TXNM ENERGY INC annual report, FY2010

Full document

Business context and reporting period

PNM Resources, Inc. (PNMR) filed this combined Form 10-K for the year ended December 31, 2010, covering PNMR, Public Service Company of New Mexico (PNM), and Texas-New Mexico Power Company (TNMP). The filing is not for “TXNM Energy Inc.”; the issuer named in the filing is PNM Resources, Inc. PNMR is a holding company with regulated electric utilities PNM and TNMP, Texas retail provider First Choice, and a 50% investment in unregulated generator Optim Energy. PNM sold its natural gas business in January 2009; it is reported as discontinued operations.

Financial performance and position

  • PNMR revenue and earnings: Continuing-operations revenue was $1.674 billion, up 1.6% from $1.648 billion in 2009. PNMR reported a $45.2 million net loss attributable to PNMR, versus $124.3 million of net earnings in 2009; diluted loss per share was $0.49, versus earnings of $1.36. The 2010 loss includes a $188.2 million pre-tax ($113.7 million after-tax) impairment of PNMR’s Optim Energy investment.
  • Operating results: Consolidated operating income was $239.5 million, compared with $191.9 million in 2009. Segment earnings attributable to PNMR were $56.8 million for PNM Electric, $16.0 million for TNMP Electric, and $24.1 million for First Choice; Corporate and Other recorded a $142.0 million loss, including the Optim Energy impairment. PNM Electric gross margin rose to $664.9 million from $589.9 million; TNMP gross margin increased to $175.5 million from $157.9 million. First Choice gross margin declined to $132.7 million from $182.4 million.
  • Cash flow and investment: Operating cash flow was $287.4 million, versus $87.7 million in 2009. Utility plant additions were $281.5 million, and PNMR contributed $20.3 million to Optim Energy. Investing cash flow was negative $275.9 million; financing cash flow was negative $10.7 million. Year-end cash was $15.4 million.
  • Debt and liquidity: At year-end, long-term debt including current installments was $1.566 billion, and short-term debt was $222.0 million. Total assets were $5.225 billion. As of February 18, 2011, consolidated short-term debt was $240.0 million and remaining availability under credit facilities was $659.8 million. PNMR and PNM revolving facilities primarily expire in August 2012; Optim Energy’s bank financing expires in May 2012.
  • Capital and shareholder returns: Planned 2011–2015 construction expenditures totaled $1.396 billion, within projected total capital requirements of $1.628 billion. PNMR declared $0.50 per common share in 2010, unchanged from 2009.

Changes versus the prior comparable period

  • PNMR moved from profit to loss mainly because of the full impairment of its Optim Energy investment. The impairment is reflected in earnings; cash flow reconciliation adds it back.
  • PNM and TNMP earnings improved, supported by regulated rate increases, higher loads and other operating factors. PNM’s revenue growth also reflected the second phase of its 2008 rate increase.
  • First Choice earnings fell by $20.4 million, as lower retail margins and mark-to-market losses on economic hedges outweighed reduced bad-debt expense. Its year-end customer count declined to 214,201 from 224,976.
  • PNMR operating cash flow increased substantially, principally reflecting income tax refunds in 2010 versus tax payments in 2009, as well as improved cash generation at PNM and TNMP. The 2009 investing cash flow included $652.9 million of proceeds from the PNM Gas sale.

Outlook, commentary, risks and unusual items

  • Rate proceedings: A February 2011 stipulation in PNM’s pending electric rate case proposed increases of $45.0 million beginning May 15, 2011 and another $40.0 million beginning January 1, 2012, subject to NMPRC approval. Other parties opposed the stipulation; the filing says the outcome is uncertain. TNMP’s 2010 rate-case settlement was approved in January 2011 and provides a $10.25 million annual revenue increase beginning February 1, 2011.
  • Optim Energy: Continued weak ERCOT power and gas markets led PNMR to write its investment down to zero. PNMR was exploring strategic alternatives and stated it might contribute equity or operating assets, but had no contractual obligation to provide further funding and gave no assurance a transaction would occur. Optim Energy itself reported a $25.1 million net loss in 2010 and had $717 million of long-term debt.
  • Environmental exposure: Proposed regional-haze controls could require selective catalytic reduction (SCR) at San Juan Generating Station (SJGS) and Four Corners. PNM estimated its share of potential SJGS SCR costs at approximately 46.3% of a station-wide $750 million–$1 billion estimate; potential Four Corners controls were estimated to cost PNM up to approximately $69 million. Requirements, timing, recoverability in rates and plant impacts remained uncertain. Coal-combustion waste rules and greenhouse-gas regulation were additional uncertainties.
  • Other contingencies: The filing discusses nuclear fuel storage and DOE disposal delays, water availability, mine reclamation, environmental litigation, and operating and regulatory proceedings. Management said it did not expect known lawsuits, environmental costs and commitments to have a material adverse effect, while cautioning that outcomes are uncertain.
  • Funding and execution risks: The company expects to use operating cash flow, credit arrangements and capital markets to fund substantial construction needs. Renewal or replacement of the PNMR and PNM credit facilities before 2012 expirations, credit ratings, rate recovery, pension funding and seasonal cash flows are important liquidity considerations.
  • Audit and controls: Deloitte issued unqualified opinions on the financial statements of PNMR, PNM and TNMP. Management and the auditor reported effective internal control over financial reporting for PNMR and PNM as of year-end; TNMP was not required to obtain an auditor attestation on internal control.

Important facts for investors to verify

  • Confirm that the intended filing is PNM Resources, Inc.’s 2010 Form 10-K, rather than a filing for TXNM Energy Inc.
  • Review the Optim Energy impairment valuation, the subsidiary’s debt and financing maturity, and any subsequent strategic transaction or funding commitment.
  • Track NMPRC decisions on PNM’s rate-case stipulation and FPPAC recovery, and the actual timing and effect of TNMP’s approved rate increase.
  • Assess the final EPA regional-haze requirements for SJGS and Four Corners, estimated compliance costs, potential plant effects and rate-recovery prospects.
  • Verify the renewal or replacement of PNMR and PNM credit facilities before August 2012, together with short-term borrowings, available capacity and planned capital expenditures.
  • Separate recurring utility performance from one-time and volatile items, including the Optim Energy impairment, tax refunds, hedging marks and the prior-year gas-sale proceeds.