Business Context and Reporting Period
This Form 8-K, filed on June 12, 2003, by PNM Resources, Inc. and Public Service Company of New Mexico (collectively, the "Company"), serves to conform the presentation of information in the 2002 Annual Report on Form 10-K to reflect matters previously disclosed in the First Quarter 2003 Form 10-Q. The filing addresses a change in business segment reporting driven by the New Mexico Public Regulation Commission's (PRC) approval of the Global Electric Agreement on January 28, 2003. Consequently, the Company's generation activities are now reported as integrated with distribution energy supply rather than as a stand-alone operation. Additionally, the filing revises prior periods to reflect a change in the reporting of trading revenues and costs in accordance with EITF 02-3 and removes non-GAAP financial measures.
Key Financial Metrics (Year Ended December 31, 2002)
- Revenue: Total operating revenues were $1,095.0 million, a significant decrease from $2,250.5 million in 2001. This decline is primarily attributed to a slowdown in the wholesale electric market.
- Profitability: Net earnings applicable to common stock were $63.7 million, a 57.5% decrease from $149.8 million in 2001. Earnings per share (diluted) were $1.61 compared to $3.77 in the prior year.
- Cash Flow: Net cash flows provided by operating activities were $97.3 million, down from $327.3 million in 2001. Net cash used in investing activities was $200.4 million.
- Debt and Liquidity: Long-term debt, including current maturities, totaled $980.1 million. Total assets were $3,026.9 million. Cash and cash equivalents at year-end were $3.7 million.
- Margins: The filing notes that the change in presentation for trading revenues (reclassifying from gross to net margin) did not affect gross margins, net income, or cash flows.
Material Changes Versus Prior Period
- Segment Reclassification: The Company reclassified its Utility Operations to combine generation and distribution activities into a single segment ("Electric Services") to align with the Global Electric Agreement. Prior periods have been restated to conform.
- Accounting Standard Change (EITF 02-3): The Company reclassified energy contracts previously accounted for under EITF 98-10 to a net margin presentation. This reduced both operating revenues and cost of energy sold by approximately $74.0 million for 2002, $89.4 million for 2001, and $99.7 million for 2000.
- Wholesale Market Performance: Wholesale operating revenues declined $1.1 billion (80.7%) to $251.4 million due to steep declines in wholesale prices (average $31/MWh in 2002 vs. $108/MWh in 2001) and reduced market liquidity.
- Utility Operations: Despite the wholesale downturn, Electric Services gross margin grew 3.3% due to load growth and the utilization of lower-cost generation.
Guidance, Outlook, and Risks
- Global Electric Agreement: The agreement sets a rate path through 2007, including a 6.5% decrease in retail electric rates in two phases (4.0% in Sept 2003 and 2.5% in Sept 2005). Rates are frozen until the end of 2007. Risks and benefits of wholesale sales inure solely to shareholders until December 2007.
- Wholesale Outlook: Management expects low wholesale prices to continue into 2003. The Company plans to scale back expansion but will continue to seek rationally priced asset additions and focus on long-term contracts.
- Regulatory Risks: The Company is actively supporting the repeal of the Restructuring Act of 1999. If repeal is delayed, modifications to the Global Electric Agreement may be triggered.
- Operational Risks: Risks include fluctuations in fuel costs, weather conditions (drought in New Mexico), performance of generating units (specifically steam generator issues at Palo Verde Nuclear Generating Station), and the outcome of legal proceedings.
- Realignment Costs: The Company incurred $8.8 million in severance costs in 2002 due to a business realignment in response to wholesale market uncertainty.
Investor Verification Checklist
- Verify the impact of the Global Electric Agreement on future retail rate reductions and the specific timeline for the 6.5% rate decrease.
- Confirm the status of the New Mexico Legislature's consideration of SB 718 regarding the repeal of the Restructuring Act.
- Review the Company's strategy for managing the $1.25 billion investment cap on merchant plants and the requirement to transfer merchant plant interests by January 1, 2010.
- Assess the financial impact of the Palo Verde Nuclear Generating Station (PVNGS) steam generator replacement costs, estimated at $22 million for Unit 2 and $46 million for Units 1 and 3.
- Monitor the Company's ability to maintain investment-grade credit ratings, which is a condition for merchant plant investments under the Global Electric Agreement.