TXNM

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009, filed by PNM Resources, Inc. (PNMR) and its subsidiaries, Public Service Company of New Mexico (PNM) and Texas-New Mexico Power Company (TNMP). The Company operates regulated electric utilities in New Mexico and Texas, along with unregulated merchant power operations through First Choice and Optim Energy. A significant strategic shift occurred during the period with the sale of PNM's natural gas operations (PNM Gas) on January 30, 2009, which are now reported as discontinued operations.

Key Financial Metrics

Note: Q1 2009 Net Earnings includes a significant gain from discontinued operations ($81.7 million) related to the sale of PNM Gas.

Material Changes vs. Prior Period

• Turnaround in Profitability: The Company moved from a net loss of $48.6 million in Q1 2008 to net earnings of $95.4 million in Q1 2009. This improvement is primarily driven by the $111.0 million pre-tax gain on the sale of PNM Gas and a significant recovery in Optim Energy's results.
• Discontinued Operations: PNM Gas was sold on January 30, 2009. Consequently, Q1 2009 results reflect only one month of gas operations compared to a full quarter in 2008. The sale generated $640.6 million in cash proceeds.
• Optim Energy Performance: Optim Energy (50% owned) swung from a net loss of $51.0 million in Q1 2008 to net earnings of $3.1 million in Q1 2009. This was due to the cessation of speculative trading losses and favorable mark-to-market adjustments on economic hedges.
• Regulatory Disallowances: Q1 2008 included $30.2 million in regulatory disallowances related to coal mine decommissioning and renewable energy credits, which were absent in Q1 2009.
• Debt Reduction: Total debt decreased by approximately $414 million, driven by the use of PNM Gas sale proceeds to retire short-term borrowings and the repurchase of long-term notes.

Guidance, Outlook, and Risks

• Rate Cases: PNM is awaiting a decision on its 2008 Electric Rate Case stipulation, which proposes a $77.3 million annual revenue increase. TNMP is pursuing a rate case including recovery of Hurricane Ike restoration costs and financing costs, with a hearing scheduled for June 2009.
• Liquidity and Credit Markets: Management notes that while credit market disruptions have impacted financial institutions, the Company's liquidity remains sufficient. However, access to capital markets may be difficult or costly. Lehman Brothers Bank (a lender) filed for bankruptcy, and one borrowing request was declined, though availability remains high ($849.9 million consolidated).
• Environmental and Regulatory Risks: Significant uncertainty exists regarding future greenhouse gas (GHG) regulations, which could increase costs for the Company's coal and gas-fired generation. The Company is also subject to ongoing litigation regarding water rights, nuclear waste disposal, and emissions standards (BART).
• First Choice Challenges: The unregulated retail provider in Texas faces high customer churn and increased bad debt expense due to economic conditions, though it has ceased speculative trading to mitigate market risk.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the sustainability of earnings by excluding the one-time $111 million gain from the PNM Gas sale.
• Rate Case Outcomes: Monitor the NMPRC and PUCT decisions on pending rate cases, which are critical for future revenue recovery and margin stability.
• Debt Refinancing: Assess the Company's ability to refinance maturing debt in the current credit environment, particularly given the Lehman Brothers exposure.
• Optim Energy Basis Differences: Review the amortization of basis differences in Optim Energy, which impacts reported equity earnings but does not reflect cash flow.
• Environmental Compliance Costs: Evaluate potential capital expenditures required for future GHG regulations and BART compliance at San Juan and Four Corners plants.