PNM Resources, Inc. (PNMR) — Q3 2010 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2010. This combined, unaudited filing covers PNMR, Public Service Company of New Mexico (PNM), and Texas-New Mexico Power Company (TNMP). The filing identifies the parent as PNM Resources, Inc.; the supplied text does not use the TXNM Energy name. Dollar amounts are in millions unless stated otherwise.
Business context and results
PNMR operates regulated electric utilities in New Mexico and Texas, alongside First Choice, a competitive Texas retail electricity provider, and a 50% investment in Optim Energy. PNM sold its natural gas business in January 2009; its results are reported as discontinued operations.
- Q3 2010: Electric revenue was $503.7, up 5.4% year over year. Operating income increased to $105.4 from $101.5, while net earnings attributable to PNMR declined to $48.6 from $54.2. Continuing-operations diluted EPS was $0.53 versus $0.60; reported diluted EPS was $0.53 versus $0.59.
- First nine months: Electric revenue was $1,292.9, up 2.2%; operating income was $189.6 versus $156.3. Earnings from continuing operations attributable to PNMR were $63.0 versus $69.8, and diluted continuing-operations EPS was $0.69 versus $0.76. Reported net earnings attributable to PNMR fell to $63.0 from $141.6, largely because 2009 included $71.9 of after-tax discontinued-operations earnings from the PNM Gas sale.
- Margins: Consolidated operating margin was approximately 20.9% in Q3 versus 21.3% a year earlier, and 14.7% year to date versus 12.4%. PNMR’s reported operating improvement reflects, in part, stronger regulated utility results; it does not offset the earnings decline at First Choice.
- Segment drivers: PNM Electric earnings attributable to PNMR rose $8.3 in Q3 and $34.5 year to date, supported by rate increases, customer load and weather. TNMP earnings rose $1.1 and $3.8, respectively, with rate increases and load growth. First Choice earnings fell $13.5 in Q3 and $27.3 year to date, reflecting lower retail margins and unrealized hedge losses. PNMR’s share of Optim Energy earnings fell $4.4 in Q3 and $6.6 year to date.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $216.6, compared with $84.9 in 2009. Investing cash flow was a use of $170.8, compared with a source of $468.2 in 2009, which included PNM Gas sale proceeds. Financing cash flow was a use of $35.3 versus $623.5 used in 2009.
- Operating cash flow included net income-tax refunds of $98.8, compared with net payments of $68.8 in 2009. It was also affected by increased collateral posting. The year-over-year comparison in cash flow therefore reflects tax and transaction timing as well as operating performance.
- At September 30, PNMR had cash of $25.1, short-term debt of $192.0, current long-term debt installments of $2.1, and long-term debt of $1,565.7. Total debt including current installments was approximately $1,759.8. Current assets were $545.6 and current liabilities were $537.7.
- PNMR reported $706.1 of consolidated remaining credit availability as of October 25, 2010, with $198.0 of short-term debt outstanding. Credit facilities expire mainly in 2011 and 2012 and will require renewal or replacement. Management stated that internal cash generation, credit facilities, and capital-market access were expected to meet requirements, while noting refinancing costs could rise.
- PNMR declared common dividends of $0.125 per share in Q3 and $0.375 per share for the first nine months, unchanged from the comparable 2009 periods.
Material changes, outlook and significant matters
- Management projected total capital requirements of $310.8 for 2010, including $264.6 of construction expenditures, and $1,640.2 for 2010–2014, including $1,409.2 of construction expenditures. The estimates exclude Optim Energy construction spending and remain subject to review and approval.
- PNM’s pending 2010 retail rate case requests a total $165.2 annual increase, proposed in phases from April 2011 and January 2012. The request represents proposed increases of 22% for PNM North and 20% for PNM South; the filing says the outcome is uncertain. PNM also sought an $11.1 annual wholesale transmission revenue increase from FERC.
- TNMP had a pending $20.1 revenue-increase request and a separate advanced-meter deployment proposal seeking recovery of $158 over 12 years, including $70.6 of capital expenditures through 2015. These were subject to regulatory proceedings.
- Environmental and regulatory exposure is significant. New Mexico’s proposed regional-haze controls at San Juan Generating Station could require SCR installation estimated by PNM at $750–$1,000 for the entire station, of which PNM’s share would be about 46.3%; PNM disputed the proposed requirement. PNM estimated its share of potential Four Corners post-combustion controls at up to $69. Costs and recovery through rates were uncertain.
- PNM’s October 2010 agreement renewing Navajo Nation rights-of-way requires 20 annual payments of $6.0 beginning in 2010, subject to CPI adjustment. The filing also discusses other rights-of-way renewals and related recovery uncertainty.
- PNM received its $3.1 share of a DOE spent-fuel litigation award, recorded as a $2.1 reduction of cost of energy and a $1.0 reduction of utility plant. It also recorded an $8.5 pretax gain, net of legal expenses, from the Republic Savings Bank litigation settlement in 2010.
- First Choice’s mark-to-market losses on unrealized economic hedges were $21.6 after tax for the first nine months, versus gains of $2.4 in 2009. Management cautioned that these noncash valuation losses may not indicate the realized margin when contracts settle. First Choice’s customer count also declined year over year.
- Management described modest near-term electricity sales growth, ongoing pressure from economic conditions, and depressed power and gas markets affecting Optim Energy. It gave no consolidated earnings or EPS guidance in the supplied filing text.
- Other key risks include regulatory decisions and cost recovery, environmental requirements, generation outages, fuel and wholesale power prices, pension funding, water availability, credit-market access, and litigation. The company stated it did not expect known legal, environmental, and commitment matters to have a material adverse effect, while noting outcomes could differ materially from estimates.
Important facts for investors to verify
- Track the outcome and timing of PNM’s and TNMP’s pending rate cases, transmission filings, and advanced-meter cost-recovery request.
- Assess potential San Juan and Four Corners environmental-control costs, implementation schedules, and whether regulators allow recovery from customers.
- Review First Choice’s customer retention, retail margins, hedge settlements and exposure to commodity-price changes; distinguish noncash mark-to-market effects from realized results.
- Confirm refinancing or replacement of credit facilities before their expirations, available borrowing capacity, and the cost and terms of any new financing.
- Monitor projected capital spending and PNM pension contributions, including the estimated $220.4 of PNM pension contributions for 2011–2014.
- Compare continuing-operations earnings with reported net earnings, recognizing that 2009 included the PNM Gas sale gain and that the filing restated certain 2009 discontinued-operations amounts.