Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2009, for 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, an unregulated retail electricity provider (First Choice) in Texas, and holds a 50% equity interest in Optim Energy, an independent power producer. A significant strategic shift occurred in early 2009 with the sale of PNM's natural gas operations (PNM Gas), which are now reported as discontinued operations.
Key Financial Metrics (Nine Months Ended Sept 30, 2009)
| Metric | 2009 (in millions) | 2008 (in millions) |
|---|---|---|
| Total Operating Revenues | $1,264.7 | $1,551.9 |
| Net Earnings Attributable to PNMR | $147.5 | $(197.6) |
| Earnings from Continuing Operations | $78.0 | $(217.4) |
| Earnings from Discontinued Operations | $77.7 | $24.6 |
| Diluted EPS (Continuing Ops) | $0.76 | $(2.72) |
| Diluted EPS (Net) | $1.61 | $(2.42) |
| Operating Cash Flow | $84.9 | $64.4 |
| Investing Cash Flow | $468.2 | $(209.9) |
| Financing Cash Flow | $(623.5) | $394.8 |
| Cash and Equivalents (End of Period) | $70.3 | $267.1 |
| Short-term Debt | $193.0 | $744.7 |
| Long-term Debt | $1,531.2 | $1,379.0 |
Material Changes vs. Prior Period
- Turnaround in Profitability: The Company reported a net earnings turnaround from a loss of $197.6 million in the prior year to a profit of $147.5 million. This is primarily driven by a $77.7 million gain from the sale of PNM Gas (discontinued operations) and improved performance in continuing operations.
- Revenue Decline: Total operating revenues decreased by approximately 18.5% year-over-year. This decline is attributed to lower wholesale power sales, reduced retail load due to economic conditions, and the absence of PNM Gas revenues after its January 2009 sale.
- Cost of Energy Reduction: Cost of energy dropped significantly from $1,026.7 million in 2008 to $556.1 million in 2009, largely due to lower natural gas prices and the divestiture of the gas segment.
- Goodwill Impairments: Unlike the prior year, which saw significant goodwill impairments ($144.1 million), no impairments were recorded in the first nine months of 2009.
- Debt Reduction: Short-term debt decreased by over $550 million, utilizing proceeds from the PNM Gas sale to retire borrowings.
Guidance, Outlook, and Risks
- Regulatory Outlook: PNM implemented the first phase of a $77.1 million annual non-fuel rate increase on July 1, 2009, with the remainder effective April 1, 2010. TNMP implemented a $12.7 million annual rate increase in September 2009. Management anticipates filing a new rate case for PNM in Q2 2010 using a future test period.
- Optim Energy Strategy: Due to adverse market conditions (low gas and power prices), Optim Energy has shifted strategy from expansion to optimizing current assets and reducing debt. No new growth projects are planned until market conditions improve.
- Climate Change and Environmental Risks: The Company faces potential costs from future greenhouse gas (GHG) regulations, including the Waxman-Markey bill and EPA rules. PNM is subject to New Mexico's Renewable Portfolio Standard, requiring increased renewable energy procurement.
- Liquidity and Credit Markets: While the Company maintains $853.6 million in available credit facilities, it notes that access to capital markets could be difficult or costly. A lender under the PNMR facility (Lehman Brothers Bank) has filed for bankruptcy, though the Company states its liquidity has not been materially impacted.
- Legal Contingencies: Significant pending matters include the Western United States Wholesale Power Market litigation, potential refunds related to the 2000-2001 energy crisis, and various environmental compliance issues (e.g., BART requirements for Four Corners and SJGS).
Investor Verification Checklist
- Discontinued Operations Impact: Verify the sustainability of earnings by analyzing results excluding the one-time $77.7 million gain from the PNM Gas sale.
- Regulatory Rate Recovery: Monitor the outcome of the pending PNM rate case (expected Q2 2010) and the NMPRC's decision on the recovery of $26.3 million in SO2 allowance credits.
- Optim Energy Performance: Assess the financial health of Optim Energy, particularly its ability to service debt without PNMR capital contributions given the shift to a "stand-alone" strategy.
- Environmental Compliance Costs: Review potential capital expenditures required for BART compliance at Four Corners and SJGS, which could range from $6.8 million to $69.0 million depending on EPA determinations.
- First Choice Bad Debt: Monitor bad debt expense trends for First Choice, which increased due to economic conditions and customer churn, despite management initiatives to improve credit standards.
- Debt Refinancing: Track the Company's ability to refinance maturing debt and renew credit facilities expiring in 2011 and 2012 in the current credit environment.