Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2009, for PNM Resources, Inc. (PNMR) and its subsidiaries, Public Service Company of New Mexico (PNM) and Texas-New Mexico Power Company (TNMP). The Company operates regulated electric utilities in New Mexico and Texas, along with unregulated merchant power operations through First Choice and Optim Energy. A significant strategic shift occurred in January 2009 with the sale of PNM Gas, which is now reported as discontinued operations. The Company is currently focused on its core regulated electric businesses and the growth of its unregulated merchant operations.
Key Financial Metrics (Six Months Ended June 30, 2009)
| Metric | 2009 (in millions) | 2008 (in millions) |
|---|---|---|
| Total Operating Revenues | $786.97 | $944.81 |
| Net Earnings (Loss) Attributable to PNMR | $93.27 | $(192.12) |
| Earnings from Continuing Operations | $19.83 | $(216.12) |
| Earnings from Discontinued Operations | $79.06 | $25.26 |
| Operating Cash Flows | $(34.37) | $12.54 |
| Investing Cash Flows | $509.79 | $(150.07) |
| Financing Cash Flows | $(590.04) | $257.65 |
| Cash and Cash Equivalents (End of Period) | $26.02 | $137.90 |
| Total Debt (Short-term + Long-term) | $1.72 billion | $2.12 billion |
Note: 2008 figures include significant goodwill impairments and trading losses not present in 2009. The 2009 Net Earnings figure is heavily influenced by the gain on the sale of PNM Gas.
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased by approximately 16.7% compared to the prior year, primarily due to the sale of the PNM Gas segment, lower retail loads from cooler weather, and reduced industrial usage.
- Profitability Improvement: Net earnings attributable to PNMR improved from a loss of $192.1 million in 2008 to a profit of $93.3 million in 2009. This turnaround is largely driven by a $110.7 million pre-tax gain on the sale of PNM Gas and the absence of $136.2 million in goodwill impairments recorded in 2008.
- Segment Performance:
- First Choice: Returned to profitability with $23.0 million in earnings (vs. $84.5 million loss in 2008) due to lower purchased power costs and the cessation of speculative trading.
- Optim Energy: Reported a net loss of $11.0 million (vs. $56.6 million loss in 2008), with PNMR's equity share being a loss of $6.0 million.
- PNM Electric: Earnings improved to a loss of $13.1 million (vs. $74.2 million loss in 2008) due to lower fuel costs and regulatory rate increases.
- Cash Flow: Operating cash flows turned negative ($34.4 million outflow) primarily due to tax payments related to the PNM Gas sale. Investing cash flows were positive ($509.8 million) due to proceeds from the PNM Gas sale ($640.6 million).
Guidance, Outlook, and Risks
- Regulatory Outlook: PNM received approval for a $77.1 million annual non-fuel revenue increase effective July 1, 2009. TNMP reached a unanimous settlement in its 2008 rate case for a $12.7 million annual revenue increase, pending PUCT approval.
- Capital Requirements: Projected total capital requirements for 2009 are $329.9 million. The Company anticipates needing additional long-term financing between 2010 and 2013.
- Liquidity: As of July 28, 2009, consolidated remaining availability under revolving credit facilities was $773.5 million. The Company maintains effective shelf registration statements for debt and equity.
- Key Risks:
- Climate Change Regulation: Potential federal and state regulations on greenhouse gas emissions (e.g., cap and trade) could significantly increase costs for fossil-fuel generation.
- Market Risk: Exposure to commodity price volatility in unregulated markets (First Choice and Optim Energy), though speculative trading has ceased.
- Counterparty Risk: Lyondell Chemical Company (LCC), a counterparty to Optim Energy, filed for Chapter 11 bankruptcy; however, it continues to perform under contracts.
- Legal Proceedings: Ongoing litigation regarding the Western United States wholesale power market and various environmental matters (e.g., Four Corners BART, San Juan River adjudication).
Investor Verification Checklist
- Discontinued Operations Impact: Verify the sustainability of earnings by excluding the one-time $110.7 million gain from the PNM Gas sale.
- Regulatory Approvals: Confirm the final approval of the TNMP rate case settlement by the Public Utility Commission of Texas (PUCT).
- Debt Refinancing: Monitor the Company's ability to refinance maturing debt in the current credit environment, specifically the $36.0 million PNM bonds repurchased in July 2009.
- Optim Energy Performance: Assess the operational stability of Optim Energy following the completion of the Cedar Bayou 4 unit and the bankruptcy of its counterparty, LCC.
- Environmental Compliance Costs: Review potential capital expenditures required for compliance with new environmental regulations, particularly regarding greenhouse gases and regional haze (BART).