material Changes vs. Prior Period
- Net Earnings Decline: Net earnings attributable to PNMR swung from a profit of $89.5 million in Q1 2009 to a loss of $8.4 million in Q1 2010. The Q1 2009 figure was significantly boosted by $75.9 million in earnings from discontinued operations (PNM Gas sale), which did not recur in 2010.
- Continuing Operations Loss: Earnings from continuing operations dropped from $13.7 million in Q1 2009 to a loss of $8.4 million in Q1 2010. This was primarily driven by a $14.5 million decrease in First Choice earnings due to mark-to-market losses on economic hedges and a $3.5 million decrease in Optim Energy's contribution.
- Segment Performance:
- PNM Electric: Earnings improved by $9.4 million due to rate increases and lower fuel costs, despite higher operating expenses.
- First Choice: Reported an operating loss of $11.3 million compared to income of $11.9 million in the prior year, largely due to $27.8 million in unrealized losses on economic hedges.
- Optim Energy: Reported a net loss of $8.0 million (PNMR share: $4.4 million loss) compared to a net income of $3.1 million (PNMR share: $1.4 million gain) in the prior year.
- Liquidity: Short-term borrowings increased by approximately $90 million to fund construction expenditures and working capital needs. Cash and cash equivalents increased to $29.0 million.
Guidance, Outlook, and Risks
- Regulatory Outlook: PNM anticipates filing a general rate case with the New Mexico Public Regulation Commission (NMPRC) in mid-2010 using a future test period. TNMP anticipates filing its next general rate case in the third quarter of 2010. Both entities expect to seek recovery of increased costs related to renewable energy, pension obligations, and rights-of-way renewals.
- Capital Requirements: Total capital requirements for 2010 are projected at $331.3 million, including $285.1 million in construction expenditures. Long-term requirements for 2010-2014 are projected at $1.77 billion.
- Environmental and Climate Change Risks: The company faces significant uncertainty regarding EPA regulations on greenhouse gases (GHG) and coal combustion by-products (CCB). Potential compliance costs could impact the economic viability of certain generating facilities, such as Four Corners and San Juan Generating Station (SJGS).
- Legal Proceedings:
- Sierra Club Litigation: A lawsuit filed in April 2010 alleges violations of the Resource Conservation and Recovery Act (RCRA) regarding CCB placement at the San Juan Mine.
- Western Wholesale Market: A settlement agreement regarding the 2000-2001 California energy crisis was approved by FERC in April 2010, requiring a $45.0 million payment by PNM.
- Republic Savings Bank: PNM received a $9.7 million settlement in April 2010, recorded as other income.
- Optim Energy Counterparty Risk: Lyondell Chemical Company (LCC), a key counterparty for Optim Energy, filed for bankruptcy in 2009. While LCC's plan was confirmed in April 2010, negotiations are ongoing to cure pre-petition defaults.
Investor Verification Checklist
- Derivative Accounting Impact: Verify the extent to which First Choice's reported loss is driven by non-cash mark-to-market losses on economic hedges versus actual realized cash flow impacts.
- Regulatory Rate Case Outcomes: Monitor the NMPRC and PUCT proceedings for PNM and TNMP to assess the likelihood and timing of cost recovery for renewable energy investments and pension obligations.
- Environmental Compliance Costs: Track EPA rulings on GHG and CCB regulations to estimate potential capital expenditures required for SJGS and Four Corners.
- Optim Energy Performance: Review Optim Energy's ability to reduce debt and optimize assets in a low-price market environment, and monitor the resolution of LCC bankruptcy-related contract issues.
- Liquidity and Credit Facilities: Confirm the status of revolving credit facilities, particularly the PNMR Facility which was amended in March 2010 to remove Lehman Brothers Bank as a lender.