Business Context and Reporting Period
This Form 8-K, filed on February 11, 2004, reports the unaudited results of operations for PNM Resources, Inc. and its subsidiary, Public Service Company of New Mexico, for the three and twelve months ended December 31, 2003. PNM Resources is an energy holding company serving approximately 450,000 natural gas and 390,000 electric customers in New Mexico, while also participating in wholesale power markets in the Western U.S.
Key Financial Metrics
Full Year 2003 Performance
- Revenue: Total operating revenues increased 23.2% to $1.456 billion ($1,455,714 thousand).
- Net Earnings (GAAP): $95.2 million ($95,173 thousand), or $2.37 per diluted share.
- Ongoing Earnings (Non-GAAP): $78.1 million, or $1.95 per diluted share.
- Operating Income: $118.6 million ($118,592 thousand).
- Consolidated Gross Margin: $653.0 million, an increase of 5.5% from the prior year.
- Interest Charges: Net interest charges totaled $66.2 million.
- Dividends: $0.91 per share paid for the full year.
Fourth Quarter 2003 Performance
- Revenue: Total operating revenues were $342.7 million ($342,651 thousand).
- Net Earnings (GAAP): $12.8 million ($12,839 thousand), or $0.32 per diluted share.
- Ongoing Earnings (Non-GAAP): $0.34 per diluted share.
- Consolidated Gross Margin: $155.6 million, a decrease of 4.0% from the prior quarter.
Material Changes Versus Prior Period
Full-year 2003 GAAP net earnings rose 49.5% compared to 2002, driven by a net one-time gain of $0.42 per share in 2003 versus a net charge of $0.20 per share in 2002. Excluding these items, ongoing earnings grew 7.7% to $1.95 per share.
Key drivers for the increase included:
- Wholesale Growth: Long-term power contracts tripled, adding 330 megawatts and boosting wholesale revenues to $534.5 million.
- Retail Growth: Weather-adjusted retail electric growth was 3.0%.
- Cost Management: Lower fuel costs and productivity improvements offset an electric rate reduction implemented in September 2003.
Conversely, warmer weather in 2003 reduced natural gas demand, resulting in zero return on the gas utility for the year. In the fourth quarter, earnings were negatively impacted by higher purchased power costs due to reduced plant availability and the delayed implementation of a planned gas rate increase.
Guidance, Outlook, and Risks
2004 Guidance
Management reaffirmed 2004 ongoing earnings guidance of $1.90 to $2.15 per diluted share. Expectations are based on expanding wholesale business, higher gas rates (approved in January 2004), lower fuel costs from the new San Juan underground mine, and continued productivity improvements.
Recent Developments
- New Mexico regulators approved a $22 million revenue increase for the gas utility, with commercial rates effective immediately and residential rates starting in April 2004.
- A 10-year contract to provide up to 35 megawatts to an Arizona municipal utility is expected to generate approximately $12 million in 2004 revenues.
- The San Juan Generating Station coal mine reached commercial operation status in Q4 2003.
Risks and Contingencies
Forward-looking statements are subject to risks including weather variability, fuel costs, wholesale power prices, regulatory decisions, and the performance of generating units. The company utilizes non-GAAP measures to exclude one-time items such as litigation settlements, accounting changes, and restructuring costs, which management believes better reflect fundamental earnings capacity.
Investor Verification Checklist
- Verify the reconciliation of GAAP net earnings ($2.37/share) to ongoing earnings ($1.95/share) to understand the impact of the $61.9 million accounting change gain and $34.6 million in one-time charges.
- Confirm the impact of the January 2004 gas rate approval on 2004 revenue projections.
- Assess the sustainability of wholesale margin growth given the volatility of power markets and the specific contribution of the 330 MW in new long-term contracts.
- Review the operational status and cost savings associated with the San Juan Generating Station's new underground mine.
- Monitor weather patterns in New Mexico, as the 2003 results were significantly impacted by warmer-than-normal temperatures affecting gas utility margins.