Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2008, filed by 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 competitive retail and wholesale energy businesses (First Choice and EnergyCo). A significant strategic shift occurred during the period with the agreement to sell PNM's natural gas operations (classified as discontinued operations) and the pending acquisition of Cap Rock Holding Corporation's Texas electric distribution business.
Key Financial Metrics
| Metric (in thousands) | Q1 2008 | Q1 2007 |
|---|---|---|
| Total Operating Revenues | $364,503 | $437,044 |
| Operating Income (Loss) | $(58,971) | $48,455 |
| Net Earnings (Loss) | $(48,636) | $29,666 |
| Diluted EPS (Continuing Ops) | $(0.93) | $0.19 |
| Diluted EPS (Net) | $(0.63) | $0.38 |
| Net Cash from Operating Activities | $24,692 | $43,622 |
| Short-term Debt | $737,000 | $665,900 |
| Long-term Debt | $1,064,253 | $1,231,859 |
| Cash and Cash Equivalents | $27,724 | $17,763 |
Material Changes vs. Prior Period
- Net Loss vs. Profit: The Company reported a net loss of $48.6 million in Q1 2008 compared to a net profit of $29.7 million in Q1 2007. This represents a deterioration of $78.3 million.
- Regulatory Disallowances: A primary driver of the loss was a $30.2 million pre-tax regulatory disallowance recorded by PNM. This resulted from a New Mexico Public Regulation Commission (NMPRC) order disallowing the recovery of $19.6 million in coal mine decommissioning costs and $10.6 million in Renewable Energy Certificate (REC) costs.
- Speculative Trading Losses: The First Choice segment incurred a pre-tax loss of $47.1 million due to speculative trading in ERCOT basis differentials. This was driven by extreme transmission congestion and historically high basis differences. First Choice has ceased speculative trading.
- EnergyCo Impact: PNMR's equity in the net loss of EnergyCo (a 50% joint venture) was $25.1 million, compared to a loss of $0.7 million in the prior year. This was largely due to mark-to-market losses on economic hedges ($47.1 million) and speculative trading losses ($2.4 million) within EnergyCo.
- Plant Availability: PNM Electric experienced reduced generation at regulated base-load plants (availability factor dropped from 85.8% to 64.6%), reducing earnings by approximately $20.5 million due to planned and unplanned outages.
- Discontinued Operations: PNM Gas operations, now classified as discontinued, generated earnings of $22.5 million in Q1 2008, up from $14.5 million in Q1 2007, primarily due to rate increases and the cessation of depreciation on assets held for sale.
Guidance, Outlook, Risks, and Unusual Items
- Credit Rating Downgrades: In April 2008, S&P and Moody's downgraded the credit ratings of PNMR, PNM, and TNMP. S&P placed them on credit watch for further downgrades. This has increased short-term borrowing costs and required the posting of approximately $16 million in letters of credit/collateral.
- Liquidity and Debt Maturities: The Company faces significant near-term debt maturities, including $300 million of PNM notes due September 2008 and $167.7 million of TNMP notes due January 2009. Additionally, PNMR has $347.3 million in equity-linked units requiring remarketing in May and August 2008. Management believes internal cash generation and credit facilities are sufficient to meet these obligations.
- Regulatory Proceedings:
- PNM Electric Rate Case: The NMPRC approved a $34.4 million revenue increase effective May 1, 2008, but denied the requested Fuel and Purchased Power Adjustment Clause (FPPAC). PNM is considering an appeal.
- Emergency FPPAC: PNM filed a motion for an Emergency FPPAC to recover fuel costs; a hearing is scheduled for May 2008.
- Gas Sale: PNM agreed to sell its gas operations for $620 million, subject to regulatory approval. Proceeds are intended to retire debt and fund capital expenditures.
- Environmental Risks: The Company faces potential costs related to Regional Haze rules (BART) for the San Juan Generating Station and Four Corners, as well as potential future climate change regulations (GHG emissions). The cost of compliance is currently uncertain.
Investor Verification Checklist
- Debt Refinancing Capability: Verify the Company's ability to successfully remarket the $347.3 million equity-linked units and refinance the $467.7 million in senior unsecured notes maturing in 2008-2009, given the recent credit downgrades and tight credit markets.
- Regulatory Recovery: Monitor the outcome of the NMPRC proceedings regarding the Emergency FPPAC and the appeal of the disallowed coal decommissioning and REC costs ($30.2 million write-off).
- Trading Exposure: Confirm that First Choice and EnergyCo have fully closed out their speculative trading positions and assess the remaining exposure to mark-to-market volatility on economic hedges.
- Plant Reliability: Review the status of planned outages and environmental upgrade projects at San Juan Generating Station (SJGS) and Four Corners to assess future generation availability and potential cost overruns.
- Transaction Closing: Track the regulatory approvals required for the sale of PNM Gas and the acquisition of Cap Rock Holding Corporation to ensure the expected cash flows and strategic pivot to electric-only operations materialize.