Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2004, for PNM Resources, Inc. and its principal subsidiary, Public Service Company of New Mexico (PNM). The Company operates as an integrated public utility providing electricity and natural gas in New Mexico, alongside wholesale electricity marketing in the Western United States. The financial statements are unaudited but have been reviewed by Deloitte & Touche LLP.
Key Financial Metrics
| Metric | Q1 2004 | Q1 2003 |
|---|---|---|
| Total Operating Revenues | $443.7 million | $385.6 million |
| Net Earnings | $24.8 million | $48.2 million |
| Diluted EPS | $0.61 | $1.22 |
| Operating Income | $33.5 million | $33.4 million |
| Net Cash from Operating Activities | $54.2 million | $6.1 million |
| Long-Term Debt | $986.8 million | $987.2 million |
| Cash and Equivalents | $2.5 million | $12.7 million (Dec 31, 2003) |
Note: Q1 2003 Net Earnings included a one-time cumulative effect of a change in accounting principle of $37.4 million and a $10.1 million write-off of transition costs.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 15.1% to $443.7 million, driven by a 22.0% increase in Gas revenues (due to higher wholesale prices and a PRC-approved rate increase) and a 20.9% increase in Wholesale revenues (due to new long-term contracts and higher volumes).
- Earnings Decline: Reported Net Earnings decreased 48.6% to $24.8 million. This decline is primarily attributable to the absence in 2004 of the $37.4 million one-time gain from the adoption of SFAS 143 and the $10.1 million transition cost write-off recorded in Q1 2003.
- Operating Performance: Excluding non-recurring items, operating income remained relatively flat ($33.5 million vs. $33.4 million). However, Wholesale Operations operating income increased 48.7% to $6.9 million, while Electric Operations operating income decreased 9.4% to $13.9 million due to rate reductions and higher maintenance costs.
- Interest Expense: Decreased 24.2% to $13.8 million due to debt refinancing and lower short-term borrowing costs.
Outlook, Risks, and Management Commentary
- Guidance and Outlook: Management expects 2004 earnings to benefit from higher wholesale power prices, new gas rates, lower fuel costs from the new San Juan Generating Station (SJGS) underground mine, and lower interest costs. A retail electric rate freeze is in effect through 2007, with a scheduled 2.5% reduction in September 2005.
- Capital Projects: The Company is analyzing three turbines with a carrying value of $79.1 million intended for delayed build-outs. Management believes the investment will be fully recovered, but impairment risks exist if plans are not realized.
- Legal and Regulatory Risks:
- FERC Proceedings: The Company is involved in refund proceedings and "Show Cause" orders regarding alleged market manipulation in California (2000-2001). While dismissed from the "Gaming Practices" docket, it faces potential disgorgement claims in the "Gaming Partnerships" docket.
- Environmental Litigation: Ongoing citizen suits regarding opacity violations at SJGS and investigations into groundwater contamination at the former Santa Fe Generating Station.
- Water Supply: Drought conditions in the Four Corners region pose a risk to water availability for generation plants, though supplemental contracts are in place for 2004.
- Accounting Changes: The Company adopted SFAS 143 (Asset Retirement Obligations) in 2003. In 2004, it is evaluating the impact of FASB Interpretation No. 46R regarding variable interest entities.
Investor Verification Checklist
- Recurring Earnings: Verify the Company's core operating performance by excluding the one-time $37.4 million SFAS 143 gain and $10.1 million transition cost write-off from the 2003 comparison.
- Wholesale Exposure: Assess the impact of the $29.5 million credit exposure to the largest counterparty and the $16.7 million Value at Risk (VAR) for the wholesale portfolio.
- Legal Contingencies: Monitor the status of the FERC "Gaming Partnerships" proceeding and the potential for disgorgement of profits (estimated between $6 million and $26 million by plaintiffs).
- Asset Impairment: Track the utilization plans for the $79.1 million in stored turbines to ensure no impairment charges are required.
- Liquidity: Confirm the utilization of the new $300 million rated commercial paper program and the status of the $413 million total liquidity arrangements.