Business context and reporting period
This combined, unaudited Form 10-Q covers the three months ended March 31, 2011, and was filed May 6, 2011. The filing is by PNM Resources, Inc. (PNMR), Public Service Company of New Mexico (PNM), and Texas-New Mexico Power Company (TNMP); the supplied company metadata says TXNM Energy, Inc. Amounts below are primarily PNMR consolidated and in U.S. dollars.
PNMR operates regulated electric utilities in New Mexico and Texas and First Choice, a competitive Texas retail electricity provider. PNM is its largest subsidiary. PNMR’s 50% investment in Optim Energy had been written down to zero at year-end 2010.
Key financial metrics
| PNMR consolidated | Q1 2011 | Q1 2010 |
|---|---|---|
| Electric operating revenue | $387.7 million | $383.5 million |
| Operating income | $52.2 million | $10.5 million |
| Net earnings (loss) attributable to PNMR | $16.6 million | $(8.4) million |
| Diluted earnings (loss) per share | $0.18 | $(0.09) |
| Cash from operating activities | $58.7 million | $(13.3) million |
| Capital expenditures for utility and non-utility plant | $63.1 million | $67.5 million |
| Cash and cash equivalents, March 31 | $12.9 million | $29.0 million |
PNMR’s gross margin was $229.2 million versus $192.6 million. The improvement in earnings chiefly reflected much better First Choice results and lower energy costs; mark-to-market results on economic hedges were a significant factor. PNMR declared quarterly common dividends of $0.125 per share, unchanged year over year.
At March 31, PNMR reported $224.0 million of short-term debt, $2.3 million of current long-term debt installments, and $1.564 billion of long-term debt. At April 28, consolidated revolving-credit and local-line availability was $651.4 million after borrowings and letters of credit; the company reported no invested cash. Management said existing cash generation and financing arrangements were expected to meet needs for the next 12 months.
Subsidiary results differed: PNM’s net earnings available for common stock were $3.6 million, down from $4.3 million; TNMP net earnings rose to $4.2 million from $1.6 million. First Choice reported segment earnings of $13.5 million versus a $7.5 million loss.
Material changes versus the prior period
- PNMR moved from a net loss to profit, while revenue increased about 1%. Operating income rose substantially as total operating expenses fell, especially cost of energy.
- First Choice’s gross margin increased $31.1 million. Management attributed a large part of the change to unrealized hedge gains in 2011 versus losses in 2010; these non-cash marks may reverse and are not necessarily indicative of realized margins. Customer count fell by 8,600 year over year.
- TNMP revenue rose to $53.8 million from $48.2 million, supported by rate increases and transmission-cost recovery. Its PUCT-approved rate-case settlement provides a $10.25 million annual revenue-requirement increase beginning February 1, 2011.
- PNM’s earnings available for common stock declined despite higher operating income, partly because 2010 included a settlement gain that did not recur and 2011 had lower other income. PNM’s retail rate case remained pending.
- Operating cash flow improved by $72.0 million year over year, including effects from prior-year settlement payments, FPPAC collection timing, and lower posted collateral. Investing cash outflow decreased, while financing cash flow shifted from inflows to outflows as net short-term borrowing growth was lower.
Outlook, commentary, risks and contingencies
- Rates and regulation: A PNM rate-case stipulation, still subject to NMPRC approval, proposed increases of $45 million after approval and a further $40 million from January 2012, with additional potential riders and recovery mechanisms. The NMPRC denied PNM’s request for interim rates. PNM also sought an $11.1 million annual wholesale transmission revenue increase at FERC.
- Capital and liquidity: PNMR projected 2011 capital requirements of $415.8 million, including $369.6 million of construction spending, and $1.617 billion for 2011–2015. The principal PNMR and PNM credit facilities primarily expire in August 2012 and must be renewed or replaced; access and terms depend on credit markets, ratings, and operating results. The filing states that the business is seasonal, with higher cash flows generally in summer.
- Environmental exposure: EPA and state regional-haze requirements for San Juan Generating Station (SJGS) were unresolved. PNM estimated SCR installation could cost $750 million–$1 billion for the station, of which its share is 46.3%; a state draft proposal instead contemplated SNCR estimated at $77 million for the station. Final requirements, timing, cost recovery, and effects on plant viability remained uncertain. Other environmental matters include Four Corners controls, greenhouse-gas rules, coal-combustion waste, and water availability.
- Optim Energy: Optim Energy lost $18.2 million in Q1 and had $717 million of long-term debt. PNMR recorded no share of those losses because its investment was fully impaired and it had no contractual funding obligation. PNMR was evaluating strategic alternatives; any further contribution would be discretionary, and further impairment or gains were possible.
- Pensions: PNM anticipated $34.9 million of additional pension contributions in 2011 and estimated $190 million in 2012–2015; actual funding depends on actuarial assumptions and investment performance.
- Other uncertainties: The filing describes numerous pending environmental, regulatory, transmission, and legal proceedings. Management said known matters were not expected to have a material adverse effect overall, but outcomes and potential losses in some cases could not be predicted or reasonably estimated.
- Management outlook: First Choice expected market conditions to remain important and margins to decline toward more historical levels. The company expected modest near-term electricity sales growth. Management cautioned that quarterly results are seasonal and not necessarily representative of a full year.
Most important facts for investors to verify
- Whether the PNM rate-case stipulation was approved, its effective dates, and the resulting allowed revenue recovery.
- Final SJGS and Four Corners environmental-control requirements, implementation schedules, cost estimates, and rate-recovery treatment.
- PNMR and PNM credit-facility renewal plans ahead of the 2012 expirations, including borrowing availability, costs, and covenant compliance.
- Whether First Choice’s hedge-related earnings gains translate into realized margins, and whether customer attrition and competitive-market conditions improve.
- Any Optim Energy strategic transaction, additional funding decision, or change in the value of PNMR’s fully impaired investment.
- Actual construction spending, pension contributions, and cash generation compared with management’s forecasts.