Business Context and Reporting Period
This is PNM Resources, Inc. and subsidiaries’ combined Form 10-K for the fiscal year ended December 31, 2011, filed February 29, 2012. Although the request identifies TXNM Energy, the filing itself covers PNM Resources, Inc. (PNMR), Public Service Company of New Mexico (PNM), and Texas-New Mexico Power Company (TNMP). PNMR is a regulated-electric-utility holding company serving New Mexico and Texas. It sold competitive retailer First Choice in November 2011 and reduced its Optim Energy interest to 1%; that remaining interest was acquired for zero value in January 2012.
Key Financial Metrics
| PNMR consolidated | 2011 | 2010 |
|---|---|---|
| Operating revenues | $1.701 billion | $1.674 billion |
| Operating income | $257.3 million | $239.5 million |
| Net earnings (loss) attributable to PNMR | $176.4 million | $(45.2) million |
| Diluted earnings (loss) per share | $1.96 | $(0.49) |
| Cash from operating activities | $292.2 million | $287.4 million |
| Cash from investing activities | $19.8 million | $(275.9) million |
| Cash from financing activities | $(312.3) million | $(10.7) million |
| Total assets at year-end | $5.205 billion | $5.225 billion |
| Long-term debt, including current installments | $1.674 billion | $1.566 billion |
PNMR’s 2011 gross margin was approximately $1.008 billion (59.3% of revenue); operating margin was approximately 15.1%. The reported earnings include a $174.9 million pretax gain on the First Choice sale, approximately $97 million after tax. PNMR also recorded $21.4 million of regulatory disallowances. Its 2011 common dividend was $0.50 per share.
At December 31, 2011, PNMR reported $82.7 million of short-term debt and $15.1 million of cash. Current assets were $462.8 million and current liabilities were $373.3 million. Available consolidated credit capacity was $584.9 million as of February 22, 2012; this is a subsequent-date measure, not year-end liquidity.
PNM’s 2011 revenue was $1.057 billion and earnings available for common stock were $54.0 million, versus $1.017 billion and $56.8 million in 2010. TNMP’s revenue was $237.9 million and net earnings $22.3 million, versus $212.6 million and $16.0 million in 2010.
Material Changes Versus the Prior Comparable Period
- PNMR’s attributable earnings improved by $221.6 million from a 2010 loss, principally reflecting the First Choice sale gain and the absence of the $188.2 million pretax Optim Energy impairment recorded in 2010. The 2011 result therefore includes a significant unusual, nonrecurring gain.
- Revenue rose about 1.6%. PNMR operating cash flow increased modestly, while the swing in investing cash flow primarily reflected First Choice sale proceeds. Financing cash outflow increased, including share repurchases, preferred-stock repurchase, debt repurchase, and debt repayment.
- PNM revenue increased, but earnings available for common stock declined. Higher regulated rates and retail load supported results, offset by lower margins on unregulated PVNGS Unit 3 sales and regulatory disallowances.
- TNMP revenue and earnings increased, reflecting rate increases, customer growth and usage, and transmission cost recovery; expense and depreciation also rose.
- PNMR completed its strategic exit from competitive businesses and focused on its two regulated electric utilities. S&P raised ratings for PNMR, PNM, and TNMP in September 2011; Moody’s raised PNMR and TNMP ratings in November 2011.
Outlook, Management Commentary, Risks, and Unusual Items
- Management projects $1.307 billion of construction expenditures for 2012–2016 and total capital requirements, including dividends, of $1.540 billion. The plan excludes potential major environmental upgrades, additional renewable resources, and possible peaking capacity. Management expects to fund requirements through operating cash flow, existing facilities, and additional long-term financing, potentially including debt or equity.
- Management’s rate-base outlook was 2% annual compound growth for PNM from 2011–2013, potentially 6% through 2016 with additional investments, and 8% annual compound growth for TNMP from 2011–2013. These projections depend on investment execution and regulatory recovery.
- PNM’s New Mexico rate settlement generally precludes a new general rate adjustment effective before July 1, 2013, subject to stated exceptions. A proposed renewable-energy rider for 2012 was pending NMPRC approval; the filing anticipated implementation in August 2012, subject to approval.
- PNM’s challenge to EPA’s regional-haze requirements at San Juan Generating Station remained unresolved. Estimated total-station installation costs were $750 million–$1 billion for SCR, compared with about $77 million for SNCR; PNM owns 46.3% of SJGS. Four Corners controls could cost PNM up to $69 million. These estimates and ultimate requirements were uncertain, and the construction plan did not include these costs.
- A September 2011 fire disrupted the San Juan coal mine. The mine operator estimated longwall operations could restart in early May 2012, but the site and equipment assessment was incomplete. PNM reported a preliminary $14.5 million increase in FPPAC deferrals associated with the incident and could not predict the restart date or full impact.
- Other material risks include regulatory cost recovery and allowed returns, coal and water supply, environmental and greenhouse-gas rules, generating-plant and transmission reliability, nuclear fuel and spent-fuel disposal, pension funding, weather and drought, and access to capital. The filing describes multiple unresolved environmental, regulatory, and legal proceedings; management did not expect known matters to materially affect results overall, but outcomes and exposures may differ from estimates.
- PNM’s Unit 1 PVNGS lease notice required a purchase-or-renewal decision by January 15, 2013; Unit 2 retention notice was due January 15, 2013. Potential lease-related payments in specified adverse events were estimated at up to $178.3 million. PNM also planned to vacate its headquarters lease by the end of 2012, but had not reached a termination agreement.
Important Facts for Investors to Verify
- How much of 2011 earnings and EPS is attributable to the First Choice sale gain, and what recurring earnings level remains after that item?
- Whether PNM’s pending renewable-energy rider and FERC rate cases are approved, and how much of requested revenues is ultimately recoverable.
- Final environmental requirements, costs, schedules, and rate recovery for SJGS and Four Corners, including the outcome of PNM’s EPA challenges.
- Whether the San Juan mine resumed longwall operations as projected, and the final fuel-cost, FPPAC, and operating effects of the fire.
- Execution and funding of the 2012–2016 capital plan, including the effect of excluded environmental and generation investments on debt, liquidity, and customer rates.
- PNM’s PVNGS lease elections and headquarters lease settlement, and any material change in credit ratings, facility availability, or dividend capacity.