Business Context and Reporting Period
This Form 8-K is filed by PNM Resources, Inc. (a New Mexico corporation) on July 22, 2008. The report addresses the termination of a material definitive agreement and provides updates on the performance of its competitive retail electric provider, First Choice Power (FCP).
Key Financial Metrics and Transaction Details
- Termination Payment: Continental Energy Systems LLC agreed to pay PNM Resources $15 million upon the closing of the PNM natural gas sale.
- Pending Gas Sale: PNM's natural gas operations are being sold to New Mexico Gas Company, Inc. for $620 million in cash, subject to adjustment. Closing is expected by year-end 2008.
- FCP Margins: Average retail margins for the quarter ended June 30, 2008, are expected to be approximately $3 per megawatt-hour.
- FCP Growth: Retail customer count increased 1.7% year-over-year; megawatt-hour sales were flat compared to the same period in 2007.
Material Changes and Operational Updates
On July 22, 2008, the Texas Merger Agreement, originally signed on January 12, 2008, was terminated. Under this agreement, PNM Resources was to acquire Cap Rock Holding Corporation for $202.5 million. Continental decided to retain Cap Rock, which was dependent on the closing of the PNM gas sale. Consequently, the parties agreed to terminate the merger while focusing on the $620 million gas asset sale.
FCP reported higher purchased power costs in the second quarter of 2008 compared to 2007, resulting in significantly lower retail margins per megawatt-hour and lower-than-expected customer growth and energy sales.
Guidance, Outlook, and Risks
Management expects FCP's quarterly performance to impact the Company's quarter and year-to-date results. Detailed financial results and discussions regarding these impacts are scheduled for the second quarter earnings news release and analyst conference call on August 11, 2008.
Risks and Contingencies:
- The closing of the pending sale of PNM natural gas utility may not occur due to regulatory or other reasons.
- FCP faces risks related to attracting and retaining customers, changes in ERCOT protocols, and fluctuations in wholesale power and natural gas prices.
- Forward-looking statements are subject to risks including regulatory decisions, weather, interest rate fluctuations, and legal proceedings.
Investor Verification Checklist
- Verify the closing status and regulatory approval of the $620 million PNM natural gas sale to NMGC.
- Confirm the receipt of the $15 million termination payment from Continental, contingent on the gas sale closing.
- Review the August 11, 2008, earnings release for full details on FCP's impact on consolidated results.
- Monitor wholesale power and natural gas price volatility affecting FCP margins.