Business context and reporting period
PNM Resources, Inc. (PNMR), Public Service Company of New Mexico (PNM) and Texas-New Mexico Power Company (TNMP) filed this combined, unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. The filing covers regulated electric utility operations in New Mexico and Texas and, through October 31, 2011, PNMR’s competitive Texas retailer, First Choice. The supplied filing identifies PNMR—not TXNM Energy—as the registrant; it does not establish a direct mapping to the company name in the request.
Results are seasonal, and interim results may not represent a full year. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance and position
| PNMR consolidated metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Electric operating revenue | $549.5 | $503.7 | $1,352.7 | $1,292.9 |
| Operating income | $108.3 | $105.4 | $193.4 | $189.6 |
| Net earnings attributable to PNMR | $43.7 | $48.6 | $64.4 | $63.0 |
| Diluted earnings per share | $0.48 | $0.53 | $0.70 | $0.69 |
| Operating cash flow | Not separately presented | Not separately presented | $198.5 | $216.6 |
- Q3 revenue increased about 9%, while PNMR-attributable earnings declined about 10%. For the first nine months, revenue rose about 5% and attributable earnings rose about 2%.
- PNMR reported $236.3 million of additions to utility and non-utility plant in the first nine months, compared with $181.3 million in 2010. Net cash used in investing was $204.8 million, versus $170.8 million.
- At September 30, PNMR had $22.3 million of balance-sheet cash, $289.0 million of short-term debt and $1,564.1 million of long-term debt. The cash-flow statement reports $25.8 million of cash at period-end; the filing’s separate held-for-sale presentation means the balance-sheet and cash-flow figures are not directly identical.
- PNMR total current assets were $625.7 million and current liabilities were $712.6 million. Short-term debt had increased from $222.0 million at December 31, 2010. Long-term debt was broadly unchanged from year-end.
- PNM’s nine-month net earnings available for common stock were $40.5 million, down from $52.2 million. TNMP’s net earnings increased to $17.1 million from $13.1 million.
Material changes versus the prior comparable period
- PNM’s $72.1 million annual retail rate increase took effect August 21, 2011. PNM cited warmer-weather loads, rate changes and higher transmission revenue as contributors to improved Q3 gross margin; lower market prices for sales from PVNGS Unit 3 weighed on unregulated margins.
- PNM recorded $17.5 million of regulatory disallowances and TNMP recorded $3.9 million in the first half of 2011. PNMR’s consolidated nine-month regulatory-disallowance expense was $21.4 million.
- TNMP implemented a $10.25 million annual base-rate increase in February and began collecting an approved advanced-meter surcharge in August. The approved meter deployment is expected to recover $113.3 million over 12 years.
- PNMR’s 2010 investment in Optim Energy had been fully impaired. On September 23, 2011, restructuring reduced PNMR’s ownership from 50% to 1%; Optim Energy debt is non-recourse to PNMR, and PNMR says it has no obligation to contribute additional funds.
- PNMR agreed to sell First Choice for $270.0 million plus working-capital adjustments. The sale closed November 1, 2011, after quarter-end, for $329.3 million including estimated working capital, subject to adjustment. First Choice remained classified as held for sale at September 30.
Outlook, commentary, risks and unusual items
- No specific earnings guidance is provided. Management said it expected modest near-term growth in electricity sales and believed operating cash generation, credit arrangements and capital-market access would be sufficient for the next 12 months, while noting that market access and regulatory outcomes could affect that assessment.
- PNMR projected 2011 capital requirements of $408.6 million, including $362.4 million of construction spending; projected 2011–2015 requirements were $1.60 billion, including $1.37 billion of construction. These estimates exclude potential San Juan Generating Station (SJGS) pollution-control costs.
- EPA’s final regional-haze plan requires selective catalytic reduction (SCR) at SJGS. PNM estimated station-wide construction costs of $749–$897 million, excluding approximately $38–$45 million of AFUDC; PNM owns 46.3% and is challenging the requirement. Cost recovery through rates is not assured. PNM estimated residential customer costs could reach approximately $85 in the first year, with costs declining thereafter.
- A September 2011 underground mine fire disrupted coal production at the San Juan mine. SJCC estimated longwall operations could restart around April 1, 2012; existing coal inventories were estimated to cover about eight and a half months at pre-disruption forecast consumption. A longer interruption could require reduced SJGS output or unit shutdowns.
- Other material uncertainties include environmental rules and litigation affecting SJGS and Four Corners, climate regulation, water availability and adjudication, nuclear safety requirements, rate-case outcomes, pension funding and commodity-market exposure. Management said it could not reliably estimate some potential losses or compliance costs.
- After quarter-end, PNMR entered into new revolving credit facilities totaling $700 million for PNMR and PNM, replacing facilities due to expire in 2012. As of November 1, consolidated availability was $704.9 million after letters of credit; no short-term debt was outstanding. The First Choice sale proceeds were used in part to repay borrowings and fund an intercompany loan to PNM.
- PNMR completed the $73.5 million purchase of its Series A convertible preferred stock on October 5. It also launched a tender offer for up to $50 million of its 9.25% notes due 2015; the offer was still pending when described. The filing reports no material change in disclosure controls and procedures.
Most important facts for investors to verify
- Final working-capital adjustment and net proceeds from the First Choice sale, and how sale proceeds are allocated among debt repayment, equity repurchases and other uses.
- Whether PNM obtains a stay or other relief from the SJGS SCR mandate, the final compliance schedule and cost, and the extent of regulatory cost recovery.
- San Juan mine recovery progress, coal availability and any resulting changes to SJGS operations or fuel costs.
- Regulatory decisions affecting PNM’s rate recovery and renewable-energy obligations, and the remaining impact of the 2011 disallowances.
- PNMR’s post-sale liquidity, debt and capital-spending needs, including the status and outcome of the note tender offer.
- How much Q3 and year-to-date earnings reflect recurring regulated operations versus weather, derivative mark-to-market changes, regulatory disallowances and other unusual items.