Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2007, for PNM Resources, Inc. (PNMR) and its subsidiaries, Public Service Company of New Mexico (PNM) and Texas-New Mexico Power Company (TNMP). The filing includes unaudited condensed consolidated financial statements. A significant structural change occurred on January 1, 2007, when TNMP transferred its New Mexico operations to PNM. Additionally, on June 1, 2007, PNMR contributed its Altura subsidiary (including the Twin Oaks power plant) to the EnergyCo joint venture, which is now accounted for using the equity method.
Key Financial Metrics (Nine Months Ended Sept 30, 2007)
| Metric | PNMR Consolidated | PNM Subsidiary | TNMP Subsidiary |
|---|---|---|---|
| Total Operating Revenues | $1,863.6 million | $1,252.2 million | $137.1 million |
| Net Earnings | $58.3 million | $26.3 million | $15.4 million |
| Net Earnings Per Share (Diluted) | $0.75 | N/A | N/A |
| Operating Cash Flows | $127.0 million | $160.3 million | $5.1 million |
| Short-Term Debt | $648.7 million | $285.6 million | $18.5 million |
| Long-Term Debt | $1,233.6 million | $705.7 million | $167.5 million |
| Cash and Equivalents | $16.7 million | $2.7 million | $0.1 million |
Material Changes vs. Prior Period
- Net Earnings Decline: PNMR net earnings decreased to $58.3 million for the nine months ended Sept 30, 2007, compared to $85.5 million in the same period of 2006. This represents a decrease of approximately 32%.
- Revenue Growth: Despite the earnings decline, total operating revenues increased slightly to $1.86 billion from $1.85 billion in 2006, driven by load growth and weather impacts in PNM Gas and TNMP, offset by reduced margins in wholesale operations.
- Impairment Charges: A significant pre-tax impairment charge of $19.5 million was recorded for the Afton Generating Station due to cost overruns exceeding the stipulated maximum for rate recovery. Additionally, a $3.4 million impairment loss was recorded for Twin Oaks intangible assets.
- Business Improvement Plan: The company recorded $12.6 million in pre-tax expenses related to a business improvement plan, primarily severance costs.
- Tax Benefit: A non-recurring income tax benefit of $16.0 million was recognized in June 2007 following a settlement with the IRS regarding previously unrecognized tax benefits. Without this benefit, the effective tax rate would have been 33.0%.
- Segment Shifts: The Wholesale segment operating income dropped significantly due to the contribution of Twin Oaks to EnergyCo and net unrealized mark-to-market losses. The PNM Electric segment saw increased revenues due to the transfer of TNMP's New Mexico assets.
Guidance, Outlook, Risks, and Unusual Items
- EnergyCo Joint Venture: PNMR now accounts for its 50% interest in EnergyCo using the equity method. EnergyCo reported net earnings of $20.9 million for the nine months ended Sept 30, 2007. PNMR's share of earnings was $12.2 million.
- Regulatory Matters:
- PNM Gas Rate Case: The NMPRC approved a $9 million annual revenue increase, but both PNM and the New Mexico Attorney General have appealed the decision to the New Mexico Supreme Court.
- PNM Electric Rate Case: PNM filed a request for an $82.4 million revenue increase. The NMPRC suspended the proposed rates until May 2008 pending further review.
- TNMP Stranded Costs: A PUCT order regarding stranded cost recovery is under appeal by various Texas cities.
- Environmental and Legal Risks:
- Global Warming: The NMPRC requires utilities to factor a standardized cost of carbon emissions ($8-$40 per metric ton) into integrated resource plans starting in 2010.
- California Market Litigation: Ongoing proceedings regarding refunds and market manipulation allegations from the 2000-2001 California energy crisis remain unresolved, with potential refund liabilities.
- San Juan Generating Station (SJGS): Environmental upgrade projects face potential delays and cost overruns, including a force majeure notice from the contractor regarding labor shortages.
- Liquidity: Cash and cash equivalents decreased significantly to $16.7 million from $123.4 million at year-end 2006. The company relies on revolving credit facilities ($1.0 billion total capacity) and commercial paper programs to meet capital requirements.
- Restatement: Prior period financial statements for 2006 were restated to correct the amortization period for deferred gains on PVNGS sale-leaseback transactions.
Key Facts for Investor Verification
- Verify the impact of the Afton impairment: Confirm the $19.5 million pre-tax charge and its effect on future rate recovery and capital expenditure plans.
- Monitor the IRS settlement: Understand that the $16.0 million tax benefit is non-recurring and assess the sustainability of earnings without it.
- Review EnergyCo performance: Track the equity earnings from EnergyCo, as it is a major growth vehicle but introduces joint venture risks and potential capital call obligations.
- Assess regulatory outcomes: Monitor the appeals of the PNM Gas and Electric rate cases, as the approved increases are not yet final and could be reduced.
- Check liquidity coverage: Given the low cash balance ($16.7 million), verify the availability and terms of the $1.0 billion revolving credit facility and commercial paper programs.
- Understand the TNMP asset transfer: Ensure comparisons between 2006 and 2007 account for the January 1, 2007, transfer of TNMP's New Mexico operations to PNM, which alters segment comparability.