Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2003, for PNM Resources, Inc. and its principal subsidiary, Public Service Company of New Mexico (PNM). The Company is an integrated public utility engaged in the generation, transmission, distribution, and sale of electricity and natural gas in New Mexico, as well as wholesale electricity marketing in the Western United States. The financial statements are unaudited but have been reviewed by independent accountants.
Key Financial Metrics
| Metric (in thousands) | Q1 2003 | Q1 2002 |
|---|---|---|
| Total Operating Revenues | $387,691 | $301,817 |
| Operating Income | $33,426 | $32,687 |
| Net Earnings | $48,316 | $24,949 |
| Net Earnings Applicable to Common Stock | $48,170 | $24,803 |
| Diluted EPS | $1.22 | $0.63 |
| Cash Flow from Operating Activities | $6,347 | $13,017 |
| Cash and Cash Equivalents (End of Period) | $53,353 | $26,708 |
| Long-Term Debt (less current maturities) | $980,106 | $980,092 |
| Total Capitalization | $2,014,863 | $1,978,701 |
Material Changes vs. Prior Period
- Net Earnings Surge: Net earnings increased 94.4% to $48.3 million. This increase is primarily driven by a one-time $37.4 million gain (net of tax) from the cumulative effect of adopting SFAS 143 (Accounting for Asset Retirement Obligations).
- Transition Cost Write-off: The earnings increase was partially offset by a $16.7 million pre-tax charge for the write-off of transition costs related to the repeal of New Mexico's Electric Utility Industry Restructuring Act.
- Revenue Growth: Total operating revenues rose 28.5% to $387.7 million.
- Gas Revenues: Increased 34.0% to $146.3 million due to higher natural gas prices, though volumes declined slightly due to warmer weather.
- Wholesale Revenues: Increased 90.6% to $107.8 million, driven by new long-term contracts and improved market prices ($42/MWh vs. $24/MWh in 2002).
- Electric Revenues: Decreased slightly by 1.3% to $133.6 million due to a reclassification of a significant customer from retail to wholesale and lower transmission demand.
- Cash Flow: Operating cash flow decreased to $6.3 million from $13.0 million, largely due to increased accounts receivable from higher wholesale prices and volumes.
Guidance, Outlook, and Risks
- 2003 Guidance: Management reaffirmed 2003 ongoing earnings guidance of $1.80 to $2.05 per diluted share, excluding the impact of the SFAS 143 adoption and the transition cost write-off.
- Regulatory Environment: The repeal of the Restructuring Act and the approval of the "Global Electric Agreement" provide a five-year rate path and a retail rate freeze through 2007. The Company has re-applied SFAS 71 regulatory accounting to its generation activities.
- Legal and Regulatory Risks:
- FERC Investigations: The Company is subject to FERC investigations regarding "Enron-like" trading practices and potential refund liabilities in California and Pacific Northwest markets. A preliminary refund liability of approximately $4.3 million was identified in California proceedings, though this may increase.
- California Litigation: The California Attorney General has threatened state court litigation regarding alleged unfair trade practices and unjust rates. Several class-action antitrust lawsuits are also pending.
- Environmental: A citizen suit under the Clean Air Act regarding opacity and PSD rules at the San Juan Generating Station (SJGS) is proceeding to trial. A natural gas explosion in Santa Fe (2001) resulted in a compliance agreement requiring over $10 million in accelerated pipeline replacement.
- Water Supply: Drought conditions in the Four Corners region pose a risk to water supplies for SJGS and Four Corners plants, though the Company has secured supplemental water rights.
- Debt Refinancing: The Company priced $182 million of tax-exempt pollution control bonds in May 2003 at a 2.75% one-year rate to refinance callable debt, hedged via forward starting interest rate swaps.
Investor Verification Checklist
- Accounting Change Impact: Verify the sustainability of earnings by excluding the $37.4 million SFAS 143 one-time gain and the $16.7 million transition cost charge.
- FERC Refund Liability: Monitor the final determination of refund liabilities in California and Pacific Northwest proceedings, as the current estimate of $4.3 million may increase.
- Wholesale Market Exposure: Assess the Company's exposure to market manipulation allegations and potential disgorgement of profits recommended by FERC staff.
- Water Rights: Confirm the status of water supply contracts for SJGS and Four Corners given ongoing drought conditions in New Mexico.
- Debt Refinancing Execution: Confirm the successful closing of the $182 million bond issuance and the settlement of the associated interest rate swaps.