Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2008, 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 electric provider (First Choice), and holds a 50% interest in EnergyCo. The reporting period is characterized by significant strategic shifts, including the pending sale of PNM's natural gas operations (classified as discontinued operations), the decision to pursue strategic alternatives for First Choice, and substantial goodwill impairments across multiple segments.
Key Financial Metrics
| Metric (Six Months Ended June 30, 2008) | Value (in millions) |
|---|---|
| Total Operating Revenues | $944.8 |
| Net Earnings (Loss) | $(192.1) |
| Net Earnings (Loss) per Share (Diluted) | $(2.42) |
| Operating Cash Flows | $12.3 |
| Short-term Debt | $426.7 |
| Long-term Debt | $1,517.0 |
| Cash and Cash Equivalents | $137.9 |
Segment Performance (Six Months 2008):
- PNM Electric: Reported a segment loss of $74.2 million, driven by regulatory disallowances and goodwill impairment.
- TNMP Electric: Reported a segment loss of $25.0 million, primarily due to goodwill impairment.
- First Choice: Reported a segment loss of $84.5 million, heavily impacted by speculative trading losses and goodwill impairment.
- Discontinued Operations (PNM Gas): Contributed $25.3 million in earnings.
Material Changes Versus Prior Period
Compared to the six months ended June 30, 2007, the Company's financial position deteriorated significantly:
- Net Loss vs. Profit: The Company reported a net loss of $192.1 million in 2008, compared to net earnings of $49.9 million in 2007.
- Goodwill Impairment: A pre-tax impairment charge of $136.2 million was recorded in the second quarter of 2008. This included $128.8 million related to goodwill (First Choice, PNM, and TNMP) and $7.4 million related to the First Choice trade name. No such impairments were recorded in the comparable 2007 period.
- Regulatory Disallowances: PNM recorded $30.2 million in regulatory disallowances related to the write-off of deferred costs for Renewable Energy Certificates (RECs) and coal mine decommissioning costs following a New Mexico Public Regulation Commission (NMPRC) rate order.
- Trading Losses: First Choice incurred significant losses from speculative trading in the ERCOT market, totaling approximately $49.0 million for the six-month period, compared to a $1.7 million loss in the prior year.
- Revenue Growth: Total operating revenues increased slightly to $944.8 million from $942.6 million in 2007, driven by rate increases and higher wholesale sales, but this was insufficient to offset rising costs and non-cash charges.
Guidance, Outlook, and Risks
Management Commentary and Strategy:
- Dividend Reduction: On August 11, 2008, the Board declared a quarterly dividend of $0.125 per share, a 46% reduction from the previous quarter, to improve liquidity and align with industry averages.
- Asset Sales: The Company is pursuing the sale of PNM Gas for $620 million, expected to close by the end of 2008. Proceeds are intended to retire debt and fund capital expenditures.
- First Choice: Management announced a decision to pursue strategic alternatives for First Choice following significant trading losses and market volatility.
- EnergyCo: The Company continues to develop EnergyCo, though it has exited speculative trading and written off development rights for the Twin Oaks expansion.
Risks and Contingencies:
- Credit Ratings: Credit ratings for PNMR, PNM, and TNMP were downgraded by S&P and Moody's in April and May 2008, with outlooks changed to negative or stable. This has increased borrowing costs and required the posting of additional collateral.
- Liquidity: The Company faces significant debt maturities in late 2008 and early 2009 ($300 million for PNM and $167.7 million for TNMP). Management relies on internal cash generation, credit facilities, and potential capital market access to meet these obligations.
- Regulatory Uncertainty: Pending appeals regarding PNM's electric and gas rate cases and the Emergency Fuel and Purchased Power Adjustment Clause (FPPAC) create uncertainty regarding future revenue recovery.
- Environmental Compliance: Ongoing regulatory matters regarding emissions (BART, CAIR) and climate change legislation pose potential future capital expenditure risks.
Investor Verification Checklist
- Debt Maturities: Verify the Company's ability to refinance or repay $467.7 million in long-term debt maturing before August 2009, given recent credit rating downgrades.
- Goodwill Impairment Finalization: Monitor the finalization of the goodwill impairment analysis for First Choice, which was preliminary as of June 30, 2008.
- PNM Gas Sale Closing: Confirm the closing of the $620 million PNM Gas sale and the receipt of proceeds to assess liquidity improvements.
- Regulatory Appeals: Track the outcome of PNM's appeals to the New Mexico Supreme Court regarding the disallowance of REC and coal mine decommissioning costs.
- First Choice Strategic Alternatives: Evaluate the timeline and potential financial impact of the strategic alternatives being pursued for the First Choice segment.
- EnergyCo Emission Allowances: Assess the impact of the federal court ruling invalidating CAIR on the value of EnergyCo's $153.5 million inventory of emission allowances.