Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2002, for PNM Resources, Inc. (the Holding Company) and its principal subsidiary, Public Service Company of New Mexico (PNM). PNM is an integrated public utility providing regulated electric and natural gas services in New Mexico, alongside unregulated generation and marketing operations in the Western United States. The company operates as a "merchant utility," balancing regulated retail service with competitive wholesale power marketing.
Key Financial Metrics
| Metric | 2002 | 2001 |
|---|---|---|
| Total Operating Revenues | $1,169.0 million | $2,339.8 million |
| Net Earnings | $64.3 million | $150.4 million |
| Diluted Earnings Per Share | $1.61 | $3.77 |
| Operating Cash Flow | $97.3 million | $327.3 million |
| Long-Term Debt | $980.1 million | $953.9 million |
| Total Assets | $3,026.9 million | $2,913.8 million |
| Return on Average Common Equity | 6.2% | 14.8% |
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased 50% to $1.169 billion, primarily driven by a 61% drop in wholesale electricity sales revenues due to a severe slowdown in the Western wholesale power market.
- Earnings Drop: Net earnings fell 57.5% to $64.3 million. The average wholesale price realized by the company dropped from $111/MWh in 2001 to approximately $34/MWh in 2002.
- Utility Operations Growth: Despite the wholesale decline, regulated electric utility operations saw a 5.3% increase in operating income, driven by 2.1% load growth and cost savings.
- Gas Segment: Gas operating revenues decreased 29.4% to $272.1 million due to lower natural gas prices and reduced sales volumes, though operating income increased slightly to $18.7 million.
- Special Items: 2002 included non-recurring charges of $7.7 million (net of tax), including realignment costs and a transmission line project write-off. 2001 included $29.6 million in special charges, including Avistar investment write-offs and coal mine decommissioning costs.
Guidance, Outlook, and Risks
- 2003 Guidance: Management expects 2003 earnings to range from $1.80 to $2.05 per share. This outlook assumes continued low wholesale market liquidity and prices averaging $34/MWh.
- Global Electric Agreement: Approved in January 2003, this agreement sets a five-year rate path, mandating a 6.5% decrease in retail electric rates in two phases (starting September 2003). This is projected to reduce earnings by $0.08 per share in 2003, partially offset by fuel cost savings from a new underground coal mine.
- Gas Rate Case: PNM filed a gas rate case in January 2003 seeking a $37.6 million increase in cost of service rates to address a return on equity below 3%.
- Regulatory Risks: The company faces uncertainty regarding the repeal of New Mexico's Restructuring Act and potential impacts from FERC investigations into Western wholesale power market practices (including California refund proceedings).
- Environmental & Legal: Significant contingencies include water supply adjudications for the San Juan River, potential liabilities from the California energy crisis (refunds and litigation), and environmental remediation costs at various sites.
Investor Verification Checklist
- Verify the impact of the Global Electric Agreement on future retail revenue streams and the timeline for the mandated rate reductions.
- Assess the status of FERC refund proceedings related to the California energy crisis and the potential liability exposure.
- Monitor the outcome of the gas rate case filed in January 2003 and its effect on the gas segment's return on equity.
- Review the water supply adjudication status for the San Juan River, which supplies the San Juan Generating Station and Four Corners Power Plant.
- Confirm the company's ability to maintain investment-grade credit ratings, which are critical for merchant plant investment limits and credit facility covenants.